1

     As filed with the Securities and Exchange Commission on June 8, 2001.
                                                 Registration No. 333-
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                             ---------------------

                        PRINCIPAL FINANCIAL GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                                                        
               DELAWARE                                 6719
   (STATE OR OTHER JURISDICTION OF          (PRIMARY STANDARD INDUSTRIAL                    42-1520346
    INCORPORATION OR ORGANIZATION)          CLASSIFICATION CODE NUMBER)                  (I.R.S. EMPLOYER
                                                                                      IDENTIFICATION NUMBER)

                                711 HIGH STREET
                             DES MOINES, IOWA 50392
                                 (515) 247-5111
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                              KAREN E. SHAFF, ESQ.
                   SENIOR VICE PRESIDENT AND GENERAL COUNSEL
                        PRINCIPAL FINANCIAL GROUP, INC.
                                711 HIGH STREET
                             DES MOINES, IOWA 50392
                                 (515) 247-5111
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)

                                   COPIES TO:

                                                      
              WOLCOTT B. DUNHAM JR., ESQ.                                 ALEXANDER M. DYE, ESQ.
                JAMES C. SCOVILLE, ESQ.                                  JOSEPH D. FERRARO, ESQ.
                  DEBEVOISE & PLIMPTON                            LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
                    875 THIRD AVENUE                                       125 WEST 55TH STREET
                NEW YORK, NEW YORK 10022                                 NEW YORK, NEW YORK 10019
                     (212) 909-6000                                           (212) 424-8000

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

    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
                             ---------------------

    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:  [ ]
                             ---------------------

    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]

    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]

    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]

                        CALCULATION OF REGISTRATION FEE

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                                                                  PROPOSED MAXIMUM
                   TITLE OF EACH CLASS OF                        AGGREGATE OFFERING            AMOUNT OF
                SECURITIES TO BE REGISTERED                           PRICE(1)              REGISTRATION FEE
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Common Stock, $0.01 par value(2)............................       $2,936,647,452             $734,161.86
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(1) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 under the Securities Act. In accordance with Rule
    457(o), the number of shares being registered and the proposed maximum
    offering price per share are not included in this table.
(2) Includes the Series A Junior Participating Preferred Stock purchase rights
    associated with the common stock.
                             ---------------------

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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   2

                                EXPLANATORY NOTE

    The prospectus relating to the shares of common stock to be used in
connection with a United States and Canadian offering, the U.S. prospectus,
begins following this page. The prospectus to be used in connection with a
concurrent international offering, the international prospectus, will consist of
the alternate pages following the U.S. prospectus and the balance of the pages
included in the U.S. prospectus for which no alternate is provided. The U.S.
prospectus and the international prospectus are identical except that they
contain different front cover pages and "Underwriting" sections. Final forms of
each prospectus will be filed with the Securities and Exchange Commission under
Rule 424(b).
   3

The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell nor does it seek an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.

                   SUBJECT TO COMPLETION. DATED       , 2001.

[PRINCIPAL FINANCIAL GROUP LOGO]

                                       Shares
                        PRINCIPAL FINANCIAL GROUP, INC.
                                  Common Stock
                             ----------------------
    This is an initial public offering of          shares of common stock of
Principal Financial Group, Inc. The offering is being made in connection with
the conversion of Principal Mutual Holding Company from a mutual insurance
holding company into a stock company in a process called a demutualization.
After the demutualization, Principal Financial Group, Inc. will indirectly own
all of the outstanding common stock of Principal Life Insurance Company.

    In addition to the shares offered by this prospectus, Principal Financial
Group, Inc. will issue an estimated shares of its common stock to policyholders
entitled to receive shares in the demutualization in exchange for their
membership interests in Principal Mutual Holding Company, or to a separate
account for the benefit of those policyholders.

    Prior to this offering there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $         and $         . Application will be made to list the common
stock on the New York Stock Exchange under the symbol "PFG".

    See "Risk Factors" on page 12 to read about factors you should consider
before buying shares of the common stock.
                             ----------------------
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
                             ----------------------

                                                              Per Share    Total
                                                              ---------    -----
                                                                    
Initial public offering price...............................  $           $
Underwriting discount.......................................  $           $
Proceeds, before expenses, to Principal Financial Group,
  Inc. .....................................................  $           $

    To the extent the underwriters sell more than          shares of common
stock, the underwriters have the option to purchase up to an additional
         shares from Principal Financial Group, Inc. at the initial public
offering price less the underwriting discount.
                             ----------------------
    The underwriters expect to deliver the shares against payment in New York,
New York on          2001.
                              GOLDMAN, SACHS & CO.
                             ----------------------
                          Prospectus dated     , 2001.
   4

                               PROSPECTUS SUMMARY

    This summary highlights information contained in this prospectus. As a
result, it does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including the "Risk Factors" section and the consolidated financial
statements and the notes to those statements. References to "$", "US$" or
"dollars" are to United States dollars, and references to "A$" are to Australian
dollars, unless we indicate otherwise. The Glossary beginning on page G-1 of
this prospectus includes definitions of certain terms which are unique to this
offering. Each term defined in the Glossary is printed in boldface the first
time it appears in this prospectus.

    The Principal Financial Group is a leading provider of retirement savings,
investment and insurance products and services, with $113.0 billion in assets
under management and approximately thirteen million customers worldwide as of
March 31, 2001. Our U.S. and international operations concentrate primarily on
asset management and accumulation. In addition, we offer a broad range of
individual life and disability insurance, group life and health insurance, and
residential mortgage loan origination and servicing in the United States.

    We focus on providing retirement products and services to businesses and
their employees. We provided services to more 401(k) plans in the United States
in 2000 than any other bank, mutual fund or insurance company, according to
surveys conducted by CFO magazine. We also had the leading market share in 1999
within the 401(k) market for businesses with less than 500 employees based on
number of plans, number of participants and assets under management, according
to the Spectrem Group.

    We believe there are attractive growth opportunities in the 401(k) and other
defined contribution pension plan markets in the United States and
internationally. Assets under all 401(k) plans in the United States are
projected to grow at an annual rate of 13.5%, reaching $2.6 trillion in plan
assets by 2004. In addition, only 15% of U.S. businesses with fewer than 500
employees offered a 401(k) plan in 1999, compared to 81% for businesses with 500
or more employees. We believe that our expertise and leadership in serving the
U.S. pension plan market give us a unique competitive advantage in the United
States, as well as in countries with a trend toward private sector defined
contribution pension systems.

OUR OPERATING SEGMENTS

    We organize our businesses into four operating segments:

    - U.S. Asset Management and Accumulation;

    - International Asset Management and Accumulation;

    - Life and Health Insurance; and

    - Mortgage Banking.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.

    One of the primary measures of our business is assets under management. We
define assets under management to include all assets on which we earn an
asset-based fee or a spread. Further, we measure the composition of assets under
management both by the segment that accumulates the assets and by the entity
that manages the assets. The table below shows the composition of assets under
management by both measures:

                                        1
   5

                     COMPOSITION OF ASSETS UNDER MANAGEMENT
                              AS OF MARCH 31, 2001

                                                                              ASSET MANAGER(2)
                                                   ----------------------------------------------------------------------
                                                                                   OTHER
                                                                                ENTITIES OF
                                                   PRINCIPAL                   THE PRINCIPAL   THIRD-PARTY   TOTAL ASSETS
                                                    CAPITAL     BT FINANCIAL     FINANCIAL        ASSET         UNDER
                                                   MANAGEMENT      GROUP         GROUP(3)       MANAGERS      MANAGEMENT
                                                   ----------   ------------   -------------   -----------   ------------
                                                                              ($ IN BILLIONS)
                                                                                              
ASSET ACCUMULATION SOURCE(1)
U.S. Asset Management and Accumulation...........    $70.9         $  --           $0.7           $5.0          $ 76.6
International Asset Management and Accumulation..      0.1          21.0            2.9            1.1            25.1
Life and Health Insurance........................      9.3            --             --            0.1             9.4
Mortgage Banking.................................       --            --            0.4             --             0.4
Corporate and Other..............................      1.5            --             --             --             1.5
                                                     -----         -----           ----           ----          ------
         Total...................................    $81.8         $21.0           $4.0           $6.2          $113.0
                                                     =====         =====           ====           ====          ======

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

(1) We define "asset accumulation" as the sale of investment-oriented products
    and services for which we provide administrative services and/or offer
    investment choices.

(2) We define "asset management" as the provision of investment advisory
    services. We refer to the entity that provides these services as the "asset
    manager."

(3) Principal Residential Mortgage, Inc., Principal International and Principal
    Bank.

    U.S. ASSET MANAGEMENT AND ACCUMULATION.  Our U.S. Asset Management and
Accumulation segment 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 Capital Management, our U.S.-based asset manager. We provide a
comprehensive portfolio of asset accumulation products and services to
businesses and individuals in the United States, with a concentration on small
and medium-sized businesses, which we define as businesses with less 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.

    Principal Capital Management provides asset management services to our U.S.
asset accumulation businesses and third-party institutional clients, as well as
our other U.S.-based segments. We established Principal Capital Management in
1999 to consolidate our extensive investment management expertise and to focus
on marketing our asset management services to third-party institutional clients.
We believe that Principal Capital Management is well-positioned to compete in
this third-party institutional market through its expertise gained from managing
a significant percentage of the assets originating from our U.S. asset
accumulation operations. As of March 31, 2001, Principal Capital Management
managed $81.8 billion in assets.

    INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION.  Our International Asset
Management and Accumulation segment consists of BT Financial Group and Principal
International. Our acquisition of BT Financial Group in 1999 was a central
element in the expansion of our international asset management and accumulation
businesses. As of March 31, 2001, BT Financial Group was the fourth largest
asset manager in Australia according to ASSIRT. As of March 31, 2001, BT
Financial Group managed $21.0 billion in assets. We believe that the mandated
retirement savings system in Australia, called superannuation, and BT Financial
Group's strong market position, together with the expertise we have developed in
the U.S. pension market, should provide for growth in our assets under
management in Australia. The activities of Principal International reflect our
efforts to capitalize on the trend toward private sector defined contribution
pension systems. Through Principal International, we offer retirement products
and services, annuities, mutual funds and life insurance. We operate through
subsidiaries in Argentina, Chile, Mexico, Indonesia and Hong Kong and joint
ventures in Brazil, Japan and India.

    LIFE AND HEALTH INSURANCE.  Our Life and Health Insurance segment offers
individual life and disability insurance as well as group life and health
insurance throughout the United States. Our individual life and disability
insurance business served approximately 750,000 policyholders with $80.8 billion
of life insurance in force as of March 31, 2001. Our individual insurance
products include interest-sensitive life, traditional life and disability
insurance. Our group insurance business served approximately 82,000 employers
covering approximately 5.0 million members and had $71.5 billion of group life
insurance in force as of March 31, 2001. Our group insurance products include
life, disability, medical, dental and vision insurance, and administrative
services.

                                        2
   6

    MORTGAGE BANKING.  Our Mortgage Banking segment engages in originating,
purchasing, selling and servicing residential mortgage loans in the United
States. We service a majority of the loans that we originate. We originated or
purchased $8.3 billion in new mortgage loans for the year ended December 31,
2000 and serviced a portfolio of $57.3 billion of mortgage loans as of March 31,
2001. Residential mortgages represent a component of our overall portfolio of
market-driven financial products and services.

OUR STRATEGIES AND OPERATING PRINCIPLES

    We seek to enhance stockholder value by pursuing the most attractive
financial services opportunities consistent with the capabilities of our asset
management and accumulation operations. We intend to accomplish this goal by
increasing the growth and profitability of these businesses through the pursuit
of the following primary strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION BUSINESS.  We intend to
strengthen our existing distribution channels and expand into new distribution
channels, further leverage our technology to achieve operating efficiencies,
continue to expand the range of investment options and effectively cross-sell
our products and services.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We selectively
target asset classes and customers in the United States, Australia and globally
to capitalize on the specific strengths of Principal Capital Management and BT
Financial Group. They jointly execute this strategy in their respective markets
and through marketing offices in London, Hong Kong and Singapore.

    INCREASE THE GROWTH AND PROFITABILITY OF PRINCIPAL INTERNATIONAL.  We will
continue to leverage our U.S. product expertise and operating platform to
strengthen Principal International. We seek to accelerate the growth of our
assets under management by capitalizing on the international trend toward
privatization of public retirement pension systems. In addition, we intend to
continue our progress in managing expenses.

    In addition to these primary strategic initiatives, we have specific
strategies within each of our operating segments, which are described in the
"Business" section of this prospectus.

    The following operating principles support our primary and segment-specific
strategies:

    - OPERATE A FULL-SERVICE PLATFORM.  We operate a full-service platform to
      serve the wide array of our customers' needs by originating sales through
      our diverse distribution channels, offering a comprehensive portfolio of
      products and services, administering these products and services
      efficiently using information technology and managing a significant
      portion of the assets for our customers.

    - BUILD ON STRONG CUSTOMER RELATIONSHIPS.  We are committed to building on
      our strong customer relationships by providing products and services that
      respond to their needs and by increasing the global awareness of our
      brand.

    - FOCUS ON FINANCIAL PERFORMANCE.  We have taken specific actions to improve
      our operating earnings over the last several years, and we intend to
      continue to focus each of our businesses to further improve financial
      performance by:

     - managing capital effectively;

     - improving cost management; and

     - actively managing our investment portfolio.

    - REINFORCE OUR CULTURE.  We are committed to strengthening our
      organization's performance-oriented culture through a new incentive
      compensation program, a management evaluation system and a stock option
      plan, each designed to enhance performance.

THE DEMUTUALIZATION

    The offering of our shares is made in connection with the conversion of
Principal Mutual Holding Company from a mutual insurance holding company into a
stock company in a process called a demutualization. Upon demutualization, the
membership interests of Principal Life's policyholders in Principal Mutual
Holding Company will be extinguished, and eligible policyholders will receive
compensation in exchange for the extinguishment of their membership interests.
Their compensation will be in the form of our common stock, cash or policy
credits, depending upon, among other things, the type of policy or policyholder.

    In order for the demutualization to be consummated and for this offering to
occur, the plan of conversion must have been approved by the policyholders
entitled to vote on the plan of conversion and by the Insurance Commissioner of
the State of Iowa. In addition, the effectiveness of the demutualization and the
closing of this offering are conditioned on their simultaneous occurrence.

                                        3
   7

    We are currently a wholly-owned subsidiary of Principal Mutual Holding
Company. The demutualization of Principal Mutual Holding Company includes the
following steps, all of which will occur on the date of the closing of this
offering:

    - Principal Mutual Holding Company will convert from a mutual insurance
      holding company into a stock company;

    - all membership interests of Principal Life's policyholders in Principal
      Mutual Holding Company will be extinguished;

    - the converted Principal Mutual Holding Company will merge with and into
      one of our wholly-owned subsidiaries;

    - we will sell shares of our common stock to the public in this offering;

    - policyholders entitled to receive compensation in the demutualization will
      receive shares of our common stock, cash or policy credits as compensation
      for the extinguishment of their membership interests in Principal Mutual
      Holding Company no later than 75 days after the closing of this offering,
      unless the Insurance Commissioner of the State of Iowa approves a later
      date; and

    - we will contribute to Principal Life all or a portion of the net proceeds
      from this offering, as described in "Use of Proceeds".

    In addition to this offering, we may also conduct a private placement of our
common stock, a private placement or public offering of convertible preferred
stock, a private placement or public offering of debt or seek other sources of
capital. The primary purpose of any of these capital raising transactions would
be to fund cash and policy credit elections.

    When the demutualization and this offering are complete, we will be a public
company and will indirectly own 100% of the common stock of Principal Life and
other operating subsidiaries of the Principal Financial Group.

EXCHANGE RATE TRANSLATION

    We translated balance sheet data and assets under management at the
appropriate end of period exchange rate. We translated income statement data and
asset flow data at the average exchange rate for the appropriate period. For BT
Financial Group, the following end of period exchange rates and average exchange
rates were used for the periods indicated:

                                 EXCHANGE RATE
                               BT FINANCIAL GROUP

                                                           AS OF OR FOR THE
                                                             THREE MONTHS
                                                                ENDED            AS OF OR FOR THE YEAR ENDED
                                                              MARCH 31,                 DECEMBER 31,
                                                           ----------------   ---------------------------------
                                                                 2001           2000        1999        1998
                                                           ----------------   ---------   ---------   ---------
                                                                                          
END OF PERIOD EXCHANGE RATES.............................     A$ 1.0000       A$ 1.0000   A$ 1.0000   A$ 1.0000
                                                              ---------       ---------   ---------   ---------
                                                              US$0.4883       US$0.5556   US$0.6543   US$0.6133

AVERAGE EXCHANGE RATES...................................     A$ 1.0000       A$ 1.0000   A$ 1.0000
                                                              ---------       ---------   ---------
                                                              US$0.5193       US$0.5738   US$0.6499

    These rates are based on noon rates of exchange provided by a third party
financial data source. At May 24, 2001, the noon rate of exchange was
A$1:US$0.5195. We used the same methodology for translating the various
currencies of Principal International's subsidiaries and joint ventures.

OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 711 HIGH STREET, DES MOINES, IOWA
                                     50392.
                    OUR TELEPHONE NUMBER IS (515) 247-5111.

                                        4
   8

                                  THE OFFERING

Common stock offered.......109,526,316 shares, assuming an initial public
                           offering price of $19.00 per share.

Common stock outstanding
after the offering.........370,000,000 shares, assuming an initial public
                           offering price of $19.00 per share.

Use of proceeds............Assuming an initial public offering price of $19.00
                           per share, our net proceeds from the offering will be
                           approximately $1,987.1 million, or $2,286.0 million
                           if the underwriters exercise their option to purchase
                           additional shares in full. We will contribute all or
                           a portion of the net proceeds to Principal Life to
                           fund (1) policy credits and cash payments for
                           policyholders for whom policy credits or cash are the
                           required form of compensation; (2) the elections for
                           cash and the elections or deemed elections for
                           ACCOUNT VALUE POLICY CREDITS that are attributable to
                           policyholders entitled to these forms of
                           compensation; and (3) an amount equal to the fees and
                           expenses of the demutualization paid by Principal
                           Life. We may retain up to $250.0 million of any
                           remaining proceeds. We will contribute any remaining
                           proceeds in excess of this $250.0 million limit to
                           Principal Life.

Dividend policy............Subject to our financial condition and declaration by
                           our board of directors, we currently intend to pay
                           regular annual cash dividends on our common stock. We
                           currently intend to declare an annual cash dividend
                           of $0.25 per share on our common stock. We expect
                           that our first annual cash dividend will be a
                           proportion of that amount, based on the number of
                           months remaining in the calendar year in which we
                           become public. See "Stockholder Dividend Policy".

Proposed New York Stock
  Exchange symbol..........PFG

    Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 16,428,947 additional shares of our
common stock, which the underwriters have the option to purchase from us to
cover over-allotments.

                                        5
   9

                    SUMMARY HISTORICAL FINANCIAL INFORMATION

    The following table provides summary historical consolidated financial
information of Principal Mutual Holding Company, the predecessor to Principal
Financial Group, Inc. prior to the demutualization, and will be applicable to
Principal Financial Group, Inc. following the demutualization. The consolidated
financial information for each of the years ended December 31, 2000, 1999 and
1998 and as of December 31, 2000 and 1999 has been derived from our audited
consolidated financial statements and notes to the financial statements included
in this prospectus. The consolidated financial information for the years ended
December 31, 1997 and 1996 and as of December 31, 1998, 1997 and 1996 has been
derived from our audited consolidated financial statements not included in this
prospectus. The summary consolidated financial information for the three months
ended March 31, 2001 and 2000 and as of March 31, 2001 has been derived from our
unaudited interim consolidated financial statements included in this prospectus.
The summary consolidated financial information as of March 31, 2000 has been
derived from our unaudited interim consolidated financial statements not
included in this prospectus. All unaudited interim consolidated financial
information presented in the table below reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of our
consolidated financial position and results of operations for such periods. The
results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year. The
following summary consolidated financial information, other than the Principal
Life statutory data, has been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP.

    The following is a summary and, in order to fully understand our
consolidated financial information, you should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to the financial statements
included in this prospectus. The results for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.

                                                     FOR THE
                                                  THREE MONTHS
                                                 ENDED MARCH 31,               FOR THE YEAR ENDED DECEMBER 31,
                                               -------------------   ----------------------------------------------------
                                               2001(2)    2000(2)    2000(2)    1999(2)    1998(2)    1997(2)    1996(2)
                                               --------   --------   --------   --------   --------   --------   --------
                                                                            ($ IN MILLIONS)
                                                                                            
INCOME STATEMENT DATA:(1)
Revenues:
  Premiums and other considerations..........  $1,064.2   $1,014.4   $3,996.4   $3,937.6   $3,818.4   $4,667.8   $5,120.9
  Fees and other revenues....................     413.0      396.4    1,576.3    1,287.3      978.8      881.9      722.4
  Net investment income......................     839.7      789.5    3,172.3    3,072.0    2,933.9    2,936.6    2,894.0
  Net realized capital gains (losses)........     (80.9)      70.3      139.9      404.5      465.8      175.3      387.8
                                               --------   --------   --------   --------   --------   --------   --------
         Total revenues......................   2,236.0    2,270.6    8,884.9    8,701.4    8,196.9    8,661.6    9,125.1

Expenses:
  Benefits, claims and settlement expenses...   1,391.9    1,319.6    5,232.3    5,260.9    5,089.0    5,632.5    6,086.5
  Dividends to policyholders.................      81.0       75.4      312.7      304.6      298.7      299.3      298.5
  Operating expenses.........................     622.7      593.2    2,479.4    2,070.3    2,074.0    2,035.5    1,909.8
                                               --------   --------   --------   --------   --------   --------   --------
         Total expenses......................   2,095.6    1,988.2    8,024.4    7,635.8    7,461.7    7,967.3    8,294.8
                                               --------   --------   --------   --------   --------   --------   --------
Income before income taxes and cumulative
  effect of accounting change................     140.4      282.4      860.5    1,065.6      735.2      694.3      830.3
Income taxes.................................      24.4       89.3      240.3      323.5       42.2      240.8      304.3
                                               --------   --------   --------   --------   --------   --------   --------
Income before cumulative effect of accounting
  change.....................................     116.0      193.1      620.2      742.1      693.0      453.5      526.0
Cumulative effect of accounting change, net
  of related income taxes....................     (10.7)        --         --         --         --         --         --
                                               --------   --------   --------   --------   --------   --------   --------
         Net income..........................  $  105.3   $  193.1   $  620.2   $  742.1   $  693.0   $  453.5   $  526.0
                                               ========   ========   ========   ========   ========   ========   ========

                                        6
   10

                                            AS OF OR FOR THE
                                           THREE MONTHS ENDED
                                                MARCH 31,                 AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                          ---------------------   ---------------------------------------------------------
                                           2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                           ($ IN MILLIONS)
                                                                                             
BALANCE SHEET DATA:(1)
Invested assets.........................  $44,002.6   $41,771.1   $42,090.6   $41,343.2   $40,686.7   $39,572.2   $38,658.3
Separate account assets.................   31,638.8    36,369.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
All other assets........................    6,771.0     6,662.1     7,250.2     7,496.7     4,247.3     3,921.4     3,317.7
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total assets...................  $82,412.4   $84,802.8   $84,257.0   $83,832.2   $73,943.3   $67,053.7   $59,142.3
                                          =========   =========   =========   =========   =========   =========   =========

Policyholder liabilities................  $38,763.7   $37,652.2   $38,095.7   $37,687.9   $35,781.7   $35,224.6   $34,725.3
Separate account liabilities............   31,638.8    36,369.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
Short-term debt.........................      550.1       766.2       459.5       547.3       290.9       313.7       198.5
Long-term debt..........................    1,294.1     1,519.6     1,336.5     1,492.9       670.9       458.9       399.1
All other liabilities...................    3,724.9     2,795.0     3,196.6     3,558.9     2,523.3     2,212.2     1,998.6
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total liabilities..............  $75,971.6   $79,102.6   $78,004.5   $78,279.3   $68,276.1   $61,769.5   $54,487.8
                                          =========   =========   =========   =========   =========   =========   =========

Retained earnings.......................  $ 6,417.8   $ 5,885.4   $ 6,312.5   $ 5,692.3   $ 4,950.2   $ 4,257.2   $ 3,803.7
Net unrealized gains (losses) on
  available-for-sale securities.........      319.9       (87.0)      129.9       (79.1)      745.9     1,037.5       859.7
Net foreign currency translation
  adjustment............................     (296.9)      (98.2)     (189.9)      (60.3)      (28.9)      (10.5)       (8.9)
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total equity...................  $ 6,440.8   $ 5,700.2   $ 6,252.5   $ 5,552.9   $ 5,667.2   $ 5,284.2   $ 4,654.5
                                          =========   =========   =========   =========   =========   =========   =========
PRINCIPAL LIFE STATUTORY DATA:(3)
Premiums and deposits(4)................  $ 1,264.7   $ 4,349.2   $15,653.3   $15,709.8   $14,120.3   $12,710.9   $12,156.2
Net income..............................      131.7       222.4       912.6       713.7       511.4       432.2       415.0

Statutory capital and surplus...........  $ 3,058.9   $ 3,266.5   $ 3,356.4   $ 3,151.9   $ 3,031.5   $ 2,811.1   $ 2,503.5
Asset valuation reserve.................      887.6       968.4       919.8       953.8       966.9     1,087.9     1,005.0
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Statutory capital and surplus
           and asset valuation
           reserve......................  $ 3,946.5   $ 4,234.9   $ 4,276.2   $ 4,105.7   $ 3,998.4   $ 3,899.0   $ 3,508.5
                                          =========   =========   =========   =========   =========   =========   =========
OTHER SUPPLEMENTAL DATA:
Net income..............................  $   105.3   $   193.1   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
Less:
Net realized capital gains (losses), as
  adjusted(5)...........................      (47.9)       49.8        93.1       266.9       320.7       111.4       261.0
Non-recurring items(6)..................      (20.5)         --      (101.0)         --       104.8          --          --
                                          ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Operating earnings.............  $   173.7   $   143.3   $   628.1   $   475.2   $   267.5   $   342.1   $   265.0
                                          =========   =========   =========   =========   =========   =========   =========
Operating return on average equity (in
  percents)(7)..........................      10.7%        8.8%       10.5%        8.9%        5.8%        8.5%        7.5%

Total return on average equity (in
  percents)(8)..........................       8.7%       11.7%       10.3%       13.9%       15.1%       11.3%       14.9%

Operating earnings before amortization
  of goodwill and other intangibles.....  $   186.6   $   153.1   $   670.8   $   492.0   $   304.0   $   352.0   $   273.7

Assets under management (in billions)...  $   113.0   $   117.7   $   117.5   $   116.6   $    80.4   $    72.1   $    63.0

Number of employees (actual)............     17,363      16,668      17,473      17,129      15,970      17,637      17,010

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. Segment operating earnings is determined
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. 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,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

                                        7
   11

    The following table provides selected segment information as of or for the
three months ended March 31, 2001 and 2000 and as of or for each of the years
ended December 31, 2000, 1999 and 1998. The segment information is reported on a
consolidated basis.

                                                    AS OF OR FOR THE THREE MONTHS                  AS OF OR FOR THE YEAR
                                                           ENDED MARCH 31,                           ENDED DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN MILLIONS)
                                                                                                 
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(9).......................  $ 1,015.7       46%      $   868.3       38%      $ 3,533.9       40%      $ 3,472.6
 International Asset Management and
   Accumulation..........................      144.4        6           157.4        7           630.7        7           379.6
 Life and Health Insurance...............    1,002.4       45         1,047.4       46         4,122.6       46         3,985.5
 Mortgage Banking........................      119.6        5            97.7        5           359.8        4           398.3
 Corporate and Other(9)(10)..............       35.0        2            29.0        1            97.1        1            61.9
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating revenues..........  $ 2,317.1      104%      $ 2,199.8       97%      $ 8,744.1       98%      $ 8,297.9

 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(5)...........................     (81.1)      (4)            70.8        3           140.8        2           403.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total consolidated revenues.......  $ 2,236.0      100%      $ 2,270.6      100%      $ 8,884.9      100%      $ 8,701.4
                                           =========      ===       =========      ===       =========      ===       =========
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................  $    88.8       51%      $    88.7       62%      $   356.6       57%      $   356.6
 International Asset Management and
   Accumulation..........................      (5.3)      (3)           (4.5)      (3)           (8.5)      (1)          (38.4)
 Life and Health Insurance...............       42.5       24            36.6       25           162.3       26            90.7
 Mortgage Banking........................       23.9       14            18.0       13            50.0        8            56.8
 Corporate and Other.....................       23.8       14             4.5        3            67.7       10             9.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating earnings..........  $   173.7      100%      $   143.3      100%      $   628.1      100%      $   475.2
                                           =========      ===       =========      ===       =========      ===       =========
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................  $    70.6       67%      $    69.9       36%      $   320.7       52%      $   321.2
 International Asset Management and
   Accumulation..........................     (25.6)     (24)             0.2       --           (7.1)      (1)          (30.7)
 Life and Health Insurance...............       42.0       40            91.4       48           209.6       34           100.8
 Mortgage Banking........................       23.9       22            18.0        9            50.0        8            56.8
 Corporate and Other.....................      (5.6)      (5)            13.6        7            47.0        7           294.0
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total net income..................  $   105.3      100%      $   193.1      100%      $   620.2      100%      $   742.1
                                           =========      ===       =========      ===       =========      ===       =========
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................  $64,144.6       78%      $66,312.3       78%      $65,795.9       78%      $65,096.4
 International Asset Management and
   Accumulation..........................    4,928.1        6         5,550.8        7         5,525.9        7         5,926.8
 Life and Health Insurance...............   10,406.6       13        10,080.9       12        10,421.1       12         9,949.8
 Mortgage Banking........................    1,915.2        2         1,793.9        2         1,556.3        2         1,737.7
 Corporate and Other(11).................    1,017.9        1         1,064.9        1           957.8        1         1,121.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets......................  $82,412.4      100%      $84,802.8      100%      $84,257.0      100%      $83,832.2
                                           =========      ===       =========      ===       =========      ===       =========
OTHER SUPPLEMENTAL DATA:
Assets Under Management:
 ($ in billions)
 U.S. Asset Management and
   Accumulation..........................  $    76.6       69%      $    75.0       64%      $    78.1       67%      $    75.6
 International Asset Management and
   Accumulation..........................       25.1       22            29.8       25            28.4       24            30.6
 Life and Health Insurance...............        9.4        8             9.1        8             9.3        8             8.7
 Mortgage Banking(12)....................        0.4       --             1.8        1             0.2       --             0.5
 Corporate and Other.....................        1.5        1             2.0        2             1.5        1             1.2
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets under management.....  $   113.0      100%      $   117.7      100%      $   117.5      100%      $   116.6
                                           =========      ===       =========      ===       =========      ===       =========

                                                  AS OF OR FOR THE YEAR
                                                   ENDED DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN MILLIONS)
                                                           
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(9).......................      40%      $ 2,933.1       36%
 International Asset Management and
   Accumulation..........................       4           223.1        3
 Life and Health Insurance...............      46         3,893.1       47
 Mortgage Banking........................       4           340.6        4
 Corporate and Other(9)(10)..............       1           342.5        4
                                              ---       ---------      ---
       Total operating revenues..........      95%      $ 7,732.4       94%
 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(5)...........................       5           464.5        6
                                              ---       ---------      ---
       Total consolidated revenues.......     100%      $ 8,196.9      100%
                                              ===       =========      ===
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................      75%      $   238.4       89%
 International Asset Management and
   Accumulation..........................     (8)          (35.4)     (13)
 Life and Health Insurance...............      19            50.0       19
 Mortgage Banking........................      12            58.8       22
 Corporate and Other.....................       2          (44.3)     (17)
                                              ---       ---------      ---
       Total operating earnings..........     100%      $   267.5      100%
                                              ===       =========      ===
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................      43%      $   277.0       40%
 International Asset Management and
   Accumulation..........................     (4)          (10.1)      (1)
 Life and Health Insurance...............      13           112.0       16
 Mortgage Banking........................       8            58.8        8
 Corporate and Other.....................      40           255.3       37
                                              ---       ---------      ---
       Total net income..................     100%      $   693.0      100%
                                              ===       =========      ===
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................      78%      $58,701.5       80%
 International Asset Management and
   Accumulation..........................       7         1,239.4        2
 Life and Health Insurance...............      12         9,116.1       12
 Mortgage Banking........................       2         1,810.4        2
 Corporate and Other(11).................       1         3,075.9        4
                                              ---       ---------      ---
       Total assets......................     100%      $73,943.3      100%
                                              ===       =========      ===
OTHER SUPPLEMENTAL DATA:
Assets Under Management:
 ($ in billions)
 U.S. Asset Management and
   Accumulation..........................      65%      $    67.2       84%
 International Asset Management and
   Accumulation..........................      26             1.2        1
 Life and Health Insurance...............       8             8.2       10
 Mortgage Banking(12)....................      --             0.7        1
 Corporate and Other.....................       1             3.1        4
                                              ---       ---------      ---
       Total assets under management.....     100%      $    80.4      100%
                                              ===       =========      ===

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

 (1) Periods prior to December 31, 2000 have been reclassified to conform to the
     presentation for that period.

                                        8
   12

 (2) Our consolidated financial results were affected by the following
     transactions that affect year-to-year comparability:

     - On February 15, 2001, we disposed of all of the stock of Principal
       International Espana, S.A. de Seguros de Vida, our subsidiary in Spain,
       for nominal proceeds, resulting in a net realized capital loss of $38.4
       million, ceasing our business operations in Spain. Total assets of our
       operations in Spain as of December 31, 2000 were $222.7 million. Revenues
       of $24.1 million from our operations in Spain were included in our
       consolidated results of operations for the three months ended March 31,
       2000, and revenues of $49.4 million, $51.7 million and $46.0 million were
       included in our results of operations for the years ended December 31,
       2000, 1999 and 1998, respectively. We included net income of $3.3 million
       from our operations in Spain for the three months ended March 31, 2000,
       and a net loss of $1.2 million and net income of $0.9 million and $2.8
       million in our results of operations for the years ended December 31,
       2000, 1999 and 1998, respectively. Our consolidated results of operations
       for the three months ended March 31, 2001 did not include revenues or net
       income from our operations in Spain.

     - On August 31, 1999, we acquired several companies affiliated with Bankers
       Trust Australia Group from Deutsche Bank AG at a purchase price of $1.4
       billion. The acquired companies now operate under the name BT Financial
       Group. We accounted for the acquisition using the purchase method. We
       included the results of operations of the acquired companies in our
       International Asset Management and Accumulation segment and our
       consolidated financial statements from the date of acquisition. Revenues
       of $63.5 million and net loss of $5.6 million were included in our
       consolidated results of operations for the three months ended March 31,
       2001. Revenues of $72.7 million and net income of $0.5 million were
       included in our consolidated results of operations for the three months
       ended March 31, 2000. Revenues of $285.5 million and net income of $6.5
       million were included in our consolidated results of operations for the
       year ended December 31, 2000. Revenues of $116.5 million and net loss of
       $3.1 million were included in our consolidated results of operations for
       the year ended December 31, 1999. We accounted for the purchase price as
       follows: $897.4 million of identifiable intangibles, consisting primarily
       of management rights and the BT brand name, $38.5 million of workforce
       intangibles and $408.6 million of resulting goodwill, which are being
       amortized on a straight line basis over 40 years, 8 years and 25 years,
       respectively.

     - We acquired Compania de Seguros de Vida El Roble S.A., or El Roble, a
       Chilean life insurance company, for a purchase price of $73.4 million in
       July 1998. We included El Roble's financial results in our International
       Asset Management and Accumulation segment. We combined the operations of
       our existing Chilean life insurance affiliate with the operations of El
       Roble to form Principal International de Chile. Our consolidated
       financial results related to these companies' combined operations
       include: total revenues of $47.0 million and $48.4 million for the three
       months ended March 31, 2001 and 2000, respectively, and $200.2 million,
       $178.1 million and $155.2 million for the years ended December 31, 2000,
       1999 and 1998, respectively; and net income of $2.4 million and $2.3
       million for the three months ended March 31, 2001 and 2000, respectively,
       and $10.2 million, $0.5 million and $17.0 million for the years ended
       December 31, 2000, 1999 and 1998, respectively.

     - In July 1998, we established our residential mortgage loan wholesale
       distribution system, a new distribution channel, by acquiring ReliaStar
       Mortgage Corporation for a purchase price of $18.6 million. We have
       integrated the operations of ReliaStar Mortgage Corporation into
       Principal Residential Mortgage, Inc., as part of our Mortgage Banking
       segment.

     - Effective April 1, 1998, we transferred substantially all of our health
       maintenance organization operations, or HMO operations, to Coventry
       Health Care, Inc., or Coventry, in exchange for 42% of their common
       stock. Our net equity in the transferred HMO operations had a carrying
       value of $170.0 million on April 1, 1998. We sold our remaining HMO
       operations in 1998 for $20.5 million resulting in no realized capital
       gain or loss. Prior to the transfer to Coventry, our Corporate and Other
       segment included $266.7 million of HMO revenues in our results for 1998.
       We report our investment in Coventry in our Corporate and Other segment
       and account for it using the equity method. Our share of Coventry's net
       income was $4.9 million and $6.0 million for the three months ended March
       31, 2001 and 2000, respectively, and $20.0 million and $19.1 million for
       the years ended December 31, 2000 and 1999, respectively. Our share of
       Coventry's net loss was $9.8 million for the year ended December 31,
       1998. In September 2000, we sold a portion of our Coventry stock, which
       reduced our ownership interest to approximately 25% of Coventry stock and
       resulted in a net realized capital gain of $13.9 million, net of tax. Our
       carrying amount in Coventry was $128.9 million as of March 31, 2001.

 (3) Statutory data have been provided from quarterly and annual statements of
     Principal Life filed with insurance regulatory authorities. Certain
     financial information for periods beginning on or after January 1, 2001 are
     not comparable to information from earlier periods. Statutory data as of or
     for the three months ended March 31, 2001 were prepared in conformity with
     the NAIC Codification of Statutory Accounting Principles ("Codification"),
     adopted as prescribed and permitted by the Insurance Division, Department
     of Commerce of the State of Iowa, effective January 1, 2001. As allowed by
     Codification, prior period information was not restated. Statutory data as

                                        9
   13

     of or for the three months ended March 31, 2000 and as of or for the years
     ended December 31, 2000, 1999, 1998, 1997 and 1996 were prepared in
     conformity with accounting practices prescribed or permitted on the dates
     thereof by the Insurance Division, Department of Commerce of the State of
     Iowa.

 (4) Codification, as adopted by Principal Life on January 1, 2001, has
     significantly impacted the reporting of Principal Life's statutory premiums
     and deposits for the three months ended March 31, 2001. Under Codification,
     amounts received for deposit-type contracts are no longer reported in the
     statement of operations as revenue, but rather are reported directly as an
     increase in an appropriate policy reserve account, a treatment that is
     similar to that under U.S. GAAP. This has the effect of decreasing reported
     total revenues and total expenses of Principal Life, with no effect to
     statutory net income or statutory surplus. Premiums and deposits for the
     three months ended March 31, 2000, and for the years ended December 31,
     2000, 1999, 1998, 1997 and 1996 included amounts received for deposit-type
     contracts of $3,190.0 million, $11,273.2 million, $11,571.5 million,
     $10,312.6 million, $8,694.9 million and $7,493.9 million, respectively.

 (5) Net realized capital gains (losses), as adjusted, are net of tax, related
     changes in the amortization pattern of deferred policy acquisition costs,
     recognition of front-end fee revenues for sales charges on pension products
     and services and net realized capital gains credited to customers. This
     presentation may not be comparable to presentations made by other
     companies. Deferred policy acquisition costs represent commissions and
     other selling expenses that vary with and are directly related to the
     production of business. These acquisition costs are deferred and amortized
     in conformity with GAAP.

     Following is a reconciliation of net realized capital gains from the
     consolidated financial statements and the adjustment made to calculate
     segment operating earnings for the periods indicated:

                                                 FOR THE THREE
                                                 MONTHS ENDED
                                                   MARCH 31,             FOR THE YEAR ENDED DECEMBER 31,
                                                ---------------   ---------------------------------------------
                                                 2001     2000     2000     1999      1998      1997     1996
                                                ------   ------   ------   -------   -------   ------   -------
                                                                        ($ IN MILLIONS)
                                                                                   
     Net realized capital gains (losses)......  $(80.9)  $ 70.3   $139.9   $ 404.5   $ 465.8   $175.3   $ 387.8
     Recognition of front-end fee revenues....    (0.2)     0.5      0.9      (1.0)     (1.3)    (0.9)       --
                                                ------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses),
         including recognition of front-end
         fee revenues.........................   (81.1)    70.8    140.8     403.5     464.5    174.4     387.8
     Amortization of deferred policy
       acquisition costs related to net
       realized capital gains (losses)........     1.0      0.2     (0.3)      4.4       5.7     (1.7)       --
     Amounts credited to contractholder
       accounts...............................      --       --       --        --     (26.3)      --        --
     Non-recurring net realized capital gains
       (losses)...............................      --       --       --        --      (1.7)      --        --
                                                ------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses),
         including recognition of front-end
         fee revenues, net of related
         amortization of deferred policy
         acquisition costs and amounts
         credited to contractholders..........   (80.1)    71.0    140.5     407.9     442.2    172.7     387.8
     Income tax effect........................    32.2    (21.2)   (47.4)   (141.0)   (121.5)   (61.3)   (126.8)
                                                ------   ------   ------   -------   -------   ------   -------
       Net realized capital gains (losses), as
         adjusted.............................  $(47.9)  $ 49.8   $ 93.1   $ 266.9   $ 320.7   $111.4   $ 261.0
                                                ======   ======   ======   =======   =======   ======   =======

 (6) For the three months ended March 31, 2001, we excluded $20.5 million of
     non-recurring items, net of tax, from net income for our presentation of
     operating earnings. The non-recurring items included the negative effects
     of (a) a cumulative effect of accounting change related to our
     implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to
     Principal Mutual Holding Company's unaudited consolidated financial
     statements; (b) a loss contingency reserve established for sales practices
     litigation ($5.9 million); and (c) expenses related to our demutualization
     ($3.9 million).

    For the three months ended March 31, 2000, we did not exclude non-recurring
    items from net income for our presentation of operating earnings.

    For the year ended December 31, 2000, we excluded $101.0 million of
    non-recurring items, net of tax, from net income for our presentation of
    operating earnings. The non-recurring items included the negative effects of
    (a) a

                                        10
   14

     loss contingency reserve established for sales practices litigation ($93.8
     million) and (b) expenses related to our demutualization ($7.2 million).

    For the year ended December 31, 1998, we excluded $104.8 million of
    non-recurring items, net of tax, from net income for our presentation of
    operating earnings. The non-recurring items included:

     - the positive effects of (a) Principal Life's release of tax reserves and
       related accrued interest ($164.4 million) and (b) accounting changes by
       our international operations ($13.3 million); and

     - the negative effects of (a) expenses and adjustments for changes in
       amortization assumptions for deferred policy acquisition costs related to
       our corporate structure change to a mutual insurance holding company
       ($27.4 million) and (b) a contribution related to permanent endowment of
       the Principal Financial Group Foundation ($45.5 million).

 (7) We define operating return on average equity as operating earnings divided
     by average total equity, excluding accumulated other comprehensive income.
     The returns for interim reporting periods are calculated by using operating
     earnings for the trailing twelve months. Accumulated other comprehensive
     income has been excluded due to its volatility between periods and because
     such data are often excluded when evaluating the overall financial
     performance of insurers. Operating return on average equity should not be
     considered a substitute for any GAAP measure of performance.

 (8) We define total return on average equity as net income divided by average
     total equity, excluding accumulated other comprehensive income. The returns
     for interim reporting periods are calculated by using net income for the
     trailing twelve months. Accumulated other comprehensive income has been
     excluded due to its volatility between periods and because such data are
     often excluded when evaluating the overall financial performance of
     insurers.

 (9) We transferred our U.S. investment management operations from our Corporate
     and Other segment to our U.S. Asset Management and Accumulation segment
     effective January 1, 1999. The U.S. Asset Management and Accumulation
     segment received fee revenues for performing investment management services
     for other segments in 2001, 2000 and 1999. The Corporate and Other segment
     received fee revenues for performing investment management services for
     other segments prior to 1999.

(10) Includes inter-segment eliminations primarily related to real estate joint
     venture rental income. The Corporate and Other segment reported rental
     income from real estate joint ventures for office space used by other
     segments.

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

(12) Excludes our mortgage loan servicing portfolio.

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                                  RISK FACTORS

    An investment in our common stock involves a number of risks. You should
consider carefully, in addition to the other information contained in this
prospectus, the following factors before investing in shares of our common
stock. In reviewing information contained in this prospectus, you should bear in
mind that past experience is no indication of future performance.

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.

    We believe that our ability to compete is based on a number of factors
including scale, service, product features, price, investment performance,
commission structure, distribution capabilities, financial strength ratings and
name recognition. We compete with a large number of financial services companies
such as banks, broker-dealers, insurers and asset managers, many of which have
advantages over us in one or more of the above competitive factors.

    Each of our segments faces strong competition. The primary competitors for
our U.S. Asset Management and Accumulation segment are asset managers, banks,
broker-dealers and insurers. Our ability to increase and retain assets under
management is directly related to the performance of our investments as measured
against market averages and the performance of our competitors. Even when
securities prices are generally rising, performance can be affected by
investment styles. For example, as growth stocks have outperformed value stocks
in recent years, we have been at a competitive disadvantage due to our
historical emphasis on the value style of investing. Principal Capital
Management may also be at a disadvantage in competing for investment management
personnel due to its location in Des Moines.

    Competition for our International Asset Management and Accumulation segment
comes primarily from local financial services firms and other international
companies operating on a stand-alone basis or in partnership with local firms.
Our Life and Health Insurance segment competes with insurers and health
maintenance organizations. We compete with other mortgage bankers, commercial
banks, savings and loan associations, credit unions and other insurers in our
Mortgage Banking segment.

    National banks, with their large existing customer bases, may increasingly
compete with insurers as a result of court rulings allowing national banks to
sell annuity products in some circumstances, and as a result of recently enacted
legislation removing restrictions on bank affiliations with insurers.
Specifically, the Gramm-Leach-Bliley Act of 1999 permits mergers that combine
commercial banks, insurers and securities firms under one holding company. These
developments may increase competition, in particular for our asset management
and accumulation businesses, by substantially increasing the number, size and
financial strength of potential competitors who may be able to offer, due to
economies of scale, more competitive pricing than we can.

A DECLINE OR INCREASED VOLATILITY IN THE SECURITIES MARKETS COULD RESULT IN
INVESTORS WITHDRAWING FROM THE MARKETS OR DECREASING THEIR RATE OF INVESTMENT,
EITHER OF WHICH COULD REDUCE OUR NET INCOME, REVENUES AND ASSETS UNDER
MANAGEMENT.

    Favorable performance by the U.S., European and Australian securities
markets over the last five years has substantially increased investments in
these markets and has benefited our asset management and accumulation businesses
and increased our assets under management. In contrast to the U.S., European and
Australian securities markets, the securities markets in the emerging economies
in which we operate or invest, such as Indonesia or Argentina, have experienced
during this period economic disruption, devaluations of their currencies or
negative growth rates, which have suppressed our revenues and profits. In
addition, because the revenues of our asset management businesses are, to a
large extent, based on the value of assets under management, a decline in the
value of these assets would also decrease our revenues. Failure of the U.S.,
European and Australian securities markets to continue the favorable performance
they have experienced over the last five years could lead to investors
withdrawing from the markets, decreasing their rate of investment or refraining
from new investments which may reduce our net income, revenues and assets under
management. Our assets, earnings and ability to generate new sales in recent
years have also increased due to significant growth in the retirement-oriented
investment market. Some of that growth is attributable to the expansion of
non-U.S. government mandated retirement savings programs. If these programs are
reduced or eliminated, our net income, revenues and assets would suffer.

A DOWNGRADE IN PRINCIPAL LIFE'S FINANCIAL STRENGTH RATINGS MAY INCREASE POLICY
SURRENDERS AND WITHDRAWALS, REDUCE NEW SALES AND TERMINATE RELATIONSHIPS WITH
DISTRIBUTORS.

    Financial strength ratings are important factors in establishing the
competitive position of insurance companies. A rating downgrade, or the
potential for such a downgrade, of Principal Life could, among other things:

    - materially increase the number of policy or contract surrenders for all or
      a portion of their net cash values and withdrawals by policyholders of
      cash values from their policies;

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    - result in the termination of our relationships with broker-dealers, banks,
      agents, wholesalers and other distributors of our products and services;
      and

    - reduce new sales, particularly with respect to general account guaranteed
      investment contracts and funding agreements purchased by pension plans and
      other institutions.

    See "Business -- Ratings".

OUR EFFORTS TO REDUCE THE IMPACT OF INTEREST RATE CHANGES ON OUR PROFITABILITY
AND SURPLUS MAY NOT BE EFFECTIVE.

    We attempt to significantly reduce the impact of changes in interest rates
on the profitability and surplus of our asset accumulation and life and health
insurance operations. We accomplish this reduction primarily by managing the
duration of our assets relative to the duration of our liabilities. During a
period of rising interest rates, policy surrenders, withdrawals and requests for
policy loans may increase as customers seek to achieve higher returns. Despite
our efforts to reduce the impact of rising interest rates, we may be required to
sell assets to raise the cash necessary to respond to such surrenders,
withdrawals and loans, thereby realizing capital losses on the assets sold. An
increase in policy surrenders and withdrawals may also require us to accelerate
amortization of policy acquisition costs relating to these contracts, which
would further reduce our net income.

    During periods of low interest rates, borrowers may prepay or redeem
mortgages and bonds that we own, which would force us to reinvest the proceeds
at lower interest rates. For some of our products, such as guaranteed investment
contracts and funding agreements, we are unable to lower the rate we credit to
customers in response to the lower return we will earn on our investments. In
addition, it may be more difficult for us to maintain our desired spread between
the investment income we earn and the interest we credit to our customers during
periods of low interest rates thereby reducing our profitability.

    Changes in interest rates can also significantly affect the profitability of
our Mortgage Banking segment. During periods of declining interest rates, we may
lose mortgage loan servicing fees due to an increase in mortgage loan
refinancing activity. During periods of rising interest rates, we may suffer a
loss of mortgage loan origination fees due to a decrease in the overall number
of home sales and the number of mortgage loan refinancings. For further
discussion on interest rate risk management, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quantitative and
Qualitative Information About Market Risk -- Interest Rate Risk".

IF WE ARE UNABLE TO ATTRACT AND RETAIN SALES REPRESENTATIVES AND DEVELOP NEW
DISTRIBUTION SOURCES, SALES OF OUR PRODUCTS AND SERVICES MAY BE REDUCED.

    We distribute our asset accumulation, asset management and life and health
insurance products and services through a variety of distribution channels,
including our own internal sales representatives, independent brokers, banks,
broker-dealers and other third-party marketing organizations. We must attract
and retain sales representatives to sell our products. Strong competition exists
among financial services companies for efficient sales representatives. We
compete with other financial services companies for sales representatives
primarily on the basis of our financial position, support services and
compensation and product features. If we are unable to attract and retain
sufficient sales representatives to sell our products, our ability to compete
and revenues from new sales would suffer.

    For example, Rogers Benefit Group, a national independent marketing and
service organization, distributes a significant portion of our group insurance
products. For the year ended March 31, 2001, Rogers Benefit Group accounted for
35% of our group insurance sales. An interruption in or changes to our
relationship with Rogers Benefit Group could impair our ability to market our
group insurance products and reduce our revenues accordingly.

OUR INTERNATIONAL BUSINESSES FACE POLITICAL, LEGAL, OPERATIONAL AND OTHER RISKS
THAT COULD REDUCE OUR PROFITABILITY IN THOSE BUSINESSES.

    Our international businesses are subject to comprehensive regulation and
supervision from central and/or local governmental authorities in each country
in which we operate. New interpretations of existing laws and regulations or the
adoption of new laws and regulations may harm our international businesses and
reduce our profitability in those businesses. In particular, BT Financial
Group's profit could suffer if the Australian superannuation system is repealed
or amended to a lower rate of contribution.

    Our international businesses face political, legal, operational and other
risks that we do not face in our operations in the U.S. We face the risk of
discriminatory regulation, nationalization or expropriation of assets, price
controls and exchange controls or other restrictions that prevent us from
transferring funds from these operations out of the countries in which they
operate or converting local currencies we hold into U.S. dollars or other
currencies. Some of our international businesses are, and are likely to continue
to be, in emerging markets such as Indonesia and India where these risks are
heightened. In addition, we rely on local staff, including local sales forces,
in these countries and we may encounter labor problems especially in countries
such as Mexico, Argentina and Brazil where workers'

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associations and trade unions are strong. If our business model is not
successful in a particular country, we may lose all or most of our investment in
that country.

FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD REDUCE OUR PROFITABILITY.

    Principal International generally writes policies denominated in various
local currencies and invests the premiums and deposits in local currencies.
Although investing in local currencies limits the effect of currency exchange
rate fluctuation on local operating results, fluctuations in such rates affect
the translation of these results into our consolidated financial statements. BT
Financial Group conducts its asset management operations in both local
currencies and U.S. dollars. Accordingly, fluctuations in foreign currency
exchange rates may reduce our profitability. For example, fluctuations in
average foreign currency of our international operations to U.S. dollar exchange
rates reduced our consolidated operating earnings by $0.2 million for the three
months ended March 31, 2001, by $0.6 million for the year ended December 31,
2000, and by $0.3 million for the year ended December 31, 1999.

A DECLINE IN AUSTRALIAN EQUITY VALUES MAY REDUCE THE PROFITABILITY OF BT
FINANCIAL GROUP'S MARGIN LENDING BUSINESS.

    A decline in the Australian equity markets or short-term volatility in the
Australian securities markets could result in investors withdrawing from the
markets or decreasing their rate of investment and level of participation in the
margin lending business, either of which could reduce the profitability of BT
Financial Group's margin lending business. Additionally, short-term volatility
in the securities markets could result in the placing of margin calls. An
inability by borrowers under BT Financial Group's margin lending business to
satisfy these margin calls may decrease our profits.

OUR RESERVES ESTABLISHED FOR FUTURE POLICY BENEFITS AND CLAIMS MAY PROVE
INADEQUATE, REQUIRING US TO INCREASE LIABILITIES.

    Our earnings depend significantly upon the extent to which our actual claims
experience is consistent with the assumptions used in setting prices for our
products and establishing liabilities for future insurance and annuity policy
benefits and claims. The liability that we have established for future policy
benefits is based on assumptions concerning a number of factors, including the
amount of premiums that we will receive in the future, rate of return on assets
we purchase with premiums received, expected claims, expenses and persistency,
which is the measurement of the percentage of insurance policies remaining in
force from year to year, as measured by premiums. However, due to the nature of
the underlying risks and the high degree of uncertainty associated with the
determination of the liabilities for unpaid policy benefits and claims, we
cannot determine precisely the amounts which we will ultimately pay to settle
these liabilities. As a result, we may experience volatility in the level of our
reserves from period to period, particularly for our health and disability
insurance products. To the extent that actual claims experience is less
favorable than our underlying assumptions, we could be required to increase our
liabilities, which may harm our financial strength and reduce our profitability.

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.

  AN INCREASE IN DEFAULTS ON OUR FIXED MATURITY SECURITIES PORTFOLIO MAY REDUCE
  OUR PROFITABILITY.

    We are subject to the risk that the issuers of the fixed maturity securities
we own will default on principal and interest payments, particularly if a major
downturn in economic activity occurs. As of March 31, 2001, our U.S. investment
operations held $28.3 billion, or 66%, of total U.S. invested assets, of which
approximately 8% were below investment grade, including $253.5 million, or 1%,
of our total fixed maturity securities which we classified as either "problem,"
"potential problem," or "restructured." See "Investments -- U.S. Investment
Operations -- U.S. Investment Results -- Fixed Maturity Securities." As of March
31, 2001, our international investment operations held $0.8 billion, or 71%, of
total international invested assets. Some of these securities have been rated on
the basis of the issuer's country credit rating while others have not been rated
by external agencies, which makes the assessment of credit quality more
difficult. See "Investments -- International Investment Operations." An increase
in defaults on our fixed maturity securities portfolio could harm our financial
strength and reduce our profitability.

  AN INCREASED RATE OF DELINQUENCY AND DEFAULTS ON OUR COMMERCIAL MORTGAGE
  LOANS, ESPECIALLY THOSE WITH BALLOON PAYMENTS, COULD DECREASE OUR
  PROFITABILITY.

    Our commercial mortgage loan portfolio faces both delinquency and default
risk. Commercial mortgage loans of $10.5 billion represented 24% of our total
invested assets as of March 31, 2001. As of March 31, 2001, loans that were
either delinquent or in the process of foreclosure totaled, on a statutory
basis, $7.2 million, or 0.1%, of our commercial mortgage loan portfolio,
compared to the industry average of 0.3% as reported by the American Council of
Life Insurers as of March 31, 2001. The performance of our commercial mortgage
loan portfolio, however, may fluctuate in the future. An increase in the
delinquency rate of our commercial mortgage loan portfolio could harm our
financial strength and decrease our profitability.

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    As of March 31, 2001, approximately $8.0 billion, or 75%, of our commercial
mortgage loans before valuation allowance had balloon payment maturities. A
balloon maturity is a loan with larger dollar amounts of payments becoming due
in the later years of the loan. The default rate on commercial mortgage loans
with balloon payment maturities has historically been higher than for commercial
mortgage loans with standard repayment schedules. Since most of the principal is
being repaid at maturity, the amount of loss on a default is generally greater
than on other commercial mortgage loans. An increase in defaults on such loans
as a result of the foregoing factors could harm our financial strength and
reduce our net income.

  WE MAY HAVE DIFFICULTY SELLING OUR PRIVATELY PLACED FIXED MATURITY SECURITIES,
  COMMERCIAL MORTGAGE LOANS AND REAL ESTATE INVESTMENTS BECAUSE THEY ARE LESS
  LIQUID THAN OUR PUBLICLY TRADED FIXED MATURITY SECURITIES.

    As of March 31, 2001, our privately placed fixed maturity securities,
commercial mortgage loans and real estate investments represented approximately
53% of the value of our invested assets. If we require significant amounts of
cash on short notice, we may have difficulty selling these investments at
attractive prices, in a timely manner, or both.

  DERIVATIVE INSTRUMENTS MAY NOT BE HONORED BY COUNTERPARTIES RESULTING IN
  INEFFECTIVE HEDGING OF OUR RISKS.

    We use derivative instruments to hedge various risks we face in our
businesses. We enter into a variety of derivative instruments, including
interest rate swaps, swaptions, currency swaps, financial futures and
mortgage-backed security forward contracts, with a number of counterparties. If,
however, our counterparties fail to honor their obligations under the derivative
instruments, we will have failed to effectively hedge the related risk. That
failure may harm our financial strength and reduce our profitability.

  ENVIRONMENTAL LIABILITY EXPOSURE MAY RESULT FROM OUR COMMERCIAL MORTGAGE LOAN
  PORTFOLIO AND REAL ESTATE INVESTMENTS.

    Liability under environmental protection laws resulting from our commercial
mortgage loan portfolio and real estate investments may harm our financial
strength and reduce our profitability. Under the laws of several states,
contamination of a property may give rise to a lien on the property to secure
recovery of the costs of cleanup. In some states, this kind of lien has priority
over the lien of an existing mortgage against the property, which would impair
our ability to foreclose on that property should the related loan be in default.
In addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, we may be liable
for costs of addressing releases or threatened releases of hazardous substances
that require remedy at a property securing a mortgage loan held by us, if our
agents or employees have become sufficiently involved in the hazardous waste
aspects of the operations of the related obligor on that loan, regardless of
whether or not the environmental damage or threat was caused by the obligor. We
also may face this liability after foreclosing on a property securing a mortgage
loan held by us. This may harm our financial strength and decrease our
profitability.

  REGIONAL CONCENTRATION OF OUR COMMERCIAL MORTGAGE LOAN PORTFOLIO IN CALIFORNIA
  MAY SUBJECT US TO ECONOMIC DOWNTURNS OR LOSSES ATTRIBUTABLE TO EARTHQUAKES IN
  THAT STATE.

    California accounted for 21%, or $2.3 billion, of our commercial mortgage
loan portfolio as of March 31, 2001. Due to this concentration of commercial
mortgage loans in California, we are exposed to potential losses resulting from
the risk of an economic downturn in California as well as to catastrophes, such
as earthquakes, that may affect the region. While we generally do not require
earthquake insurance for properties on which we make commercial mortgage loans,
we do take into account property specific engineering reports, construction type
and geographical concentration by fault lines in our investment underwriting
guidelines. If economic conditions in California deteriorate or catastrophes
occur, we may experience delinquencies on the portion of our commercial mortgage
loan portfolio located in California in the future, which may harm our financial
strength and reduce our profitability.

OUR ABILITY TO PAY DIVIDENDS AND MEET OUR OBLIGATIONS MAY BE CONSTRAINED BY THE
LIMITATION ON DIVIDENDS IOWA INSURANCE LAWS IMPOSE ON PRINCIPAL LIFE.

    We are an insurance holding company whose assets include all of the
outstanding shares of the common stock of Principal Life and other direct
subsidiaries. Our ability to pay dividends to our stockholders and meet our
obligations, including paying operating expenses and any debt service, depends
upon the receipt of dividends from Principal Life. Iowa insurance laws impose
limitations on the ability of Principal Life to pay dividends to us. Any
inability of Principal Life to pay dividends to us in the future may cause us to
be unable to pay dividends to our stockholders and meet our other obligations.

WE MAY NEED TO FUND DEFICIENCIES IN OUR CLOSED BLOCK; ASSETS ALLOCATED TO THE
CLOSED BLOCK BENEFIT ONLY THE HOLDERS OF CLOSED BLOCK POLICIES.

    In connection with its conversion in 1998 into a stock life insurance
company, Principal Life established an accounting mechanism, known as a CLOSED
BLOCK, for the benefit of participating ordinary life insurance policies that

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had a dividend scale in force on July 1, 1998. Dividend scales are the actuarial
formulas used by life insurance companies to determine amounts payable as
dividends on participating policies based on experience factors relating to,
among other things, investment results, mortality, lapse rates, expenses,
premium taxes and policy loan interest and utilization rates. The Closed Block
was designed to provide reasonable assurance to policyholders included in the
Closed Block that, after the conversion, assets would be available to maintain
the aggregate dividend scales in effect for 1997 if the experience underlying
such scales were to continue.

    We allocated assets to the Closed Block as of July 1, 1998 in an amount such
that we expect their cash flows, together with anticipated revenues from the
policies in the Closed Block, to be sufficient to support the Closed Block
business, including payment of claims, expenses, charges and taxes and to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continues,
and to allow for appropriate adjustments in such scales if the experience
changes. We bear the costs of expenses associated with Closed Block policies
and, accordingly, these costs were not funded as part of the assets allocated to
the Closed Block. Any increase in such costs in the future will be borne by us.
As of March 31, 2001, Closed Block assets and liabilities were $4,568.8 million
and $5,597.6 million, respectively. As of December 31, 2000, Closed Block assets
and liabilities were $4,507.4 million and $5,547.8 million, respectively. As of
December 31, 1999, Closed Block assets and liabilities were $4,317.4 million and
$5,394.6 million, respectively.

    We will continue to pay guaranteed benefits under the policies included in
the Closed Block, in accordance with their terms. The Closed Block assets, cash
flows generated by the Closed Block assets and anticipated revenues from polices
included in the Closed Block may not be sufficient to provide for the benefits
guaranteed under these policies. If they are not sufficient, we must fund the
shortfall. Even if they are sufficient, we may choose for business reasons to
support dividend payments on policies in the Closed Block with our general
account funds.

    The Closed Block assets, cash flows generated by the Closed Block assets and
anticipated revenues from policies in the Closed Block will benefit only the
holders of those policies. In addition, to the extent that these amounts are
greater than the amounts estimated at the time we funded the Closed Block,
dividends payable in respect of the policies included in the Closed Block may be
greater than they would have been in the absence of a Closed Block. Any excess
earnings will be available for distribution over time to Closed Block
policyholders but will not be available to our stockholders.

CHANGES IN REGULATIONS OR ACCOUNTING STANDARDS MAY REDUCE OUR PROFITABILITY.

  CHANGES IN REGULATION IN THE UNITED STATES MAY REDUCE OUR PROFITABILITY.

    Our insurance business is subject to comprehensive state regulation and
supervision throughout the U.S. The primary purpose of state regulation of the
insurance business is to protect policyholders, not stockholders. The laws of
the various states establish insurance departments with broad powers to regulate
such matters as:

    - licensing companies to transact business,

    - licensing agents,

    - admitting statutory assets,

    - mandating a number of insurance benefits,

    - regulating premium rates,

    - approving policy forms,

    - regulating unfair trade and claims practices,

    - establishing statutory reserve requirements and solvency standards,

    - fixing maximum interest rates on life insurance policy loans and minimum
      rates for accumulation of surrender values,

    - restricting various transactions between affiliates, and

    - regulating the types, amounts and valuation of investments.

    State insurance regulators and the National Association of Insurance
Commissioners, or NAIC, continually reexamine existing laws and regulations, and
may impose changes in the future.

    Federal legislation and administrative policies in areas such as employee
benefit plan regulation, financial services regulation and federal taxation can
reduce our profitability. For example, Congress has, from time to time,
considered legislation relating to changes in the Employee Retirement Income
Security Act of 1974 to permit application of state law remedies, such as
consequential and punitive damages, in lawsuits for wrongful denial of benefits,
which, if adopted, could increase our liability for damages in future
litigation. Additionally, new interpretations of existing laws

                                        16
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and the passage of new legislation may harm our ability to sell new policies and
increase our claims exposure on policies we issued previously. In addition,
reductions in contribution levels to defined contribution plans may decrease our
profitability. See "Regulation -- U.S. Operations -- Federal Insurance
Initiatives".

  CHANGES IN FEDERAL TAXATION COULD REDUCE SALES OF OUR INSURANCE, ANNUITY AND
  INVESTMENT PRODUCTS.

    Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on income attributable to a
distribution under the contract for the year in which the distribution is made.
Congress has, from time to time, considered legislation that would reduce or
eliminate the benefit of such deferral of taxation on the accretion of value
within life insurance and non-qualified annuity contracts. Enactment of such
legislation, including a simplified "flat tax" income structure with an
exemption from taxation for investment income, could result in fewer sales of
our insurance, annuity and investment products.

  REPEAL OR MODIFICATION OF THE FEDERAL ESTATE TAX COULD REDUCE OUR REVENUES.

    Repeal or modification of the federal estate tax could reduce our revenues.
Through the twelve months ended December 31, 2000, we received recurring premium
of $43.9 million for survivorship life insurance policies we have sold. A
significant number of these policies were purchased for the purpose of providing
cash to pay federal estate taxes. Repeal or modification of the federal estate
tax could result in policyholders reducing coverage under or surrendering these
policies. See "Regulation -- U.S. Operations -- Tax Legislation".

  CHANGES IN FEDERAL, STATE AND FOREIGN SECURITIES LAWS MAY REDUCE OUR
  PROFITABILITY.

    Our asset management and accumulation and life insurance businesses are
subject to various levels of regulation under federal, state and foreign
securities laws. These laws and regulations are primarily intended to protect
investors in the securities markets or investment advisory or brokerage clients
and generally grant supervisory agencies broad administrative powers, including
the power to limit or restrict the conduct of business for failure to comply
with such laws and regulations. Changes to these laws or regulations that
restrict the conduct of our business could reduce our profitability.

  WE MAY EXPERIENCE VOLATILITY IN NET INCOME DUE TO CHANGES IN STANDARDS FOR
  ACCOUNTING FOR DERIVATIVES.

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 will require us to include all derivatives in
our consolidated statement of financial position at fair value. The accounting
for changes in the fair value of a derivative depends on its intended use.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and recorded as a
component of equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. We adopted SFAS 133
effective January 1, 2001. The cumulative effect of the application of SFAS 133
included a negative effect of $10.7 million on net income and a negative effect
of $14.2 million on accumulated other comprehensive income. During the three
months ended March 31, 2001, we recognized the change in value related to cash
flow hedges in accumulated other comprehensive income, and reclassified a gain
from accumulated other comprehensive income to earnings, which was offset by net
losses on the assets or liabilities being hedged. These amounts were not
material. The impact of the application of SFAS 133 on net income during the
three months ended March 31, 2001 was $6.1 million and the impact to accumulated
other comprehensive income was $(10.0) million.

A CHALLENGE TO THE INSURANCE COMMISSIONER OF THE STATE OF IOWA'S APPROVAL OF THE
PLAN OF CONVERSION COULD PUT THE TERMS OF OUR DEMUTUALIZATION IN QUESTION AND
REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

    After a public hearing, the Insurance Commissioner of the State of Iowa will
determine whether to approve the plan of conversion. To approve the plan, the
Insurance Commissioner of the State of Iowa must find that the plan meets the
standards of Iowa law governing demutualizations, including, among other things,
whether the plan is fair and equitable to Principal Mutual Holding Company and
policyholders of Principal Life. We do not expect that any order of the
Insurance Commissioner of the State of Iowa approving the plan will address the
fairness of the plan to purchasers of common stock in the offering.

    The Iowa law governing the demutualization provides that an action
challenging the plan can be filed, within the limitation period provided under
Iowa law, after the Insurance Commissioner of the State of Iowa issues her order
approving the plan. The existence of such a challenge could reduce the market
price of our common stock. In the event that the plan or the Insurance
Commissioner of the State of Iowa's order approving the plan is challenged, a
successful challenge could result in monetary damages, a modification of the
plan or the Insurance Commissioner of the State of Iowa's approval of the plan
being set aside. In addition, a successful challenge would likely result in
substantial

                                        17
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uncertainty relating to the terms and effectiveness of the plan, and an extended
period of time might be required to reach a final determination. Such an outcome
would likely reduce the market price of our common stock.

LITIGATION AND REGULATORY INVESTIGATIONS MAY HARM OUR FINANCIAL STRENGTH AND
REDUCE OUR PROFITABILITY.

    We are a plaintiff or defendant in actions arising out of our insurance
business and investment operations. We are, from time to time, also involved in
various governmental and administrative proceedings. Such litigation may harm
our financial strength and reduce our profitability.

    Life insurance companies have historically been subject to substantial
litigation resulting from claims disputes and other matters. Most recently, such
companies have faced extensive claims, including class-action lawsuits, alleging
improper life insurance sales practices. Negotiated settlements of such
class-action lawsuits have had a material adverse effect on the business,
financial condition and results of operations of other life insurance companies.
Principal Life is currently a defendant in two purported class-action lawsuits
alleging improper sales practices. We have reached an agreement in principle to
settle both of those lawsuits. The settlement has received court approval. We
have established reserves at a level sufficient to cover the cost of the
settlement.

SALES OF SHARES DISTRIBUTED IN THE DEMUTUALIZATION MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK.

    Substantially all of our shares of common stock distributed in the
demutualization and this offering will be freely tradable. Sales of substantial
amounts of common stock, or the perception that such sales could occur, could
reduce the prevailing market price for our common stock. We believe the
following factors may increase selling pressure on our common stock:

    - Some policyholders, in particular owners of larger policies, who elect to
      receive cash instead of common stock as compensation in the
      demutualization may nevertheless receive common stock compensation if
      there is insufficient cash available for cash payment to policyholders.
      Those policyholders who elected to receive cash instead of common stock
      may be especially likely to sell the shares of common stock they received
      in the demutualization to realize cash proceeds.

    - Some policyholders may be fiduciaries of pension plans that are subject to
      the Employee Retirement Income Security Act of 1974, or ERISA, trusts that
      own individual life insurance policies or welfare benefit plans. Those
      policyholders, particularly if they did not elect to receive common stock
      as compensation in the demutualization, may determine that the exercise of
      their fiduciary duties requires them to promptly sell the shares of common
      stock they received in the demutualization.

    - We must establish a commission-free sales program in the event there are
      policyholders who receive in the demutualization in exchange for their
      membership interests 99 or fewer shares of our common stock. Under this
      program, these policyholders would have the opportunity to sell their
      shares at prevailing market prices without paying brokerage commission,
      mailing charges, registration fees, or other administrative or similar
      expenses. This program would begin no sooner than six months after the
      date of the closing of this offering, and no later than 12 months after
      the date of the closing of this offering, and would continue for at least
      3 months. Policyholders who received in the demutualization 100 or more
      shares of common stock would not be eligible for the commission-free sales
      program.

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.

    State laws and our certificate of incorporation and by-laws may delay,
defer, prevent, or render more difficult a takeover attempt that our
stockholders might consider in their best interests. For instance, they may
prevent our stockholders from receiving the benefit from any premium to the
market price of our common stock offered by a bidder in a takeover context. Even
in the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock if they are
viewed as discouraging takeover attempts in the future.

    State laws and our certificate of incorporation and by-laws may also make it
difficult for stockholders to replace or remove our management. These provisions
may facilitate management entrenchment which may delay, defer or prevent a
change in our control, which may not be in the best interests of our
stockholders.

    Under the Iowa insurance laws, for a period of five years following the
effective date of the demutualization, no person may acquire beneficial
ownership of more than 5% of the outstanding shares of our common stock without
the prior approval of the Insurance Commissioner of the State of Iowa and our
board of directors. The Insurance Commissioner of the State of Iowa and our
board of directors may consider the following factors:

    - the effects of the action on our stockholders;

    - the effects of the action on our employees, suppliers, creditors and
      customers;

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    - the effects of the action on the communities in which we operate;

    - our long-term as well as short-term interests; and

    - the long-term as well as short-term interests of our stockholders.

    This restriction does not apply to acquisitions made by us or made through
an employee benefit plan or employee benefit trust sponsored by us.

    The following provisions, included in our certificate of incorporation and
by-laws, may also have anti-takeover effects and may delay, defer or prevent a
takeover attempt that our stockholders might consider in their best interests.
In particular, our certificate of incorporation and by-laws:

    - permit our board of directors to issue one or more series of preferred
      stock;

    - divide our board of directors into three classes;

    - limit the ability of stockholders to remove directors;

    - prohibit stockholders from filling vacancies on our board of directors;

    - prohibit stockholders from calling special meetings of stockholders;

    - impose advance notice requirements for stockholder proposals and
      nominations of directors to be considered at stockholder meetings; and

    - require the approval by the holders of at least 75% of our outstanding
      common stock for the amendment of our by-laws and provisions of our
      certificate of incorporation governing:

     - the classified board,

     - the director's discretion in determining what he or she reasonably
       believes to be in the best interests of Principal Financial Group, Inc.,

     - the liability of directors, and

     - the elimination of stockholder actions by written consent.

    In addition, Section 203 of the General Corporation Law of the State of
Delaware may limit the ability of an "interested stockholder" to engage in
business combinations with us. An interested stockholder is defined to include
persons owning 15% or more of our outstanding voting stock.

    Our stockholder rights plan may have anti-takeover effects. The stockholder
rights plan is designed to protect our stockholders in the event of unsolicited
offers to acquire us and other coercive takeover tactics which, in the opinion
of our board of directors, could impair the board's ability to represent
stockholder interests. Our stockholder rights plan might render an unsolicited
takeover more difficult or less likely to occur, even though such a takeover
might offer our stockholders the opportunity to sell their stock at a price
above the prevailing market price and may be favored by our stockholders.

    See "Description of Capital Stock and Change of Control Related Provisions"
for additional information on the anti-takeover measures applicable to us.

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   23

                        STATISTICAL INFORMATION SOURCES

    This prospectus includes statistical data regarding the asset management and
accumulation, life and health insurance and mortgage banking industries.

    - Statistical data regarding industry growth projections of, as well as our
      market share within, the pension industry are based on information
      included in publications of Spectrem Group, a pension consulting
      organization, and data from the 2000 Marketplace Update prepared by RG
      Wuelfing & Associates, Inc. for members of Society of Professional
      Administrators and Recordkeepers. Spectrem Group data regarding our market
      share within the pension industry exclude all employers with fewer than 5
      employees.

    - Statistical data regarding our market share within the 401(k) plan market
      are derived from information collected through surveys conducted by CFO
      Magazine, a monthly magazine offering coverage of business issues from the
      perspective of the senior financial officer.

    - Statistical data regarding our use of information technology are provided
      by InformationWeek Magazine, a weekly publication reporting on the use of
      technology in business.

    - Statistical data regarding the group insurance, annuity, guaranteed
      investment contract and funding agreement industries are based on
      information reported to LIMRA International, Inc., a financial services
      industry marketing research organization. LIMRA International, Inc.
      rankings are based on data provided by U.S. companies in connection with
      LIMRA International, Inc. conducted surveys.

    - Statistical data comparing the investment performance of some of our
      mutual funds and separate accounts to our competitors are provided by
      Morningstar, an independent provider of financial information concerning
      mutual fund performance and the Investment Company Institute, the national
      association of the American investment company industry.

    - Statistical data regarding the Australian asset management and
      accumulation industries are based on information reported to ASSIRT, an
      Australian investment research firm.

    - Statistical data regarding the growth of Australian superannuation assets
      are provided by Cerulli Associates, Inc., a Boston- and London-based
      research and consulting firm that specializes in financial institutions.

    - Statistical data regarding the performance of our margin lending business
      in Australia are provided by Cannex, an Australian margin lending rating
      agency.

    - Statistical data regarding the group life and health insurance industry
      are based on information provided by the 1999 Life and Health Statistical
      report of National Underwriter, a weekly publication servicing the
      insurance and financial services industries.

    - Statistical data regarding the mortgage banking industry are based on
      information provided by Inside Mortgage Finance, a weekly newsletter
      reporting on the residential mortgage industry, and by the 1999 Cost of
      Servicing Survey conducted by the Mortgage Bankers Association of America,
      an association representing the interests of members of the real estate
      finance industry.

    - Statistical data regarding the performance of our commercial mortgages and
      information regarding our equity real estate portfolio are provided by the
      American Council of Life Insurers, an organization representing the
      interests of members of the life insurance industry.

    - Statistical data regarding the mutual fund industry are based on
      information provided by the 2001 Mutual Fund Fact Book of the Investment
      Company Institute, an investment company industry organization.

    The organizations gathering such data use methodology and conventions that
they deem appropriate to measure the companies within the relevant industry
segment. These organizations generally indicate that they have obtained
information from sources believed to be reliable, but do not guarantee the
accuracy and completeness of such information. While we believe this information
to be reliable, we have not independently verified such data.

                                        20
   24

                              THE DEMUTUALIZATION

    In the following section, we provide a summary of the demutualization and of
the plan of conversion. The following is just a summary, and is qualified by
reference to the actual terms of the plan of conversion. A copy of the plan of
conversion has been filed as an exhibit to the registration statement of which
this prospectus forms a part.

THE PLAN OF CONVERSION

  ADOPTION AND APPROVAL OF THE PLAN OF CONVERSION

    The board of directors of Principal Mutual Holding Company unanimously
adopted the plan of conversion on March 31, 2001. The principal feature of the
plan of conversion is the conversion of Principal Mutual Holding Company from a
mutual insurance holding company into a stock company, a form of conversion
known as "demutualization".

    Because Principal Mutual Holding Company is a mutual insurance holding
company organized under the laws of the State of Iowa, the demutualization is
governed by Iowa law. Iowa law requires that the plan of conversion be approved
by the policyholders entitled to vote on the plan of conversion by two-thirds of
the votes cast, and also by the Insurance Commissioner of the State of Iowa.

    The plan of conversion will not become effective unless, after conducting a
public hearing on the plan of conversion, the Insurance Commissioner of the
State of Iowa approves it based on a finding, among other things, that the plan
of conversion is fair and equitable to Principal Mutual Holding Company and the
policyholders of Principal Life. See "Risk Factors -- A challenge to the
Insurance Commissioner of the State of Iowa's approval of the plan of conversion
could put the terms of our demutualization in question and reduce the market
price of our common stock." In addition, the effectiveness of the
demutualization and the closing of this offering are conditioned on their
simultaneous occurrence.

  STEPS TO DEMUTUALIZATION

    We are currently a wholly-owned subsidiary of Principal Mutual Holding
Company. The demutualization of Principal Mutual Holding Company includes the
following steps, all of which will occur on the date of the closing of this
offering:

    - Principal Mutual Holding Company will convert from a mutual insurance
      holding company into a stock company;

    - all membership interests of Principal Life's policyholders in Principal
      Mutual Holding Company will be extinguished;

    - the converted Principal Mutual Holding Company will merge with and into
      Principal Iowa Newco, Inc.;

    - Principal Financial Group, Inc., an Iowa business corporation and
      subsidiary of Principal Mutual Holding Company, will merge with and into
      Principal Iowa Newco, Inc.;

    - Principal Financial Services, Inc., an Iowa business corporation, will
      merge with and into Principal Iowa Newco, Inc., and Principal Iowa Newco,
      Inc. will change its name to "Principal Financial Services, Inc.";

    - we will sell shares of our common stock to the public in this offering;

    - policyholders entitled to receive compensation in the demutualization will
      receive shares of our common stock, cash or policy credits as compensation
      for the extinguishment of their membership interests in Principal Mutual
      Holding Company no later than 75 days after the closing of this offering,
      unless the Insurance Commissioner of the State of Iowa approves a later
      date; and

    - we will contribute to Principal Financial Services, Inc., and Principal
      Financial Services, Inc. will contribute to Principal Life, all or a
      portion of the net proceeds from this offering, as described in "Use of
      Proceeds".

    In addition to this offering, we may also conduct a private placement of our
common stock, a private placement or public offering of convertible preferred
stock, a private placement or public offering of debt or seek other sources of
capital. The primary purpose of any of these capital raising transactions would
be to fund cash and policy credit elections.

    When the demutualization and this offering are complete, we will be a
Delaware public company. We will own 100% of the stock of Principal Financial
Services, Inc., and Principal Financial Services, Inc. will own 100% of the
stock of Principal Life and other operating subsidiaries of the Principal
Financial Group.

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   25

    The following chart illustrates our corporate structure prior to and
following the demutualization:

               [STRUCTURE BEFORE & AFTER DEMUTUALIZATION GRAPHS]

  EFFECTIVE DATE

    The demutualization will become effective on the date of the closing of this
offering. The plan of conversion provides that the effective date will occur
after the approval by the policyholders entitled to vote on the plan of
conversion and the Insurance Commissioner of the State of Iowa, but on or before
12 months after the date on which the Insurance Commissioner of the State of
Iowa approves the plan of conversion. With the approval of the Insurance
Commissioner of the State of Iowa, the effective date deadline may be extended.

                                        22
   26

  ADDITIONAL REVIEW AND APPROVAL

    Our plan of conversion is also subject to review by the New York
Superintendent of Insurance, who may raise objections if he determines that its
provisions are unfair or inequitable to New York policyholders. We have also
applied to the Department of Labor for prohibited transaction exemptions under
ERISA. A more complete description of these exemptions is provided under the
heading "-- ERISA Considerations".

PAYMENT OF CONSIDERATION TO ELIGIBLE POLICYHOLDERS

  AMOUNT AND FORM OF CONSIDERATION

    Until the effective date of the demutualization, Principal Mutual Holding
Company is a mutual insurance holding company governed by its members, who are
policyholders of Principal Life. In connection with the demutualization, the
membership interests of Principal Life policyholders in Principal Mutual Holding
Company will be extinguished, and policyholders entitled to receive compensation
in the demutualization will receive compensation in exchange for the
extinguishment of their membership interests.

    Policyholders entitled to receive compensation in the demutualization are
those persons who:

    - owned on March 31, 2000 a Principal Life policy or contract and who had a
      continuous membership interest in Principal Mutual Holding Company through
      ownership of a Principal Life policy or contract from March 31, 2000 until
      the date of the closing of this offering; or

    - were issued a Principal Life policy or contract on or before April 8, 1980
      and transferred ownership rights of that policy or contract on or before
      April 8, 1980, so long as such policy or contract remained in force until
      the date of the closing of this offering.

    Whether or not a policy or contract is in force is determined based upon our
records. In general, a policy or contract is in force on a given day if it has
been issued and is in effect, has not matured by death or otherwise or been
surrendered or otherwise terminated, and verbal or written notice of the
insured's death has not been received by Principal Life. A policy is generally
not in force until it is issued and is in effect. However, a policy is
considered to be in force if we have received at our administrative office an
application complete on its face or payment of the full initial premium, or such
lesser amount required by our normal administrative procedures, together with
sufficient information to effect a contract of insurance according to our normal
administrative procedures for coverage to be effective, provided that such
policy is later issued in accordance with the terms of its application.

    We currently estimate that compensation will consist of a fixed component
equal to 100 shares of common stock for each policyholder entitled to receive
compensation in the demutualization, and a variable component of additional
shares allocated, based on actuarial formulas described in our plan of
conversion and the actuarial contribution memorandum. The actuarial formulas
take into account a policy's past and estimated future contributions to the
surplus and asset valuation reserve of Principal Life.

    The compensation will be in the form of either policy credits, cash or
shares of our common stock. In the case of the MANDATORY POLICY CREDITS, policy
credits are either an increase in cash value, account value, dividend
accumulations, face amount, extended term period or benefit payment, as
appropriate, depending on the policy. In the case of group policies, policy
credits are either SEPARATE ACCOUNT POLICY CREDITS or Account Value Policy
Credits. The form of compensation will be determined as follows:

    POLICY CREDITS.  The following types of policies will be required to receive
or be eligible for policy credits:

    - If the policy is required to receive Mandatory Policy Credits, the policy
      credits may take the form of an increase in cash value, account value,
      dividend accumulations, face amount, extended term period or benefit
      payment, as appropriate, depending on the policy. The following types of
      policies are required to receive Mandatory Policy Credits:

     - Individual retirement annuity contracts under Section 408(b) or Section
       408A of the Internal Revenue Code.

     - Tax sheltered annuity contracts under Section 403(b) of the Internal
       Revenue Code.

     - Individual annuity contracts issued directly to a plan participant under
       a plan qualified under Section 401(a) or Section 403(a) of the Internal
       Revenue Code.

     - Individual life insurance policies issued directly to a plan participant
       under a plan qualified under Section 401(a) or Section 403(a) of the
       Internal Revenue Code.

    - If the policy is owned by a QUALIFIED PLAN CUSTOMER, the policy credit may
      take the form of Separate Account Policy Credits, which may be allocated
      to participants under the policy. A Qualified Plan Customer may elect
      common stock or, subject to the limits described in the plan of
      conversion, Account Value Policy Credits or cash as consideration rather
      than Separate Account Policy Credits. If no election is made, such
      Qualified Plan

                                        23
   27

      Customer will receive Separate Account Policy Credits. However, Qualified
      Plan Customers whose group annuity contracts were issued in California
      will not be eligible for Separate Account Policy Credits. Instead, they
      are eligible to receive common stock or, subject to the limits described
      in the plan of conversion, Account Value Policy Credits or cash. If no
      election is made, Qualified Plan Customers whose group annuity contracts
      were issued in California will receive common stock.

    - If the policy is owned by a NON-RULE 180 QUALIFIED PLAN CUSTOMER, the
      policy credit may take the form of an Account Value Policy Credit, which
      may be allocated to participants under the policy. A Non-Rule 180
      Qualified Plan Customer may elect to receive common stock or, subject to
      the limits described in the plan of conversion, cash as consideration
      rather than Account Value Policy Credits. If no election is made, such
      Non-Rule 180 Qualified Plan Customer will receive Account Value Policy
      Credits.

    CASH.  The following types of policies will be eligible solely for cash:

    - Policies for which the mailing address of the policyholder on Principal
      Life's or Principal Mutual Holding Company's records is one at which mail
      is undeliverable.

    - Policies for which the mailing address of the policyholder on Principal
      Life's or Principal Mutual Holding Company's records is located outside
      the United States.

    - Policies for which it is not reasonably feasible or appropriate to provide
      consideration in the form that policyholders would otherwise receive.

    All policyholders who are entitled to receive shares of our common stock
will be permitted, prior to the vote of the policyholders entitled to vote on
the plan of conversion, to express a preference to receive cash, rather than
common stock, as consideration for the extinguishment of their membership
interests. Cash will be distributed to such policyholders to the extent
available. Eligible policyholders that elect cash and are allocated 100 shares
or fewer will receive cash. See "-- Limits on Amount Available for Cash, Account
Value Policy Credits and Separate Account Policy Credits Compensation".

    COMMON STOCK.  Except for policies which are eligible solely for Mandatory
Policy Credits or cash, all eligible policies will be eligible for shares of our
common stock.

  CALCULATION OF COMPENSATION

    COMMON STOCK.  Policyholders receiving common stock as compensation will
receive the number of shares of common stock ultimately allocated to them. The
value of each share of common stock will be equal to its public trading price on
any particular day.

    CASH AND POLICY CREDITS (OTHER THAN SEPARATE ACCOUNT POLICY
CREDITS).  Policyholders receiving cash or policy credits (other than Separate
Account Policy Credits) will receive an amount equal to the number of shares of
common stock that are allocated to them multiplied by the price per share at
which the common stock is sold in this offering.

    SEPARATE ACCOUNT POLICY CREDITS.  Policyholders receiving Separate Account
Policy Credits will receive an amount equal to their respective share of the
assets in the separate account holding shares of our common stock and maintained
by Principal Life. Because our common stock will initially be the only asset in
this separate account, any policyholder's share of the assets when the separate
account is initiated will be equal to the number of shares of our common stock
allocated to that policyholder multiplied by the public trading price of our
common stock at that time. See "-- Operation of the Separate Account Holding
Shares of our Common Stock".

  LIMITS ON AMOUNT AVAILABLE FOR CASH, ACCOUNT VALUE POLICY CREDITS AND SEPARATE
  ACCOUNT POLICY CREDITS COMPENSATION

    Each policyholder who is eligible to receive common stock will have an
opportunity to elect cash. If cash is not elected by such policyholder, a
preference for common stock will be assumed, unless such policyholder is a
Qualified Plan Customer or a Non-Rule 180 Qualified Plan Customer.

    There may be a limit to the amount of funds available to pay cash and
provide Account Value Policy Credits to eligible policyholders allocated more
than 100 shares of common stock under our plan of conversion. It is possible
that the total funds raised in this offering and the other capital raising
transactions, if applicable, will not be sufficient to fund cash distributions
or Account Value Policy Credits for all of the eligible policyholders who have
been allocated more than 100 shares of common stock and who have elected cash,
or elected or are deemed to have elected Account Value Policy Credits. However,
eligible policyholders who are allocated 100 or fewer shares of common stock
will receive cash or Account Value Policy Credits, if they so elect.

    In the event that the total available funds are not sufficient, the
available funds will be distributed to those expressing a preference for cash or
Account Value Policy Credits based on the number of shares of common stock

                                        24
   28

that would be distributed to each electing policyholder, progressing from the
smallest number of shares to the largest number at which all policyholders
electing cash or Account Value Policy Credits can be accommodated.

    Qualified Plan Customers whose cash or Account Value Policy Credit
preferences cannot be satisfied will instead receive Separate Account Policy
Credits. Non-Rule 180 Qualified Plan Customers and Qualified Plan Customers
whose group annuity contracts were issued in California whose cash or Account
Value Policy Credit preferences cannot be satisfied will instead receive shares
of our common stock.

    The maximum number of allocated shares for which cash or Account Value
Policy Credits will be available will depend on a number of factors. These
factors include the number of policyholders eligible for common stock, Mandatory
Policy Credits or cash, the size of the initial public offering, the initial
public offering stock price, the size of any other capital raising transaction,
if applicable, and the percentage of policyholders who elect to receive cash or
Account Value Policy Credits.

    In addition, the amount of Separate Account Policy Credits will be limited
so that no less than 50% of the total consideration distributed to policyholders
entitled to receive compensation in the demutualization will be in the form of
common stock.

  ACTUARIAL OPINION

    Principal Mutual Holding Company retained Milliman & Robertson, Inc., an
independent actuarial consulting firm, to advise it in connection with actuarial
matters involved in the development of the plan of conversion and the payment of
consideration to policyholders entitled to receive compensation in the
demutualization. The opinion of Daniel J. McCarthy, F.S.A., an independent
consulting actuary associated with Milliman & Robertson, Inc., dated March 31,
2001, states, in reliance upon the matters described in such opinion, that the
principles, assumptions and methodologies used to allocate the consideration
among policyholders entitled to receive compensation in the demutualization are
reasonable and appropriate and result in an allocation of consideration that is
fair and equitable to these policyholders. A copy of the opinion is attached as
Annex A to this prospectus.

OPERATION OF THE SEPARATE ACCOUNT HOLDING SHARES OF OUR COMMON STOCK

    We estimate that approximately 50 million shares of our common stock may be
issued to a new separate account of Principal Life in connection with funding
the Separate Account Policy Credits. As described above, these shares will be
held in the separate account for the benefit of Qualified Plan Customers and may
be sold in the market from time to time as a result of instructions from the
Qualified Plan Customers holding interests in this separate account. If not
directed otherwise by the Qualified Plan Customer, the separate account
interests owned by that Qualified Plan Customer may also be allocated to
participants' benefit plan accounts under the applicable policy. Dividends with
respect to these shares will be paid to Principal Life and allocated to the
separate account. The Qualified Plan Customer may request Principal Life to
transfer the value of its interest in the separate account to Principal Life's
general account or to another account for investment purposes. Principal Life
will have no right to use the assets of the separate account for any obligation
or purpose other than those relating to the group annuity contract under which
the assets in the separate account will be held.

    Principal Life will hold legal title to these shares in a fiduciary
capacity. The Qualified Plan Customers will remain the beneficial owners of
these shares and be able to exercise voting rights. The plan of conversion
provides that Principal Life, as record holder of the shares held in the
separate account, will solicit voting instructions from the Qualified Plan
Customers holding interests in the separate account and will vote the shares as
instructed.

    If the Qualified Plan Customer fails to provide instructions to Principal
Life, the non-directed shares (the shares as to which Principal Life has
received no instruction) will be voted as follows:

    - if the matter involved is routine, Principal Life will vote the
      non-directed shares under a "mirror voting" provision, in other words the
      non-directed shares will be voted in the same proportion, either for,
      against or abstain, as the shares in the separate account for which
      Principal Life has received instructions; or

    - if the matter involved is not routine, an independent fiduciary appointed
      by Principal Life will instruct Principal Life to vote the non-directed
      shares in a way that, in the independent fiduciary's judgment, would be in
      the best interest of the participants and beneficiaries of the benefits
      plans of Qualified Plan Customers in whose interest such shares are held;
      Principal Life will retain fiduciary responsibility as to these matters,
      and the independent fiduciary will in effect act as Principal Life's
      agent.

    Routine matters refer to matters within the ordinary course of the business
of the corporation and its stockholders, such as the election of directors at an
annual meeting. Non-routine matters refer to fundamental corporate decisions
outside the ordinary course of the business of the corporation and its
stockholders, such as a potential change of control.

                                        25
   29

    Principal Life expects to appoint as independent fiduciary a major financial
institution with investment management expertise. These voting procedures will
be set forth in an agreement between Principal Life and the independent
fiduciary as well as in the plan of operation for the separate account.

    In our future consolidated financial statements, we will report the shares
of our common stock held by the new separate account of Principal Life as an
investment of the separate account, and will establish a corresponding separate
account liability, based on the fair value of those shares, for the amounts owed
to the Qualified Plan Customers under the related group variable annuity
contracts. This is consistent with the accounting under generally accepted
accounting principles for other separate accounts where all investment risks and
rewards are borne by the contractholders. Generally accepted accounting
principles accord special accounting treatment to group variable annuity
contracts issued by separate accounts, recognizing that such contracts provide
contractholders with virtually all the rights of ownership except legal title to
the shares held in the separate account and therefore company shares held in a
subsidiary's separate account need not be accounted for as treasury stock.

THE CLOSED BLOCK

    At the time our existing pre-demutualization mutual insurance holding
company structure was created in 1998, for policy dividend purposes only,
Principal Life formed and began operating a Closed Block for the benefit of
individual policies paying experience-based policy dividends. For accounting
purposes only, assets of Principal Life were allocated to the Closed Block in an
amount that produces cash flows which, together with anticipated revenue from
the Closed Block policies and contracts, were expected to be sufficient to
support the Closed Block policies including, but not limited to, provisions for
payment of claims, expenses, charges and taxes, and to provide for continuation
of policy and contract dividends in aggregate in accordance with the 1997
dividend scales, if the experience underlying such scales continues, and to
allow for appropriate adjustments in such scales, if such experience changes.
Assets in the Closed Block remain as general account assets of Principal Life
and are fully subject to the claims of creditors of Principal Life, like any
general account assets. The Closed Block continues in existence as established
and will not be affected by the demutualization. No additional policies will be
added to the Closed Block as a result of the demutualization.

COMMISSION-FREE SALES PROGRAM

    In accordance with the plan of conversion, subject to any applicable
requirements of federal or state securities laws, we must establish a
commission-free sales program in the event there are policyholders entitled to
receive compensation in the demutualization who receive 99 or fewer shares of
our common stock. This circumstance would only occur if we adjust the total
number of shares allocated to policyholders entitled to receive compensation in
the demutualization so that the fixed component would consist of fewer than 100
shares of our common stock. This adjustment would only take place with the prior
approval of the Insurance Commissioner of the State of Iowa, and would most
likely occur in order to ensure that the filing range for the price of a share
of our common stock is a range that we and the managing underwriters of this
offering deem appropriate.

    If we have to establish this program, the plan of conversion requires that
we begin the program no sooner than the first business day after the six-month
anniversary, and no later than the first business day after the twelve-month
anniversary, of the date of the closing of this offering, and continue the
program for at least three months. We may extend the three-month period if we
determine the extension to be appropriate and in the best interest of the
policyholders entitled to receive compensation in the demutualization. Under
this program, each policyholder entitled to receive compensation in the
demutualization who receives 99 or fewer shares of our common stock would have
the opportunity at any time during the three-month period to sell all, but not
less than all, of those shares in one transaction at prevailing market prices
without paying brokerage commissions or other similar expenses. We would also
offer each stockholder entitled to participate in the commission-free sales
program the opportunity to purchase shares of our common stock as necessary to
increase its holdings to a 100 share round lot without paying brokerage
commissions or other similar expenses. This stock purchase program would occur
simultaneously and in conjunction with the commission-free sales program.

LIMITATIONS ON ACQUISITION AND DISPOSITION OF SECURITIES BY OFFICERS AND
DIRECTORS

    No officer, director or employee will receive stock or cash compensation at
the time of the demutualization other than what he or she may receive as a
policyholder entitled to receive compensation in the demutualization or as a
plan participant of a policyholder entitled to receive compensation in the
demutualization.

    Until six months after the completion of the demutualization, we may not
award any stock options, stock grants or other stock-based grants to any of our
executive officers or directors, our executive officers and directors and their
families may not purchase shares of our common stock, and our executive officers
and directors may not receive distributions of stock under our long-term
performance plan. Until eighteen months after the completion of the
demutualization, we may not issue any shares of our common stock to a
participant under our excess plan (our non qualified retirement savings plan).
No stock incentive awards to our executive officers and no awards to our
directors

                                        26
   30

may become exercisable or distributable earlier than eighteen months after the
completion of the demutualization, except in cases of death or disability or, in
limited circumstances, with the approval of the Insurance Commissioner of the
State of Iowa. These restrictions apply not only to those who are "executive
officers" within the meaning given that term in the Securities Exchange Act of
1934, but also to the officers of any of our affiliated companies or
subsidiaries with a title of Second Vice President or a more senior title, whom
we refer to in the plan of conversion as our "executive officers."

    These limitations do not prevent us from issuing common stock:

    - in connection with our employees savings plan, our agents savings plan,
      any employee stock ownership plan or other employee benefit plan
      established for the benefit of our employees and qualified under the
      Internal Revenue Code; or

    - to match contributions by employees to any such plan.

    Further, our stock incentive plan allows us to issue shares of common stock
to our employees other than our executive officers and directors, as well as to
our agents, but not before 30 days after the completion of the demutualization.

    We may issue shares of common stock, options or other stock-based incentives
pursuant to our stock incentive plan, the long-term performance plan, the
directors stock plan and the excess plan, although the maximum number of shares
of common stock that may be issuable under all such plans, and any new plan
awarding our common stock, during the five year period after the completion of
the demutualization, is 6% of the number of shares outstanding immediately
following the completion of the demutualization, unless the shareholders vote to
increase such maximum number. The number of shares that may be awarded in the
eighteen months following the completion of the demutualization is limited to
40% of such maximum. These limitations are not applicable to three plans: our
employee stock purchase plan, pursuant to which we may issue up to 2% of the
total number of shares outstanding immediately following the completion of the
demutualization, our employees savings plan and our agents savings plan.

LIMITATIONS ON ACQUISITIONS OF OUR COMMON STOCK

    Iowa law prohibits for a period of 5 years following the date of
distribution of consideration to the policyholders in exchange for their
membership interests:

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, from directly or indirectly acquiring or offering to acquire the
      beneficial ownership of more than 5% of any class of voting security of
      the reorganized company, and

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, who acquires 5% or more of any class of voting security of the
      reorganized company prior to the conversion, from directly or indirectly
      acquiring or offering to acquire the beneficial ownership of additional
      voting securities of the reorganized company,

unless the acquisition is approved by the Insurance Commissioner of the State of
Iowa and by the board of directors of the reorganized company.

    By virtue of these provisions, we may not be subject to an acquisition by
another company during the 5 years following the distribution of consideration
to policyholders entitled to receive compensation in the demutualization.

AMENDMENTS TO THE PLAN

    The board of directors of Principal Mutual Holding Company may amend the
plan of conversion at any time before the date of the closing of this offering
with the approval of the Insurance Commissioner of the State of Iowa. The board
of directors of Principal Financial Group, Inc. may amend the plan of conversion
after the date of the closing of this offering with the approval of the
Insurance Commissioner of the State of Iowa.

POSSIBILITY OF APPEAL

    Under Iowa law, judicial review of a decision of the Insurance Commissioner
of the State of Iowa may be sought by initiation of an action, within the
limitation period provided under Iowa law, after the Insurance Commissioner of
the State of Iowa issues her order approving the plan of conversion.

ERISA CONSIDERATIONS

    We and our subsidiaries provide a variety of fiduciary and other services to
employee benefit plans that are also policyholders. The provision of such
services may cause us to be a "party in interest" or "disqualified person," as
such terms are defined in ERISA and the Internal Revenue Code, with respect to
such plans. Unless an exemption is

                                        27
   31

obtained from the Department of Labor, some transactions between parties in
interest or disqualified persons and those plans are prohibited by ERISA and the
Internal Revenue Code. We have applied to the Department of Labor for prohibited
transaction exemptions under ERISA, which would, if granted, provide relief from
the restrictions of ERISA and the Internal Revenue Code to permit policyholders
entitled to receive compensation in the demutualization to receive common stock,
cash or policy credits in accordance with the plan of conversion.

    We have requested that the Department of Labor grant a prohibited
transaction exemption with respect to compensation under the plan of conversion
to policyholders entitled to receive compensation in the demutualization as to
which we are a "party in interest" or "disqualified person." Such exemption
would be subject to various conditions, including the implementation of the plan
of conversion in accordance with procedural and substantive safeguards that are
imposed under the Iowa demutualization law and supervised by the Insurance
Commissioner of the State of Iowa. Based upon discussions with the Department of
Labor, we believe that the Department of Labor will issue an exemption prior to
the date of the closing of this offering. However, we cannot guarantee that the
Department of Labor will take such action. If the Department of Labor does not
issue the requested exemption prior to the date of the closing of this offering,
we may, with the approval of the Insurance Commissioner of the State of Iowa,
either pay such consideration to policyholders entitled to receive compensation
in the demutualization or delay such payment and place such consideration in an
escrow or similar arrangement until such time as the Department of Labor issues
the exemption. The escrow or arrangement will provide for payment of such
consideration plus interest earned on such consideration not later than the
third anniversary of the date of the closing of this offering.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION TO US

    We have received a private letter ruling from the Internal Revenue Service
to the effect that, among other matters:

    - The conversion of Principal Mutual Holding Company from a mutual insurance
      holding company into a stock company will be treated as a
      "recapitalization" within the meaning of section 368(a)(1)(E) of the
      Internal Revenue Code;

    - The merger of Principal Mutual Holding Company into Principal Iowa Newco,
      Inc. will not be prevented from qualifying as a "reorganization" within
      the meaning of section 368(a)(1)(A) or section 368(a)(2)(D) of the
      Internal Revenue Code by reason of Principal Mutual Holding Company's
      status as a "mutual insurance holding company" until immediately prior to
      such merger; and

    - The affiliated federal income tax group of which Principal Mutual Holding
      Company is the common parent immediately before the consummation of the
      proposed transaction will remain in existence, with Principal Financial
      Group, Inc., a Delaware corporation and the issuer of our common stock, as
      the common parent.

    We have received opinions of our special tax counsel, Debevoise & Plimpton,
dated May 24, 2001, substantially to the effect that, under the federal income
tax law and facts as they existed on the date of the opinion:

    - Policies issued by Principal Life prior to the completion of the
      demutualization will not be deemed newly-issued policies for any material
      federal income tax purpose as a result of Principal Mutual Holding
      Company's conversion from a mutual insurance holding company into a stock
      company;

    - Policyholders receiving solely shares of our common stock and Qualified
      Plan Customers whose policies are credited with Separate Account Policy
      Credits should not recognize income, gain or loss for federal income tax
      purposes as a result of the consummation of our demutualization;

    - For policies that are tax sheltered annuities, individual retirement
      annuities, Roth IRAs or individual life insurance policies or annuity
      contracts issued to participants in qualified retirement plans, the
      completion of our demutualization, including the crediting of compensation
      in the form of policy credits, will not result in any transaction that
      will (1) be treated as a contribution or distribution that will result in
      penalties to the holder or that will be subject to withholding, (2)
      disqualify an individual retirement annuity policy or give rise to a
      prohibited transaction between the individual retirement annuity and the
      individual for whose benefit it is established, or his or her beneficiary,
      or (3) adversely affect the tax-favored status of these policies under the
      Internal Revenue Code or result in penalties or any other material adverse
      federal income tax consequences to the holders of these policies under the
      Internal Revenue Code;

    - For policies that are part of a tax-qualified pension or profit-sharing
      plan described in section 401(a) or section 403(a) of the Internal Revenue
      Code and that will be credited with compensation in the form of policy
      credits, the completion of our demutualization, including the crediting of
      compensation in the form of policy credits, will not result in any
      transaction that will disqualify the plan, give rise to a prohibited
      transaction between the plan and the individual for whose benefit it is
      established, or his or her beneficiary, or otherwise adversely affect the
      tax-favored status of the policies under the Internal Revenue Code or
      result in penalties or any other material adverse federal income tax
      consequences to the holders of these policies under the Internal Revenue
      Code; and

                                        28
   32

    - The summary of the principal federal income tax consequences to
      policyholders of their receipt of compensation under our plan of
      conversion, that is contained under the heading "U.S. Federal Income Tax
      Considerations" in the information booklet provided to policyholders, is,
      to the extent it describes matters of law or legal conclusions and subject
      to the limitations and assumptions described in it, an accurate summary of
      the material federal income tax consequences to policyholders of the
      consummation of our plan of conversion under the federal income tax law.

    In order for us to complete our demutualization, our special tax counsel
must confirm that each of these opinions continues to be true under the facts
and federal income tax law as they exist on the date of the closing of this
offering.

    Based on the Internal Revenue Service rulings we have received and the
opinions of our special tax counsel described above, we believe that the
Principal Financial Group will not realize significant income, gain or loss for
federal income tax purposes as a result of the consummation of the
demutualization under the terms of the plan of conversion.

    The private letter rulings we have received from the Internal Revenue
Service and the opinions of special tax counsel described above are based on the
accuracy of representations and undertakings made by us.

                                        29
   33

                                USE OF PROCEEDS

    Our net proceeds from the offering will be approximately $1,987.1 million,
or $2,286.0 million if the underwriters exercise in full their option to
purchase additional shares of common stock in the offering, assuming an initial
public offering price of $19.00 per share, and after deducting underwriting
discounts and commissions and the estimated expenses of the offering. The
following table summarizes the use of these net proceeds, assuming the
underwriters do not exercise their option to purchase additional shares of
common stock in the offering:

USE OF PROCEEDS:                                               ($ IN MILLIONS)
                                                            
Cash contributed to Principal Life..........................      $1,737.1
Proceeds retained by Principal Financial Group, Inc. .......         250.0
                                                                  --------
         Total net proceeds.................................      $1,987.1
                                                                  ========

    The plan of conversion requires us to contribute all or a portion of the net
proceeds to Principal Life to fund (1) policy credits and cash payments for
policyholders for whom policy credits or cash are the required form of
compensation; (2) the elections for cash and the elections or deemed elections
for Account Value Policy Credits that are attributable to policyholders entitled
to these forms of compensation; and (3) an amount equal to the fees and expenses
of the demutualization paid by Principal Life. We may retain up to $250.0
million of any remaining proceeds. We will contribute any remaining proceeds in
excess of this $250.0 million limit to Principal Life.

    In connection with the demutualization, Principal Life will require funds to
satisfy the following needs. As of the date of this prospectus:

    - $36.1 million is estimated to be required for the cost of the nonrecurring
      expenses of Principal Life directly related to the demutualization;

    - $1,533.0 million is estimated to be used to make cash payments and fund
      Account Value Policy Credits to policyholders entitled to receive
      compensation in the demutualization; and

    - $168.0 million is estimated to be necessary to support compensation to
      policyholders eligible solely for cash or policy credits.

    In addition to the shares of our common stock distributed in this offering,
for which we will receive cash proceeds, many policyholders entitled to receive
compensation in the demutualization will receive shares of our common stock
distributed in connection with the demutualization, as well as cash, Account
Value Policy Credits or Separate Account Policy Credits, as compensation for
extinguishment of their membership interests in Principal Mutual Holding
Company. None of Principal Financial Group, Inc., Principal Financial Services,
Inc. or Principal Life will receive any proceeds from the issuance of our common
stock to policyholders entitled to receive compensation in the demutualization
for the extinguishment of their membership interests in Principal Mutual Holding
Company or to the separate account to be established for the Separate Account
Policy Credits.

                                        30
   34

                          STOCKHOLDER DIVIDEND POLICY

    We currently intend to pay regular annual cash dividends on our common
stock. We currently intend to declare an annual cash dividend of $0.25 per share
on our common stock. We expect that our first annual cash dividend will be a
proportion of that amount, based on the number of months remaining in the
calendar year in which we become public. Although we intend to pay dividends,
the declaration and payment of dividends is subject to the discretion of our
board of directors. The declaration, payment and amount of dividends will be
dependent upon our results of operations, financial condition, cash
requirements, future prospects, regulatory and other restrictions on the payment
of dividends by our subsidiaries to us and other factors deemed relevant by our
board of directors. There can be no assurance that we will declare and pay any
dividends.

    As a holding company, we will depend principally on dividends from Principal
Life to satisfy our financial obligations, pay operating expenses and pay
dividends to our stockholders.

    If Principal Life is unable to pay stockholder dividends in the future, our
ability to pay dividends to our stockholders and meet our cash obligations will
be limited. The payment of dividends by Principal Life is subject to the
discretion of its board of directors. In addition, the Iowa insurance laws limit
how and when Principal Life can pay stockholder dividends. Principal Life will
be able to pay approximately $760.9 million in dividends in 2001 based on its
2000 statutory financial results without being subject to the restrictions on
payment of extraordinary stockholder dividends, of which as of April 30, 2001,
$510.9 million had been paid. See "Risk Factors -- Our ability to pay dividends
and meet our obligations may be constrained by the limitation on dividends Iowa
insurance laws impose on Principal Life", "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources", and Note 14 to our audited consolidated financial statements.

                                        31
   35

                                 CAPITALIZATION

    The following table provides, as of March 31, 2001, (1) our actual
consolidated capitalization and (2) our pro forma capitalization after giving
effect to:

    - the demutualization and the issuance of 260,473,684 shares of our common
      stock to policyholders entitled to receive compensation in the
      demutualization or to the separate account to be established for the
      Separate Account Policy Credits;

    - the sale of 109,526,316 shares of our common stock in this offering at an
      assumed initial public offering price of $19.00 per share; and

    - the application of the net proceeds from this offering as described under
      "Use of Proceeds," as if the demutualization and this offering had
      occurred as of March 31, 2001.

    We based the pro forma information on the assumptions we have made about the
number of shares of common stock and the amount of cash and policy credits that
will be distributed to policyholders entitled to receive compensation in the
demutualization. We describe these assumptions in "Unaudited Pro Forma Condensed
Consolidated Financial Information." You should read this table in conjunction
with the Unaudited Pro Forma Condensed Consolidated Financial Information
appearing in this prospectus.

    The table below assumes that the underwriters' option to purchase additional
shares of common stock in the offering is not exercised.

                                                                     AS OF
                                                                 MARCH 31, 2001
                                                              --------------------
                                                               ACTUAL    PRO FORMA
                                                              --------   ---------
                                                                ($ IN MILLIONS)
                                                                   
Debt:
  Short-term debt...........................................  $  550.1   $  550.1
  Long-term debt............................................   1,294.1    1,294.1
                                                              --------   --------
         Total debt.........................................   1,844.2    1,844.2
Equity:
  Common stock, $0.01 par value; 2.5 billion shares
    authorized; 370.0 million shares issued and
    outstanding.............................................        --        3.7
  Additional paid-in capital................................        --    6,687.8
  Retained earnings.........................................   6,417.8         --
  Accumulated other comprehensive income (loss).............      23.0       23.0
                                                              --------   --------
         Total equity.......................................   6,440.8    6,714.5
                                                              --------   --------
             Total capitalization...........................  $8,285.0   $8,558.7
                                                              ========   ========

Book value per common share.................................             $  18.15
                                                                         ========

                                        32
   36

                   SELECTED HISTORICAL FINANCIAL INFORMATION

    The following table provides summary historical consolidated financial
information of Principal Mutual Holding Company, the predecessor to Principal
Financial Group, Inc. prior to the demutualization, and will be applicable to
Principal Financial Group, Inc. following the demutualization. The consolidated
financial information for each of the years ended December 31, 2000, 1999 and
1998 and as of December 31, 2000 and 1999 has been derived from our audited
consolidated financial statements and notes to the financial statements included
in this prospectus. The consolidated financial information for the years ended
December 31, 1997 and 1996 and as of December 31, 1998, 1997 and 1996 has been
derived from our audited consolidated financial statements not included in this
prospectus. The summary consolidated financial information for the three months
ended March 31, 2001 and 2000 and as of March 31, 2001 has been derived from our
unaudited interim consolidated financial statements included in this prospectus.
The summary consolidated financial information as of March 31, 2000 has been
derived from our unaudited interim consolidated financial statements not
included in this prospectus. All unaudited interim consolidated financial
information presented in the table below reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of our
consolidated financial position and results of operations for such periods. The
results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year. The
following summary consolidated financial information, other than the Principal
Life statutory data, has been prepared in accordance with GAAP.

    The following is a summary and, in order to fully understand our
consolidated financial information, you should also read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to the financial statements
included in this prospectus. The results for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.

                                          FOR THE THREE
                                          MONTHS ENDED
                                            MARCH 31,                      FOR THE YEAR ENDED DECEMBER 31,
                                      ---------------------   ---------------------------------------------------------
                                       2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                         
INCOME STATEMENT DATA:(1)
Revenues:
  Premiums and other
    considerations..................  $ 1,064.2   $ 1,014.4   $ 3,996.4   $ 3,937.6   $ 3,818.4   $ 4,667.8   $ 5,120.9
  Fees and other revenues...........      413.0       396.4     1,576.3     1,287.3       978.8       881.9       722.4
  Net investment income.............      839.7       789.5     3,172.3     3,072.0     2,933.9     2,936.6     2,894.0
  Net realized capital gains
    (losses)........................      (80.9)       70.3       139.9       404.5       465.8       175.3       387.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total revenues.............    2,236.0     2,270.6     8,884.9     8,701.4     8,196.9     8,661.6     9,125.1

Expenses:
  Benefits, claims and settlement
    expenses........................    1,391.9     1,319.6     5,232.3     5,260.9     5,089.0     5,632.5     6,086.5
  Dividends to policyholders........       81.0        75.4       312.7       304.6       298.7       299.3       298.5
  Operating expenses................      622.7       593.2     2,479.4     2,070.3     2,074.0     2,035.5     1,909.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total expenses.............    2,095.6     1,988.2     8,024.4     7,635.8     7,461.7     7,967.3     8,294.8
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
Income before income taxes and
  cumulative effect of accounting
  change............................      140.4       282.4       860.5     1,065.6       735.2       694.3       830.3
Income taxes........................       24.4        89.3       240.3       323.5        42.2       240.8       304.3
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
Income before cumulative effect of
  accounting change.................      116.0       193.1       620.2       742.1       693.0       453.5       526.0
Cumulative effect of accounting
  change, net of related income
  taxes.............................      (10.7)         --          --          --          --          --          --
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Net income.................  $   105.3   $   193.1   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
                                      =========   =========   =========   =========   =========   =========   =========

                                        33
   37

                                            AS OF OR
                                          FOR THE THREE
                                          MONTHS ENDED                       AS OF OR FOR THE YEAR ENDED
                                            MARCH 31,                               DECEMBER 31,
                                      ---------------------   ---------------------------------------------------------
                                       2001(2)     2000(2)     2000(2)     1999(2)     1998(2)     1997(2)     1996(2)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                         
BALANCE SHEET DATA:(1)
Invested assets.....................  $44,002.6   $41,771.1   $42,090.6   $41,343.2   $40,686.7   $39,572.2   $38,658.3
Separate account assets.............   31,638.8    36,369.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
All other assets....................    6,771.0     6,662.1     7,250.2     7,496.7     4,247.3     3,921.4     3,317.7
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total assets...............  $82,412.4   $84,802.8   $84,257.0   $83,832.2   $73,943.3   $67,053.7   $59,142.3
                                      =========   =========   =========   =========   =========   =========   =========

Policyholder liabilities............  $38,763.7   $37,652.2   $38,095.7   $37,687.9   $35,781.7   $35,224.6   $34,725.3
Separate account liabilities........   31,638.8    36,369.6    34,916.2    34,992.3    29,009.3    23,560.1    17,166.3
Short-term debt.....................      550.1       766.2       459.5       547.3       290.9       313.7       198.5
Long-term debt......................    1,294.1     1,519.6     1,336.5     1,492.9       670.9       458.9       399.1
All other liabilities...............    3,724.9     2,795.0     3,196.6     3,558.9     2,523.3     2,212.2     1,998.6
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total liabilities..........  $75,971.6   $79,102.6   $78,004.5   $78,279.3   $68,276.1   $61,769.5   $54,487.8
                                      =========   =========   =========   =========   =========   =========   =========

Retained earnings...................  $ 6,417.8   $ 5,885.4   $ 6,312.5   $ 5,692.3   $ 4,950.2   $ 4,257.2   $ 3,803.7
Net unrealized gains (losses) on
  available-for-sale securities.....      319.9       (87.0)      129.9       (79.1)      745.9     1,037.5       859.7
Net foreign currency translation
  adjustment........................     (296.9)      (98.2)     (189.9)      (60.3)      (28.9)      (10.5)       (8.9)
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Total equity...............  $ 6,440.8   $ 5,700.2   $ 6,252.5   $ 5,552.9   $ 5,667.2   $ 5,284.2   $ 4,654.5
                                      =========   =========   =========   =========   =========   =========   =========
PRINCIPAL LIFE STATUTORY DATA:(3)
Premiums and deposits(4)............  $ 1,264.7   $ 4,349.2   $15,653.3   $15,709.8   $14,120.3   $12,710.9   $12,156.2
Net income..........................      131.7       222.4       912.6       713.7       511.4       432.2       415.0

Statutory capital and surplus.......  $ 3,058.9   $ 3,266.5   $ 3,356.4   $ 3,151.9   $ 3,031.5   $ 2,811.1   $ 2,503.5
Asset valuation reserve.............      887.6       968.4       919.8       953.8       966.9     1,087.9     1,005.0
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Statutory capital and
           surplus and asset
           valuation reserve........  $ 3,946.5   $ 4,234.9   $ 4,276.2   $ 4,105.7   $ 3,998.4   $ 3,899.0   $ 3,508.5
                                      =========   =========   =========   =========   =========   =========   =========
OTHER SUPPLEMENTAL DATA:
Net income..........................  $   105.3   $   193.1   $   620.2   $   742.1   $   693.0   $   453.5   $   526.0
Less:
Net realized capital gains (losses),
  as adjusted(5)....................      (47.9)       49.8        93.1       266.9       320.7       111.4       261.0
Non-recurring items(6)..............      (20.5)         --      (101.0)         --       104.8          --          --
                                      ---------   ---------   ---------   ---------   ---------   ---------   ---------
         Operating earnings.........  $   173.7   $   143.3   $   628.1   $   475.2   $   267.5   $   342.1   $   265.0
                                      =========   =========   =========   =========   =========   =========   =========
Operating return on average equity
  (7)...............................      10.7%        8.8%       10.5%        8.9%        5.8%        8.5%        7.5%

Total return on average equity(8)...       8.7%       11.7%       10.3%       13.9%       15.1%       11.3%       14.9%

Operating earnings before
  amortization of goodwill and other
  intangibles.......................  $   186.6   $   153.1   $   670.8   $   492.0   $   304.0   $   352.0   $   273.7

Assets under management (in
  billions).........................  $   113.0   $   117.7   $   117.5   $   116.6   $    80.4   $    72.1   $    63.0

Number of employees (actual)........     17,363      16,668      17,473      17,129      15,970      17,637      17,010

                                        34
   38

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. Segment operating earnings is determined
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. 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,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

    The following table provides selected segment information as of or for the
three months ended March 31, 2001 and 2000 and as of or for each of the years
ended December 31, 2000, 1999 and 1998. The segment information is reported on a
consolidated basis.

                                                 AS OF OR FOR THE THREE MONTHS ENDED            AS OF OR FOR THE YEAR ENDED
                                                              MARCH 31,                                 DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN MILLIONS)
                                                                                                 
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(9).......................  $ 1,015.7       46%      $   868.3       38%      $ 3,533.9       40%      $ 3,472.6
 International Asset Management and
   Accumulation..........................      144.4        6           157.4        7           630.7        7           379.6
 Life and Health Insurance...............    1,002.4       45         1,047.4       46         4,122.6       46         3,985.5
 Mortgage Banking........................      119.6        5            97.7        5           359.8        4           398.3
 Corporate and Other(9)(10)..............       35.0        2            29.0        1            97.1        1            61.9
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating revenues..........  $ 2,317.1      104%      $ 2,199.8       97%      $ 8,744.1       98%      $ 8,297.9

 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(5)...........................      (81.1)      (4)           70.8        3           140.8        2           403.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total consolidated revenues.......  $ 2,236.0      100%      $ 2,270.6      100%      $ 8,884.9      100%      $ 8,701.4
                                           =========      ===       =========      ===       =========      ===       =========
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................  $    88.8       51%      $    88.7       62%      $   356.6       57%      $   356.6
 International Asset Management and
   Accumulation..........................       (5.3)      (3)           (4.5)      (3)           (8.5)      (1)          (38.4)
 Life and Health Insurance...............       42.5       24            36.6       25           162.3       26            90.7
 Mortgage Banking........................       23.9       14            18.0       13            50.0        8            56.8
 Corporate and Other.....................       23.8       14             4.5        3            67.7       10             9.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total operating earnings..........  $   173.7      100%      $   143.3      100%      $   628.1      100%      $   475.2
                                           =========      ===       =========      ===       =========      ===       =========
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................  $    70.6       67%      $    69.9       36%      $   320.7       52%      $   321.2
 International Asset Management and
   Accumulation..........................      (25.6)     (24)            0.2       --            (7.1)      (1)          (30.7)
 Life and Health Insurance...............       42.0       40            91.4       48           209.6       34           100.8
 Mortgage Banking........................       23.9       22            18.0        9            50.0        8            56.8
 Corporate and Other.....................       (5.6)      (5)           13.6        7            47.0        7           294.0
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total net income..................  $   105.3      100%      $   193.1      100%      $   620.2      100%      $   742.1
                                           =========      ===       =========      ===       =========      ===       =========
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................  $64,144.6       78%      $66,312.3       78%      $65,795.9       78%      $65,096.4
 International Asset Management and
   Accumulation..........................    4,928.1        6         5,550.8        7         5,525.9        7         5,926.8
 Life and Health Insurance...............   10,406.6       13        10,080.9       12        10,421.1       12         9,949.8
 Mortgage Banking........................    1,915.2        2         1,793.9        2         1,556.3        2         1,737.7
 Corporate and Other(11).................    1,017.9        1         1,064.9        1           957.8        1         1,121.5
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets......................  $82,412.4      100%      $84,802.8      100%      $84,257.0      100%      $83,832.2
                                           =========      ===       =========      ===       =========      ===       =========

                                               AS OF OR FOR THE YEAR ENDED
                                                      DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN MILLIONS)
                                                           
OPERATING EARNINGS DATA:
Operating revenues:
 U.S. Asset Management and
   Accumulation(9).......................      40%      $ 2,933.1       36%
 International Asset Management and
   Accumulation..........................       4           223.1        3
 Life and Health Insurance...............      46         3,893.1       47
 Mortgage Banking........................       4           340.6        4
 Corporate and Other(9)(10)..............       1           342.5        4
                                              ---       ---------      ---
       Total operating revenues..........      95%      $ 7,732.4       94%
 Net realized capital gains (losses),
   including recognition of front-end fee
   revenues(5)...........................       5           464.5        6
                                              ---       ---------      ---
       Total consolidated revenues.......     100%      $ 8,196.9      100%
                                              ===       =========      ===
Operating earnings (loss):
 U.S. Asset Management and
   Accumulation..........................      75%      $   238.4       89%
 International Asset Management and
   Accumulation..........................      (8)          (35.4)     (13)
 Life and Health Insurance...............      19            50.0       19
 Mortgage Banking........................      12            58.8       22
 Corporate and Other.....................       2           (44.3)     (17)
                                              ---       ---------      ---
       Total operating earnings..........     100%      $   267.5      100%
                                              ===       =========      ===
INCOME STATEMENT DATA:
Net income (loss):
 U.S. Asset Management and
   Accumulation..........................      43%      $   277.0       40%
 International Asset Management and
   Accumulation..........................      (4)          (10.1)      (1)
 Life and Health Insurance...............      13           112.0       16
 Mortgage Banking........................       8            58.8        8
 Corporate and Other.....................      40           255.3       37
                                              ---       ---------      ---
       Total net income..................     100%      $   693.0      100%
                                              ===       =========      ===
BALANCE SHEET DATA:
Total assets:
 U.S. Asset Management and
   Accumulation..........................      78%      $58,701.5       80%
 International Asset Management and
   Accumulation..........................       7         1,239.4        2
 Life and Health Insurance...............      12         9,116.1       12
 Mortgage Banking........................       2         1,810.4        2
 Corporate and Other(11).................       1         3,075.9        4
                                              ---       ---------      ---
       Total assets......................     100%      $73,943.3      100%
                                              ===       =========      ===

                                        35
   39

                                                           AS OF MARCH 31,                           AS OF DECEMBER 31,
                                           -----------------------------------------------   ----------------------------------
                                                  2001(2)                  2000(2)                  2000(2)            1999(2)
                                           ----------------------   ----------------------   ----------------------   ---------
                                            AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT     % OF TOTAL    AMOUNT
                                           ---------   ----------   ---------   ----------   ---------   ----------   ---------
                                                                             ($ IN BILLIONS)
                                                                                                 
OTHER SUPPLEMENTAL DATA:
Assets Under Management: ($ in billions)
 U.S. Asset Management and
   Accumulation..........................  $    76.6       69%      $    75.0       64%      $    78.1       67%      $    75.6
 International Asset Management and
   Accumulation..........................       25.1       22            29.8       25            28.4       24            30.6
 Life and Health Insurance...............        9.4        8             9.1        8             9.3        8             8.7
 Mortgage Banking(12)....................        0.4       --             1.8        1             0.2       --             0.5
 Corporate and Other.....................        1.5        1             2.0        2             1.5        1             1.2
                                           ---------      ---       ---------      ---       ---------      ---       ---------
       Total assets under management.....  $   113.0      100%      $   117.7      100%      $   117.5      100%      $   116.6
                                           =========      ===       =========      ===       =========      ===       =========

                                                   AS OF DECEMBER 31,
                                           -----------------------------------
                                            1999(2)            1998(2)
                                           ----------   ----------------------
                                           % OF TOTAL    AMOUNT     % OF TOTAL
                                           ----------   ---------   ----------
                                                     ($ IN BILLIONS)
                                                           
OTHER SUPPLEMENTAL DATA:
Assets Under Management: ($ in billions)
 U.S. Asset Management and
   Accumulation..........................      65%      $    67.2       84%
 International Asset Management and
   Accumulation..........................      26             1.2        1
 Life and Health Insurance...............       8             8.2       10
 Mortgage Banking(12)....................      --             0.7        1
 Corporate and Other.....................       1             3.1        4
                                              ---       ---------      ---
       Total assets under management.....     100%      $    80.4      100%
                                              ===       =========      ===

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

 (1) Periods prior to December 31, 2000 have been reclassified to conform to the
     presentation for that period.

 (2) Our consolidated financial results were affected by the following
     transactions that affect year-to-year comparability:

     - On February 15, 2001, we disposed of all of the stock of Principal
       International Espana, S.A. de Seguros de Vida, our subsidiary in Spain,
       for nominal proceeds, resulting in a net realized capital loss of $38.4
       million, ceasing our business operations in Spain. Total assets of our
       operations in Spain as of December 31, 2000 were $222.7 million. Revenues
       of $24.1 million from our operations in Spain were included in our
       consolidated results of operations for the three months ended March 31,
       2000, and revenues of $49.4 million, $51.7 million and $46.0 million were
       included in our results of operations for the years ended December 31,
       2000, 1999 and 1998, respectively. We included net income of $3.3 million
       from our operations in Spain for the three months ended March 31, 2000,
       and a net loss of $1.2 million and net income of $0.9 million and $2.8
       million in our results of operations for the years ended December 31,
       2000, 1999 and 1998, respectively. Our consolidated results of operations
       for the three months ended March 31, 2001 did not include revenues or net
       income from our operations in Spain.

     - On August 31, 1999, we acquired several companies affiliated with Bankers
       Trust Australia Group from Deutsche Bank AG at a purchase price of $1.4
       billion. The acquired companies now operate under the name BT Financial
       Group. We accounted for the acquisition using the purchase method. We
       included the results of operations of the acquired companies in our
       International Asset Management and Accumulation segment and our
       consolidated financial statements from the date of acquisition. Revenues
       of $63.5 million and net loss of $5.6 million were included in our
       consolidated results of operations for the three months ended March 31,
       2001. Revenues of $72.7 million and net income of $0.5 million were
       included in our consolidated results of operations for the three months
       ended March 31, 2000. Revenues of $285.5 million and net income of $6.5
       million were included in our consolidated results of operations for the
       year ended December 31, 2000. Revenues of $116.5 million and net loss of
       $3.1 million were included in our consolidated results of operations for
       the year ended December 31, 1999. We accounted for the purchase price as
       follows: $897.4 million of identifiable intangibles, consisting primarily
       of management rights and the BT brand name, $38.5 million of workforce
       intangibles and $408.6 million of resulting goodwill, which are being
       amortized on a straight line basis over 40 years, 8 years and 25 years,
       respectively.

     - We acquired Compania de Seguros de Vida El Roble S.A., or El Roble, a
       Chilean life insurance company, for a purchase price of $73.4 million in
       July 1998. We included El Roble's financial results in our International
       Asset Management and Accumulation segment. We combined the operations of
       our existing Chilean life insurance affiliate with the operations of El
       Roble to form Principal International de Chile. Our consolidated
       financial results related to these companies' combined operations
       include: total revenues of $47.0 million and $48.4 million for the three
       months ended March 31, 2001 and 2000, respectively, and $200.2 million,
       $178.1 million and $155.2 million for the years ended December 31, 2000,
       1999 and 1998, respectively; and net income of $2.4 million and $2.3
       million for the three months ended March 31, 2001 and 2000, respectively,
       and $10.2 million, $0.5 million and $17.0 million for the years ended
       December 31, 2000, 1999 and 1998, respectively.

     - In July 1998, we established our residential mortgage loan wholesale
       distribution system, a new distribution channel, by acquiring ReliaStar
       Mortgage Corporation for a purchase price of $18.6 million. We have
       integrated the operations of ReliaStar Mortgage Corporation into
       Principal Residential Mortgage, Inc., as part of our Mortgage Banking
       segment.

     - Effective April 1, 1998, we transferred substantially all of our health
       maintenance organization operations, or HMO operations, to Coventry
       Health Care, Inc., or Coventry, in exchange for 42% of their common
       stock. Our net equity in the transferred HMO operations had a carrying
       value of $170.0 million on April 1, 1998. We sold our remaining HMO
       operations in 1998 for $20.5 million resulting in no realized capital
       gain or loss. Prior to the

                                        36
   40

       transfer to Coventry, our Corporate and Other segment included $266.7
       million of HMO revenues in our results for 1998. We report our investment
       in Coventry in our Corporate and Other segment and account for it using
       the equity method. Our share of Coventry's net income was $4.9 million
       and $6.0 million for the three months ended March 31, 2001 and 2000,
       respectively, and $20.0 million and $19.1 million for the years ended
       December 31, 2000 and 1999, respectively. Our share of Coventry's net
       loss was $9.8 million for the year ended December 31, 1998. In September
       2000, we sold a portion of our Coventry stock, which reduced our
       ownership interest to approximately 25% of Coventry stock and resulted in
       a net realized capital gain of $13.9 million, net of tax. Our carrying
       amount in Coventry was $128.9 million as of March 31, 2001.

  (3) Statutory data have been provided from quarterly and annual statements of
      Principal Life filed with insurance regulatory authorities. Certain
      financial information for periods beginning on or after January 1, 2001
      are not comparable to information from earlier periods. Statutory data as
      of or for the three months ended March 31, 2001 were prepared in
      conformity with the NAIC Codification of Statutory Accounting Principles
      ("Codification"), adopted as prescribed and permitted by the Insurance
      Division, Department of Commerce of the State of Iowa, effective January
      1, 2001. As allowed by Codification, prior period information was not
      restated. Statutory data as of or for the three months ended March 31,
      2000 and as of or for the years ended December 31, 2000, 1999, 1998, 1997
      and 1996 were prepared in conformity with accounting practices prescribed
      or permitted on the dates thereof by the Insurance Division, Department of
      Commerce of the State of Iowa.

  (4) Codification, as adopted by Principal Life on January 1, 2001, has
      significantly impacted the reporting of Principal Life's statutory
      premiums and deposits for the three months ended March 31, 2001. Under
      Codification, amounts received for deposit-type contracts are no longer
      reported in the statement of operations as revenue, but rather are
      reported directly as an increase in an appropriate policy reserve account,
      a treatment that is similar to that under U.S. GAAP. This has the effect
      of decreasing reported total revenues and total expenses of Principal
      Life, with no effect to statutory net income or statutory surplus.
      Premiums and deposits for the three months ended March 31, 2000 and for
      the years ended December 31, 2000, 1999, 1998, 1997 and 1996 included
      amounts received for deposit-type contracts of $3,190.0 million, $11,273.2
      million, $11,571.5 million, $10,312.6 million, $8,694.9 million and
      $7,493.9 million, respectively.

                                        37
   41

  (5) Net realized capital gains (losses), as adjusted, are net of tax, related
      changes in the amortization pattern of deferred policy acquisition costs,
      recognition of front-end fee revenues for sales charges on pension
      products and services and net realized capital gains credited to
      customers. This presentation may not be comparable to presentations made
      by other companies. Deferred policy acquisition costs represent
      commissions and other selling expenses that vary with and are directly
      related to the production of business. These acquisition costs are
      deferred and amortized in conformity with GAAP.

    Following is a reconciliation of net realized capital gains from the
    consolidated financial statements and the adjustment made to calculate
    segment operating earnings for the periods indicated:

                                                 FOR THE THREE
                                                 MONTHS ENDED
                                                   MARCH 31,             FOR THE YEAR ENDED DECEMBER 31,
                                                ---------------   ---------------------------------------------
                                                 2001     2000     2000     1999      1998      1997     1996
                                                ------   ------   ------   -------   -------   ------   -------
                                                                        ($ IN MILLIONS)
                                                                                   
      Net realized capital gains (losses).....  $(80.9)  $ 70.3   $139.9   $ 404.5   $ 465.8   $175.3   $ 387.8
      Recognition of front-end fee revenues...    (0.2)     0.5      0.9      (1.0)     (1.3)    (0.9)       --
                                                ------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           including recognition of front-end
           fee revenues.......................   (81.1)    70.8    140.8     403.5     464.5    174.4     387.8
      Amortization of deferred policy
         acquisition costs related to net
         realized capital gains (losses)......     1.0      0.2     (0.3)      4.4       5.7     (1.7)       --
      Amounts credited to contractholder
         accounts.............................      --       --       --        --     (26.3)      --        --
      Non-recurring net realized capital
         gains (losses).......................      --       --       --        --      (1.7)      --        --
                                                ------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           including recognition of front-end
           fee revenues, net of related
           amortization of deferred policy
           acquisition costs and amounts
           credited to contractholders........   (80.1)    71.0    140.5     407.9     442.2    172.7     387.8
      Income tax effect.......................    32.2    (21.2)   (47.4)   (141.0)   (121.5)   (61.3)   (126.8)
                                                ------   ------   ------   -------   -------   ------   -------
         Net realized capital gains (losses),
           as adjusted........................  $(47.9)  $ 49.8   $ 93.1   $ 266.9   $ 320.7   $111.4   $ 261.0
                                                ======   ======   ======   =======   =======   ======   =======

  (6) For the three months ended March 31, 2001, we excluded $20.5 million of
      non-recurring items, net of tax, from net income for our presentation of
      operating earnings. The non-recurring items included the negative effects
      of (a) a cumulative effect of accounting change related to our
      implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to
      Principal Mutual Holding Company's unaudited consolidated financial
      statements; (b) a loss contingency reserve established for sales practices
      litigation ($5.9 million); and (c) expenses related to our demutualization
      ($3.9 million).

      For the three months ended March 31, 2000, we did not exclude
      non-recurring items from net income for our presentation of operating
      earnings.

      For the year ended December 31, 2000, we excluded $101.0 million of
      non-recurring items, net of tax, from net income for our presentation of
      operating earnings. The non-recurring items included the negative effects
      of (a) a loss contingency reserve established for sales practices
      litigation ($93.8 million) and (b) expenses related to our demutualization
      ($7.2 million).

      For the year ended December 31, 1998, we excluded $104.8 million of
      non-recurring items, net of tax, from net income for our presentation of
      operating earnings. The non-recurring items included:

     - the positive effects of (a) Principal Life's release of tax reserves and
       related accrued interest ($164.4 million) and (b) accounting changes by
       our international operations ($13.3 million); and

     - the negative effects of (a) expenses and adjustments for changes in
       amortization assumptions for deferred policy acquisition costs related to
       our corporate structure change to a mutual insurance holding company,
       ($27.4 million) and (b) a contribution related to permanent endowment of
       the Principal Financial Group Foundation ($45.5 million).

                                        38
   42

 (7) We define operating return on average equity as operating earnings divided
     by average total equity, excluding accumulated other comprehensive income.
     The returns for interim reporting periods are calculated by using operating
     earnings for the trailing twelve months. Accumulated other comprehensive
     income has been excluded due to its volatility between periods and because
     such data are often excluded when evaluating the overall financial
     performance of insurers. Operating return on average equity should not be
     considered a substitute for any GAAP measure of performance.

 (8) We define total return on average equity as net income divided by average
     total equity, excluding accumulated other comprehensive income. The returns
     for interim reporting periods are calculated by using net income for the
     trailing twelve months. Accumulated other comprehensive income has been
     excluded due to its volatility between periods and because such data are
     often excluded when evaluating the overall financial performance of
     insurers.

 (9) We transferred our U.S. investment management operations from our Corporate
     and Other segment to our U.S. Asset Management and Accumulation segment
     effective January 1, 1999. The U.S. Asset Management and Accumulation
     segment received fee revenues for performing investment management services
     for other segments in 2001, 2000 and 1999. The Corporate and Other segment
     received fee revenues for performing investment management services for
     other segments prior to 1999.

(10) Includes inter-segment eliminations primarily related to real estate joint
     venture rental income. The Corporate and Other segment reported rental
     income from real estate joint ventures for office space used by other
     segments.

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

(12) Excludes our mortgage loan servicing portfolio.

                                        39
   43

        UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

    The unaudited pro forma condensed consolidated financial information
presented below for Principal Financial Group, Inc. gives effect to:

    - the demutualization;

    - the sale of shares of common stock in this offering; and

    - the application of the estimated net proceeds from this offering as
      described in "Use of Proceeds," as if the demutualization and the initial
      public offering had occurred as of March 31, 2001 for purposes of the
      unaudited pro forma condensed consolidated statement of financial
      position, and as of January 1, 2000 for purposes of the unaudited pro
      forma condensed consolidated statement of operations for the three months
      ended March 31, 2001 and the year ended December 31, 2000.

    The principal assumptions used in the pro forma information are as follows:

    - 109,526,316 shares of common stock are sold to investors in the offering
      at a price of $19.00 per share;

    - 260,473,684 shares of common stock are allocated and issued to
      policyholders entitled to receive compensation in the demutualization, of
      which 50,000,000 shares are allocated and issued as part of the Separate
      Account Policy Credits;

    - 89,526,316 shares of common stock are allocated but not issued to
      policyholders entitled to receive compensation in the demutualization who
      receive payments in the form of cash or policy credits at an assumed
      initial public offering price of $19.00 per share, rather than in shares
      of common stock; and

    - a federal income tax rate of 35% is used to show the income tax effects of
      the pro forma adjustments.

    The estimated initial public offering prices per share are used for
illustrative purposes only and are not intended to predict the actual initial
public offering price. The initial public offering price will depend on many
factors and cannot be known at this time.

    The pro forma information reflects gross proceeds of $2,081.0 million from
the issuance of the shares, less an assumed underwriting discount and offering
expenses aggregating $93.9 million, or net proceeds from the offering of
$1,987.1 million. Of the estimated net proceeds, we have assumed that Principal
Financial Group, Inc. was entitled to and did retain $250.0 million to be used
for general corporate purposes and for payment of a dividend, if any, to our
stockholders in the first year after the date of the closing of this offering,
and the remaining $1,737.1 million will be contributed to Principal Life. For
purposes of the pro forma statement of financial position, we have estimated
that $19.0 million pre-tax will be required for the cost of additional
nonrecurring expenses related to the demutualization, $1,533.0 million will be
used to make elective cash payments and fund Account Value Policy Credits to
policyholders entitled to receive these forms of compensation in the
demutualization and $168.0 million will be used to support compensation to
policyholders eligible solely for cash or policy credits.

    The pro forma information is based on available information and on
assumptions management believes are reasonable. The pro forma information is
provided for informational purposes only. This information does not necessarily
indicate our consolidated financial position or our consolidated results of
operations had these transactions been consummated on the dates assumed. It also
does not in any way represent a projection or forecast of our consolidated
financial position or consolidated results of operations for any future date or
period.

    The pro forma information should be read in conjunction with our
consolidated financial statements and the notes to the financial statements,
included in this prospectus, and with the other information included in this
prospectus, including the information provided under "The Demutualization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business".

                                        40
   44

   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                                          AS OF MARCH 31, 2001
                                                      ------------------------------------------------------------
                                                                         THE            THE INITIAL
                                                      HISTORICAL   DEMUTUALIZATION    PUBLIC OFFERING    PRO FORMA
                                                      ----------   ---------------    ---------------    ---------
                                                                            ($ IN MILLIONS)
                                                                                             
ASSETS
Invested assets:
  Fixed maturities, available-for-sale..............  $29,110.8       $      --          $     --        $29,110.8
  Equity securities, available-for-sale.............      618.6              --                --            618.6
  Mortgage loans....................................   11,378.6              --                --         11,378.6
  Real estate.......................................    1,186.1              --                --          1,186.1
  Policy loans......................................      819.3              --                --            819.3
  Other investments.................................      889.2              --                --            889.2
                                                      ---------       ---------          --------        ---------
         Total invested assets......................   44,002.6                                           44,002.6

Cash and cash equivalents...........................      525.6        (1,533.0)(1)       1,987.1(2)         967.3
                                                                          (12.4)(5)
Accrued investment income...........................      516.7                                              516.7
Premiums due and other receivables..................      335.2              --                --            335.2
Deferred policy acquisition costs...................    1,268.9              --                --          1,268.9
Property and equipment..............................      500.9              --                --            500.9
Goodwill and other intangibles......................    1,225.5              --                --          1,225.5
Mortgage loan servicing rights......................    1,164.0              --                --          1,164.0
Separate account assets.............................   31,638.8           950.0(7)             --         32,588.8
Other assets........................................    1,234.2              --                --          1,234.2
                                                      ---------       ---------          --------        ---------
         Total assets...............................  $82,412.4       $  (595.4)         $1,987.1        $83,804.1
                                                      =========       =========          ========        =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Contractholder funds..............................  $24,919.0       $      --          $     --        $24,919.0
  Future policy benefits and claims.................   13,252.5           168.0(1)             --         13,420.5
  Other policyholder funds..........................      592.2              --                --            592.2
  Short-term debt...................................      550.1              --                --            550.1
  Long-term debt....................................    1,294.1              --                --          1,294.1
  Income taxes currently payable....................      149.3              --                --            149.3
  Deferred income taxes.............................      587.3              --                --            587.3
  Separate account liabilities......................   31,638.8           950.0(7)                        32,588.8
  Other liabilities.................................    2,988.3              --                --          2,988.3
                                                      ---------       ---------          --------        ---------
         Total liabilities..........................   75,971.6         1,118.0                --         77,089.6
Stockholders' equity:
  Common stock, $0.01 par value; 2.5 billion shares
    authorized; 370.0 million shares issued and
    outstanding(6)..................................         --             2.6(3)            1.1(2)           3.7
  Additional paid-in capital........................         --         4,701.8(3)        1,986.0(2)       6,687.8
  Retained earnings.................................    6,417.8        (1,701.0)(1)            --               --
                                                                       (4,704.4)(3)
                                                                          (12.4)(5)
Accumulated other comprehensive income..............       23.0              --                --             23.0
                                                      ---------       ---------          --------        ---------
    Total stockholders' equity......................    6,440.8        (1,713.4)          1,987.1          6,714.5
                                                      ---------       ---------          --------        ---------
    Total liabilities and stockholders' equity......  $82,412.4       $  (595.4)         $1,987.1        $83,804.1
                                                      =========       =========          ========        =========

 See notes to unaudited pro forma condensed consolidated financial information.

                                        41
   45

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                                   FOR THE THREE MONTHS ENDED MARCH 31, 2001
                                                           ----------------------------------------------------------
                                                                              THE           THE INITIAL
                                                           HISTORICAL   DEMUTUALIZATION   PUBLIC OFFERING   PRO FORMA
                                                           ----------   ---------------   ---------------   ---------
                                                              ($ AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                                
Revenues:
  Premiums and other considerations......................   $1,064.2         $  --            $   --        $1,064.2
  Fees and other revenues................................      413.0            --                --           413.0
  Net investment income..................................      839.7            --                --           839.7
  Net realized capital losses............................      (80.9)           --                --           (80.9)
                                                            --------         -----            ------        --------
         Total revenues..................................    2,236.0            --                --         2,236.0

Expenses:
  Benefits, claims and settlement expenses...............    1,391.9            --                --         1,391.9
  Dividends to policyholders.............................       81.0            --                --            81.0
  Operating expenses.....................................      622.7          (6.0)(4)            --           616.7
                                                            --------         -----            ------        --------
         Total expenses..................................    2,095.6          (6.0)               --         2,089.6
                                                            --------         -----            ------        --------
Income before income taxes and cumulative effect of
  accounting change......................................      140.4           6.0                --           146.4
Income taxes.............................................       24.4           2.1                --            26.5
                                                            --------         -----            ------        --------
Income before cumulative effect of accounting change.....      116.0           3.9                --           119.9
Cumulative effect of accounting change, net of related
  income taxes...........................................      (10.7)           --                --           (10.7)
                                                            --------         -----            ------        --------
    Net income...........................................   $  105.3         $ 3.9            $   --        $  109.2
                                                            ========         =====            ======        ========
Income per share.........................................                                                   $   0.30
                                                                                                            ========
Shares used in calculating per share amount(6)...........                                                      370.0
                                                                                                            ========

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                                                                  FOR THE YEAR ENDED DECEMBER 31, 2000
                                                       ----------------------------------------------------------
                                                                          THE           THE INITIAL
                                                       HISTORICAL   DEMUTUALIZATION   PUBLIC OFFERING   PRO FORMA
                                                       ----------   ---------------   ---------------   ---------
                                                          ($ AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                            
Revenues:
  Premiums and other considerations..................   $3,996.4        $   --            $   --        $3,996.4
  Fees and other revenues............................    1,576.3            --                --         1,576.3
  Net investment income..............................    3,172.3            --                --         3,172.3
  Net realized capital gains.........................      139.9            --                --           139.9
                                                        --------        ------            ------        --------
         Total revenues..............................    8,884.9            --                --         8,884.9

Expenses:
  Benefits, claims and settlement expenses...........    5,232.3            --                --         5,232.3
  Dividends to policyholders.........................      312.7            --                --           312.7
  Operating expenses.................................    2,479.4         (11.1)(4)            --         2,468.3
                                                        --------        ------            ------        --------
         Total expenses..............................    8,024.4         (11.1)               --         8,013.3
                                                        --------        ------            ------        --------
Income before income taxes...........................      860.5          11.1                --           871.6
Income taxes.........................................      240.3           3.9                --           244.2
                                                        --------        ------            ------        --------
    Net income.......................................   $  620.2        $  7.2            $   --        $  627.4
                                                        ========        ======            ======        ========
Income per share.....................................                                                   $   1.70
                                                                                                        ========
Shares used in calculating per share amount(6).......                                                      370.0
                                                                                                        ========

 See notes to unaudited pro forma condensed consolidated financial information.

                                        42
   46

   NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

(1) Represents ($ in millions):

                                                               

    Cash and Account Value Policy Credits assumed to be
      distributed to eligible policyholders.....................  $1,533.0

    Compensation to policyholders eligible solely for cash or
      policy credits............................................     168.0

                                                                  --------

    Total.......................................................  $1,701.0

                                                                  ========

(2) Represents gross proceeds of $2,081.0 million from the sale of 109,526,316
    shares of common stock at an assumed initial public offering price of $19.00
    per share, less underwriting discounts and offering expenses of $93.9
    million.

(3) Represents the reclassification of the residual retained earnings ($4,704.4
    million) of Principal Mutual Holding Company to common stock ($2.6 million)
    and additional paid-in capital ($4,701.8 million) to reflect the
    demutualization.

(4) Represents the elimination of $6.0 million, or $3.9 million net of tax, of
    expenses related to the demutualization incurred through the three months
    ended March 31, 2001, and $11.1 million, or $7.2 million net of tax, of
    expenses related to the demutualization incurred through December 31, 2000.

(5) The estimated additional nonrecurring expenses of $19.0 million, or $12.4
    million net of tax, related to the demutualization, assumed to be incurred
    as of the date of the unaudited pro forma condensed consolidated statement
    of financial condition, were charged to equity. The pro forma condensed
    consolidated statement of operations does not reflect such nonrecurring
    expenses.

(6) The assumed number of shares used in the calculation of unaudited pro forma
    net income per common share was determined as follows:

                                                                  NUMBER OF SHARES
                                                                  ----------------

    Assumed shares allocated to eligible policyholders..........    350,000,000

    Less: assumed shares allocated to eligible policyholders who
      receive cash or policy credits(a).........................     89,526,316

                                                                    -----------

    Assumed shares issued to eligible policyholders(b)..........    260,473,684

    Assumed shares issued in this offering......................    109,526,316

                                                                    -----------

    Total outstanding shares of common stock....................    370,000,000

                                                                    ===========

    (a) Gives effect to (1) $1,533.0 million to pay cash and fund Account Value
        Policy Credits to eligible policyholders and (2) $168.0 million to
        support compensation to policyholders eligible solely for cash or policy
        credits.

    (b) Includes 50,000,000 shares issued as part of the Separate Account Policy
        Credits. These shares are included in both basic and diluted income per
        share calculations.

    The plan of conversion provides that the amount of consideration paid in
    cash or provided as policy credits to an eligible policyholder will equal
    the number of shares allocated to such eligible policyholder multiplied by
    the initial public offering price.

(7) Represents the value of 50,000,000 shares placed in the Separate Account for
    Qualified Plan Customers at an assumed share price of $19.00 per share. The
    valuations of the separate account shares are recorded at fair value and are
    reported as separate account assets and separate account liabilities in the
    unaudited pro forma condensed consolidated statement of financial position.
    Changes in the fair value of the separate account shares are reflected in
    both the separate account assets and separate account liabilities and do not
    impact the pro forma results of operations.

                                        43
   47

                 UNAUDITED PRO FORMA SUPPLEMENTARY INFORMATION

    The pro forma supplementary information presented below was derived from the
unaudited pro forma condensed consolidated financial information and the notes
included in this prospectus. The pro forma supplementary information gives
effect to the demutualization and the initial public offering as if they had
occurred as of March 31, 2001 for purposes of the information derived from the
unaudited pro forma condensed consolidated statement of financial position and
as of January 1, 2000 for purposes of the information derived from the unaudited
pro forma condensed consolidated statement of operations for the three months
ended March 31, 2001 and the year ended December 31, 2000. The pro forma
supplementary information is provided for informational purposes only and should
not be construed to be indicative of our consolidated financial position or our
consolidated results of operations had these transactions been consummated on
the dates assumed, and do not in any way represent a projection or forecast of
our consolidated financial position or consolidated results of operations for
any future date or period. The pro forma supplementary information below shall
be read in conjunction with the information provided under, or referred to in,
"Unaudited Pro Forma Condensed Consolidated Financial Information."

    THE ESTIMATED INITIAL PUBLIC OFFERING PRICES PER SHARE IN THE TABLES BELOW
ARE USED FOR ILLUSTRATIVE PURPOSES ONLY AND ARE NOT INTENDED TO PREDICT THE
ACTUAL INITIAL PUBLIC OFFERING PRICE. THE INITIAL PUBLIC OFFERING PRICE WILL
DEPEND ON MANY FACTORS AND CANNOT BE KNOWN AT THIS TIME.

    The information presented in the table below gives effect to the sale of
115,102,067, 109,526,316 and 106,400,270 shares of common stock, respectively,
in the offering based upon the assumed initial public offering price per share
of $14.00, $19.00 and $24.00, respectively. This information is intended to
illustrate how the unaudited pro forma condensed consolidated financial
information would be affected by varying the price per share in the offering.

                                                               ASSUMING THE FOLLOWING INITIAL
                                                                    PUBLIC OFFERING PRICE
                                                              ---------------------------------
                                                               $14.00      $19.00      $24.00
                                                              ---------   ---------   ---------
                                                                 ($ AND SHARES IN MILLIONS,
                                                                  EXCEPT PER SHARE AMOUNTS)
                                                                             
SHARE INFORMATION
Assumed shares allocated to eligible policyholders..........      350.0       350.0       350.0
Less: Assumed shares allocated to eligible policyholders who
  receive cash or policy credits............................      (89.5)      (89.5)      (89.5)
                                                              ---------   ---------   ---------
Assumed shares issued to eligible policyholders.............      260.5       260.5       260.5
Assumed shares issued in this offering......................      115.1       109.5       106.4
                                                              ---------   ---------   ---------
Total outstanding shares of common stock....................      375.6       370.0       366.9
                                                              =========   =========   =========
OWNERSHIP PERCENTAGE
Eligible policyholders......................................       69.4%       70.4%       71.0%
Purchasers in the offering..................................       30.6%       29.6%       29.0%

FOR THE THREE MONTHS ENDED MARCH 31, 2001
Net Income..................................................  $   105.3   $   105.3   $   105.3
The demutualization(1)......................................        3.9         3.9         3.9
                                                              ---------   ---------   ---------
Pro forma net income........................................  $   109.2   $   109.2   $   109.2
                                                              =========   =========   =========

Pro forma net income per share..............................  $    0.29   $    0.30   $    0.30
                                                              =========   =========   =========

FOR THE YEAR ENDED DECEMBER 31, 2000
Net Income..................................................  $   620.2   $   620.2   $   620.2
The demutualization(2)......................................        7.2         7.2         7.2
                                                              ---------   ---------   ---------
Pro forma net income........................................  $   627.4   $   627.4   $   627.4
                                                              =========   =========   =========

Pro forma net income per share..............................  $    1.67   $    1.70   $    1.71
                                                              =========   =========   =========
AS OF MARCH 31, 2001
Total stockholders' equity..................................  $ 6,440.8   $ 6,440.8   $ 6,440.8
The demutualization(3)......................................   (1,265.7)   (1,713.4)   (2,161.0)
The initial public offering(4)..............................    1,537.5     1,987.1     2,439.7
                                                              ---------   ---------   ---------
Pro forma total stockholders' equity........................  $ 6,712.6   $ 6,714.5   $ 6,719.5
                                                              =========   =========   =========

Pro forma book value per share..............................  $   17.87   $   18.15   $   18.31
                                                              =========   =========   =========

                                        44
   48

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

(1) Represents the elimination of expenses related to the demutualization
    incurred through March 31, 2001.

(2) Represents the elimination of expenses related to the demutualization
    incurred through December 31, 2000.

(3) Represents:

    - The payment of $1,129.5 million, $1,533.0 million and $1,936.3 million,
      respectively, to pay cash and fund Account Value Policy Credits to
      eligible policyholders;

    - The payment of $123.8 million, $168.0 million and $212.3 million,
      respectively, to support compensation to policyholders eligible solely for
      cash or policy credits; and

    - Estimated additional non-recurring expenses of $12.4 million, net of tax,
      related to the demutualization.

(4) Represents the assumed gross proceeds of $1,611.4 million, $2,081.0 million
    and $2,553.6 million, respectively, from the sale of common stock in the
    offering less underwriting discounts and offering expenses of $73.9 million,
    $93.9 million and $113.9 million, respectively.

                                        45
   49

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The following analysis of the consolidated results of our operations and
financial condition should be read in conjunction with the "Selected Historical
Financial Information," the consolidated financial statements and the related
notes to the financial statements and the other financial information included
elsewhere in this prospectus.

FORWARD-LOOKING INFORMATION

    Our narrative analysis below and in "Business" contains forward-looking
statements that are 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 "may," "expects," "should" or similar expressions. Because these
forward-looking statements are based on estimates and assumptions that are
subject to significant business, economic and competitive risks and
uncertainties, many of which are beyond our control or are subject to change,
actual results could be materially different. See "Risk Factors" for a
discussion of risks and uncertainties that may cause our actual results to
differ materially.

OVERVIEW

    We are a leading provider of retirement savings, investment and insurance
products and services. We have four operating segments:

    - 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 Capital
      Management, our U.S.-based asset manager. We provide a comprehensive
      portfolio of asset accumulation products and services to businesses and
      individuals in the United States, 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 to the employees of our
      business customers and other individuals.

    - International Asset Management and Accumulation, which consists of BT
      Financial Group, our Australia-based asset manager, and Principal
      International. Our acquisition of BT Financial Group in 1999 was a central
      element in the expansion of our international asset management and
      accumulation businesses. Through Principal International, we offer
      retirement products and services, annuities, mutual funds and life
      insurance. We operate through subsidiaries in Argentina, Chile, Mexico,
      Indonesia and Hong Kong and joint ventures in Brazil, Japan and India.

    - Life and Health Insurance, which provides individual life and disability
      insurance as well as group life and health insurance throughout the United
      States. Our individual insurance products include interest-sensitive life,
      traditional life and disability insurance. Our group insurance products
      include life, disability, medical, dental and vision insurance, and
      administrative services.

    - Mortgage Banking, which engages in originating, purchasing, selling and
      servicing residential mortgage loans in the United States.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segments.

                                        46
   50

  REVENUES AND EXPENSES

    Our segments earn revenues and incur expenses from various sources as
outlined in the following tables. The following tables provide a detailed list
of the sources and their relationship to our financial statement line items.

    REVENUES.  The table below provides a summary of our sources of revenues by
segment:

                           REVENUE SOURCES BY SEGMENT

                                                                   INTERNATIONAL
                                                     U.S. ASSET        ASSET
                                                     MANAGEMENT     MANAGEMENT
                                                        AND             AND        LIFE AND HEALTH   MORTGAGE   CORPORATE AND
                  REVENUE SOURCES                   ACCUMULATION   ACCUMULATION       INSURANCE      BANKING        OTHER

 PREMIUMS AND OTHER CONSIDERATIONS:

 Single premium group and individual annuities
   with life contingencies                               X               X

 Group and individual life insurance                                     X                X

 Group medical, dental and vision insurance                                               X

 Group and individual disability insurance                                                X

 FEES AND OTHER REVENUES:

 Administrative and asset management fee revenues
   from group and individual variable annuities          X               X

 Administrative fee revenues from pension plans          X               X

 Asset management and administrative fee revenues
   from institutional asset management and mutual
   funds                                                 X               X

 Assets backing margin lending operations                                X

 Mortality, administrative and asset management
   fee revenues from variable and universal life
   insurance products                                                    X                X

 Group fee-for-service business                                                           X

 Servicing and originating residential mortgage
   loans                                                                 X                              X

 Net gains and losses on the sale of residential
   mortgage loans and residential mortgage loan
   servicing rights                                                                                     X

 Fee revenues from the marketing of other products
   to our servicing portfolio customers                                                                 X

 NET INVESTMENT INCOME:

 Securitizations of commercial mortgage-backed
   securities                                            X

 Assets backing group guaranteed investment
   contracts and individual fixed annuities              X               X

 Assets backing life and health insurance product
   liabilities                                                           X                X

 Securitizations of residential mortgage loans                                                          X

 Assets backing capital                                  X               X                X             X             X

                                        47
   51

    EXPENSES.  The table below provides a summary of our expenses by segment:

                              EXPENSES BY SEGMENT

                                                                   INTERNATIONAL
                                                     U.S. ASSET        ASSET
                                                     MANAGEMENT     MANAGEMENT
                                                        AND             AND        LIFE AND HEALTH   MORTGAGE   CORPORATE AND
                     EXPENSES                       ACCUMULATION   ACCUMULATION       INSURANCE      BANKING        OTHER

 BENEFITS, CLAIMS AND SETTLEMENT EXPENSES:

 Benefits paid and reserve increases on single
   premium group and individual annuities with
   life contingencies                                    X               X

 Interest credited on group guaranteed investment
   contracts and individual fixed annuities              X               X

 Benefits paid and reserve increases on group and
   individual life insurance                                             X                X

 Benefits paid and reserve increases on group
   medical, dental and vision insurance                                                   X

 Benefits paid and reserve increases on group and
   individual disability insurance                                                        X

 DIVIDENDS TO POLICYHOLDERS                              X                                X

 OPERATING EXPENSES:

 General business expenses and commissions, net of
   deferred expenses                                     X               X                X             X             X

 Amortization of deferred policy acquisition costs       X               X                X

 Premium taxes                                           X               X                X

 Income taxes                                            X               X                X             X             X

 Amortization of goodwill and other intangibles          X               X                X             X             X

 Amortization of residential mortgage loan
   servicing rights                                                      X                              X

 Net gains and losses on mortgage loan servicing
   hedge activity                                                                                       X

 Interest expense on corporate debt                                                                                   X

                                        48
   52

  PROFITABILITY

    Our profitability depends in large part upon:

    - our amount of assets under management;

    - the spreads we earn on our policyholders' general account balances;

    - our ability to generate fee revenues greater than the amount it costs us
      to administer pension products, manage investments for retail and
      institutional clients and provide other administrative services;

    - our ability to price our life and health insurance products at a level
      that enables us to earn a margin over the cost of providing benefits and
      the expense of acquiring and administering those products, which is
      primarily a function of competitive conditions, persistency, our ability
      to assess and manage trends in mortality and morbidity experience, our
      ability to generate investment earnings and our ability to maintain
      expenses in accordance with pricing assumptions;

    - our ability to effectively monitor and price residential mortgage loans we
      originate, purchase, and sell and to manage the costs to service
      residential mortgage loans;

    - our ability to effectively hedge the effect of interest rate changes on
      our residential mortgage servicing rights. See "Business -- Mortgage
      Banking -- Risk Management";

    - our ability to manage our investment portfolio to maximize investment
      returns and minimize risks such as interest rate changes or defaults or
      impairments of invested assets;

    - fluctuations of foreign currency exchange rates; and

    - our ability to manage our operating expenses.

  TRENDS

    U.S. ASSET MANAGEMENT AND ACCUMULATION.  Our sales of pension and other
asset accumulation products and services in the United States have been affected
by overall trends in the U.S. retirement services industry, as our customers
have begun to rely less on defined benefit retirement plans, social security and
other government programs. Current trends in the work environment include a more
mobile workforce and the desire of employers to pass the market risk of
retirement investments to employees by shifting from offering defined benefit
plans to offering defined contribution plans. These trends are increasing the
demand for defined contribution pension arrangements such as 401(k) plans, as
well as mutual funds and variable annuities. Also, the "baby-boom" generation of
U.S. workers has reached an age where saving is critical and they continue to
seek tax-advantaged investment products for retirement. Considering these
trends, our group and individual variable annuity assets under management and
other fee-based asset accumulation products have continued to increase, while
traditional spread-based assets under management have grown at a slower rate.

    The table below provides a summary of assets under management from our
fee-based asset accumulation products and spread-based asset accumulation
products as of March 31, 2001, and December 31, 2000, 1999, and 1998:

                                                           U.S. ASSET ACCUMULATION
                                         -----------------------------------------------------------
                                         FEE-BASED ASSETS   SPREAD-BASED ASSETS   TOTAL ASSETS UNDER
                 AS OF                   UNDER MANAGEMENT    UNDER MANAGEMENT         MANAGEMENT
                 -----                   ----------------   -------------------   ------------------
                                                               ($ IN BILLIONS)
                                                                         
March 31, 2001.........................       $39.3                $30.3                $69.6
December 31, 2000......................        42.5                 28.5                 71.0
December 31, 1999......................        42.1                 28.2                 70.3
December 31, 1998......................        34.5                 29.0                 63.5

    Asset management services have been among the most profitable and rapidly
growing sectors of the financial services industry, at both the retail and
institutional level. We formally established Principal Capital Management, our
U.S-based asset manager, in 1999 to consolidate our investment operations and to
enter the third-party institutional asset management market. We seek to take
advantage of current trends which indicate that both retail and institutional
investors embrace specialization, providing increased fees to successful active
managers with expertise in specialty and niche areas. Our U.S. third-party
assets under management increased to $6.1 billion as of March 31, 2001, from
$3.5 billion since the establishment of Principal Capital Management on January
1, 1999.

                                        49
   53

    The following table provides a summary of Principal Capital Management's
affiliated and third-party assets under management as of March 31, 2001, and
December 31, 2000, 1999, and 1998:

                                                          PRINCIPAL CAPITAL MANAGEMENT
                                           -----------------------------------------------------------
                                           AFFILIATED ASSETS   THIRD-PARTY ASSETS   TOTAL ASSETS UNDER
AS OF                                      UNDER MANAGEMENT     UNDER MANAGEMENT      MANAGEMENT(1)
- -----                                      -----------------   ------------------   ------------------
                                                                 ($ IN BILLIONS)
                                                                           
March 31, 2001...........................        $75.7                $6.1                $81.8
December 31, 2000........................         76.9                 6.3                 83.2
December 31, 1999........................         77.5                 4.7                 82.2
December 31, 1998(2).....................         73.6                 3.5                 77.1

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

(1) Includes all assets for which Principal Capital Management provides
    investment advisory services.

(2) Represents assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION.  Our international asset
management and accumulation businesses focus on countries with a trend toward
private sector defined contribution pension systems. Our acquisition of BT
Financial Group in August 1999 is consistent with these trends. We are seeking
to take advantage of an Australian government requirement for all employers to
contribute 8% of an employee's salary to an employer-sponsored defined
contribution retirement plan, referred to as superannuation. The required
employer contribution is scheduled to rise to 9% by 2002.

    The governments of other countries have also instituted privatized pension
systems requiring employees who join the labor force to contribute to a private
pension system. With variations depending upon the specific country, we have
targeted these markets for sales of retirement and related products and
services, including defined contribution pension plans, annuities and mutual
funds to individuals and businesses. In several of our international markets, we
complement our sales of these products with sales of life insurance products.

    We have pursued our international strategy through a combination of
start-ups, acquisitions and joint ventures, which require infusions of capital
consistent with our strategy of long-term growth and profitability.

    LIFE AND HEALTH INSURANCE.  Our U.S. individual life insurance premiums have
been influenced by both economic and industry trends. Both fee revenues and
policyholder liabilities related to our interest-sensitive life insurance
products have increased due to a strong equity market and customer preference
for insurance products with variable investment and tax-advantaged accumulation
product options. Premiums and policyholder liabilities related to our individual
traditional life insurance products have remained relatively flat.

                                                                INDIVIDUAL LIFE AND HEALTH
                                         -------------------------------------------------------------------------
                                                 INTEREST-SENSITIVE                     TRADITIONAL LIFE
                                                   LIFE INSURANCE                           INSURANCE
                                         -----------------------------------   -----------------------------------
                                              FEE            POLICYHOLDER                           POLICYHOLDER
AS OF OR FOR THE                            REVENUES        LIABILITIES(1)         PREMIUMS         LIABILITIES
- ----------------                         --------------   ------------------   ----------------   ----------------
                                                                      ($ IN MILLIONS)
                                                                                      
Three months ended March 31, 2001......      $24.1             $1,575.4             $194.9            $5,499.6
Year ended December 31, 2000...........       89.1              1,559.2              772.8             5,468.1
Year ended December 31, 1999...........       61.7              1,231.2              780.8             5,289.1
Year ended December 31, 1998...........       49.7              1,068.2              792.3             5,083.6

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

(1) Includes separate account liabilities for policies with variable insurance
    options.

    Increased competition in the U.S. group health insurance industry has
affected pricing of premiums. Most group health insurance policies are subject
to annual review by policyholders, who may seek competitive quotations prior to
renewal. Regulation has had and may continue to have an adverse effect on our
ability to adequately price group health insurance products. At the same time,
health care costs have continued to rise, placing pressure on margins. Our group
health insurance premiums increased in recent years due to competitive prices
and new sales initiatives. These increases were partially offset by our
decisions to exit under-performing and non-strategic businesses and markets.
Effective April 1, 1998, we transferred substantially all of our HMO operations
to Coventry Health Care, Inc., due to unsatisfactory scale and return from these
operations. Medical insurance premiums from our HMO operations were $898.2
million in 1997. Also during 1998, we ceased sales of medical insurance products
in fourteen states where we were not achieving desired returns. Medical
insurance premiums from these states were $209.2 million in 1997. We are now
focusing on sales of medical insurance products in select geographic markets
where we believe we can achieve satisfactory returns. Effective January 1, 2000,
we ceased new sales of our Medicare supplement insurance product and effective
July 1, 2000, reinsured all existing business. We continue to sell group dental
and vision insurance,
                                        50
   54

disability insurance and life insurance to employers desiring a broad range of
employee benefit products and services for their employees. We have targeted
these non-medical products for growth, especially dental and vision insurance
products. Our group health insurance and group life insurance premiums for the
three months ended March 31, 2001, and for the years ended December 31, 2000,
1999, and 1998 were as follows:

                                                                                             GROUP LIFE
                                                      GROUP HEALTH INSURANCE                 INSURANCE
                                         -------------------------------------------------   ----------
                                                      MEDICARE       DENTAL
                                          MEDICAL    SUPPLEMENT    AND VISION   DISABILITY      LIFE
                                         INSURANCE    INSURANCE    INSURANCE    INSURANCE    INSURANCE
                FOR THE                  PREMIUMS    PREMIUMS(1)    PREMIUMS     PREMIUMS     PREMIUMS
                -------                  ---------   -----------   ----------   ----------   ----------
                                                          ($ IN MILLIONS)
                                                                              
Three months ended March 31, 2001......  $  384.0      $   --        $ 88.4       $23.7        $ 59.3
Year ended December 31, 2000...........   1,601.8        98.4         332.7        92.9         277.7
Year ended December 31, 1999...........   1,563.5       164.6         259.0        84.5         273.6
Year ended December 31, 1998...........   1,523.0       121.2         202.7        81.1         350.8

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

(1) Effective January 1, 2000, we ceased new sales of our Medicare supplement
    insurance and effective July 1, 2000, reinsured all existing business.

    MORTGAGE BANKING.  We believe residential mortgages play a central role in
the financial planning activities of individuals in the United States. As a
result, our mortgage banking operations represent a component of our overall
portfolio of market-driven financial products and services.

    Interest rate trends significantly impact our residential mortgage business.
Since 1998, interest rates in the U.S. have remained relatively lower than in
the early 1990s. During 1998 and through most of 1999, the strong economy
coupled with relatively low interest rates created a favorable real estate
market that increased production of residential mortgage loans throughout the
industry and also contributed to an increase in residential mortgage loan
refinancing. Starting late in 1999, interest rates increased, resulting in
decreases in production and refinancing of residential mortgage loans throughout
the industry. This trend reversed in early 2001, when interest rates decreased,
resulting in increases in mortgage loan production.

    We manage growth in the mortgage loan servicing portfolio, through retention
of mortgage loan production and the sale and acquisition of mortgage loan
servicing rights. Our servicing portfolio grew at a compound annual rate of 15%
from December 31, 1998 through December 31, 2000, reflecting our increased
retention of servicing rights of loans produced and acquisition of servicing
rights. Growth in the mortgage loan servicing portfolio was slower in 2000, as a
result of a decrease in mortgage loan production and an increase in sales of
mortgage loan servicing rights. Our residential mortgage loan production and the
unpaid principal balances in our residential mortgage loan servicing portfolio
as of or for the three months ended March 31, 2001, and as of or for the years
ended December 31, 2000, 1999, and 1998 were as follows:

                                                           RESIDENTIAL MORTGAGE     RESIDENTIAL MORTGAGE
AS OF OR FOR THE                                             LOAN PRODUCTION      LOAN SERVICING PORTFOLIO
- ----------------                                           --------------------   ------------------------
                                                                           ($ IN MILLIONS)
                                                                            
Three months ended March 31, 2001........................       $ 4,854.9                $57,304.8
Year ended December 31, 2000.............................         8,311.8                 55,987.4
Year ended December 31, 1999.............................        13,307.3                 51,875.5
Year ended December 31, 1998.............................        12,120.5                 41,973.0

INVESTMENT ACTIVITY

    Our primary investment objective is to maximize after-tax investment returns
within risk parameters we view as acceptable. In 2000 and 1999, we sold lower
yielding fixed maturity securities to allow for reinvestment in higher yielding
fixed maturity securities. This repositioning of our investment portfolio
generated net realized capital losses in our fixed maturity security portfolio.
Net realized capital losses related to fixed maturities were $125.9 million and
$96.9 million for the years ended December 31, 2000 and 1999, respectively.

    In 1999 and 1998, we began repositioning our investment portfolio by selling
invested assets with lower yields, primarily equities and real estate, and
reinvesting the proceeds in assets with higher yields, primarily fixed
maturities. Net realized capital gains related to equity securities were $383.0
million and $302.9 million for the years ended December 31, 1999 and 1998,
respectively. Net realized capital gains related to real estate were $56.4
million and $120.6 million for the years ended December 31, 1999 and 1998,
respectively.

    In 1999, we sold a portion of our investment in United Payors and United
Providers, a publicly traded service organization that acts as an intermediary
between health care payors and health care providers, realizing an after-tax

                                        51
   55

capital gain of $17.9 million. In 2000, we sold our remaining investment and
realized an after-tax capital gain of $58.9 million.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

  ACQUISITIONS AND DISPOSITIONS

    We acquired and disposed of the following businesses, among others, during
the past several years:

    PRINCIPAL INTERNATIONAL ESPANA, S.A. DE SEGUROS DE VIDA.  On February 15,
2001, we disposed of all of the stock of Principal International Espana, S.A. de
Seguros de Vida, our subsidiary in Spain, for nominal proceeds, resulting in a
net realized capital loss of $38.4 million, ceasing our business operations in
Spain. Total assets of our operations in Spain as of December 31, 2000 were
$222.7 million.

    Revenues of $24.1 million from our operations in Spain were included in our
consolidated results of operations for the three months ended March 31, 2000,
and revenues of $49.4 million, $51.7 million and $46.0 million were included in
our results of operations for the years ended December 31, 2000, 1999 and 1998,
respectively. We included net income of $3.3 million from our operations in
Spain for the three months ended March 31, 2000, and a net loss of $1.2 million
and net income of $0.9 million and $2.8 million in our results of operations for
the years ended December 31, 2000, 1999 and 1998, respectively. Our consolidated
results of operations for the three months ended March 31, 2001 did not include
revenues or net income from our operations in Spain.

    BT FINANCIAL GROUP.  On August 31, 1999, we acquired several companies
affiliated with Bankers Trust Australia Group from Deutsche Bank AG at a
purchase price of $1.4 billion. The acquired companies now operate under the
name of BT Financial Group. We accounted for the acquisition using the purchase
method. The results of operations of the acquired companies have been included
in our consolidated financial statements from the date of acquisition. We
included revenues of $63.5 million and net loss of $5.6 million in our
consolidated results of operations for the three months ended March 31, 2001. We
included revenues of $72.7 million and net income of $0.5 million in our
consolidated results of operations for the three months ended March 31, 2000. We
included revenues of $285.5 million and net income of $6.5 million in our
consolidated results of operations for the year ended December 31, 2000. We
included revenues of $116.5 million and net loss of $3.1 million in our
consolidated results of operations for the year ended December 31, 1999.

    We accounted for the purchase price as follows: $897.4 million of
identifiable intangibles, consisting primarily of management rights and the BT
brand name, $38.5 million of workforce intangibles and $408.6 million of
resulting goodwill. We are amortizing these intangible assets on a straight-line
basis over 40 years, 8 years and 25 years, respectively. We report the goodwill
and other intangibles, including the related amortization, in our International
Asset Management and Accumulation segment.

    We issued unsecured long-term debt of $665.0 million to partially fund our
acquisition of BT Financial Group. We report this debt and related interest
expense in our Corporate and Other segment.

    COMPANIA DE SEGUROS DE VIDA EL ROBLE S.A.  We acquired Compania de Seguros
de Vida El Roble S.A., or El Roble, a Chilean life insurance company, at a
purchase price of $73.4 million in July 1998. We included El Roble's financial
results in our International Asset Management and Accumulation segment. The
operations of our existing Chilean life insurance affiliate were combined with
the operations of El Roble to form Principal International de Chile. Our
consolidated financial results related to these companies' combined operations
include: total revenues of $47.0 million and $48.4 million for the three months
ended March 31, 2001 and 2000, respectively, and $200.2 million, $178.1 million
and $155.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively; and net income of $2.4 million and $2.3 million for the three
months ended March 31, 2001 and 2000, respectively, and $10.2 million, $0.5
million and $17.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

    RELIASTAR MORTGAGE CORPORATION.  In July 1998, we established our
residential mortgage loan wholesale distribution system, a new distribution
channel, by acquiring ReliaStar Mortgage Corporation at a purchase price of
$18.6 million. The operations of ReliaStar Mortgage Corporation have been
integrated into Principal Residential Mortgage, Inc., as part of our Mortgage
Banking segment.

    COVENTRY HEALTH CARE.  Effective April 1, 1998, we transferred substantially
all of our HMO operations to Coventry Health Care, Inc., or Coventry, in
exchange for 42% of the common stock of Coventry. Our net equity in the
transferred HMO operations had a carrying value of $170.0 million on April 1,
1998. We sold our remaining HMO operations in 1998 for $20.5 million resulting
in no realized capital gain or loss. Prior to the transfer to Coventry, our
Corporate and Other segment included $266.7 million of HMO revenues in our
results for 1998.

    We report our investment in Coventry in our Corporate and Other segment and
account for it using the equity method. Our share of Coventry's net income was
$4.9 million and $6.0 million for the three months ended March 31, 2001 and
2000, respectively, and $20.0 million and $19.1 million for the years ended
December 31, 2000 and 1999, respectively. Our share of Coventry's net loss was
$9.8 million for the year ended December 31, 1998. In September 2000, we sold a
portion of our Coventry stock, which reduced our ownership to approximately 25%
of Coventry and

                                        52
   56

resulted in a realized capital gain of $13.9 million, net of tax. Our carrying
amount in Coventry was $128.9 million as of March 31, 2001.

    PRINCIPAL CAPITAL MANAGEMENT.  We transferred our U.S. investment management
operations from our Corporate and Other segment to our U.S. Asset Management and
Accumulation segment effective January 1, 1999. In connection with this
transfer, we established Principal Capital Management to consolidate our U.S.
asset management operations. Principal Capital Management is primarily composed
of the former investment department of Principal Life and the investment
professionals of Invista Capital Management, a registered investment advisor
focused on the specialized needs of institutional clients. We included fee
revenues of $7.4 million and $6.9 million for the three months ended March 31,
2001 and 2000, respectively, and $31.5 million and $36.2 million for the years
ended December 31, 2000 and 1999, respectively, related to our third-party
clients in our U.S. Asset Management and Accumulation segment. Prior to the
formation of Principal Capital Management, we included fee revenues of $10.6
million in 1998, related to our third-party clients in our Corporate and Other
segment.

  REINSURANCE TRANSACTION

    Effective July 1, 2000, we entered into a reinsurance agreement with General
& Cologne Life Re of America to reinsure 100% of our Medicare supplement
insurance block. Medicare supplement insurance premiums were $98.4 million and
$75.9 million for the six months ended June 30, 2000 and 1999, respectively, and
$164.6 million and $121.2 million for the years ended December 31, 1999 and
1998, respectively.

  OPERATING EARNINGS AND NON-RECURRING ITEMS

    For the three months ended March 31, 2001, we excluded $20.5 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included the negative
effects of: (1) a cumulative effect of accounting change related to our
implementation of SFAS 133 ($10.7 million), as discussed in Note 2 to Principal
Mutual Holding Company's unaudited consolidated financial statements; (2) a loss
contingency reserve established for sales practices litigation ($5.9 million);
and (3) expenses related to our demutualization ($3.9 million).

    For the three months ended March 31, 2000, we did not exclude non-recurring
items from net income for our presentation of operating earnings.

    For the year ended December 31, 2000, we excluded $101.0 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included the negative
effects of: (1) a loss contingency reserve established for sales practices
litigation ($93.8 million), and (2) expenses related to our demutualization
($7.2 million). See "Business -- Legal Proceedings".

    For the year ended December 31, 1998, we excluded $104.8 million of
non-recurring items, net of tax, from net income for our presentation of
consolidated operating earnings. The non-recurring items included:

    - the positive effects of: (1) Principal Life's release of tax reserves and
      related accrued interest in the amount of $164.4 million, consisting of
      $145.4 million in taxes and $19.0 million of interest, resulting from the
      decision of the Internal Revenue Service in 1998 to accept Principal
      Life's position on previously contested tax matters, and (2) accounting
      changes by our international operations ($13.3 million); and

    - the negative effects of: (1) expenses and adjustments for changes in
      amortization assumptions for deferred policy acquisition costs related to
      our corporate structure change to a mutual insurance holding company
      ($27.4 million), and (2) a contribution related to permanent endowment of
      the Principal Financial Group Foundation ($45.5 million).

  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 have not had a material impact
on our consolidated financial results. Our consolidated operating earnings were
negatively impacted $0.2 million for the three months ended March 31, 2001, $0.6
million for the year ended December 31, 2000 and $0.3 million for the year ended
December 31, 1999, 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 "-- Quantitative and Qualitative Information about
Market Risk."

                                        53
   57

THE MUTUAL INSURANCE HOLDING COMPANY REORGANIZATION

    Effective July 1, 1998, Principal Mutual Life Insurance Company formed
Principal Mutual Holding Company, a mutual insurance holding company, and
converted to Principal Life, a stock life insurance company. All of the shares
of Principal Life were issued to Principal Mutual Holding Company through two
newly formed Iowa intermediate holding companies, Principal Financial Group,
Inc., and Principal Financial Services, Inc. The reorganization itself did not
have a material financial impact on Principal Mutual Holding Company and its
subsidiaries, including Principal Life, as the net assets transferred to achieve
the change in legal organization were accounted for at historical carrying
amounts in a manner similar to that in pooling-of-interests accounting.

    In conjunction with the formation of the mutual insurance holding company,
Principal Life established a Closed Block for the benefit of individual
participating dividend-paying policies in force on that date. The Closed Block
was designed to provide reasonable assurance to policyholders included in the
Closed Block that, after the formation of the mutual insurance holding company,
assets would be available to maintain dividends in aggregate in accordance with
the 1997 policy dividend scales if the experience underlying such scales
continued. Assets were allocated to the Closed Block in amounts such that their
cash flows, together with anticipated revenues from policies included in the
Closed Block, were reasonably expected to be sufficient to support such
policies, including provision for payment of claims, expenses, charges and
taxes, and to provide for the continuation of dividends in aggregate in
accordance with the 1997 policy dividend scales if the experience underlying
such scales continued, and to allow for appropriate adjustments in such scales
if the experience changes.

    Assets allocated to the Closed Block inure to the benefit of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by Principal
Mutual Holding Company. Principal Life will continue to pay guaranteed benefits
under all policies, including the policies included in the Closed Block, in
accordance with their terms. If the assets allocated to the Closed Block, the
investment cash flows from those assets and revenues from the policies included
in the Closed Block, including investment income thereon, prove to be
insufficient to pay the benefits guaranteed under the policies included in the
Closed Block, Principal Life will be required to make such payments from its
general funds.

    The formation of the Closed Block in 1998 did not have a material impact on
our financial results. As of March 31, 2001, Closed Block assets and liabilities
were $4,568.8 million and $5,597.6 million, respectively. As of December 31,
2000, Closed Block assets and liabilities were $4,507.4 million and $5,547.8
million, respectively. As of December 31, 1999, Closed Block assets and
liabilities were $4,317.4 million and $5,394.6 million, respectively.

THE DEMUTUALIZATION

    The board of directors of Principal Mutual Holding Company unanimously
adopted the plan of conversion on March 31, 2001. Under the terms of the plan of
conversion, on the effective date of the demutualization, which is the date of
the closing of this offering, Principal Mutual Holding Company will convert from
a mutual insurance holding company into a stock company and become our
wholly-owned subsidiary.

    The demutualization will become effective on the date of the closing of this
offering. The plan of conversion provides that the effective date will occur
after the approval by the Insurance Commissioner of the State of Iowa and the
policyholders entitled to vote on the plan of conversion, but on or before 12
months after the date on which the Insurance Commissioner of the State of Iowa
approves the plan of conversion. With the approval of the Insurance Commissioner
of the State of Iowa, the effective date deadline may be extended.

    We estimate that costs relating to the demutualization, excluding costs
relating to this offering, will be approximately $23.5 million, net of tax, of
which $11.1 million was incurred through March 31, 2001. Demutualization
expenses consist primarily of printing and mailing costs and our aggregate cost
of engaging independent accounting, actuarial, financial, investment banking,
legal and other consultants to advise us on the demutualization. In addition,
our costs include the costs of the staff and advisors of the Insurance
Commissioner of the State of Iowa, the New York State Insurance Department and
potentially other regulatory authorities as to the demutualization process and
related matters.

                                        54
   58

RESULTS OF OPERATIONS

    The table below presents summary consolidated financial information for the
periods indicated.

                                                                FOR THE THREE
                                                                MONTHS ENDED             FOR THE YEAR ENDED
                                                                  MARCH 31,                 DECEMBER 31,
                                                             -------------------   ------------------------------
                                                               2001       2000       2000       1999       1998
                                                             --------   --------   --------   --------   --------
                                                                               ($ IN MILLIONS)
                                                                                          
INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations........................  $1,064.2   $1,014.4   $3,996.4   $3,937.6   $3,818.4
  Fees and other revenues..................................     413.0      396.4    1,576.3    1,287.3      978.8
  Net investment income....................................     839.7      789.5    3,172.3    3,072.0    2,933.9
  Net realized capital gains (losses)......................     (80.9)      70.3      139.9      404.5      465.8
                                                             --------   --------   --------   --------   --------
         Total revenues....................................   2,236.0    2,270.6    8,884.9    8,701.4    8,196.9
Expenses:
  Benefits, claims and settlement expenses.................   1,391.9    1,319.6    5,232.3    5,260.9    5,089.0
  Dividends to policyholders...............................      81.0       75.4      312.7      304.6      298.7
  Operating expenses.......................................     622.7      593.2    2,479.4    2,070.3    2,074.0
                                                             --------   --------   --------   --------   --------
         Total expenses....................................   2,095.6    1,988.2    8,024.4    7,635.8    7,461.7
                                                             --------   --------   --------   --------   --------
Income before income taxes and cumulative effect of
  accounting change........................................     140.4      282.4      860.5    1,065.6      735.2
Income taxes...............................................      24.4       89.3      240.3      323.5       42.2
                                                             --------   --------   --------   --------   --------
  Income before cumulative effect of accounting change.....     116.0      193.1      620.2      742.1      693.0
Cumulative effect of accounting change, net of related
  income taxes.............................................     (10.7)        --         --         --         --
                                                             --------   --------   --------   --------   --------
  Net income...............................................  $  105.3   $  193.1   $  620.2   $  742.1   $  693.0
                                                             ========   ========   ========   ========   ========
OTHER DATA:
Net income.................................................  $  105.3   $  193.1   $  620.2   $  742.1   $  693.0
Less:
  Net realized capital gains (losses), as adjusted.........     (47.9)      49.8       93.1      266.9      320.7
  Non-recurring items......................................     (20.5)        --     (101.0)        --      104.8
                                                             --------   --------   --------   --------   --------
Operating earnings.........................................  $  173.7   $  143.3   $  628.1   $  475.2   $  267.5
                                                             ========   ========   ========   ========   ========
Operating earnings before amortization of goodwill and
  other intangibles........................................  $  186.6   $  153.1   $  670.8   $  492.0   $  304.0

 THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000

    Premiums and other considerations increased $49.8 million, or 5%, to
$1,064.2 million for the three months ended March 31, 2001, from $1,014.4
million for the three months ended March 31, 2000. The increase reflected a
$136.1 million increase from the U.S. Asset Management and Accumulation segment,
primarily due to an increase in premiums from single premium group annuities
with life contingencies, which are typically used to fund defined benefit
pension plan terminations. The premium income we receive from these contracts
fluctuates due to the variability in the number and size of pension plan
terminations in the market and our ability to attract new sales. The increase
was partially offset by a $73.7 million, or 9%, decrease from the Life and
Health Insurance segment, primarily related to our decision to reinsure 100% of
our group Medicare supplement insurance business effective July 1, 2000. Life
and Health Insurance segment premiums also decreased due to large premium rate
increases in 2000, which led to high lapses and low sales of group medical
insurance. The increase was also partially offset by a $12.5 million, or 21%,
decrease from the International Asset Management and Accumulation segment,
primarily related to the loss of premiums and other considerations due to the
February 2001 divestiture of our operations in Spain.

    Fees and other revenues increased $16.6 million, or 4%, to $413.0 million
for the three months ended March 31, 2001, from $396.4 million for the three
months ended March 31, 2000. The increase was primarily due to a $23.0 million,
or 23%, increase from the Mortgage Banking segment, primarily resulting from an
increase in mortgage loan production fee revenues reflecting the increase in
mortgage loan production volume. The increase was also due to a $15.1 million,
or 30%, increase from the Life and Health Insurance segment, primarily related
to growth in our interest-sensitive life insurance block of business and
increased fee revenues due to fee rate increases in our group fee-for-service
and group medical insurance businesses. The increases were partially offset by a
$9.3 million, or 5%, decrease from the U.S. Asset Management and Accumulation
segment, primarily due to a decrease in surrender charge revenues from pension
products, reflecting the decreasing interest rate environment. The increases
were also partially offset by a $8.8 million decrease from the Corporate and
Other segment, primarily related to a change in inter-segment

                                        55
   59

eliminations included in this segment. The increases were partially offset by a
$3.4 million, or 5%, decrease from the International Asset Management and
Accumulation segment primarily as a result of the weakening of the Australian
dollar versus the U.S. dollar.

    Net investment income increased $50.2 million, or 6%, to $839.7 million for
the three months ended March 31, 2001, from $789.5 million for the three months
ended March 31, 2000. The increase was primarily due to a $1,827.2 million, or
4%, increase in average invested assets and cash and was also due to an increase
in investment yields due to higher yields on fixed income securities. The yield
on average invested assets and cash was 7.7% for the three months ended March
31, 2001, compared to 7.5% for the three months ended March 31, 2000.

    Net realized capital gains (losses) decreased $151.2 million to $80.9
million of net realized capital losses for the three months ended March 31,
2001, from $70.3 million of net realized capital gains for the three months
ended March 31, 2000. The decrease primarily related to the sale of our
investment in United Payors and United Providers. During the three months ended
March 31, 2000, we sold our investment and realized a capital gain of $90.6
million. During the three months ended March 31, 2001, we realized capital
losses on sales of equity securities, a result of the decline in the equity
markets, the sale of our operations in Spain, and permanent impairments of fixed
maturity securities.

    Benefits, claims and settlement expenses increased $72.3 million, or 5%, to
$1,391.9 million for the three months ended March 31, 2001, from $1,319.6
million for the three months ended March 31, 2000. The increase was primarily
due to a $135.4 million, or 24%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to the increase in reserves from sales of
single premium group annuities with life contingencies. The increase was
partially offset by a $52.8 million, or 8%, decrease from the Life and Health
Insurance segment, primarily related to our decision to reinsure 100% of our
group Medicare supplement insurance business effective July 1, 2000. The
increase was also partially offset by a $10.1 million, or 15%, decrease from the
International Asset Management and Accumulation segment, primarily related to
the loss of benefits, claims and settlement expenses resulting from the
divestiture of our operations in Spain.

    Dividends to policyholders increased $5.6 million, or 7%, to $81.0 million
for the three months ended March 31, 2001, from $75.4 million for the three
months ended March 31, 2000. The increase was primarily attributable to a $3.5
million, or 5%, increase from the Life and Health Insurance segment due to
increased dividends on traditional individual life insurance products, a result
of increases in the cash values of the policies. The increase was also due to a
$2.1 million increase from the U.S. Asset Management and Accumulation segment
resulting from an increase in dividends for our pension full-service
accumulation products.

    Operating expenses increased $29.5 million, or 5%, to $622.7 million for the
three months ended March 31, 2001, from $593.2 million for the three months
ended March 31, 2000. The increase was primarily due to a $19.5 million, or 10%,
increase from the U.S. Asset Management and Accumulation segment, primarily
resulting from an increase in amortization of deferred policy acquisition costs
attributable to pension products. The increase also reflected a $12.9 million,
or 18%, increase from the Mortgage Banking segment, primarily due to mortgage
loan production expenses, reflecting the increase in mortgage loan production
volume. In addition, the increase was due to a $3.1 million, or 21%, increase
from the Corporate and Other segment, primarily related to a non-recurring loss
contingency reserve established for litigation sales practices and
demutualization costs. The increase was also due to a $2.7 million, or 3%,
increase from the International Asset Management and Accumulation segment,
primarily related to an increase in amortization of goodwill and other
intangibles. The increases were partially offset by an $8.7 million, or 4%,
decrease from the Life and Health Insurance segment, primarily a result of a
decrease in commissions resulting from our decision to reinsure 100% of our
group Medicare supplement insurance business effective July 1, 2000.

    Income taxes decreased $64.9 million, or 73%, to $24.4 million for the three
months ended March 31, 2001, from $89.3 million for the three months ended March
31, 2000. The effective income tax rate was 17% for the three months ended March
31, 2001 and 32% for the three months ended March 31, 2000. The effective rates
for the three months ended March 31, 2001 and 2000 were lower than the corporate
income tax rate of 35% primarily due to income tax deductions allowed for
corporate dividends received, for which the estimated benefit recognition rate
increased during the three months ended March 31, 2001 compared to the three
months ended March 31, 2000, as a result of favorable tax developments. The
effective tax rate for the three months ended March 31, 2001 was further reduced
by additional tax benefits related to excess tax over book capital losses
realized from the sale of our operations in Spain.

    As a result of foregoing factors and the inclusion of the cumulative effect
of accounting change, net of related income taxes, net income decreased $87.8
million, or 45%, to $105.3 million for the three months ended March 31, 2001,
from $193.1 million for the three months ended March 31, 2000. The cumulative
effect of accounting change related to our implementation of SFAS 133, as
previously discussed under the caption "-- Transactions Affecting Comparability
of Results of Operations -- Operating Earnings and Non-Recurring Items."

    During the three months ended March 31, 2001, non-recurring items of $20.5
million, net of tax, included the negative effects of: (1) a cumulative effect
of change in accounting principle related to our implementation of SFAS 133
($10.7 million); (2) a loss contingency reserve established for sales practices
litigation ($5.9 million); and (3) expenses related to our demutualization ($3.9
million).

                                        56
   60

    As a result of the foregoing factors and the exclusion of net realized
capital gains, as adjusted and non-recurring items, operating earnings increased
$30.4 million, or 21%, to $173.7 million for the three months ended March 31,
2001, from $143.3 million for the three months ended March 31, 2000. The
increase resulted from a $19.3 million increase from the Corporate and Other
segment, primarily due to improved investment yields. The increase was also due
to a $5.9 million, or 33%, increase from the Mortgage Banking segment, primarily
due to an increase in mortgage loan production earnings, reflecting an increase
in mortgage loan production volume. In addition, the increase was due to a $5.9
million, or 16%, increase from the Life and Health Insurance segment due to
improved margins on individual life insurance business resulting from higher
investment yields and due to improved loss ratios on group life insurance
business. Also contributing to the increase was a $0.1 million increase from the
U.S. Asset Management and Accumulation segment due to improved investment yields
and growth from our pension investment-only block of business. These increases
were partially offset by a $0.8 million, or 18%, decrease from the International
Asset Management and Accumulation segment.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $58.8 million, or 1%, to
$3,996.4 million in 2000, from $3,937.6 million in 1999. The increase reflected
a $59.9 million, or 2%, increase from the Life and Heath Insurance segment,
primarily the result of increased sales of group dental insurance products and
an increase in group medical premiums, primarily attributable to increased sales
in 1999 and significant group medical premium rate increases. In addition, the
increase was due to a $40.6 million, or 23%, increase from the International
Asset Management and Accumulation segment, primarily related to sales of single
premium annuities with life contingencies by new annuity companies we
established in Mexico in July 1999 and in Argentina in August 1999. The
increases were partially offset by a $41.3 million, or 7%, decrease from the
U.S. Asset Management and Accumulation segment, primarily related to a decrease
in premiums from single premium group annuities with life contingencies, which
are typically used to fund defined benefit pension plan terminations. The
premium income we receive from these contracts fluctuates due to the variability
in the number and size of defined benefit pension plan terminations in the
market and our ability to attract new sales.

    Fees and other revenues increased $289.0 million, or 22%, to $1,576.3
million in 2000, from $1,287.3 million in 1999. The increase was primarily due
to a $199.6 million increase from the International Asset Management and
Accumulation segment, primarily resulting from the inclusion of fees and other
revenues contributed by BT Financial Group, which we acquired in August 1999.
The increase was also due to a $90.3 million, or 15%, increase from the U.S.
Asset Management and Accumulation segment, primarily attributable to an increase
in administrative fee revenues, reflecting an increase in the amortization of
front-end fee revenues, a result of a change in our assumptions related to
amortization of deferred policy acquisition costs attributable to pension
products. We also received higher fee revenues related to surrender charges,
which are fees charged to policyholders when they surrender an annuity for its
cash value. Fee revenues also increased due to fees from pension
customer-directed investment transfers, reflecting the higher interest rate
environment and the resulting increased customer account activity. Fee revenues
for U.S. pension products and services also increased, reflecting increased
assets under management in 1999. The increase was also due to a $49.8 million,
or 28%, increase from the Life and Health Insurance segment, primarily related
to growth in our interest-sensitive life insurance block of business and
increased fee revenues from our group fee-for-service business, primarily a
result of an increase in members and fees. The increases were partially offset
by a $31.2 million decrease from the Corporate and Other segment, which reflects
a change in inter-segment eliminations included in this segment and the
termination of a reinsurance and participation agreement under which we received
fee revenues in 1999, but not in 2000. The increases were also partially offset
by a $19.5 million, or 5%, decrease from the Mortgage Banking segment, primarily
due to a decrease in residential mortgage loan production revenues as a result
of the decrease in residential mortgage loan production volume during 2000.

    Net investment income increased $100.3 million, or 3%, to $3,172.3 million
in 2000, from $3,072.0 million in 1999. The increase was primarily due to an
increase in investment yields due to higher interest rates on new investments.
The yield on average invested assets and cash was 7.5% in 2000, compared to 7.4%
in 1999. The increase was also due to a $934.8 million, or 2%, increase in
average invested assets and cash.

    Net realized capital gains decreased $264.6 million, or 65%, to $139.9
million in 2000, from $404.5 million in 1999. The decrease was due in part to a
decrease in sales of invested assets, primarily equity securities, in 2000. In
1999, we sold a significant portion of our equity securities portfolio to reduce
exposure to common stock and to realize appreciation. We also recognized an
increase in net realized capital losses in 2000, compared to 1999, in our fixed
income securities portfolio, reflecting our investment philosophy to reposition
the investment portfolio to maximize investment returns by selling lower
yielding fixed income securities to allow for reinvestment in higher yielding
fixed income securities. In 1999, we sold a portion of our investment in United
Payors and United Providers, a publicly traded service organization that acts as
an intermediary between health care payors and health care providers, realizing
a capital gain of $27.6 million. In 2000, we sold our remaining investment and
realized a capital gain of $90.6 million.

    Benefits, claims and settlement expenses decreased $28.6 million, or 1%, to
$5,232.3 million in 2000, from $5,260.9 million in 1999. The decrease was
primarily due to a $55.5 million, or 2%, decrease from the Life and Health
Insurance segment, primarily resulting from the release of group medical and
group Medicare supplement claim

                                        57
   61

reserves established in 1999. The claim reserves were established in 1999 as a
result of poor claim experience during the first three quarters of 1999 and an
expectation that claims would continue to increase through the second quarter of
2000. Group Medicare supplement benefits, claims and settlement expenses also
decreased as a result of our decision to cease new sales of group Medicare
supplement insurance effective January 1, 2000 and our decision to reinsure all
existing business as of July 1, 2000. In addition, the decrease was related to a
$24.7 million, or 1%, decrease from the U.S. Asset Management and Accumulation
segment primarily resulting from a decrease in benefit payments and reserve
changes reflecting the decrease in our block of pension experience rated
business and an increase in our guaranteed business. The decreases were
partially offset by a $52.1 million, or 25%, increase from the International
Asset Management and Accumulation segment, primarily due to an increase in the
change in reserves and policy and contract benefit payments, primarily related
to additional sales of annuity products with life contingencies in Mexico,
Argentina and Chile.

    Dividends to policyholders increased $8.1 million, or 3%, to $312.7 million
in 2000, from $304.6 million in 1999. The increase was primarily attributable to
a $12.5 million, or 4%, increase from the Life and Health Insurance segment due
to increased dividends on traditional individual life insurance products, a
result of increases in the cash values of the policies. The increase was
partially offset by a $4.4 million, or 49%, decrease in dividends from the U.S.
Asset Management and Accumulation segment, which reflected a decrease in our
block of pension experience rated business.

    Operating expenses increased $409.1 million, or 20%, to $2,479.4 million in
2000, from $2,070.3 million in 1999. The increase was primarily due to a $160.2
million, or 76%, increase from the International Asset Management and
Accumulation segment, primarily resulting from the inclusion of BT Financial
Group in our financial results effective August 1999, including a $23.3 million
increase amortization of goodwill and other intangibles. The increase also
reflected a $121.5 million, or 20%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to a change in our assumptions related to
amortization of deferred policy acquisition costs related to pension products
and also due to an increase in pension salary and incentive compensation costs
and other pension administrative expenses. In addition, the increase was due to
a $116.0 million increase from the Corporate and Other segment, primarily
related to a non-recurring loss contingency reserve established for sales
practices litigation and demutualization costs as well as additional interest
costs related to private debt securities and commercial paper issued in
connection with our acquisition of BT Financial Group. The increase was also due
to a $39.5 million, or 5%, increase from the Life and Health Insurance segment,
primarily due to expenses related to our group Medicare supplement business and
higher group medical commissions. The increases were partially offset by a $28.1
million, or 9%, decrease from the Mortgage Banking segment, primarily a result
of net gains we earned on hedges related to our servicing portfolio in 2000.

    Income taxes decreased $83.2 million, or 26%, to $240.3 million in 2000,
from $323.5 million in 1999. The effective income tax rate was 28% in 2000 and
30% in 1999. The effective rates for 2000 and 1999 were lower than the corporate
income tax rate of 35%, primarily due to income tax deductions allowed for
corporate dividends received.

    As a result of the foregoing factors, net income decreased $121.9 million,
or 16%, to $620.2 million in 2000, from $742.1 million in 1999.

    In 2000, non-recurring items of $101.0 million, net of tax, included the
negative effects of (1) a loss contingency reserve established for sales
practices litigation ($93.8 million); and (2) expenses related to our
demutualization study ($7.2 million).

    Operating earnings increased $152.9 million, or 32%, to $628.1 million in
2000, from $475.2 million in 1999. The increase resulted from a $71.6 million,
or 79%, increase from the Life and Health Insurance segment, primarily due to
improved earnings from our group medical business. The increase was also due to
a $58.2 million increase from the Corporate and Other segment, primarily due to
improved investment yields and lower expenses due in part to a net recovery of
interest expense related to a successful tax audit appeal. In addition, the
increase was due to a $29.9 million, or 78%, increase from the International
Asset Management and Accumulation segment due to growth in our international
operations, due in part to BT Financial Group, which we acquired in August 1999.
Operating earnings from the U.S. Asset Management and Accumulation did not
change as increases in revenues were offset by increases in expenses. These
increases were partially offset by a $6.8 million, or 12%, decrease from the
Mortgage Banking segment, primarily due to a decrease in mortgage loan
production earnings, reflecting a decrease in production volume.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $119.2 million, or 3%, to
$3,937.6 million in 1999, from $3,818.4 million in 1998. The increase was
primarily due to a $285.0 million, or 101%, increase from the U.S. Asset
Management and Accumulation segment, due to increased sales of single premium
group annuities with life contingencies. The premium income we receive from
these contracts fluctuates due to the variability in the number and size of
pension plan terminations in the market and our ability to attract new sales.
The increase was also due to a $64.0 million, or 2%, increase from the Life and
Health Insurance segment, primarily due to growth in our dental insurance
business, and an increase in premiums and other considerations for group
Medicare supplement insurance

                                        58
   62

and group medical insurance, a result of more competitive pricing and new sales
incentives. The increase was also due to a $32.8 million, or 22%, increase from
the International Asset Management and Accumulation segment, primarily related
to the addition of premiums from El Roble, a Chilean life insurance company we
acquired in July 1998, sales of single premium annuities with life
contingencies, related primarily to our newly formed annuity company in Mexico,
and sales of single premium group annuities with life contingencies in Spain.
The increases were partially offset by a $262.6 million decrease from the
Corporate and Other segment, primarily related to our HMO operations, which
contributed premiums and other considerations through March 31, 1998, prior to
being transferred to Coventry.

    Fees and other revenues increased $308.5 million, or 32%, to $1,287.3
million in 1999, from $978.8 million in 1998. The increase was primarily due to
a $165.7 million, or 37%, increase from the U.S. Asset Management and
Accumulation segment, primarily due to growth in assets under management, which
benefited from strong equity market performance in 1999, an increase in net
deposits received from our pension customers and an increase in third-party
asset management fee revenues. The increase in U.S. Asset Management and
Accumulation segment fee revenues was related to the inclusion of asset
management fee revenues of Principal Capital Management in this segment at the
beginning of 1999. Such asset management fee revenues were reported in the
Corporate and Other segment prior to 1999, leading to a $35.1 million decrease
for the Corporate and Other segment. This change in reported segment did not
have an impact on our consolidated financial results. The increase was also due
to a $77.5 million increase from the International Asset Management and
Accumulation segment, primarily related to the inclusion of fees and revenues
contributed by BT Financial Group, which we acquired in August 1999. The
increase was also due to a $66.9 million, or 20%, increase from the Mortgage
Banking segment, primarily due to an increase in residential mortgage loan
servicing revenues resulting from the increase in our residential mortgage loan
servicing portfolio. The increase was also attributable to a $33.5 million, or
23%, increase from the Life and Health Insurance segment, primarily due to an
increase in fee revenues from our group fee-for-service business, as we provided
more clients with customized services that result in higher fees, and an
increase in fee revenues due to increased sales of individual interest-sensitive
life insurance products, a result of customer preference for universal life and
variable life insurance products.

    Net investment income increased $138.1 million, or 5%, to $3,072.0 million
in 1999, from $2,933.9 million in 1998. The increase was primarily due to higher
investment yields in 1999. The yield on average invested assets and cash was
7.4% in 1999, compared to 7.2% in 1998. The increase was also due to an $897.2
million, or 2%, increase in average invested assets. Our pro rata share of
Coventry's net income increased $28.9 million, as a result of Coventry's
improved earnings in 1999 compared to 1998. In addition, BT Financial Group
contributed $18.3 million of net investment income in 1999.

    Net realized capital gains, as adjusted, decreased $61.3 million, or 13%, to
$404.5 million in 1999, from $465.8 million in 1998. Our net realized capital
gains reflect significant sales activity in both 1999 and 1998. We continued to
reposition the investment portfolio to maximize operating investment returns by
selling lower yielding invested assets and reinvesting in higher yielding
investments. In addition, we sold a significant portion of our equity securities
portfolio in 1999 and 1998 to reduce our exposure to common stock and to realize
appreciation in value. Additionally, we reduced our investments in real estate
in 1999 and 1998 to reduce our exposure to this asset class. We actively managed
our portfolio of residential mortgage-backed securities to ensure that the
securities we held traded close to or below par to manage prepayment risk. These
activities resulted in the realization of capital gains and losses.

    Benefits, claims and settlement expenses increased $171.9 million, or 3%, to
$5,260.9 million in 1999, from $5,089.0 million in 1998. The increase was
primarily due to a $288.2 million, or 14%, increase from the U.S. Asset
Management and Accumulation segment, related primarily to a larger block of
single premium group annuities with life contingencies. The increase was also
due to a $109.6 million, or 4%, increase from the Life and Health Insurance
segment, reflecting an increase in group medical and group Medicare supplement
benefits. This increase was also due to reserve changes in 1999, which were
primarily due to claim reserves established as a result of poor claim experience
during the first three quarters of 1999 and an expectation that claims would
continue to increase through the second quarter of 2000. The increase was also
due to a $44.9 million, or 27%, increase from the International Asset Management
and Accumulation segment, primarily attributable to the addition of benefits,
claims and settlement expenses from El Roble, which we acquired in July 1998,
and an increase in the change in reserves due to sales of single premium group
annuities with life contingencies in Spain and Mexico. The increases were
partially offset by a $270.8 million decrease from the Corporate and Other
segment, primarily related to our HMO operations, which generated benefits,
claims and settlement expenses in 1998, prior to being transferred to Coventry.

    Dividends to policyholders increased $5.9 million, or 2%, to $304.6 million
in 1999, from $298.7 million in 1998. The increase was due to a $10.3 million
increase from the U.S. Asset Management and Accumulation segment, a reflection
of lower dividends in 1998, as several large group annuity contracts renewed in
the form of non-participating contracts in 1998. The increase was partially
offset by a $4.4 million, or 1%, decrease from the Life and Health Insurance
segment, primarily related to a decrease in group life and health insurance
dividends when compared to 1998. After July 1, 1998, new issues and renewals of
group life and health contracts were in the form of non-participating policies.
These policies included experience refund provisions that were reported as
reductions of premiums in 1999, instead of as dividends to policyholders. The
change in presentation did not affect net income. The Life and Health Insurance
                                        59
   63

segment dividend decrease was partially offset by an increase in individual
traditional life insurance dividends due to increases in the cash values of
policies and in the interest rates credited to the policies.

    Operating expenses decreased $3.7 million to $2,070.3 million in 1999, from
$2,074.0 million in 1998. The decrease was primarily due to a $198.0 million, or
79%, decrease from the Corporate and Other segment, primarily due to our HMO
operations which generated operating expenses in 1998, prior to the transfer of
those operations to Coventry. The decrease was also attributable to a $29.0
million, or 3%, decrease from the Life and Health Insurance segment, primarily
related to a decrease in amortization of deferred policy acquisition costs for
individual life and disability insurance in 1999, compared to 1998. Amortization
was higher in 1998 due to loss recognition on older blocks of business. The
decreases were partially offset by a $120.1 million increase from the
International Asset Management and Accumulation segment, primarily due to the
addition of BT Financial Group in August 1999. BT Financial Group's operating
expenses included $13.7 million of amortization of goodwill and other
intangibles. The decreases were also partially offset by a $60.6 million, or
24%, increase from the Mortgage Banking segment, primarily due to an increase in
amortization of residential mortgage loan servicing rights, a result of the
increase in the residential mortgage loan servicing portfolio. The decreases
were also partially offset by a $42.6 million, or 7%, increase from the U.S.
Asset Management and Accumulation segment, primarily related to Principal
Capital Management, which was included in this segment at the beginning of 1999.

    Income taxes increased $281.3 million to $323.5 million in 1999, from $42.2
million in 1998. The effective income tax rate was 30% in 1999 and 6% in 1998,
compared to the U.S. corporate income tax rate of 35%. The effective income tax
rate was lower than the corporate income tax rate in 1999, primarily due to tax
exempt income. The rate was also reduced due to higher deferred taxes related to
health reserves in 1998, the effects of which were reversed in 1999. The
effective income tax rate was lower than the corporate income tax rate of 35% in
1998, primarily due to Principal Life's release of a tax reserve, as previously
discussed under the caption "-- Transactions Affecting Comparability of Results
of Operations -- Operating Earnings and Non-Recurring Items," and related
accrued interest in the amount of $164.4 million, consisting of $145.4 million
in taxes and $19.0 million of interest.

    As a result of the foregoing factors, net income increased $49.1 million, or
7%, to $742.1 million in 1999, from $693.0 million in 1998.

    In 1998, non-recurring items of $104.8 million, net of tax, included: the
positive effects of (1) a favorable settlement of a contingent tax matter
($164.4 million), see "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items," and (2) accounting
changes by our international operations ($13.3 million); and the negative
effects of (1) expenses related to our corporate structure change to a mutual
insurance holding company and related adjustments for changes in amortization
assumptions for deferred policy acquisition costs ($27.4 million) and (2) a
contribution related to permanent endowment of the Principal Financial Group
Foundation ($45.5 million).

    Operating earnings increased $207.7 million, or 78%, to $475.2 million in
1999, from $267.5 million in 1998. The increase resulted from a $118.2 million,
or 50%, increase from the U.S. Asset Management and Accumulation segment
primarily resulting from growth in our pension full service accumulation
business. The increase was also due to a $53.8 million increase from the
Corporate and Other segment, primarily due to the absence of losses from our HMO
operations in 1999, a result of the transfer of our HMO operations to Coventry
in 1998. In addition, the increase was due to a $40.7 million, or 81%, increase
from the Life and Health Insurance segment, primarily due to increased earnings
from our individual life insurance business and, to a lesser extent, increases
in earnings from our group disability insurance business. These increases were
partially offset by a $3.0 million, or 8%, decrease from the International Asset
Management and Accumulation segment, primarily attributable to an increase in
operating expenses related to BT Financial Group, which we acquired in August
1999. These increases were also partially offset by a $2.0 million, or 3%,
decrease from the Mortgage Banking segment.

RESULTS OF OPERATIONS BY SEGMENT

    We evaluate segment performance by segment operating earnings, which
excludes the effect of net realized capital gains and losses, as adjusted, and
non-recurring events and transactions. Segment operating earnings is determined
by adjusting GAAP net income for net realized capital gains and losses, as
adjusted, and non-recurring items that we believe are not indicative of overall
operating trends. 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,
recurring operations of our businesses. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

                                        60
   64

    The following table presents segment information as of or for the three
months ended March 31, 2001 and 2000 and as of or for each of the years ended
December 31, 2000, 1999 and 1998:

                                                              AS OF OR FOR THE
                                                             THREE MONTHS ENDED        AS OF OR FOR THE YEAR ENDED
                                                                  MARCH 31,                   DECEMBER 31,
                                                            ---------------------   ---------------------------------
                                                              2001        2000        2000        1999        1998
                                                            ---------   ---------   ---------   ---------   ---------
                                                                                 ($ IN MILLIONS)
                                                                                             
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation(2).................  $ 1,015.7   $   868.3   $ 3,533.9   $ 3,472.6   $ 2,933.1
International Asset Management and Accumulation...........      144.4       157.4       630.7       379.6       223.1
Life and Health Insurance.................................    1,002.4     1,047.4     4,122.6     3,985.5     3,893.1
Mortgage Banking..........................................      119.6        97.7       359.8       398.3       340.6
Corporate and Other(1)(2).................................       35.0        29.0        97.1        61.9       342.5
                                                            ---------   ---------   ---------   ---------   ---------
  Total operating revenues................................    2,317.1     2,199.8     8,744.1     8,297.9     7,732.4
Net realized capital gains, including recognition of
  front-end fee revenues(3)...............................      (81.1)       70.8       140.8       403.5       464.5
                                                            ---------   ---------   ---------   ---------   ---------
         Total consolidated revenues......................  $ 2,236.0   $ 2,270.6   $ 8,884.9   $ 8,701.4   $ 8,196.9
                                                            =========   =========   =========   =========   =========
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation....................  $    88.8   $    88.7   $   356.6   $   356.6   $   238.4
International Asset Management and Accumulation...........       (5.3)       (4.5)       (8.5)      (38.4)      (35.4)
Life and Health Insurance.................................       42.5        36.6       162.3        90.7        50.0
Mortgage Banking..........................................       23.9        18.0        50.0        56.8        58.8
Corporate and Other.......................................       23.8         4.5        67.7         9.5       (44.3)
                                                            ---------   ---------   ---------   ---------   ---------
         Total operating earnings.........................      173.7       143.3       628.1       475.2       267.5
Net realized capital gains (losses), as adjusted(3).......      (47.9)       49.8        93.1       266.9       320.7
Non-recurring items(4)....................................      (20.5)         --      (101.0)         --       104.8
                                                            ---------   ---------   ---------   ---------   ---------
GAAP REPORTED:
Net income................................................  $   105.3   $   193.1   $   620.2   $   742.1   $   693.0
                                                            =========   =========   =========   =========   =========
TOTAL ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation....................  $64,144.6   $66,312.3   $65,795.9   $65,096.4   $58,701.5
International Asset Management and Accumulation...........    4,928.1     5,550.8     5,525.9     5,926.8     1,239.4
Life and Health Insurance.................................   10,406.6    10,080.9    10,421.1     9,949.8     9,116.1
Mortgage Banking..........................................    1,915.2     1,793.9     1,556.3     1,737.7     1,810.4
Corporate and Other(5)....................................    1,017.9     1,064.9       957.8     1,121.5     3,075.9
                                                            ---------   ---------   ---------   ---------   ---------
         Total assets.....................................  $82,412.4   $84,802.8   $84,257.0   $83,832.2   $73,943.3
                                                            =========   =========   =========   =========   =========

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

(1) Includes inter-segment eliminations primarily related to real estate joint
    venture rental income and internal investment management fee revenues. The
    Corporate and Other segment reported rental income from real estate joint
    ventures for office space used by other segments.

(2) The U.S. Asset Management and Accumulation segment received fee revenues for
    performing investment management services for other segments in 2001, 2000
    and 1999. The Corporate and Other segment received fee revenues for
    performing investment management services for other segments prior to 1999.

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(3) Net realized capital gains, as adjusted, are net of tax, related changes in
    the amortization pattern of deferred policy acquisition costs, recognition
    of front-end fee revenues for sales charges on pension products and services
    and net realized capital gains credited to customers. This presentation may
    not be comparable to presentations made by other companies.

                                                                   FOR THE THREE
                                                                   MONTHS ENDED         FOR THE YEAR ENDED
                                                                     MARCH 31,             DECEMBER 31,
                                                                  ---------------   --------------------------
                                                                   2001     2000     2000     1999      1998
                                                                  ------   ------   ------   -------   -------
                                                                                ($ IN MILLIONS)
                                                                                        
    Net realized capital gains (losses).........................  $(80.9)  $ 70.3   $139.9   $ 404.5   $ 465.8
    Recognition of front-end fee revenues.......................    (0.2)     0.5      0.9      (1.0)     (1.3)
                                                                  ------   ------   ------   -------   -------
      Net realized capital gains (losses), including recognition
        of front-end fee revenues...............................   (81.1)    70.8    140.8     403.5     464.5
    Amortization of deferred policy acquisition costs related to
      net realized capital gains (losses).......................     1.0      0.2     (0.3)      4.4       5.7
    Amounts credited to contractholder accounts.................      --       --       --        --     (26.3)
    Non-recurring net realized capital gains (losses)...........      --       --       --        --      (1.7)
                                                                  ------   ------   ------   -------   -------
      Net realized capital gains (losses), including recognition
        of front-end fee revenues, net of related amortization
        of deferred policy acquisition costs and amounts
        credited to contractholders.............................   (80.1)    71.0    140.5     407.9     442.2
    Income tax effect...........................................    32.2    (21.2)   (47.4)   (141.0)   (121.5)
                                                                  ------   ------   ------   -------   -------
      Net realized capital gains (losses), as adjusted..........  $(47.9)  $ 49.8   $ 93.1   $ 266.9   $ 320.7
                                                                  ======   ======   ======   =======   =======

(4) For the three months ended March 31, 2001, non-recurring items of $20.5
    million, net of tax, included the negative effects of: (1) a cumulative
    effect of change in accounting principle related to our implementation of
    SFAS 133 ($10.7 million); (2) a loss contingency reserve established for
    sales practices litigation ($5.9 million); and (3) expenses related to our
    demutualization ($3.9 million). For the three months ended March 31, 2000,
    we did not exclude non-recurring items from net income for our presentation
    of operating earnings. For the year ended December 31, 2000, non-recurring
    items of $101.0 million, net of tax, included the negative effects of: (1) a
    loss contingency reserve established for sales practices litigation ($93.8
    million); and (2) expenses related to our demutualization study ($7.2
    million). For the year ended December 31, 1998, non-recurring items of
    $104.8 million, net of tax, included: the positive effects of (1) a
    favorable settlement of a contingent tax matter ($164.4 million), see
    "-- Transactions Affecting Comparability of Results of
    Operations -- Operating Earnings and Non-Recurring Items," and (2)
    accounting changes by our international operations ($13.3 million); and the
    negative effects of (1) expenses related to our corporate structure change
    to a mutual insurance holding company and related adjustments for changes in
    amortization assumptions for deferred policy acquisition costs ($27.4
    million) and (2) a contribution related to permanent endowment of the
    Principal Financial Group Foundation ($45.5 million).

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

                                        62
   66

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

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

                                                         FOR THE THREE
                                                         MONTHS ENDED            FOR THE YEAR ENDED
                                                           MARCH 31,                DECEMBER 31,
                                                       -----------------   ------------------------------
                                                         2001      2000      2000       1999       1998
                                                       --------   ------   --------   --------   --------
                                                                        ($ IN MILLIONS)
                                                                                  
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations..................  $  249.5   $113.4   $  525.4   $  566.7   $  281.7
  Fees and other revenues............................     168.5    177.1      704.6      616.2      450.8
  Net investment income..............................     597.7    577.8    2,303.9    2,289.7    2,200.6
                                                       --------   ------   --------   --------   --------
         Total operating revenues....................   1,015.7    868.3    3,533.9    3,472.6    2,933.1
Expenses:
  Benefits, claims and settlement expenses, including
    dividends to policyholders.......................     692.2    554.7    2,315.2    2,344.3    2,019.5
  Operating expenses.................................     214.2    193.5      740.9      626.3      592.3
                                                       --------   ------   --------   --------   --------
         Total expenses..............................     906.4    748.2    3,056.1    2,970.6    2,611.8
                                                       --------   ------   --------   --------   --------
Pre-tax operating earnings...........................     109.3    120.1      477.8      502.0      321.3
Income taxes.........................................      20.5     31.4      121.2      145.4       82.9
                                                       --------   ------   --------   --------   --------
Operating earnings...................................      88.8     88.7      356.6      356.6      238.4

Net realized capital gains (losses), as adjusted.....      (7.4)   (18.8)     (35.9)     (35.4)      14.7
Non-recurring items..................................     (10.8)      --         --         --       23.9
                                                       --------   ------   --------   --------   --------
GAAP REPORTED:
Net income...........................................  $   70.6   $ 69.9   $  320.7   $  321.2   $  277.0
                                                       ========   ======   ========   ========   ========

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

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2000

    Premiums and other considerations increased $136.1 million to $249.5 million
for the three months ended March 31, 2001, from $113.4 million for the three
months ended March 31, 2000. The increase was primarily due to a $137.3 million
increase in premiums from single premium group annuities with life
contingencies, which are typically used to fund defined benefit pension plan
terminations. The premium income we receive from these contracts fluctuates due
to the variability in the number and size of pension plan terminations in the
market and our ability to attract new sales. This increase was partially offset
by a $1.3 million decrease related to decreased sales of our single premium
individual annuities with life contingencies.

    Fees and other revenues decreased $8.6 million, or 5%, to $168.5 million for
the three months ended March 31, 2001, from $177.1 million for the three months
ended March 31, 2000. The decrease was primarily related to a $14.7 million
decrease in surrender charge revenues from pension products, reflecting the
decreasing interest rate environment. Additionally, a decrease of $4.7 million
was primarily due to a change in intra-segment eliminations. These decreases
were partially offset by an increase of $10.4 million in fees and other revenues
related to Principal Capital Management, primarily the result of revenues
attributable to real estate securitizations.

    Net investment income increased $19.9 million, or 3%, to $597.7 million for
the three months ended March 31, 2001, from $577.8 million for the three months
ended March 31, 2000. The increase was primarily due to a $1,983.9 million, or
6%, increase in average invested assets and cash for the segment. The yield on
average invested assets and cash was 7.3% for the three months ended March 31,
2001, compared to 7.5% for the three months ended March 31, 2000, reflecting an
increase in cash and cash equivalents, which earns lower yields than invested
assets.

    Benefits, claims and settlement expenses, including dividends to
policyholders, increased $137.5 million, or 25%, to $692.2 million for the three
months ended March 31, 2001, from $554.7 million for the three months ended
March 31, 2000. An increase of $140.9 million from our pension full-service
payout business primarily reflected the increase in reserves from sales of
single premium group annuities with life contingencies and an increase in
dividends. A $7.8 million increase related to our pension investment-only
business was primarily due to an increase in interest credited due to the growth
in our investment-only business. An additional $2.5 million increase was
primarily related to an increase in interest credited in our individual annuity
business, resulting from customers electing the fixed annuity

                                        63
   67

options of their variable annuity product. Partially offsetting these increases
was a $13.8 million decrease in our pension full-service accumulation business
reflecting a decrease in interest credited, primarily a result of a decrease in
average crediting rates.

    Operating expenses increased $20.7 million, or 11%, to $214.2 million for
the three months ended March 31, 2001, from $193.5 million for the three months
ended March 31, 2000. An increase of $15.9 million related to our pension
business was primarily due to an increase in amortization of deferred policy
acquisition costs. An increase of $6.7 million for Principal Bank was primarily
related to growth in bank operations. Additionally, an increase of $3.8 million
in operating expenses related to Principal Capital Management, was primarily the
result of an increase in compensation costs resulting from growth in operations.
These increases were partially offset by a $6.0 million decrease resulting from
a change in intra-segment eliminations.

    Income taxes decreased $10.9 million, or 35%, to $20.5 million for the three
months ended March 31, 2001, from $31.4 million for the three months ended March
31, 2000. The effective income tax rate for this segment was 19% for the three
months ended March 31, 2001, and 26% for the three months ended March 31, 2000.
The effective income tax rates for the three months ended March 31, 2001 and
2000 were lower than the corporate income tax rate of 35%, primarily due to
income tax deductions allowed for corporate dividends received, for which the
estimated benefit recognition rate increased during the three months ended March
31, 2001 compared to the three months ended March 31, 2000, as a result of
favorable tax developments, and other tax-exempt income.

    As a result of the foregoing factors, operating earnings increased $0.1
million to $88.8 million for the three months ended March 31, 2001, from $88.7
million for the three months ended March 31, 2000.

    Net realized capital losses, as adjusted, decreased $11.4 million, or 61%,
to $7.4 million for the three months ended March 31, 2001, from $18.8 million
for the three months ended March 31, 2000. The decrease was primarily due to the
positive effects of a change in the mortgage loan valuation allowance, primarily
reflecting the decrease in the amount invested in commercial mortgage loans. In
addition, there was a decrease in losses related to sales of fixed maturities,
reflecting a decrease in portfolio activity in 2001. These decreases were
partially offset by losses due to permanent impairments of fixed maturity
securities.

    As a result of the foregoing factors and the inclusion of non-recurring
items for the three months ended March 31, 2001, net income increased $0.7
million, or 1%, to $70.6 million for the three months ended March 31, 2001, from
$69.9 million for the three months ended March 31, 2000. Non-recurring items for
the three months ended March 31, 2001 had a negative impact on net income of
$10.8 million, net of tax, due to the cumulative effect of accounting change,
net of income taxes, related to our implementation of SFAS 133, as previously
discussed under the caption "-- Transactions Affecting Comparability of Results
of Operations -- Operating Earnings and Non-Recurring Items."

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations decreased $41.3 million, or 7%, to $525.4
million in 2000, from $566.7 million in 1999. The decrease was primarily due to
a $43.3 million decrease in premiums from single premium group annuities with
life contingencies, which are typically used to fund defined benefit pension
plan terminations. The premium income we receive from these contracts fluctuates
due to the variability in the number and size of pension plan terminations in
the market and our ability to attract new sales. This decrease was partially
offset by a $2.0 million increase related to increased sales of our single
premium individual annuities with life contingencies.

    Fees and other revenues increased $88.4 million, or 14%, to $704.6 million
in 2000, from $616.2 million in 1999. The increase was primarily related to a
$74.2 million increase in administrative fee revenues for pension products and
services. The increase in administrative fee revenues reflected an increase in
the amortization of front-end fee revenues, a result of a change in our
assumptions related to amortization of deferred policy acquisition costs
attributable to pension products. We also received higher fee revenues from
surrender charges and pension customer-directed investment transfers, reflecting
the higher interest rate environment and increased customer account activity.
The increase in fee revenues was also due in part to growth in assets under
management related to our pension products in 1999. An increase of $13.0 million
was primarily due to investment management fee revenues from our mutual fund
business and commission fee revenues related to sales of third-party mutual
funds. An increase of $5.6 million in individual annuity fees, primarily a
result of growth in separate account assets related to individual annuity
products, also contributed to the segment increase. The increase in fees and
other revenues was partially offset by a $5.6 million decrease in fee revenues
related to Principal Capital Management, primarily a result of a decrease in
proceeds related to commercial mortgage-backed securitization transactions.

    Net investment income increased $14.2 million, or 1%, to $2,303.9 million in
2000, from $2,289.7 million in 1999. The increase was primarily due to a
$1,561.6 million, or 5%, increase in average invested assets and cash for the
segment. The yield on average invested assets and cash was 7.3% in 2000,
compared to 7.6% in 1999, due to a decrease in interest credited on assets
backing allocated capital. The decrease in interest credited was partially
offset by higher interest rates on fixed income investments backing product
liabilities.

    Benefits, claims and settlement expenses, including dividends to
policyholders, decreased $29.1 million, or 1%, to $2,315.2 million in 2000, from
$2,344.3 million in 1999. A decrease of $26.7 million in benefits and reserve
changes, and
                                        64
   68

a $4.5 million decrease in dividends to policyholders were both related to our
full-service pension accumulation products, reflecting the decrease in our block
of pension experience rated business and an increase in our guaranteed business.
An additional $21.4 million decrease was attributable to decreased sales of
single premium group annuities with life contingencies. Partially offsetting
these decreases was a $19.5 million increase related to our investment-only
business, primarily reflecting an increase in interest credited due to the
growth in our investment-only business. An additional $3.8 million increase was
primarily related to an increase in interest credited on individual fixed
annuities and the fixed component of variable annuities, a result of higher
interest crediting rates during 2000.

    Operating expenses increased $114.6 million, or 18%, to $740.9 million in
2000, from $626.3 million in 1999. An increase of $57.3 million was primarily
due to a change in our assumptions related to amortization of deferred policy
acquisition costs attributable to pension products. An additional $28.7 million
increase was primarily related to an increase in pension salary and incentive
compensation costs and other pension administrative costs. Operating expenses
also increased $9.7 million for our mutual fund business, primarily the result
of increased sales of third-party mutual funds and also due to other mutual fund
operating expenses. An $8.3 million increase in operating expenses related to
our individual annuity business was primarily due to an increase in amortization
of deferred policy acquisition costs. Additionally, a $6.5 million increase in
operating expenses for Principal Capital Management was primarily related to an
increase in incentive compensation costs.

    Income taxes decreased $24.2 million, or 17%, to $121.2 million in 2000,
from $145.4 million in 1999. The effective income tax rate for this segment was
25% in 2000, and 29% in 1999. The effective tax rates 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 were $356.6 million
in both 2000 and 1999.

    Net realized capital losses, as adjusted, increased to $35.9 million in
2000, from $35.4 million in 1999. This segment recognized net realized capital
losses consistent with our change in investment philosophy, which increased
portfolio activity. We repositioned the investment portfolio to maximize
operating investment returns by selling lower yielding fixed income securities
to allow for reinvestment in higher yielding fixed income securities. This
repositioning of the portfolio generated net realized capital losses.

    As a result of the foregoing factors, net income decreased to $320.7 million
in 2000, from $321.2 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $285.0 million, or 101%, to
$566.7 million in 1999 from $281.7 million in 1998. The increase was primarily
due to a $279.9 million increase in premiums for single premium group annuities
with life contingencies, which are typically used to fund defined benefit
pension plan terminations. The premium income we receive from these contracts
fluctuates due to the variability in the number and size of defined benefit
pension plan terminations in the market and our ability to attract new sales.
The increase in premiums and other considerations was also due to a $5.1 million
increase related to increased sales of single premium individual annuities with
life contingencies.

    Fees and other revenues increased $165.4 million, or 37%, to $616.2 million
in 1999, from $450.8 million in 1998. The increase was primarily contributed by
our U.S. asset management operations, as we included Principal Capital
Management in this segment at the beginning of 1999. Fees and other revenues
contributed in 1999 by Principal Capital Management were $74.6 million. In
addition, an increase of $71.8 million in fees and other revenues from our
pension products contributed to the increase, as a result of growth in assets
under management, which benefited from strong equity market performance in 1999
and an increase in net deposits received from customers, particularly in early
1999. The increase in fees and other revenues was also due to an $11.9 million
increase in mutual fund fee revenues, primarily due to an increase in assets
under management in our mutual fund business. The growth in assets under
management related to our individual annuity products also contributed to a $6.9
million increase in fees and other revenues, which reflected the increase in new
deposits related to individual variable annuity sales and strong market
performance.

    Net investment income increased $89.1 million, or 4%, to $2,289.7 million in
1999, from $2,200.6 million in 1998. The increase was primarily due to a $858.6
million, or 3%, increase in average invested assets and cash for the segment.
The yield on average invested assets and cash was 7.6% in 1999 and 7.5% in 1998.

    Benefits, claims and settlement expenses, including dividends to
policyholders, increased $324.8 million, or 16%, to $2,344.3 million in 1999,
from $2,019.5 million in 1998. An increase of $227.6 million was primarily due
to a larger block of single premium group annuities with life contingencies.
Additionally, the growth in our block of group annuities caused a $93.6 million
increase in interest credited to guaranteed business. In addition, a $10.3
million increase in dividends to policyholders was a reflection of lower
dividends in 1998, a result of several large group annuity contracts that
renewed in the form of non-participating contracts in 1998. These increases were
partially offset by a $9.9 million decrease, primarily due to a decrease in
interest credited on individual annuities, the result of a smaller block of
single

                                        65
   69

premium individual annuities with life contingencies reflecting terminations
that exceeded new sales. The decrease in interest credited was also due to lower
interest crediting rates in 1999 compared to 1998.

    Operating expenses increased $34.0 million, or 6%, to $626.3 million in
1999, from $592.3 million in 1998. The increase was primarily due to higher
operating expenses from our U.S. asset management operations, related to
Principal Capital Management, which was included in this segment at the
beginning of 1999. Operating expenses attributable to Principal Capital
Management were $101.0 million. The increase was also due to a $7.4 million
increase in operating expenses, primarily related to growth in our individual
annuity business, reflected by increases in general expenses, taxes, licenses
and fees and amortization of deferred policy acquisition costs. Additionally, we
experienced a $2.9 million increase, primarily attributable to increased
commissions and other general expenses related to our mutual fund business. The
increases were partially offset by a $62.1 million decrease in operating
expenses related to our pension products and services, which reflect higher
expenses in 1998 related to the costs of implementing new retirement plan
processing technology. In addition, a $16.6 million decrease was due to a
write-down of goodwill in 1998, reflecting continued operating losses and
significantly reduced cash flow forecasts of Trust Consultants, Inc., a pension
administration subsidiary.

    Income taxes increased $62.5 million, or 75%, to $145.4 million in 1999 from
$82.9 million in 1998. The effective income tax rate for this segment was 29% in
1999 and 26% in 1998, compared to the U.S. corporate income tax rate of 35%. The
effective income tax rate was lower than the corporate income tax rate in 1999
and 1998, due to tax exempt income related primarily to dividends received
deductions. Although tax exempt income for the segment increased over 1998
levels, the increase in the effective tax rate for 1999 was due to the increase
in taxable operating earnings for the segment.

    As a result of the foregoing factors, operating earnings increased $118.2
million, or 50%, to $356.6 million in 1999, from $238.4 million in 1998.

    Net realized capital gains, as adjusted, decreased $50.1 million to net
realized capital losses of $35.4 million in 1999, from $14.7 million of net
realized capital gains in 1998. This segment recognized net realized capital
losses consistent with our change in investment philosophy, which increased
portfolio activity. Specifically, we repositioned the investment portfolio to
maximize operating investment returns by selling lower yielding invested assets
to allow for reinvestment in higher yielding investments. This repositioning of
the portfolio generated net realized capital losses.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income increased $44.2 million, or 16%, to $321.2 million in
1999, from $277.0 million in 1998. In 1998, net income for this segment included
non-recurring items totaling $23.9 million, net of tax, related to a release of
a tax reserve, as previously discussed under the caption "-- Transactions
Affecting Comparability of Results of Operations -- Operating Earnings and
Non-Recurring Items".

                                        66
   70

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

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

                                                               FOR THE THREE
                                                               MONTHS ENDED        FOR THE YEAR ENDED
                                                                 MARCH 31,            DECEMBER 31,
                                                              ---------------   ------------------------
                                                               2001     2000     2000     1999     1998
                                                              ------   ------   ------   ------   ------
                                                                           ($ IN MILLIONS)
                                                                                   
OPERATING EARNINGS DATA:
Operating revenues(1):
  Premiums and other considerations.........................  $ 46.4   $ 58.9   $220.5   $179.9   $147.1
  Fees and other revenues...................................    71.9     75.3    305.2    105.6     28.1
  Net investment income.....................................    26.1     23.2    105.0     94.1     47.9
                                                              ------   ------   ------   ------   ------
         Total operating revenues...........................   144.4    157.4    630.7    379.6    223.1
Expenses:
  Benefits, claims and settlement expenses..................    57.5     67.6    262.2    210.1    165.2
  Operating expenses........................................    93.6     90.9    372.3    212.1    101.2
                                                              ------   ------   ------   ------   ------
         Total expenses.....................................   151.1    158.5    634.5    422.2    266.4
                                                              ------   ------   ------   ------   ------
Pre-tax operating loss......................................    (6.7)    (1.1)    (3.8)   (42.6)   (43.3)
Income taxes (benefits).....................................    (1.4)     3.4      4.7     (4.2)    (7.9)
                                                              ------   ------   ------   ------   ------
Operating loss..............................................    (5.3)    (4.5)    (8.5)   (38.4)   (35.4)

Net realized capital gains (losses), as adjusted............   (20.3)     4.7      1.4      7.7     12.0
Non-recurring items.........................................      --       --       --       --     13.3
                                                              ------   ------   ------   ------   ------
GAAP REPORTED:
Net income (loss)...........................................  $(25.6)  $  0.2   $ (7.1)  $(30.7)  $(10.1)
                                                              ======   ======   ======   ======   ======
OTHER DATA:
Operating earnings (loss) before amortization of goodwill
  and other intangibles.....................................  $  6.8   $  4.6   $ 28.5   $(24.6)  $(28.5)

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

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2000

    Premiums and other considerations decreased $12.5 million, or 21%, to $46.4
million for the three months ended March 31, 2001, from $58.9 million for the
three months ended March 31, 2000. The decrease was related to the loss of $17.5
million of premiums and other considerations due to the February 2001
divestiture of our operations in Spain. A decrease of $5.1 million in Chile was
primarily due to the weakening of the Chilean peso versus the U.S. dollar. The
decreases were partially offset by a $9.6 million increase resulting from
increased sales of single premium annuities with life contingencies in Mexico,
primarily generated as a result of the addition of agents.

    Fees and other revenues decreased $3.4 million, or 5%, to $71.9 million for
the three months ended March 31, 2001, from $75.3 million for the three months
ended March 31, 2000. The decrease was primarily related to a $7.8 million
decrease of fee revenues contributed by BT Financial Group, primarily as a
result of the weakening of the Australian dollar versus the U.S. dollar. The
decrease was partially offset by a $4.1 million increase in Principal
International fee revenues, a result of assets under management growth in
Mexico, deposits growth in Hong Kong resulting from sales to plans established
under the new Mandatory Provident Fund, which started in December 2000, and
increased sales of universal life-type products in Argentina.

    Net investment income increased $2.9 million, or 13%, to $26.1 million for
the three months ended March 31, 2001, from $23.2 million for the three months
ended March 31, 2000. The increase was primarily attributable to a $5.7 million
increase from Principal International related to an 11% increase in average
invested assets and cash and an increase in investment yields. The yield on
average invested assets and cash was 8.2% for the three months ended March 31,
2001, compared to 6.8% for the three months ended March 31, 2000. In addition, a
net increase of $0.7 million of equity method net investment income related to
our pro rata share of net income, excluding the effect of goodwill amortization,
of BrasilPrev Previdencia Privada S.A., a pension company in Brazil in which we
acquired a minority interest in October 1999, and our pro rata share of net loss
of ING/Principal Pensions Co., Ltd., a pension company in Japan in which we
acquired a minority interest in January 2000. The increases were partially
offset by the $2.1 million loss of net investment income resulting from the
divestiture of our operations in Spain. The increases were also partially offset
by a $1.5 million decrease related to the operations of BT Financial Group.

                                        67
   71

    Benefits, claims and settlement expenses decreased $10.1 million, or 15%, to
$57.5 million for the three months ended March 31, 2001, from $67.6 million for
the three months ended March 31, 2000. The decrease was primarily related to the
loss of $18.9 million of benefits, claims and settlement expenses resulting from
the divestiture of our operations in Spain. The decrease was partially offset by
a $9.3 million increase in reserve changes and policy and contract benefit
payments in Mexico, the result of increased sales of single premium annuities
with life contingencies.

    Operating expenses increased $2.7 million, or 3%, to $93.6 million for the
three months ended March 31, 2001, from $90.9 million for the three months ended
March 31, 2000. The increase was primarily due to a $1.9 million increase of
operating expenses incurred by BT Financial Group, including a $3.0 million
increase in amortization of goodwill and other intangibles. The increase was
partially offset by a decrease in operating expenses resulting from the
weakening of the Australian dollar versus the U.S. dollar. In addition, a $2.5
million increase in Mexico was primarily attributable to commissions and
compensation resulting from increased sales. These increases were partially
offset by the loss of $1.9 million of operating expenses resulting from the
divestiture of our operations in Spain.

    Income tax expense (benefits) decreased $4.8 million to a $1.4 million
income tax benefit for the three months ended March 31, 2001, from $3.4 million
of income tax expense for the three months ended March 31, 2000. The decrease
was primarily due to a decrease in pre-tax operating earnings from BT Financial
Group.

    As a result of the foregoing factors, operating loss increased $0.8 million,
or 18%, to $5.3 million for the three months ended March 31, 2001, from $4.5
million for the three months ended March 31, 2000.

    Net realized capital gains, as adjusted, decreased $25.0 million to $20.3
million of net realized capital losses for the three months ended March 31,
2001, from $4.7 million of net realized capital gains for the three months ended
March 31, 2000. The decrease was primarily due to a $21.0 million after-tax net
realized capital loss on the sale of our operations in Spain. In addition, a
$4.4 million decrease was related to net realized capital gains from our
operations in Spain for the three months ended March 31, 2000.

    As a result of the foregoing factors, net income decreased $25.8 million to
a $25.6 million net loss for the three months ended March 31, 2001, from $0.2
million net income for the three months ended March 31, 2000.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $40.6 million, or 23%, to $220.5
million in 2000, from $179.9 million in 1999. Increases of $16.9 million in
Mexico, $16.7 million in Argentina and $5.9 million in Chile were primarily a
result of increased sales of single premium annuities with life contingencies.
The increased sales in Mexico were primarily a result of sales by Principal
Pensiones, S.A. de C.V., an annuity company we established in July 1999. The
increased sales in Argentina primarily resulted from sales by an annuity company
we established in August 1999.

    Fees and other revenues increased $199.6 million to $305.2 million in 2000,
from $105.6 million in 1999. The increase was primarily related to a $180.2
million increase resulting from the contribution of fee revenues by BT Financial
Group, which we acquired in August 1999. In addition, an $8.1 million increase
was primarily due to lower fees and other revenues recognized in 1999 related to
El Roble in Chile. An additional $6.5 million increase was primarily
attributable to higher fee revenues from administering retirement funds in
Mexico, due to the implementation of a more attractive pricing structure for our
customers, which also resulted in increased retention of existing accounts and
an increased number of covered lives.

    Net investment income increased $10.9 million, or 12%, to $105.0 million in
2000, from $94.1 million in 1999. An $11.3 million increase was primarily
attributable to an increase in average invested assets in Principal
International. In addition, an $11.2 million increase resulted from our equity
method investment gains related to our pro rata share of net income, excluding
the effect of goodwill amortization, of BrasilPrev Previdencia Privada S.A., a
pension company in Brazil in which we acquired a minority interest in October
1999. The increases were partially offset by an $8.7 million decrease related to
the inclusion of BT Financial Group, primarily related to its margin lending
business. The margin lending business was securitized in late 1999, which
resulted in a shift of income generation from net investment income to fee
revenues in 2000. The increases were also partially offset by a $3.1 million
equity method investment loss related to our pro rata share of net loss of
ING/Principal Pensions Co., Ltd., a pension company in Japan in which we
acquired a minority interest in January 2000.

    Benefits, claims and settlement expenses increased $52.1 million, or 25%, to
$262.2 million in 2000, from $210.1 million in 1999. The increase was primarily
due to an increase in reserve changes and policy and contract benefit payments
of $18.5 million in Mexico and $18.4 million in Argentina, the result of
increased sales of single premium annuities with life contingencies. In
addition, a $13.4 million increase in reserve changes and policy and contract
benefit payments in Chile primarily resulted from the increased sales of annuity
products and the implementation of a new reserve calculation method to refine
reserve calculations.

    Operating expenses increased $160.2 million, or 76%, to $372.3 million in
2000, from $212.1 million in 1999. The increase was primarily due to a $151.1
million increase resulting from the inclusion of operating expenses incurred by
BT Financial Group, including a $23.3 million increase in amortization of
goodwill and other intangibles. The increase

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also included $6.0 million of amortization of goodwill and present value of
future profits related to BrasilPrev, which we acquired in October 1999.

    Income tax expense (benefits) increased $8.9 million to $4.7 million of tax
expense in 2000, from a $4.2 million tax benefit in 1999. The increase was
primarily due to $9.1 million of income tax expense related to an increase in
pre-tax operating earnings from BT Financial Group.

    As a result of the foregoing factors, operating loss decreased $29.9
million, or 78%, to $8.5 million in 2000, from $38.4 million in 1999.

    Net realized capital gains, as adjusted, decreased $6.3 million, or 82%, to
$1.4 million in 2000, from $7.7 million in 1999. The decrease was primarily due
to $4.7 million decrease in net realized capital gains in Principal
International, resulting from repositioning of investment portfolios to better
match long-term liabilities and assets in 1999. In addition, net realized
capital gains, as adjusted, in 1999 included a $1.7 million gain on the sale of
minority interest in a capital management company, which was sold following the
acquisition of BT Financial Group.

    As a result of the foregoing factors, net loss decreased $23.6 million, or
77%, to $7.1 million in 2000, from $30.7 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $32.8 million, or 22%, to $179.9
million in 1999, from $147.1 million in 1998. An increase of $14.2 million was
primarily due to increased premiums in Chile related to El Roble, which we
acquired in July 1998. A $6.9 million increase related primarily to sales of
single premium annuities with life contingencies by a newly formed annuity
company, Principal Pensiones, S.A. de C.V., in Mexico in July 1999. Premiums and
other considerations in Spain increased $6.7 million, primarily due to increased
sales of single premium group annuities with life contingencies. Changes to the
distribution within Principal Mexico Compania de Seguros S.A. de C.V., and new
business generated as a result of name recognition of our two Mexican companies,
Principal Afore S.A. de C.V. and Principal Pensiones S.A. de C.V., helped
contribute to an increase in group insurance premiums of $2.2 million. In
addition, premiums of $1.8 million were generated in 1999 related to a new lump
sum individual annuity product with life contingencies in Argentina.

    Fees and other revenues increased $77.5 million to $105.6 million in 1999,
from $28.1 million in 1998. The increase was primarily related to BT Financial
Group, which contributed $95.5 million of fees and other revenues in 1999. This
increase was partially offset by a $9.7 million decrease relating to El Roble,
and the loss of $6.5 million of fees due to our 1998 divestiture of a pension
subsidiary in Argentina. The divestiture resulted from our decision to
discontinue selling products related to the state-mandated retirement plan,
which we determined did not generate adequate returns.

    Net investment income increased $46.2 million, or 96%, to $94.1 million in
1999, from $47.9 million in 1998. The increase was primarily due to $19.7
million of increased net investment income related to our 1998 acquisition of El
Roble. BT Financial Group generated $18.3 million of net investment income in
1999. An additional $6.7 million of the increase related to investment income
received in 1999 on an international mutual fund in Chile, which had generated a
loss in 1998. This mutual fund was classified as a trading security in 1998 and
1999, but has been classified as available-for-sale since January 1, 2000.
Related gains and losses will be recognized in equity rather than net investment
income.

    Benefits, claims and settlement expenses increased $44.9 million, or 27%, to
$210.1 million in 1999, from $165.2 million in 1998. The increase was primarily
due to $27.0 million of additional expenses related to El Roble. In addition, an
increase in changes in reserves of $7.8 million in Spain was due primarily to
increased sales of single premium group annuities with life contingencies. In
addition, the increase was also due to $6.9 million of expenses related to
Principal Pensiones, which we formed in 1999 in Mexico. The increase was also
due to a $1.0 million increase in change in reserves in Mexico, as a result of
increased sales of group life insurance products.

    Operating expenses increased $110.9 million, or 110%, to $212.1 million in
1999, from $101.2 million in 1998. The increase was primarily related to BT
Financial Group, which contributed $117.3 million of operating expenses in 1999,
including $13.7 million amortization of goodwill and other intangibles. The
increase was partially offset by a $5.3 million decrease in expenses in
Argentina, primarily related to the subsidiary we sold in 1998, and reductions
in sales force and staff levels in our remaining operations in Argentina.

    Income tax benefits decreased $3.7 million, or 47%, to $4.2 million in 1999,
from $7.9 million in 1998. A decrease in income tax benefits of $2.4 million was
primarily associated with deferred tax assets related to income tax benefits in
our international asset accumulation operations that were not recognized due to
loss carryforwards we determined would not be utilized. The decrease was also
due to $1.3 million of income tax expense related to BT Financial Group, which
we acquired in August 1999.

    As a result of the foregoing factors, operating loss increased $3.0 million,
or 8%, to $38.4 million in 1999, from $35.4 million in 1998.

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    Net realized capital gains, as adjusted, decreased $4.3 million, or 36%, to
$7.7 million in 1999, from $12.0 million in 1998. Net realized capital gains
decreased $6.0 million, primarily because 1998 included the gain on the sale of
the pension subsidiary in Argentina in 1998, as previously discussed. The
decrease was offset by $1.7 million of net realized capital gains contributed by
BT Financial Group.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net loss increased $20.6 million to $30.7 million in 1999, from
$10.1 million in 1998. In 1998, our net loss included the positive effects of
$13.3 million, net of tax, of non-recurring items related to accounting changes
by Principal International.

LIFE AND HEALTH INSURANCE SEGMENT

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

                                                      AS OF OR FOR THE
                                                        THREE MONTHS        AS OF OR FOR THE YEAR ENDED
                                                       ENDED MARCH 31,              DECEMBER 31,
                                                     -------------------   ------------------------------
                                                       2001       2000       2000       1999       1998
                                                     --------   --------   --------   --------   --------
                                                                       ($ IN MILLIONS)
                                                                                  
OPERATING EARNINGS DATA:
Operating Revenues(1):
  Premiums and other considerations................  $  768.3   $  842.0   $3,250.5   $3,190.6   $3,126.6
  Fees and other revenues..........................      64.9       49.8      230.0      180.2      146.7
  Net investment income............................     169.2      155.6      642.1      614.7      619.8
                                                     --------   --------   --------   --------   --------
         Total operating revenues..................   1,002.4    1,047.4    4,122.6    3,985.5    3,893.1
Expenses:
  Benefits, claims and settlement expenses.........     645.0      697.8    2,659.4    2,714.9    2,605.3
  Dividends to policyholders.......................      78.2       74.7      308.1      295.6      300.0
  Operating expenses...............................     215.2      224.3      913.6      872.0      892.4
                                                     --------   --------   --------   --------   --------
         Total expenses............................     938.4      996.8    3,881.1    3,882.5    3,797.7
                                                     --------   --------   --------   --------   --------
  Pre-tax operating earnings.......................      64.0       50.6      241.5      103.0       95.4
  Income taxes.....................................      21.5       14.0       79.2       12.3       45.4
                                                     --------   --------   --------   --------   --------
  Operating earnings...............................      42.5       36.6      162.3       90.7       50.0

Net realized capital gains (losses), as adjusted...      (0.6)      54.8       47.3       10.1        1.9
Non-recurring items................................       0.1         --         --         --       60.1
                                                     --------   --------   --------   --------   --------
GAAP REPORTED:
Net income.........................................  $   42.0   $   91.4   $  209.6   $  100.8   $  112.0
                                                     ========   ========   ========   ========   ========
OTHER DATA:
Premiums and other considerations:
  Group life and health insurance..................  $  555.4   $  630.8   $2,403.5   $2,345.2   $2,278.8
  Individual life and disability insurance.........     212.9      211.2      847.0      845.4      847.8
Incurred loss ratios(2) (in percents):
  Group life insurance.............................        69%        79%        70%        71%        79%
  Group disability insurance.......................        86        104         85         80        102
  Group medical and group Medicare supplement
    insurance(3)...................................        82         81         83         90         85
  Group dental and vision insurance................        77         77         76         77         77

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

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

(2) Ratios exclude the impact of the change in experience related reserves for
    all time periods, to reflect underlying claim experience.

(3) Ratios exclude group Medicare supplement insurance after July 1, 2000, the
    date at which group Medicare supplement insurance was 100% reinsured.

  THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2000

    Premiums and other considerations decreased $73.7 million, or 9%, to $768.3
million for the three months ended March 31, 2001, from $842.0 million for the
three months ended March 31, 2000. Group Medicare supplement insurance premium
decreased $48.8 million, resulting from our decision to reinsure 100% of this
business effective July 1, 2000. Large premium rate increases in 2000 led to
high lapses and low sales of group medical insurance, which resulted in a $30.1
million decrease in premiums. Group life insurance premium decreased $7.3
million primarily due to

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the loss of two large customers and an overall increase in lapses associated
with lapses of group medical coverages. These decreases were partially offset by
a $9.9 million increase in group dental insurance premium due to increases in
dental premium rates.

    Fees and other revenues increased $15.1 million, or 30%, to $64.9 million
for the three months ended March 31, 2001, from $49.8 million for the three
months ended March 31, 2000. Fee revenues from individual interest-sensitive
life insurance products increased $6.1 million, a result of growth in that block
of business. The growth reflected a continued shift in customer preference from
individual traditional life insurance products to individual universal life and
individual variable universal life insurance products. Fee revenues from our
group fee-for-service business and our group medical insurance business
increased $5.6 million and $1.4 million, respectively, primarily due to
increases in fee rates. Individual traditional life insurance and other life
insurance fee revenues increased $1.2 million, primarily related to Executive
Benefit Services, Inc., a company we acquired in January 2001 that specializes
in the sale of executive benefit products and services to businesses.

    Net investment income increased $13.6 million, or 9%, to $169.2 million for
the three months ended March 31, 2001, from $155.6 million for the three months
ended March 31, 2000. The increase was primarily due to a $368.4 million, or 4%,
increase in average invested assets and cash for the segment. Net investment
income also increased due to an increase in average investment yields for the
segment. The yield on average invested assets and cash was 7.7% for the three
months ended March 31, 2001, compared to 7.3% for the three months ended March
31, 2000, primarily due to higher interest yields on fixed income securities
backing product liabilities.

    Benefits, claims and settlement expenses decreased $52.8 million, or 8%, to
$645.0 million for the three months ended March 31, 2001, from $697.8 million
for the three months ended March 31, 2000. Group Medicare supplement insurance
benefits, claims and settlement expenses decreased $52.7 million, resulting from
our decision to reinsure 100% of this business effective July 1, 2000. Group
life insurance benefits, claims and settlement expenses decreased $13.5 million
due to lower mortality experience and the loss of two large customers. These
decreases were partially offset by a $7.4 million increase in dental insurance
benefits, claims and settlement expenses and a $4.0 million increase in
individual interest-sensitive life insurance benefits, claims and settlement
expenses due to growth in these blocks of business.

    Dividends to policyholders increased $3.5 million, or 5%, to $78.2 million
for the three months ended March 31, 2001, from $74.7 million for the three
months ended March 31, 2000. The increase was due to increased dividends on
traditional individual life insurance products, a result of increases in the
cash values of the policies.

    Operating expenses decreased $9.1 million, or 4%, to $215.2 million for the
three months ended March 31, 2001, from $224.3 million for the three months
ended March 31, 2000. Group life and health insurance operating expenses
decreased $10.9 million, primarily due to a decrease in commissions resulting
from our decision to reinsure 100% of our group Medicare supplement insurance
business effective July 1, 2000. This decrease was offset by a $1.8 million
increase in individual life and health operating expenses, primarily
attributable to growth in our individual disability insurance block of business
and higher amortization of deferred policy acquisition costs related to
individual disability insurance.

    Income taxes increased $7.5 million, or 54%, to $21.5 million for the three
months ended March 31, 2001, from $14.0 million for the three months ended March
31, 2000. The effective income tax rate for this segment was 34% for the three
months ended March 31, 2001 and 28% for the three months ended March 31, 2000.
The effective income tax rate for the three months ended March 31, 2001 was
lower than the corporate income tax rate of 35%, primarily due to tax-exempt
income. The effective tax rate for the three months ended March 31, 2000 was
lower than the corporate income tax rate of 35%, primarily due to tax exempt
income and a reduction in a tax reserve as a result of a favorable IRS audit
event.

    As a result of the foregoing factors, operating earnings increased $5.9
million, or 16%, to $42.5 million for the three months ended March 31, 2001,
from $36.6 million for the three months ended March 31, 2000.

    Net realized capital gains (losses), as adjusted, decreased $55.4 million,
or 101%, to a $0.6 million net realized capital loss for the three months ended
March 31, 2001, from a $54.8 million net realized capital gain for the three
months ended March 31, 2000. The decrease primarily related to the sale of our
investment in United Payors and United Providers. In 2000, we sold our remaining
investment and realized an after-tax capital gain of $58.9 million. The decrease
was also due to losses from permanent impairments of fixed maturity securities
during the three months ended March 31, 2001. The decreases were partially
offset by the positive effects of a change in the mortgage loan valuation
allowance, primarily reflecting a decrease in the amount invested in commercial
mortgage loans.

    As a result of the foregoing factors and the inclusion of non-recurring
items for the three months ended March 31, 2001, net income decreased $49.4
million, or 54%, to $42.0 million for the three months ended March 31, 2001,
from $91.4 million for the three months ended March 31, 2000. Non-recurring
items for the three months ended March 31, 2001 had a positive impact on net
income of $0.1 million, net of tax, due to the cumulative effect of accounting
change, net of income taxes, related to our implementation of FAS 133, as
previously discussed under the caption "-- Transactions Affecting Comparability
of Results of Operations -- Operating Earnings and Non-Recurring Items."

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  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Premiums and other considerations increased $59.9 million, or 2%, to
$3,250.5 million in 2000, from $3,190.6 million in 1999. Group dental insurance
premiums increased $72.3 million, primarily resulting from increased sales of
group dental insurance products. Group medical premiums increased $38.3 million,
primarily related to an increase in the premium base due to increased sales in
late 1999, and significant group medical premium rate increases. Also
contributing to the increase was a $9.6 million increase in individual
disability insurance premiums due to continued growth in sales. Group disability
insurance premiums increased $8.4 million due to an increase in long-term
disability covered members and an increase in short-term disability premium per
member. These increases were partially offset by a $66.2 million decrease in
group Medicare supplement premium, resulting from our decision to cease new
sales of group Medicare supplement insurance in January 2000 and our decision to
reinsure 100% of this business effective July 1, 2000.

    Fees and other revenues increased $49.8 million, or 28%, to $230.0 million
in 2000, from $180.2 million in 1999. Fee revenues from individual
interest-sensitive life insurance products increased $27.4 million, a result of
growth in that block of business. The growth reflects a continued shift in
customer preference from individual traditional life insurance products to
individual universal life and individual variable life insurance products. Fee
revenues from our group fee-for-service business increased $20.3 million,
primarily due to increases in members and fees.

    Net investment income increased $27.4 million, or 4%, to $642.1 million in
2000, from $614.7 million in 1999. The increase was primarily due to a $483.9
million, or 6%, increase in average invested assets and cash for the segment.
The increase in net investment income due to asset growth was partially offset
by a decrease in average investment yields for the segment. The yield on average
invested assets and cash was 7.4% in 2000, compared to 7.5% in 1999, due to a
decrease in interest credited on assets backing allocated capital. The decrease
in interest credited was partially offset by higher interest rates on fixed
income investments backing product liabilities.

    Benefits, claims and settlement expenses decreased $55.5 million, or 2%, to
$2,659.4 million in 2000, from $2,714.9 million in 1999. Group medical insurance
benefits claims and settlement expenses decreased $108.6 million, primarily
resulting from the release of claim reserves established in 1999. The claim
reserves were established in 1999 as a result of poor claim experience during
the year and an expectation that claims would continue to increase through the
second quarter of 2000. This decrease was partially offset by an increase in
claims due to rising medical costs. Benefits, claims and settlement expenses
also decreased $102.8 million for group Medicare supplement insurance, as a
result of our reinsuring this business effective July 1, 2000, improved claim
experience during the first half of the year and the release of reserves
established in 1999, for the same reasons previously described for our group
medical business. These decreases were partially offset by a $56.1 million
increase in group dental benefits, claims and settlement expenses, primarily due
to growth in that block of business. Individual disability insurance claims and
reserves increased $49.5 million, primarily due to less favorable morbidity
experience and related increases in reserves for claims and incurred but not
reported claims. Individual interest-sensitive life insurance benefits and
claims increased $40.2 million, primarily due to an increase in both interest
credited and mortality costs, primarily resulting from growth in the block of
business and reserve adjustments. Group disability claims and reserves increased
$9.5 million, primarily a result of less favorable morbidity experience and an
increase in covered members.

    Dividends to policyholders increased $12.5 million, or 4%, to $308.1 million
in 2000, from $295.6 million in 1999. The increase was due to increased
dividends on traditional individual life insurance products, a result of
increases in the cash values of the policies.

    Operating expenses increased $41.6 million, or 5%, to $913.6 million in
2000, from $872.0 million in 1999. Group life and health insurance operating
expenses increased $26.0 million, primarily due to expenses related to our group
Medicare supplement business, and a write-down of goodwill related to group
Medicare supplement insurance. Group life and health insurance operating
expenses also increased due to an increase in commissions, resulting from higher
commission scales, an increase in premium, and settlements with wholesale
distributors related to discontinued group health business. These increases were
offset by a decrease in general expenses related to both our group medical and
group Medicare supplement insurance products. Individual life and disability
insurance operating expenses also increased $15.6 million, primarily due to an
increase in amortization of deferred policy acquisition costs related to
individual disability insurance.

    Income taxes increased $66.9 million to $79.2 million in 2000, from $12.3
million in 1999. The effective income tax rate for this segment was 33% in 2000
and 12% in 1999. The effective tax rate for 2000 was lower than the corporate
income tax rate of 35% due to tax-exempt income. The effective income tax rate
for 1999 was lower than the corporate income tax rate of 35%, primarily
resulting from overestimated deferred taxes related to health insurance reserves
in 1998, the effects of which were reversed in 1999 and also due to tax-exempt
income.

    As a result of the foregoing factors, operating earnings increased $71.6
million, or 79%, to $162.3 million in 2000, from $90.7 million in 1999.

    Net realized capital gains, as adjusted, increased $37.2 million to $47.3
million in 2000, from $10.1 million in 1999. The increase was primarily due to
net realized capital gains, as adjusted, related to the sale of our investment
in United

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Payors and United Providers. We sold a portion of our investment in 1999,
realizing an after-tax capital gain of $17.9 million. In 2000, we sold our
remaining investment and realized an after-tax capital gain of $58.9 million.
The increase in capital gains was partially offset by a $2.3 million increase in
net realized capital losses on sales of fixed income securities, as a result of
our investment portfolio repositioning strategy to sell lower yielding fixed
income securities to allow for reinvestment in higher yielding fixed income
securities.

    As a result of the foregoing factors, net income increased $108.8 million,
or 108%, to $209.6 million in 2000, from $100.8 million in 1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Premiums and other considerations increased $64.0 million, or 2%, to
$3,190.6 million in 1999, from $3,126.6 million in 1998. In 1999, group health
insurance premiums increased $55.3 million, as a result of increased sales of
our dental insurance products. Premiums and other considerations also increased
$43.4 million for Medicare supplement insurance products and $40.5 million for
group medical insurance products, a result of prices being more competitive and
new sales incentives. Premiums increased $9.1 million due to an increase in
sales of individual disability insurance products, as a result of increased
marketing efforts. Premiums also increased $3.4 million for group disability
insurance products, due to growth in our short-term disability insurance
product. The increases were partially offset by a $77.2 million decrease in
group life insurance products, due to our decision to terminate our
participation during 1998 in two large government reinsurance pools that were
producing inadequate returns. Also, individual traditional life insurance
premiums decreased by $11.5 million in 1999, continuing a shift in customer
preference from traditional life insurance products to universal life and
variable life insurance products.

    Fees and other revenues increased $33.5 million, or 23%, to $180.2 million
in 1999, from $146.7 million in 1998. Fees and other revenues increased in 1999,
primarily due to a $15.1 million increase in fee revenues from our group
fee-for-service business, a result of increased sales due to focused marketing
and distribution efforts to provide more clients with customized services that
resulted in higher fees. Also, fee revenues from individual interest-sensitive
life insurance products increased $12.0 million in 1999. The increase reflects
the shift in customer preference from traditional life insurance products to
universal life and variable life insurance products, as previously discussed.
Fee revenues from traditional life insurance products increased $2.2 million,
due to growth in reinsurance fee revenues associated with term life insurance
products. Fee revenues from dental insurance products and services increased
$2.0 million, related to our 1998 acquisition of Dental Net, Inc., an integrated
managed dental services organization. Fee revenues related to group life
insurance also increased $0.8 million.

    Net investment income decreased $5.1 million, or 1%, to $614.7 million in
1999, from $619.8 million in 1998. The decrease in 1999 was primarily due to a
decrease in average investment yields for the segment. The yield on the weighted
average invested assets and cash was 7.5% in 1999, compared to 7.8% in 1998. The
decrease reflects lower interest rates on new fixed income investments. The
decrease was partially offset by a $247.8 million, or 3%, increase in average
invested assets for the segment.

    Benefits, claims and settlement expenses increased $109.6 million, or 4%, to
$2,714.9 million in 1999, from $2,605.3 million in 1998. The increase in 1999
was primarily due to a $122.3 million increase in group medical benefits and
reserve increases, and a $53.8 million increase in Medicare supplement benefits
and reserve increases, primarily a result of claim reserves established in 1999,
as a result of poor claim experience through the third quarter of 1999 and an
expectation that claims would continue to increase through the second quarter of
2000. Group medical and Medicare supplement benefits, claims and settlement
expenses also increased, due to growth in the blocks of business. Dental
insurance claims also increased $41.7 million, due primarily to growth in our
dental insurance business. The increase was partially offset by an $87.0 million
decrease in group life insurance claims and reserves, due primarily to our
decision to terminate our participation in two large government reinsurance
pools during 1998.

    Dividends to policyholders decreased $4.4 million, or 1%, to $295.6 million
in 1999, from $300.0 million in 1998. The decrease was primarily due to a $13.9
million decrease in group life and health insurance dividends. After July 1,
1998, new issues and renewals of group life and health contracts were in the
form of non-participating policies. The policies included experience refund
provisions that were reported as reductions of premiums in 1999, instead of as
dividends to policyholders. The change in presentation did not affect net
income. The decrease was partially offset by a $9.5 million increase in
individual traditional life insurance dividends, primarily a result of increases
in the cash values of the policies and in the interest rates credited to the
policies.

    Operating expenses decreased $20.4 million, or 2%, to $872.0 million in
1999, from $892.4 million in 1998. Operating expenses were lower in 1999,
primarily due to a $28.3 million decrease in individual life and disability
insurance expenses due to a decrease in amortization of deferred policy
acquisition costs in 1999 compared to 1998. Amortization was higher in 1998, due
to loss recognition on older blocks of business. The decrease was partially
offset by a $7.9 million increase in group life and health insurance expenses,
primarily due to an increase in the distribution costs related to the
acquisition of a distribution system, higher commission scales and an increase
in dental insurance operating expenses due to our acquisition of Dental Net,
Inc.

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    Income taxes decreased $33.1 million, or 73%, to $12.3 million in 1999, from
$45.4 million in 1998. The effective income tax rate for this segment was 12% in
1999 and 48% in 1998, compared to the corporate income tax rate of 35%. The
effective tax rates differed from the corporate income tax rate in 1999 and
1998, due to overestimated deferred taxes related to health reserves in 1998,
the effects of which were reversed in 1999.

    As a result of the foregoing factors, operating earnings increased $40.7
million, or 81%, to $90.7 million in 1999, from $50.0 million in 1998.

    Net realized capital gains, as adjusted, increased $8.2 million to $10.1
million in 1999, from $1.9 million in 1998, primarily due to a $17.9 million net
realized capital gain related to the sale of a portion of our equity investment
in United Payors and United Providers. This capital gain was offset by a net
$9.7 million decrease in net realized capital gains, primarily due to net
realized capital losses on sales of fixed income investments, as a result of our
investment portfolio repositioning strategy to sell lower yielding fixed income
securities to allow for reinvestment in higher yielding fixed income securities.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income decreased $11.2 million, or 10%, to $100.8 million in
1999, from $112.0 million in 1998. Net income was higher in 1998, primarily due
to the positive impacts of non-recurring items totaling $60.1 million, net of
tax, which included a $76.5 million release of tax reserves, as previously
discussed under the caption "-- Transactions Affecting Comparability of Results
of Operations -- Operating Earnings and Non-Recurring Items," and expenses
related to amortization of deferred policy acquisition costs associated with the
formation of the mutual insurance holding company.

MORTGAGE BANKING SEGMENT

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

                                                          AS OF OR FOR THE
                                                         THREE MONTHS ENDED        AS OF OR FOR THE YEAR ENDED
                                                              MARCH 31,                   DECEMBER 31,
                                                        ---------------------   ---------------------------------
                                                          2001        2000        2000        1999        1998
                                                        ---------   ---------   ---------   ---------   ---------
                                                                             ($ IN MILLIONS)
                                                                                         
OPERATING EARNINGS DATA:
Operating Revenues:(1)
  Loan servicing......................................  $    88.9   $    85.0   $   313.8   $   286.5   $   235.4
  Loan production.....................................       30.7        12.7        46.0       111.8       105.2
                                                        ---------   ---------   ---------   ---------   ---------
         Total operating revenues.....................      119.6        97.7       359.8       398.3       340.6
Expenses:
  Loan servicing......................................       59.6        54.9       215.3       241.3       180.9
  Loan production.....................................       23.3        15.1        67.4        69.5        69.3
                                                        ---------   ---------   ---------   ---------   ---------
         Total expenses...............................       82.9        70.0       282.7       310.8       250.2
                                                        ---------   ---------   ---------   ---------   ---------
Pre-tax operating earnings............................       36.7        27.7        77.1        87.5        90.4
Income taxes..........................................       12.8         9.7        27.1        30.7        31.6
                                                        ---------   ---------   ---------   ---------   ---------
Operating earnings....................................       23.9        18.0        50.0        56.8        58.8

Net realized capital gains (losses), as adjusted......         --          --          --          --          --
Non-recurring items...................................         --          --          --          --          --
                                                        ---------   ---------   ---------   ---------   ---------
GAAP REPORTED:
Net income............................................  $    23.9   $    18.0   $    50.0   $    56.8   $    58.8
                                                        =========   =========   =========   =========   =========
OTHER DATA:
Mortgage loan production volume.......................  $ 4,854.9   $ 1,312.6   $ 8,311.8   $13,307.3   $12,120.5
Gain on sale of mortgage loans........................       17.4         2.6         9.4        55.2        59.5
Mortgage loan servicing portfolio.....................   57,304.8    51,091.9    55,987.4    51,875.5    41,973.0
Gain on sale of mortgage loan servicing rights........        6.1        13.9        14.9         5.5         1.8

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

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2000

    Total operating revenues increased $21.9 million, or 22%, to $119.6 million
for the three months ended March 31, 2001, from $97.7 million for the three
months ended March 31, 2000. The increase was primarily due to an $18.0 million
increase in mortgage loan production revenues, reflecting the increase in
mortgage loan production volume during the three months ended March 31, 2001. In
addition, mortgage loan servicing revenues increased $3.9 million, reflecting
the

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growth in the mortgage loan servicing portfolio. The increase in mortgage loan
servicing revenues was partially offset by a decrease in sales of mortgage loan
servicing rights.

    Total expenses increased $12.9 million, or 18%, to $82.9 million for the
three months ended March 31, 2001, from $70.0 million for the three months ended
March 31, 2000. The increase was primarily due to an $8.2 million increase in
expenses related to mortgage loan production, reflecting the increase in
mortgage loan production volume. An increase of $4.7 million in mortgage loan
servicing expenses was primarily due to an increase in the reserve for estimated
future loan losses and the increase in the mortgage loan servicing portfolio.
The increase in mortgage loan servicing expenses was partially offset by net
gains on servicing hedge activity.

    Income taxes increased $3.1 million, or 32%, to $12.8 million for the three
months ended March 31, 2001, from $9.7 million for the three months ended March
31, 2000. The effective income tax rate for this segment was 35% for both the
three months ended March 31, 2001 and 2000.

    As a result of the foregoing factors, operating earnings and net income
increased $5.9 million, or 33%, to $23.9 million for the three months ended
March 31, 2001, from $18.0 million for the three months ended March 31, 2000.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Total operating revenues decreased $38.5 million, or 10%, to $359.8 million
in 2000, from $398.3 million in 1999. The decrease was primarily due to a $65.8
million decrease in mortgage loan production revenues, reflecting the decrease
in mortgage loan production volume during 2000. The decrease in total revenues
was partially offset by a $27.3 million increase in mortgage loan servicing
revenues, primarily due to growth in the average balance of the mortgage loan
servicing portfolio. Additionally, an increase in mortgage loan servicing fee
revenues was the result of the sale of mortgage loan servicing rights,
representing approximately $1.0 billion from the mortgage loan servicing
portfolio, as part of our mortgage loan servicing strategy.

    Total expenses decreased $28.1 million, or 9%, to $282.7 million in 2000
from $310.8 million in 1999. The decrease was primarily due to a $26.0 million
decrease in expenses related to mortgage loan servicing, primarily a result of
net gains we earned on hedges related to our servicing portfolio in 2000. In the
second quarter of 2000, we shifted our servicing hedge portfolio from U.S.
Treasury-related instruments to London Inter-Bank Offer Rate based hedges
including swaps and swaptions, which resulted in net gains of $10.2 million. The
decrease was also due to a $2.1 million decrease in mortgage loan production
expenses related to the decrease in mortgage loan production volume during 2000.

    Income taxes decreased $3.6 million, or 12%, to $27.1 million in 2000, from
$30.7 million in 1999. The effective income tax rate for this segment was 35% in
both 2000 and 1999.

    As a result of the foregoing factors, operating earnings and net income
decreased $6.8 million, or 12%, to $50.0 million in 2000, from $56.8 million in
1999.

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Total operating revenues increased $57.7 million, or 17%, to $398.3 million
in 1999, from $340.6 million in 1998. The increase was primarily due to a $58.4
million increase in residential mortgage loan servicing revenues. The increase
in revenues was partially offset by a $7.3 million decrease in revenues,
resulting from our sale of Principal Portfolio Services, Inc., a mortgage loan
due diligence service provider, in January 1999. The mortgage loan servicing
portfolio increased by $9.9 billion, or 24%, to $51.9 billion in 1999, from
$42.0 billion in 1998. The mortgage loan servicing portfolio growth during 1999
was due to higher mortgage loan production and acquisitions of mortgage loan
servicing rights, representing $5.6 billion in unpaid principal balances.
Mortgage loan production related revenues increased $6.6 million, due to higher
mortgage loan production volumes in 1999.

    Total expenses increased $60.6 million, or 24%, to $310.8 million in 1999,
from $250.2 million in 1998. The increase in total expenses was attributable to
a $67.6 million increase related to mortgage loan servicing, primarily
reflecting an increase in amortization of mortgage loan servicing rights, a
result of the increase in our mortgage loan servicing portfolio. This increase
was partially offset by a $7.2 million decrease in expenses, resulting from our
sale of Principal Portfolio Services, Inc.

    Income taxes decreased $0.9 million, or 3%, to $30.7 million in 1999, from
$31.6 million in 1998. The effective income tax rate for this segment was 35%
for both 1999 and 1998.

    As a result of the foregoing factors, operating earnings and net income
decreased $2.0 million, or 3%, to $56.8 million in 1999, from $58.8 million in
1998.

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CORPORATE AND OTHER SEGMENT

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

                                                              FOR THE THREE
                                                                  MONTHS
                                                                  ENDED           FOR THE YEAR ENDED
                                                                MARCH 31,            DECEMBER 31,
                                                              --------------   -------------------------
                                                               2001    2000     2000      1999     1998
                                                              ------   -----   -------   ------   ------
                                                                           ($ IN MILLIONS)
                                                                                   
OPERATING EARNINGS DATA:
Operating Revenues:(1)
         Total operating revenues...........................  $ 35.0   $29.0   $  97.1   $ 61.9   $342.5
Expenses:
         Total expenses.....................................     2.7    14.9      14.4     54.1    430.6
                                                              ------   -----   -------   ------   ------
Pre-tax operating earnings (loss)...........................    32.3    14.1      82.7      7.8    (88.1)
Income taxes (benefits).....................................     8.5     9.6      15.0     (1.7)   (43.8)
                                                              ------   -----   -------   ------   ------
Operating earnings (loss)...................................    23.8     4.5      67.7      9.5    (44.3)

Net realized capital gains (losses), as adjusted............   (19.6)    9.1      80.3    284.5    292.1
Non-recurring items.........................................    (9.8)     --    (101.0)      --      7.5
                                                              ------   -----   -------   ------   ------
GAAP REPORTED:
Net income (loss)...........................................  $ (5.6)  $13.6   $  47.0   $294.0   $255.3
                                                              ======   =====   =======   ======   ======

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

(1) Excludes net realized capital gains (losses) and their impact on recognition
    of front-end fee revenues.

  THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2000

    Total operating revenues increased $6.0 million, or 21%, to $35.0 million
for the three months ended March 31, 2001, from $29.0 million for the three
months ended March 31, 2000. Operating revenues increased $11.0 million,
primarily as a result of improved investment yields for the segment. The
increase was partially offset by a $5.1 million change in inter-segment
eliminations included in this segment, which was offset by a corresponding
change in total expenses.

    Total expenses decreased $12.2 million, or 82%, to $2.7 million for the
three months ended March 31, 2001, from $14.9 million for the three months ended
March 31, 2000. The decrease was primarily related to a $5.1 million change in
inter-segment eliminations included in this segment. Interest expense on
commercial paper issued in connection with the acquisition of BT Financial Group
decreased $2.6 million as a result of the repayment of commercial paper. In
addition, interest expense decreased $2.3 million as a result of a reduction of
commercial real estate debt on home office properties. Interest expense also
decreased $1.9 million, primarily due to an accrual of interest to be received
as a result of the resolution of a favorable IRS tax audit event in 2000.

    Income taxes decreased $1.1 million, or 11%, to $8.5 million for the three
months ended March 31, 2001, from $9.6 million for the three months ended March
31, 2000. The effective income tax rates for this segment were 26% for the three
months ended March 31, 2001 and 68% for the three months ended March 31, 2000.
The effective income tax rate for the three months ended March 31, 2001 was
lower than the corporate income tax rate of 35% because of tax exempt income,
non-taxable income and tax credits. The effective income tax rate for the three
months ended March 31, 2000 was higher than the corporate income tax rate of 35%
due to an increase in income tax reserves established for contested IRS tax
audit matters.

    As a result of the foregoing factors, operating earnings increased $19.3
million to $23.8 million for the three months ended March 31, 2001, from $4.5
million for the three months ended March 31, 2000.

    Net realized capital gains, as adjusted, decreased $28.7 million to $19.6
million of net realized capital losses for the three months ended March 31,
2001, from $9.1 million of net realized capital gains for the three months ended
March 31, 2000. The decrease was primarily due to lower capital gains on sales
of equity securities due to the decline in the equity markets.

    As a result of the foregoing factors and the inclusion of non-recurring
items for the three months ended March 31, 2001, net income decreased $19.2
million to a $5.6 million net loss for the three months ended March 31, 2001,
from $13.6 million net income for the three months ended March 31, 2000. For the
three months ended March 31, 2001, net income included the negative effect of
non-recurring items totaling $9.8 million, net of tax, related to: (1) a loss
contingency reserve established for sales practices litigation ($5.9 million)
and (2) demutualization costs ($3.9 million), as previously discussed under the
caption "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items."

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   80

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

    Total operating revenues increased $35.2 million, or 57%, to $97.1 million
in 2000, from $61.9 million in 1999. Net investment income increased $71.0
million, as a result of improved investment yields for the segment. The increase
was partially offset by an $11.5 million decrease in net investment income,
reflecting a reduction in average invested assets, primarily due to the sale of
invested assets in 1999 to partially fund the acquisition of BT Financial Group.
The increase in total revenues was also partially offset by a $9.0 million
decrease related to a change in inter-segment eliminations included in this
segment, which was offset by a corresponding change in total expenses. In
addition, the increase was also partially offset by an $8.5 million decrease in
fees and other revenues, primarily related to the termination of a reinsurance
and participation agreement under which we continued to receive fee revenues in
1999, but not in 2000. Net investment income also decreased $5.0 million related
to our pro rata share of net loss of HealthExtras, Inc., a company in which we
hold a minority interest.

    Total expenses decreased $39.7 million, or 73%, to $14.4 million in 2000,
from $54.1 million in 1999. Interest expense related to IRS tax audit matters
decreased $40.8 million, primarily due to a net recovery of previously paid
interest related to a successful tax audit appeal. Expenses also decreased $33.2
million due to the cessation of interim service agreements with Coventry at the
end of 1999. A $9.0 million decrease in operating expenses was related to a
change in inter-segment eliminations included in this segment. The decreases
were partially offset by $31.2 million of additional interest expense in 2000 on
private debt securities and commercial paper issued in connection with the
acquisition of BT Financial Group in August 1999. In addition, a $10.0 million
increase was related primarily to corporate initiatives funded by this segment.

    Income tax expense (benefits) increased $16.7 million to $15.0 million of
tax expense in 2000, from a $1.7 million income tax benefit in 1999. The
increase was primarily a result of an increase in pre-tax operating earnings,
which included tax exempt income. The effective income tax rate for this segment
was lower than the corporate income tax rate of 35% in both 2000 and 1999
because of tax exempt income.

    As a result of the foregoing factors, operating earnings increased $58.2
million to $67.7 million in 2000, from $9.5 million in 1999.

    Net realized capital gains, as adjusted, decreased $204.2 million, or 72%,
to $80.3 million in 2000, from $284.5 million in 1999. The decrease was
primarily due to decreased sales of invested assets, primarily equity
securities, in 2000. We sold a significant portion of our equity securities
portfolio in 1999 and 1998 to reduce our exposure to common stock and to realize
appreciation.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 2000, net income decreased $247.0 million, or 84%, to $47.0 million in
2000, from $294.0 million in 1999. In 2000, net income included the negative
effect of non-recurring items totaling $101.0 million, net of tax, related to:
(1) a loss contingency reserve established for sales practices litigation ($93.8
million) and (2) demutualization costs ($7.2 million), as previously discussed
under the caption "-- Transactions Affecting Comparability of Results of
Operations -- Operating Earnings and Non-Recurring Items".

  YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Total operating revenues decreased $280.6 million, or 82%, to $61.9 million
in 1999, from $342.5 million in 1998. Our HMO operations contributed $272.6
million of total revenues in 1998, prior to being transferred to Coventry.

    Excluding the impact of HMO operations, total operating revenues decreased
$8.0 million, or 11%, to $61.9 million in 1999, from $69.9 million in 1998. Our
U.S. asset management operations were transferred to the U.S. Asset Management
and Accumulation segment, effective January 1, 1999, and the financial results
of the U.S. asset management operations are no longer reported in the Corporate
and Other segment. This transfer resulted in decreased revenues of $22.7
million, representing $10.6 million of fee revenues collected from institutional
clients for investment management services in 1998 and $12.1 million of net
investment income related to the operations in 1998. An additional decrease in
net investment income of $10.5 million was primarily due to $520.0 million of
invested assets sold in 1999 to partially fund the acquisition of BT Financial
Group. The decreases were partially offset by a $28.9 million increase in net
investment income, related to our pro rata share of Coventry's net income, as a
result of Coventry's improved earnings in 1999, as compared to 1998.

    Total expenses decreased $376.5 million, or 87%, to $54.1 million in 1999,
from $430.6 million in 1998. Our HMO operations contributed $342.3 million of
expenses in 1998 prior to being transferred to Coventry.

    Excluding the impact of HMO operations, total expenses decreased $34.2
million, or 39%, to $54.1 million in 1999, from $88.3 million in 1998. The
decrease was primarily related to $16.3 million of operating expenses of the
U.S. asset management operations that were transferred to the U.S. Asset
Management and Accumulation segment, effective January 1, 1999. Prior to the
transfer, these expenses were reported in the Corporate and Other segment.

                                        77
   81

    Income tax benefits decreased $42.1 million, or 96%, to $1.7 million in
1999, from $43.8 million in 1998. As a result of an increase in pre-tax
operating earnings, income tax benefits decreased $33.5 million. The remaining
$8.6 million income tax benefit decrease was related to settlements of prior
year IRS tax audits.

    As a result of the foregoing factors, operating earnings increased $53.8
million, or 121%, to $9.5 million in 1999, from a $44.3 million operating loss
in 1998.

    Net realized capital gains, as adjusted, decreased $7.6 million, or 3%, to
$284.5 million in 1999, from $292.1 million in 1998. We sold a significant
portion of our equity securities portfolio in 1999 and 1998 to reduce our
exposure to common stock and to realize appreciation. Our sales of invested
assets, primarily equity securities, increased in 1999 and resulted in a $33.1
million increase in realized capital gains. This increase was more than offset
by a $40.7 million increase in capital gains taxes in 1999, compared to 1998.
Capital gains taxes were lower in 1998, due to permanent income tax differences
in that year related to a gain on appreciated common stock contributed to the
Principal Financial Group Foundation that was not realized for income tax
purposes.

    As a result of the foregoing factors and the inclusion of non-recurring
items in 1998, net income increased $38.7 million, or 15%, to $294.0 million in
1999, from $255.3 million in 1998. In 1998, net income included non-recurring
items totaling $7.5 million, net of tax, related to:

    - the positive effects of a release of tax reserves; and

    - the negative effects of (a) a contribution related to permanent endowment
      of the Principal Financial Group Foundation and (b) expenses related to
      our reorganization into a mutual insurance holding company structure, as
      previously discussed under the caption "-- Transactions Affecting
      Comparability of Results of Operations -- Operating Earnings and
      Non-Recurring Items".

LIQUIDITY AND CAPITAL RESOURCES

    Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. The primary source
of our liquidity will be dividends we receive from Principal Life. We could also
receive dividends from our other direct subsidiaries, including Princor
Financial Services Corporation, Principal Financial Services (Australia) Inc.,
Principal International de Chile, S.A. and PFG do Brasil Ltda. However, given
the historical cash flows of the operations and financial results of these
subsidiaries, it is unlikely that we may rely upon them for significant cash
flow in the next twelve months. In addition, we will retain up to $250.0 million
of the net proceeds from this offering to be used for working capital, payment
of dividends and other general corporate purposes.

    The payment of dividends by Principal Life to us is limited by Iowa laws.
Under Iowa laws, Principal Life may pay dividends only from the earned profits
arising from its business and must receive the prior approval of the Insurance
Commissioner of the State of Iowa to pay any dividend that would exceed
statutory limitations. The current statutory limitation is the greater of:

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

    - the net gain from operations of Principal Life determined on a statutory
      basis for the previous calendar year.

    Iowa law gives the Insurance Commissioner of the State of Iowa discretion to
disapprove requests for dividends in excess of these limits. Principal Life will
be able to pay approximately $760.9 million in dividends in 2001 based on its
2000 statutory results without being subject to the restrictions on payment of
extraordinary stockholder dividends, of which $510.9 million had been paid, as
of April 30, 2001. The ability to make dividends or distributions in the future
will depend on the amounts of statutory surplus and net gain from operations
determined on a statutory basis for the previous year.

    Our primary uses of liquidity could include payment of dividends on our
common stock, interest payments and any other payments related to debt
servicing, payment of general operating expenses, contributions to subsidiaries,
potential acquisitions and the repurchase of common stock.

  SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

    Net cash provided by operating activities was $668.3 million and $250.4
million for the three months ended March 31, 2001 and 2000, respectively. The
increase was primarily due to a decrease in cash paid for operating expenses.
Net cash provided by operating activities was $2,581.7 million, $2,059.5 million
and $1,916.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The increase in 2000 was primarily due to an increase in customer
and escrow deposit liabilities for Principal Bank compared to 1999. The increase
in 1999 resulted primarily from an increase related to current and deferred
income taxes compared to 1998.

    Net cash used in investing activities was $1,750.4 million and $500.4
million for the three months ended March 31, 2001 and 2000, respectively. The
increase in cash used was primarily due to an increase in net cash invested in
available-for-sale securities during the period. Net cash used in investing
activities was $1,217.7 million, $3,294.7 million

                                        78
   82

and $693.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The decrease in cash used in 2000 was primarily due to a decrease
in purchases of interests in subsidiaries in 2000 compared to 1999, primarily a
result of the purchase of BT Financial Group in 1999. The increase in 1999
compared to 1998 resulted primarily from an increase in purchases of
available-for-sale fixed maturities and purchases of interests in subsidiaries,
primarily BT Financial Group.

    Net cash provided by financing activities was $681.1 million for the three
months ended March 31, 2001 and net cash used in financing activities was $112.5
million for the three months ended March 31, 2000. Net cash provided increased
as a result of a positive inflow of net investment contract deposits. Net cash
used in financing activities was $1,006.9 million, net cash provided by
financing activities was $1,343.9 million and net cash used in financing
activities was $1,308.7 million for the years ended December 31, 2000, 1999 and
1998, respectively. The increase in cash used in 2000 compared to 1999 was
primarily due to the change in net deposits related to investment contracts and
due to a decrease in issuance of debt. The increase in cash provided in 1999
resulted primarily from issuance of debt, primarily in connection with the
acquisition of BT Financial Group in August 1999, and an increase in net
deposits related to investment contract deposits compared to 1998.

    Cash flow requirements are also supported by committed lines of credit
totaling $600.0 million, of which there were no outstanding balances as of March
31, 2001. The lines of credit are available to provide backup of the commercial
paper programs.

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

  PRINCIPAL LIFE

    Historically, the principal cash flow sources for Principal Life have been
premiums from life and health insurance products, pension and annuity deposits,
asset management fee revenues, administrative services fee revenues, income from
investments, proceeds from the sales or maturity of investments and short-term
borrowings. Cash outflows consist primarily of payment of benefits to
policyholders and beneficiaries, income and other taxes, current operating
expenses, payment of dividends to policyholders, payments in connection with
investments acquired, payments made to acquire subsidiaries, payment of
dividends to parent, and payments relating to policy and contract surrenders,
withdrawals, policy loans, interest expense and repayment of short-term
borrowings.

    Principal Life maintains investment strategies generally intended to provide
adequate funds to pay benefits without forced sales of investments. Products
having liabilities with longer lives, such as life insurance and full-service
payout pension products, are matched with assets having similar estimated lives
such as mortgage loans, long-term bonds and private placement bonds.
Shorter-term liabilities are matched with investments such as short and
medium-term fixed maturities. In addition, highly liquid, high quality
short-term U.S. Treasury securities and other liquid investment grade fixed
maturities are held to fund anticipated operating expenses, surrenders,
withdrawals and development and maintenance expenses associated with new
products and technologies. See "-- Quantitative and Qualitative Information
about Market Risk -- Interest Rate Risk" for a discussion of duration matching.

    Our privately placed fixed maturity securities, commercial mortgage loans
and real estate investments are generally less liquid than our publicly traded
fixed maturity securities. As of March 31, 2001, these asset classes represented
approximately 53% of the value of our consolidated invested assets.

    Life insurance companies generally produce a positive cash flow from
operations, as measured by the amount by which cash inflows are adequate to meet
benefit obligations to policyholders and normal operating expenses as they are
incurred. The remaining cash flow is generally used to increase the asset base
to provide funds to meet the need for future policy benefit payments and for
writing and acquiring new business. It is important to match the investment
portfolio maturities to the cash flow demands of the type of annuity, investment
or insurance product being provided. Principal Life continuously monitors
benefits, surrenders and maturities to provide projections of future cash
requirements. As part of this monitoring process, Principal Life performs cash
flow testing of many of its assets and liabilities under various scenarios to
evaluate the adequacy of reserves. In developing its investment strategy,
Principal Life establishes a level of cash and securities which, combined with
expected net cash inflows from operations, maturities of fixed maturity
investments and principal payments on mortgage-backed securities, are believed
adequate to meet anticipated short-term and long-term benefit and expense
payment obligations. There can be no assurance that future experience regarding
benefits and surrenders will be similar to historic experience since withdrawal
and surrender levels are influenced by such factors as the interest rate
environment and the claims paying ability and financial strength ratings of
Principal Life.

    Principal Life takes into account asset-liability management considerations
in the product development and design process. Contract terms of 97% of
Principal Life's interest-sensitive products as of December 31, 2000 include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. These provisions generally do one or more of the following:
limit the amount of penalty-free withdrawals, limit the circumstances under
which withdrawals are permitted, or assess a surrender charge or market value
adjustment relating to the underlying
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assets. The market value adjustment feature in Principal Life's fixed annuity
products adjusts the surrender value of a contract in the event of surrender
prior to the end of the contract period to protect Principal Life against losses
due to higher interest rates at the time of surrender. The following table
summarizes Principal Life's statutory liabilities for annuities and deposit
funds by their contractual withdrawal provisions:

                                                               AS OF DECEMBER 31,
                                                                      2000
                                                               ------------------
                                                                ($ IN MILLIONS)
                                                            
STATUTORY LIABILITIES FOR ANNUITIES AND DEPOSIT FUNDS:
  Not subject to discretionary withdrawal...................       $17,813.8
  Subject to discretionary withdrawal with adjustments:
  Specified surrender charges at book value less surrender
    charge of 5% or more....................................           670.9
  Market value adjustments..................................        40,535.0
                                                                   ---------
         Subtotal...........................................        59,019.7
  Subject to discretionary withdrawal without adjustments...         2,138.1
                                                                   ---------
         Total..............................................       $61,157.8
                                                                   =========

  INTERNATIONAL OPERATIONS

    BT Financial Group produced a positive cash flow from operations in 2000,
which is expected to continue to be maintained. Principal cash flow sources for
BT Financial Group have been fee revenues and interest spread earned on margin
lending operations. Cash outflows consist primarily of operating expenses
including interest payments on debt issued in connection with the acquisition of
BT Financial Group.

    Principal International is in a development or entry stage in several
countries. Historically, principal cash flow sources for Principal International
have been pension and annuity deposits, asset management fee revenues,
administrative services fee revenues, insurance premiums, income from
investments, proceeds from the sales or maturity of investments and short-term
borrowings. Cash outflows consist primarily of payment of benefits to
policyholders and beneficiaries, income and other taxes, current operating
expenses, payments in connection with investments acquired, and payments
relating to policy and contract surrenders, withdrawals, policy loans, interest
expense and repayment of short-term borrowings.

    Principal International maintains investment strategies generally intended
to provide adequate funds to pay benefits without forced sales of investments.
Highly liquid, high quality short-term government securities and other liquid
investment grade fixed maturities are held to fund anticipated operating cash
outflows and development and maintenance expenses associated with new products
and technologies.

    Principal International's operating companies monitor benefits, surrenders
and maturities to provide projections of future cash requirements. There can be
no assurance that future experience regarding benefits and surrenders will be
similar to historic experience since withdrawal and surrender levels are
influenced by factors such as the interest rate environment.

    Our Brazilian and Chilean operations produced a positive cash flow from
operations in the first three months of 2001 and in 2000. These cash flows have
been historically maintained at the local country level for strategic expansion
purposes. Our other international operations have required infusions of capital
of $7.5 million for the three months ended March 31, 2001 and $75.8 million,
$126.8 million and $219.7 million for the years ended December 31, 2000, 1999
and 1998, respectively, to meet the cash flow requirements of those operations
or to fund acquisitions. These other operations are primarily in the start-up
stage or are expanding in the short term. Our capital funding of these
operations is consistent with our long term strategy to establish viable
companies that can sustain future growth from internally generated sources.

QUANTITATIVE AND QUALITATIVE INFORMATION 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:

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    - rebalance our existing asset or liability portfolios;

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

    - 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 seek to earn returns on investments that enhance our ability to offer
competitive rates and prices to customers while contributing to attractive and
stable profits and long-term capital growth. Accordingly, 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.

    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. Duration measures the change in the fair
value of assets and liabilities for given changes in interest rates. For
example, if interest rates increase by a hypothetical 100 basis points, the fair
value of an asset with a duration of 5 years is expected to decrease in value by
approximately 5%.

    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 March 31, 2001, the difference between the asset and liability
durations on our primary duration managed portfolio was 0.02 years. 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 dictate that total duration gaps between the asset and liability
portfolios must be within 0.25 years. The value of the assets in this portfolio
was $23,965.7 million as of March 31, 2001.

    We also manage interest rate risk by employing a partial duration analysis.
With this technique, the yield curve is dissected into various term components
and a partial duration is calculated for each. Each partial duration represents
the potential change in fair value of the asset or liability to interest rate
shift in rates in the applicable component of the yield curve. We minimize
potential volatility in the fair value of surplus of Principal Life as a result
of changes in the yield curve by managing each partial duration gap between the
assets and liabilities within established guidelines.

    With respect to our primary duration managed portfolio, we use several
methods to correct any potential total or partial duration gaps that are outside
of our established risk tolerance ranges. We can rebalance the existing asset or
liability portfolios or we can redirect new asset purchases until the asset
portfolio is better aligned with the liabilities and our duration gaps are back
within their limits. If a more expedient correction is desired, another method
we use is forward interest rate swaps. These swaps are designed to move duration
exposure from one specific point on the yield curve to another, and are an
efficient way to quickly shift the partial and total duration profile of the
asset portfolio so that duration gaps and hence interest rate risk is minimized.

    For products such as whole life insurance, term life insurance and single
premium deferred annuities, the liability cashflow is less predictable, and a
duration-matching strategy is less reliable and manageable. We do, however, try
to manage the duration of these portfolios. For these products, we manage
interest rate risk based on a modeling process that considers the target average
life, maturities, crediting rates and assumptions of policyholder behavior. As
of March 31, 2001, the weighted-average difference between the asset and
liability durations on these portfolios was 1.2 years. 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
$12,036.8 million as of March 31, 2001.

    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 $2,576.9 million as of March 31,
2001.

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    Using the assumptions and data in effect as of March 31, 2001, we estimate
that a 100 basis point immediate, parallel increase in interest rates decreases
the net fair value of our portfolio by $178.8 million. The following table
details the estimated changes by risk management strategy:

                                                                      AS OF
                                                                 MARCH 31, 2001       NET FAIR VALUE
RISK MANAGEMENT STRATEGY                                      VALUE OF TOTAL ASSETS       CHANGE
- ------------------------                                      ---------------------   --------------
                                                                         ($ IN MILLIONS)
                                                                                
Primary duration-managed....................................        $23,965.7            $ (32.6)
Duration-monitored..........................................         12,036.8             (146.2)
Non duration-managed........................................          2,576.9                 --
                                                                    ---------            -------
         Total..............................................        $38,579.4            $(178.8)
                                                                    =========            =======

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

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

    We manage interest rate risk on our mortgage loan pipeline by buying and
selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on futures contracts. We also use interest rate floors, futures
contracts, options on futures contracts, swaps and swaptions in hedging a
portion of our portfolio of mortgage servicing rights from prepayment risk
associated with changes in interest rates.

    We measure pipeline interest rate risk exposure by adjusting the at-risk
pipeline in light of the theoretical optionality of each applicant's rate/price
commitment. The at-risk pipeline, which consists of closed loans and rate locks,
is then refined at the product type level to express each product's sensitivity
to changes in market interest rates in terms of a single current coupon MBS
duration. Suitable hedges are selected and a similar methodology applied to this
hedge position. We limit our risk exposure by requiring that the net position
value not change by more than $10 million given an instantaneous change in the
benchmark MBS price of +/-2.5%. This price sensitivity analysis is performed at
least once daily. The value of the loans in the pipeline as of March 31, 2001
was $5.2 billion. Due to the impact of our hedging activities, we estimate that
a 100 basis point immediate parallel increase in the interest rates decreases
the March 31, 2001 net position value by less than $16.6 million.

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

    The market value of the servicing asset declines as interest rates decrease
due to possible mortgage loan servicing rights impairment that may result from
increased current and projected future prepayment activity. The change in value
of the servicing asset due to interest rate movements is reduced by the use of
financial instruments, including derivative contracts, that increase in
aggregate value when interest rates decline. We recently shifted our servicing
hedge portfolio from U.S. Treasury related instruments to London Inter-Bank
Offer Rate hedges, including swaps and swaptions. Based on values as of March
31, 2001, a 100 basis point parallel decrease in interest rates produces a $36
million decline in value of the servicing asset of our Mortgage Banking segment,
due to the impact of these hedging vehicles and the current differences between
current market values and GAAP book values.

    CASH FLOW VOLATILITY.  Cashflow volatility arises as a result of several
factors. One is the inherent difficulty in perfectly matching the cashflows of
new asset purchases with that of new liabilities. Another factor is the inherent
cashflow volatility of some classes of assets and liabilities. In order to
minimize cashflow volatility, we manage differences between expected asset and
liability cashflows within pre-established guidelines.

    We also seek to minimize cashflow 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
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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 cashflow 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 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 interest rate characteristics 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.

    In conjunction with the interest rate swaps, interest rate swaptions and
other 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:

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

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

    - limiting exposure to AA- credit or better;

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

    - 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 remote and that such losses, if any, would not be material.
Futures contracts trade on organized exchanges and, therefore, effectively have
no credit risk.

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

                                                                   AS OF MARCH 31, 2001
                                              ---------------------------------------------------------------
                                                                            FAIR VALUE (NO ACCRUED INTEREST)
                                                                           ----------------------------------
                                                                            -100
                                                             WEIGHTED       BASIS                  +100 BASIS
                                              NOTIONAL       AVERAGE        POINT                    POINT
                                               AMOUNT      TERM (YEARS)    CHANGE     NO CHANGE      CHANGE
                                              ---------    ------------    -------    ---------    ----------
                                                                      ($ IN MILLIONS)
                                                                                    
Interest rate swaps.........................  $ 4,773.2        6.06(1)     $ (29.0)    $(18.2)       $(31.4)
Principal Only swaps........................      150.0        2.56(1)        13.3       (7.5)        (12.4)
Interest rate floors........................    3,200.0        5.25(2)        83.7       71.2         (39.0)
U.S. Treasury futures.......................      255.3        0.25(3)       (11.5)      (0.7)         10.0
Swaptions...................................    2,512.0        3.56(4)        64.7       79.0         (45.4)
Treasury rate guarantees....................       27.0        0.19(5)        (2.0)        --           2.2
Mortgage-backed forwards and options........    5,951.7        0.17(5)      (148.2)     (11.2)        179.3
                                              ---------                    -------     ------        ------
         Total..............................  $16,869.2                    $ (29.0)    $112.6        $ 63.3
                                              =========                    =======     ======        ======

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

(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.

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

    DEBT ISSUED AND OUTSTANDING.  As of March 31, 2001, the aggregate fair value
of debt was $1,312.1 million. A 100 basis point, immediate, parallel decrease in
interest rates would increase the fair value of debt by approximately $72.6
million.

                                                                       AS OF MARCH 31, 2001
                                                              ---------------------------------------
                                                                 FAIR VALUE (NO ACCRUED INTEREST)
                                                              ---------------------------------------
                                                               -100 BASIS                 +100 BASIS
                                                              POINT CHANGE   NO CHANGE   POINT CHANGE
                                                              ------------   ---------   ------------
                                                                          ($ IN MILLIONS)
                                                                                
7.95% notes payable, due 2004...............................    $  218.8     $  212.4      $  206.3
8.2% notes payable, due 2009................................       540.7        508.4         478.4
7.875% surplus notes payable, due 2024......................       199.5        184.4         169.3
8% surplus notes payable, due 2044..........................       100.5         90.4          81.8
Non-recourse mortgages and notes payable....................       165.4        156.7         148.6
Other mortgages and notes payable...........................       159.8        159.8         159.8
                                                                --------     --------      --------
         Total long-term debt...............................    $1,384.7     $1,312.1      $1,244.2
                                                                ========     ========      ========

  EQUITY RISK

    Equity risk is the risk that we will incur economic losses due to adverse
fluctuations in a particular common stock. As of March 31, 2001, the fair value
of our equity securities was $618.6 million. A 10% decline in the value of the
equity securities would result in an unrealized loss of $61.9 million.

    We also have indirect equity risk exposure with respect to BT Financial
Group margin lending operations. Under the terms of this financing arrangement,
BT Financial Group margin lending operations allow retail clients and
independent financial advisors on behalf of clients, within limits approved by
senior management, to borrow funds from BT Financial Group to invest in an
approved list of securities and mutual fund investments which serve as security
for the loan. The risk of loan default increases as the value of the underlying
securities declines. This risk is actively managed through the use of margin
calls on loans when the underlying securities fall below established levels.
Overall, the margin lending portfolio is limited to a ratio of borrowed funds to
market value of securities of 60%. On November 30, 1999, BT Financial Group
margin lending operations securitized its margin lending portfolio with Westpac
Banking Corporation, an Australian bank. Under the terms of this financing, BT
Financial Group margin lending operations are required to allocate capital equal
to approximately 7% of the outstanding borrowed amount, as a cushion for loan
defaults. As of March 31, 2001, the margin lending portfolio was $546.0 million,
or A$1,118.2 million, while the ratio of borrowed funds to market value of
securities was 44%, below that of the maximum allowed.

  FOREIGN CURRENCY RISK

    Foreign currency risk is the risk that we will incur economic losses due to
adverse fluctuations in foreign currency exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional amount of our currency swap agreements associated with
foreign-denominated liabilities as of March 31, 2001 was $3,061.2 million. We
also have fixed maturity securities that are denominated in foreign currencies.
However, we use derivatives to hedge the foreign currency risk, both interest
payments and the final maturity payment, of these funding agreements and
securities. As of March 31, 2001, the fair value of our foreign currency
denominated fixed maturity securities was $406.5 million. We use currency swap
agreements of the same currency to hedge the foreign currency exchange risk
related to these investments. The notional amount of our currency swap
agreements associated with foreign-denominated fixed maturity securities as of
March 31, 2001 was $428.7 million. With regard to our international operations,
we attempt to do as much of our business as possible in the functional currency
of the country of operation. At times, however, we are unable to do so, and in
these cases, we use foreign exchange derivatives to hedge the resulting risks.

    Additionally, we utilize foreign currency swaps related to $665.0 million of
private notes issued in connection with our acquisition of BT Financial Group.
Currently the interest payments related to these notes are serviced through
operating cash flows of our Australian operations. By utilizing the foreign
currency and interest rate swaps, the impact of Australian dollar and U.S.
dollar exchange rate fluctuations have a minimal effect on our ability to rely
on the cash flows of our Australian operations to service the interest and
principal payments related to the notes.

    We estimate that as of March 31, 2001, a 10% immediate unfavorable change in
each of the foreign currency exchange rates to which we are exposed would result
in no 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

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unfavorable change in all currency exchange rates should not be construed as a
prediction by us of future market events, but rather as an illustration of the
potential impact of such an event. Our largest individual currency exposure is
to fluctuations between the Australian dollar and the U.S. dollar.

  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. See "Risk
Factors -- Our efforts to reduce the impact of interest rate changes on our
profitability and surplus may not be effective".

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                                    BUSINESS

    The Principal Financial Group is a leading provider of retirement savings,
investment and insurance products and services, with $113.0 billion in assets
under management and approximately thirteen million customers worldwide as of
March 31, 2001. Our U.S. and international operations concentrate primarily on
asset management and accumulation. In addition, we offer a broad range of
individual life and disability insurance, group life and health insurance, and
residential mortgage loan origination and servicing in the United States.

    We provide a comprehensive portfolio of asset accumulation products and
services to businesses and individuals in the United States, with a
concentration on small and medium-sized businesses, which we define as
businesses with less than 1,000 employees. We place a particular emphasis on
businesses with less than 500 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.

    We provided services to more 401(k) plans in the United States in 2000 than
any other bank, mutual fund or insurance company, according to surveys conducted
by CFO magazine. From 1998 to 2000, our 401(k) assets under management increased
20% and our plan participants increased 8%. Within the 401(k) market for
businesses with less than 500 employees, we had the leading market share in 1999
based on number of plans (9.7%), number of participants (14.1%) and assets under
management (7.2%), according to the Spectrem Group. We believe that the 401(k)
market has strong growth potential. The Spectrem Group projects that assets
under all 401(k) plans in the United States will grow at a compound annual rate
of 13.5%, reaching $2.6 trillion in plan assets by 2004. The small and
medium-sized business market remains under-penetrated with only 15% of U.S.
businesses with less than 500 employees offering a 401(k) plan in 1999.
Accordingly, we believe that we are uniquely positioned to capitalize on the
growth opportunities in the 401(k) plan and other defined contribution pension
plan markets in the United States and internationally.

    Principal Capital Management, our U.S.-based asset manager, provides asset
management services to our U.S. asset accumulation businesses and third-party
institutional clients, as well as our other U.S.-based segments. We established
Principal Capital Management in 1999 to consolidate our extensive investment
management expertise and to focus on marketing our asset management services to
third-party institutional clients. We believe that Principal Capital Management
is well-positioned to compete in this third-party institutional market through
its expertise gained from managing a significant percentage of the assets
originating from our U.S. asset accumulation operations. As of March 31, 2001,
Principal Capital Management managed $81.8 billion in assets, of which $6.1
billion, or 7%, represented assets managed directly for third-party
institutional clients.

    Our acquisition of BT Financial Group in 1999 was a central element in the
expansion of our international asset management and accumulation businesses. As
of March 31, 2001, BT Financial Group was the fourth largest asset manager in
Australia according to ASSIRT. As of March 31, 2001, BT Financial Group had
accumulated $22.2 billion of assets under management and provided investment
advisory services to $21.0 billion in assets. We believe that the mandated
retirement savings system in Australia, called superannuation, and BT Financial
Group's strong market position, together with the expertise we have developed in
the U.S. defined contribution pension plan market, should provide for growth in
our assets under management in Australia. BT Financial Group and Principal
Capital Management together enhance our ability to compete in global asset
management.

    The activities of Principal International reflect our efforts to capitalize
on the trend toward private sector defined contribution pension systems. We
believe that this trend offers significant potential for future growth. We also
believe that the expertise we have developed in serving the U.S. pension plan
market enables us to take advantage of these opportunities. Through Principal
International, we offer retirement products and services, annuities, mutual
funds and life insurance. We operate through subsidiaries in Argentina, Chile,
Mexico, Indonesia and Hong Kong and joint ventures in Brazil, Japan and India.

    Our Life and Health Insurance segment offers individual life and disability
insurance as well as group life and health insurance throughout the United
States. Our individual life and disability insurance business served
approximately 750,000 policyholders with $80.8 billion of life insurance in
force as of March 31, 2001. Our individual insurance products include
interest-sensitive life, traditional life and disability insurance. Our group
insurance business served approximately 82,000 employers covering approximately
5.0 million members and had $71.5 billion of group life insurance in force as of
March 31, 2001. Our group insurance products include life, disability, medical,
dental and vision insurance, and administrative services.

    Our Mortgage Banking segment engages in originating, purchasing, selling and
servicing residential mortgage loans in the United States. We service a majority
of the loans that we originate. We originated or purchased $8.3 billion in new
mortgage loans for the year ended December 31, 2000 and serviced a portfolio of
$57.3 billion of mortgage loans as of March 31, 2001. Residential mortgages
represent a component of our overall portfolio of market-driven financial
products and services.

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ASSETS UNDER MANAGEMENT BY SEGMENT

    For management and financial reporting purposes, we organize our businesses
into four operating segments:

    - U.S. Asset Management and Accumulation;

    - International Asset Management and Accumulation;

    - Life and Health Insurance; and

    - Mortgage Banking.

    We also have a Corporate and Other segment which consists of the assets and
activities that have not been allocated to any other segment.

    One of the primary measures of our businesses is assets under management. We
define "assets under management" as any assets on which we earn an asset-based
fee or a spread. Fee-based products, such as mutual funds, provide no investment
guarantee to the customer and provide us the potential for higher returns on our
capital. Customer deposits in fee-based investments are either included in our
separate accounts or do not appear on our balance sheet. The investment results
of the separate account assets generally pass through to the separate account
policyholders and contractholders, less management fees, so that we bear limited
or no investment risk on such assets. Spread-based products, such as guaranteed
investment contracts, provide a guarantee of return to customers for a specified
period of time. The spread is the difference between the investment income we
earn and the investment income we credit to our customers. We generally report
customer deposits in spread-based investments on our balance sheet.

    The table below shows by segment the amount of assets on which we earned an
asset-based fee as compared to that on which we earned a spread for the periods
indicated:

                            ASSETS UNDER MANAGEMENT
                       FEE-BASED/SPREAD-BASED COMPOSITION

                                 AS OF MARCH 31,                                   AS OF DECEMBER 31,
                             -----------------------   --------------------------------------------------------------------------
                                      2001                      2000                      1999                    1998(2)
                             -----------------------   -----------------------   -----------------------   ----------------------
                              FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL     FEE    SPREAD   TOTAL
                             -----   ------   ------   -----   ------   ------   -----   ------   ------   -----   ------   -----
                                                                       ($ IN BILLIONS)
                                                                                        
U.S. Asset Management and
  Accumulation.............  $45.5   $31.1    $ 76.6   $48.9   $29.2    $ 78.1   $46.9   $28.7    $ 75.6   $38.0   $29.2    $67.2
International Asset
  Management and
  Accumulation.............   22.5     2.6      25.1    25.6     2.8      28.4    28.4     2.2      30.6     0.3     0.9      1.2
Life and Health
  Insurance................    1.9     7.5       9.4     2.1     7.2       9.3     2.0     6.7       8.7     1.3     6.9      8.2
Mortgage Banking(1)........     --     0.4       0.4      --     0.2       0.2      --     0.5       0.5      --     0.7      0.7
                             -----   -----    ------   -----   -----    ------   -----   -----    ------   -----   -----    -----
Subtotal...................  $69.9   $41.6     111.5   $76.6   $39.4     116.0   $77.3   $38.1     115.4   $39.6   $37.7     77.3
                             =====   =====             =====   =====             =====   =====             =====   =====
Corporate and Other........                      1.5                       1.5                       1.2                      3.1
                                              ------                    ------                    ------                    -----
        Total..............                   $113.0                    $117.5                    $116.6                    $80.4
                                              ======                    ======                    ======                    =====

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

(1) Excludes our mortgage loan servicing portfolio.

(2) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    Our primary focus is on asset management and accumulation, with particular
emphasis on retirement products and services. We define "asset accumulation" as
the sale of investment-oriented products and services for which we provide
administrative services and/or offer investment choices from one or more asset
managers. Our asset accumulation products and services include pensions, mutual
funds, individual annuities and banking products. The fees our customers pay for
these products and services are based on the asset balance of the product the
customer purchases. We retain a portion of these fees in return for our
administrative services and pay a portion to the asset manager, which may be us.
We report the asset balances within our asset accumulation operations as assets
under management if we earn an asset-based fee or a spread on those assets,
regardless of whether our affiliated asset managers manage any of the underlying
investment assets.

    We define "asset management" as the provision of investment advisory
services, including the screening, selection, purchase and ultimate sale of
specific financial assets. We refer to the entity that provides these services
as an "asset manager." The asset manager may be affiliated with us, such as
Principal Capital Management and BT Financial Group, or may be an unaffiliated
third-party.

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    We manage a large majority of assets originating from our asset accumulation
operations. The table below shows the assets managed by asset manager:

                            ASSETS UNDER MANAGEMENT
                                BY ASSET MANAGER

                                                                AS OF MARCH 31,      AS OF DECEMBER 31,
                                                                ---------------    -----------------------
                                                                     2001           2000     1999    1998
                                                                ---------------    ------   ------   -----
                                                                             ($ IN BILLIONS)
                                                                                         
Principal Capital Management................................        $ 81.8         $ 83.2   $ 82.2   $77.1
BT Financial Group..........................................          21.0           24.3     28.2      --
Other Entities of the Principal Financial Group.............           4.0            3.7      2.6     1.9
Third-Party Asset Managers..................................           6.2            6.3      3.6     1.4
                                                                    ------         ------   ------   -----
         Total..............................................        $113.0         $117.5   $116.6   $80.4
                                                                    ======         ======   ======   =====

OUR STRATEGY

    Our goal is to enhance stockholder value by pursuing the most attractive
financial services opportunities consistent with the capabilities of our asset
management and accumulation operations. We intend to accomplish this goal by
increasing the growth and profitability of these businesses through the pursuit
of the following primary strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION BUSINESS.  We intend to
strengthen our existing distribution channels and expand into new distribution
channels, further leverage our technology to achieve operating efficiencies,
continue to expand the range of investment options and effectively cross-sell
our products and services.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We selectively
target asset classes and customers in the United States, Australia and globally
to capitalize on the specific strengths of Principal Capital Management and BT
Financial Group. They jointly execute this strategy in their respective markets
and through marketing offices in London, Hong Kong and Singapore.

    INCREASE THE GROWTH AND PROFITABILITY OF PRINCIPAL INTERNATIONAL.  We will
continue to leverage our U.S. product expertise and operating platform to
strengthen Principal International. We seek to accelerate the growth of our
assets under management by capitalizing on the international trend toward
privatization of public retirement pension systems. In addition, we intend to
continue our progress in managing expenses.

    In addition to these primary strategic initiatives, we have specific
strategies within each of our operating segments, which are described in our
operating segment discussions.

OPERATING PRINCIPLES

    To effectively realize our strategic initiatives, we are implementing the
following operating principles:

    - operate a full-service platform to serve the needs of our customers;

    - build on strong customer relationships;

    - focus on our financial performance; and

    - reinforce our culture.

  OPERATE A FULL-SERVICE PLATFORM

    We differentiate ourselves by operating a full-service platform to serve the
wide array of our customers' needs by originating sales through our diverse
distribution channels, offering a comprehensive portfolio of products and
services, administering our products and services efficiently using information
technology and managing a significant portion of the assets we accumulate as
follows:

    STRENGTHEN OUR DIVERSE DISTRIBUTION CHANNELS.  We originate sales of our
products and services through diverse distribution channels that include our
retirement services sales representatives, financial representatives, insurance
brokers, registered representatives and direct channels such as Principal
Connection(SM). We also use other distribution sources particular to each
business segment. We intend to strengthen and grow existing distribution
channels and to expand into new distribution sources for sales of our products
and services. In particular, we realigned our retirement services sales force to
focus on new sales, targeted new distribution channels to sell our 401(k)
products and services and created Principal Connection, our direct distribution
channel to individuals.

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    OFFER A COMPREHENSIVE PORTFOLIO OF MARKET-DRIVEN PRODUCTS AND SERVICES.  We
provide a comprehensive portfolio of products and services in the markets in
which we operate, as follows:

    - We focus on providing full-service asset accumulation products to
      businesses. We continue to add new investment choices to increase the
      range of investment styles, asset classes and asset managers we offer to
      our customers. In addition to our pension products and services, we offer
      a comprehensive portfolio of life and health insurance products.

    - Principal Capital Management and BT Financial Group offer a variety of
      asset classes and investment styles to institutional investors. In
      addition, we have developed a collaborative approach between these two
      firms, whereby the respective strengths and capabilities in asset classes
      of each investment operation are made available to our customers.

    - For our individual customers, including employees of our business
      customers, we offer variable and fixed individual annuities, retail mutual
      funds, individual insurance products, residential mortgages and banking
      products.

    USE TECHNOLOGY TO ENHANCE SALES, CUSTOMER SERVICE AND EFFICIENCY.  We invest
in information technology to achieve continued operational efficiency and to
deliver enhanced value to our customers through timely, responsive service and
competitive pricing.

    - In December 2000, InformationWeek ranked us among the top 25 of the 100
      most innovative companies in the United States in building profitable and
      successful customer relationships, and also profiled Impact401(k).com, our
      fully electronic 401(k) product through which the plan sponsor can handle
      the purchase, enrollment and administration of a 401(k) plan entirely
      through the Internet. We were one of only four financial services
      companies to achieve a top 25 ranking.

    - We are a leader in the use of the Internet to service our customers in the
      United States. Through our Internet site, we offer customers a
      "consolidated view" displaying all the Principal Financial Group products
      they own, including pension plans, insurance policies, mutual funds, bank
      products and mortgage balance information. Our increasing use of the
      Internet to provide pension products and services allows us to lower our
      unit costs and more efficiently serve our customers. For example, the
      number of transactions processed through Principal Direct Connect, which
      allows plan sponsors to transfer retirement data via the Internet, has
      increased from approximately 23.0 million in 1999 to approximately 84.6
      million in 2000. For the three months ended March 31, 2001, approximately
      31.2 million transactions were processed through Principal Direct Connect.

    - We seek to leverage technology developed for our U.S. operations into our
      international operations. We currently utilize a common
      client/server-based system in most countries, designed to incorporate our
      expertise from our U.S. systems.

    PROVIDE ASSET MANAGEMENT FOR A SIGNIFICANT PORTION OF THE ASSETS WE
ACCUMULATE.  Principal Capital Management and BT Financial Group manage a large
majority of the assets we accumulate. By offering investment choices that are
managed by our affiliated asset managers, we enhance our ability to retain the
asset management fees that would otherwise be paid to third-party asset
managers.

  BUILD ON STRONG CUSTOMER RELATIONSHIPS

    We are committed to building on our strong customer relationships by
providing products and services that respond to their needs and by increasing
the global awareness of our brand.

    RESPOND TO THE NEEDS OF OUR CUSTOMERS.  One of our core values is customer
focus, and we place priority on understanding and meeting their needs. We
conduct ongoing market research to monitor customer needs and preferences. We
offer a comprehensive portfolio of products and services, provide a wide range
of choices of investment styles, asset classes and asset managers, and utilize
technology built around the customer's needs and desires. We continue to expand
our product portfolio to continue to meet the changing needs of our customers.
We also use a variety of relationship-building tools, including financial
counseling, a financial education magazine, investment education materials,
account statements and our Internet website.

    INCREASE GLOBAL AWARENESS OF OUR BRAND.  We believe brand recognition is
particularly important in establishing and maintaining strong relationships with
our customers and distributors. Therefore, we have made a substantial effort to
establish the "Edge" triangle as a widely recognized logo in the United States
and the other countries in which we operate. To develop awareness of our brand,
we have maintained high-visibility advertising and event sponsorships, such as
the Olympics and the Super Bowl. For example, during the 2000 Olympic Summer
Games, we launched a new advertising campaign, "we understand what you are
working for," designed to enhance recognition and leverage our brand to attract
new customers. The Mobius Advertising Awards honored us in February 2001 with
its Mobius Award. We received a first-place award in the financial services
category for our 2000 "Happy People" print advertising campaign.
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  FOCUS ON FINANCIAL PERFORMANCE

    We have taken specific actions to improve our operating earnings over the
last several years, and we intend to continue to focus each of our businesses to
further improve financial performance. We reported record operating earnings for
2000, with an operating return on average equity of 10.5%. We believe our
financial performance will further improve if we continue to:

    - manage capital effectively;

    - improve cost management; and

    - actively manage our investment portfolio.

    MANAGE CAPITAL EFFECTIVELY.  We believe that effective management of capital
is essential to creating stockholder value. This consists of assessing the
near-term financial impact as well as the long-term attractiveness of each of
our businesses. We have already taken the following initiatives:

    - We increased the discipline in our capital allocation process. Our goal is
      to improve profitability by increasing our focus on, and capital
      allocation to, asset management and accumulation products and services
      which offer us a potential for higher returns on our capital, such as
      fee-based products.

    - We exited under-performing and non-strategic businesses and markets,
      including: the HMO business; several other group medical insurance
      businesses; our retail securities brokerage operations, our pre-retirement
      asset accumulation business in Argentina, and our operations in Spain.

    - We have focused our international operations and investments in countries
      that we believe offer the greatest long-term growth opportunities,
      favorable demographics and a trend toward private sector defined
      contribution pension systems. As a result, we operate through subsidiaries
      in Argentina, Chile, Mexico, Indonesia and Hong Kong, and joint ventures
      in Brazil, Japan and India.

    IMPROVE COST MANAGEMENT.  We are committed to improving profitability by
actively managing our operating expenses. We seek to achieve further operating
leverage through increased operating efficiencies. We have made significant
investments in technology to enhance the efficiency of our operations,
particularly in the area of customer service and transaction processing. For
example, our annualized full-service pension transactions per U.S. employee rose
from 11,926 in 1998 to 17,872 for the three months ended March 31, 2001.

    ACTIVELY MANAGE OUR INVESTMENT PORTFOLIO.  Over the past three years, we
rebalanced our investment portfolio by reducing our exposure to equity
securities and real estate. We reoriented the portfolio toward investments that
produce higher current investment income, rather than those that produce
long-term capital gains that had historically been the focus of our investment
activities as a mutual life insurance company. In addition to reducing our
portfolio risk profile, we will continue to manage our investment portfolio to
achieve higher yields consistent with our risk management strategy.

  REINFORCE OUR CULTURE

    We are committed to strengthening our organization's performance-oriented
culture. The following are three specific activities that support this
objective:

    - We have a new incentive compensation program for our senior management
      designed to align compensation with individual and company-wide
      performance measures. We refined our performance review program to
      increase individual accountability and better align individual and
      corporate goals toward profitable growth.

    - We adopted a balanced scorecard for our employees to measure their
      performance from four perspectives: financial results; customer relations;
      internal process and learning and growth. Our balanced scorecard links
      performance in these areas to salary, establishes accountability, focuses
      employees on common goals and helps employees see how their contributions
      can affect our financial results.

    - Upon demutualization, we intend to adopt a stock option plan designed to
      encourage broad-based employee ownership. We believe this plan will
      advance the interests of our stockholders by enhancing our ability to
      attract, retain and motivate individuals who make important contributions
      to our company. We also believe that employee equity ownership
      opportunities and performance-based incentives will closely align the
      interests of our employees with those of our stockholders.

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SEGMENT OVERVIEW

    The table below provides a summary of the markets targeted, the distribution
channels used and the products and services offered by each of our operating
segments:

                                            U.S. ASSET MANAGEMENT AND ACCUMULATION
- -------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
- ---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
Asset Accumulation
- - Businesses, their employees and other  - Retirement services sales                    - Pension
individuals                              representatives                                - Full-service accumulation
- - Not-for-profit organizations           - Institutional marketers                      - Full-service payout
- - Large financial institutions and       - Affiliated financial representatives         - Investment-only
employers for our guaranteed investment  - Affiliated and unaffiliated                  - Administration-only
  contracts, funding agreements and      registered representatives                     - Mutual funds
institutional mutual funds               - Independent brokers                          - Individual annuities
                                         - Principal Connection                         - Banking

Principal Capital Management
- - Large U.S. corporate, private and      - Institutional marketers                      - Institutional and retail money
  Taft-Hartley pension funds             - Consultants                                  management in:
- - U.S. endowments and foundations                                                         - Domestic equities
- - Sub-advisory relationships with                                                         - International equities
  non-affiliated financial institutions                                                   - Fixed income
- - Non-US institutions (in collaboration                                                   - Commercial real estate
  with BT Financial Group)
- - Real estate development
- - Securitization markets

                                        INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
- -------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
- ---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
BT Financial Group
- - Corporate superannuation funds         - Consultants                                  - Institutional and retail money
- - Businesses, their employees and other  - Financial intermediaries (financial            management
  individuals                              advisors, accountants and solicitors)        - Mutual funds
- - Australian and non-Australian          - Institutional marketers                      - Corporate superannuation products
institutions                             - Direct distribution to customers             - Processing and transaction services
- - Financial intermediaries                                                              for financial planners, financial
                                                                                        intermediaries and companies
                                                                                        - Margin lending
Principal International
- - Businesses, their employees and other  - Distribution appropriate to each             - Retirement services
  individuals                              country and market, for example:             - Brazil
                                         - Dedicated retirement services sales          - Hong Kong
                                           forces in Mexico and Hong Kong               - India
                                         - Financial institutions in Brazil             - Indonesia
                                           through the branches of Banco do             - Japan
                                           Brasil                                       - Mexico
                                         - Unaffiliated brokers in Chile                - Annuities and life insurance
                                                                                        - Argentina
                                                                                        - Chile
                                                                                        - Mexico

                                                   LIFE AND HEALTH INSURANCE
- -------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
- ---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
Individual Life and Disability Insurance
- - Businesses, their employees and other  - Affiliated financial representatives         - Individual insurance
individuals                              - Independent brokers                          - Interest-sensitive life
                                         - Affiliated and unaffiliated                  - Traditional life
                                         registered representatives                     - Disability
                                         - Disability sales representatives

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                                                   LIFE AND HEALTH INSURANCE
- -------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
- ---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
Group Life and Health Insurance
- - Businesses                             - Group sales representatives                  - Group life
                                         - Rogers Benefit Group sales                   - Group disability
                                         representatives                                - Group medical
                                         - Non-medical sales representatives            - Group dental and vision
                                                                                        - Fee-for-service

                                                       MORTGAGE BANKING
- -------------------------------------------------------------------------------------------------------------------------------
                MARKETS                               DISTRIBUTION                                 PRODUCTS/SERVICES
- ---------------------------------------  ---------------------------------------        ---------------------------------------
                                                                                  
- - Individuals                            - Correspondent lending institutions           - Originate, purchase, sell and service
                                         - Mortgage loan officers (retail                 prime credit quality, first-lien
                                           origination)                                   residential mortgage loans
                                         - Regional offices that work directly
                                           with approved mortgage loan brokers
                                           (wholesale)
                                         - Mortgage Direct

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    Our U.S. Asset Management and Accumulation segment consists of:

    - asset accumulation operations which provide retirement savings and related
      investment products and services to businesses, their employees and other
      individuals; and

    - Principal Capital Management, our U.S.-based asset manager.

    Our U.S. Asset Management and Accumulation segment contributed 44%, 41%, 42%
and 38% of our total operating revenues and 51%, 57%, 75% and 89% of our total
operating earnings for the three months ended March 31, 2001, and the years
ended December 31, 2000, 1999 and 1998, respectively.

    The table below shows the operating revenues, operating earnings, assets and
assets under management of our U.S. Asset Management and Accumulation segment
for the periods indicated:

                     U.S. ASSET MANAGEMENT AND ACCUMULATION
                         SELECTED FINANCIAL HIGHLIGHTS

                                                   AS OF OR FOR
                                                     THE THREE
                                                   MONTHS ENDED
                                                     MARCH 31,             AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                  ---------------    -----------------------------------------------------
                                                       2001               2000               1999              1998(4)
                                                  ---------------    ---------------    ---------------    ---------------
                                                                              ($ IN MILLIONS)
                                                                                               
OPERATING REVENUES(1)
  U.S. Asset Accumulation.......................  $   977.0    96%   $ 3,398.1    96%   $ 3,348.1    96%   $ 2,933.1   100%
  Principal Capital Management..................       48.2     5        174.2     5        156.6     5           --    --
  Intra-segment eliminations(2).................       (9.5)   (1)       (38.4)   (1)       (32.1)   (1)          --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $ 1,015.7   100%   $ 3,533.9   100%   $ 3,472.6   100%   $ 2,933.1   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
OPERATING EARNINGS:
  U.S. Asset Accumulation.......................  $    79.2    89%   $   317.6    89%   $   321.2    90%   $   238.4   100%
  Principal Capital Management..................        9.6    11         39.0    11         35.4    10           --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $    88.8   100%   $   356.6   100%   $   356.6   100%   $   238.4   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
ASSETS:
  U.S. Asset Accumulation.......................  $63,176.2    98%   $64,883.9    99%   $64,410.4    99%   $58,701.5   100%
  Principal Capital Management..................      968.4     2        912.0     1        686.0     1           --    --
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $64,144.6   100%   $65,795.9   100%   $65,096.4   100%   $58,701.5   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===
ASSETS UNDER MANAGEMENT:
  ($ in billions)
  U.S. Asset Accumulation.......................  $    69.6    91%   $    71.0    91%   $    70.3    93%   $    63.5    94%
  Principal Capital Management(3)...............        7.0     9          7.1     9          5.3     7          3.7     6
                                                  ---------   ---    ---------   ---    ---------   ---    ---------   ---
        Total...................................  $    76.6   100%   $    78.1   100%   $    75.6   100%   $    67.2   100%
                                                  =========   ===    =========   ===    =========   ===    =========   ===

- ---------------
(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

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(2) Includes eliminations of amounts related to U.S. asset management fee
    revenues received from our U.S. asset accumulation operations.

(3) Represents $6.1 billion, $6.3 billion, $4.7 billion and $3.5 billion of
    assets from third-party clients as of March 31, 2001 and as of December 31,
    2000, 1999 and 1998, respectively, with the remainder representing assets
    supporting other Principal Capital Management activities. Assets accumulated
    by other affiliates are shown under the business which accumulated the
    assets.

(4) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

U.S. ASSET ACCUMULATION

    Our asset accumulation activities in the United States date back to the
1940s when we first began providing pension plan products and services. We now
offer a comprehensive portfolio of asset accumulation products and services for
retirement savings and investment:

    - To businesses of all sizes, we offer 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. For more
      basic needs, we offer our mutual funds as a funding vehicle for SIMPLE
      IRA, payroll deduction, 401(k) and 403(b) plans;

    - To large institutional clients, we also offer investment-only products,
      including guaranteed investment contracts and funding agreements; and

    - To employees of businesses and other individuals, we offer the ability to
      accumulate retirement savings through mutual funds, individual annuities
      and bank products.

    We organize our U.S. asset accumulation operations in the following product
and service categories:

    - pension;

    - mutual funds;

    - individual annuities; and

    - Principal Bank.

    We further group our pension products and services into four categories:

    - full-service accumulation;

    - full-service payout;

    - investment-only; and

    - administration-only.

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    The table below shows the operating revenues for our U.S. asset accumulation
operations for the periods indicated:

                            U.S. ASSET ACCUMULATION
                               OPERATING REVENUES

                                                          FOR THE THREE
                                                          MONTHS ENDED          FOR THE YEAR ENDED
                                                            MARCH 31,              DECEMBER 31,
                                                          -------------   ------------------------------
                                                              2001          2000       1999       1998
                                                          -------------   --------   --------   --------
                                                                         ($ IN MILLIONS)
                                                                                    
Pension
  Full-service Accumulation.............................     $269.1       $1,168.1   $1,178.2   $1,185.8
  Full-service Payout...................................      357.7          920.6      929.0      643.6
  Investment-Only.......................................      244.3          881.7      833.8      715.9
  Administration-Only...................................        9.8           42.3       39.3       36.8
Mutual Funds............................................       29.5          108.7       95.4       83.5
Individual Annuities....................................       68.0          267.5      270.2      267.2
Principal Bank..........................................        3.9            9.2        2.2        0.3
Eliminations............................................       (5.3)            --         --         --
                                                             ------       --------   --------   --------
  U.S. Asset Accumulation...............................     $977.0       $3,398.1   $3,348.1   $2,933.1
                                                             ======       ========   ========   ========

    The table below breaks down the assets under management for our U.S. asset
accumulation operations between those derived from fee-based products and those
derived from spread-based products for the periods indicated:

                            U.S. ASSET ACCUMULATION
                           ASSETS UNDER MANAGEMENT(1)
                       FEE-BASED/SPREAD-BASED COMPOSITION

                                  AS OF MARCH 31,                                  AS OF DECEMBER 31,
                               ----------------------   ------------------------------------------------------------------------
                                        2001                     2000                     1999                     1998
                               ----------------------   ----------------------   ----------------------   ----------------------
                                FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL    FEE    SPREAD   TOTAL
                               -----   ------   -----   -----   ------   -----   -----   ------   -----   -----   ------   -----
                                                                        ($ IN BILLIONS)
                                                                                       
Pension......................  $33.2   $27.4    $60.6   $36.0   $25.7    $61.7   $35.7   $25.6    $61.3   $29.3   $25.9    $55.2
Mutual Funds.................    3.6      --      3.6     3.9      --      3.9     4.1      --      4.1     3.7      --      3.7
Individual Annuities.........    2.2     2.5      4.7     2.4     2.5      4.9     2.3     2.5      4.8     1.5     3.1      4.6
Principal Bank...............    0.3     0.4      0.7     0.2     0.3      0.5      --     0.1      0.1      --      --       --
                               -----   -----    -----   -----   -----    -----   -----   -----    -----   -----   -----    -----
  U.S. Asset Accumulation....  $39.3   $30.3    $69.6   $42.5   $28.5    $71.0   $42.1   $28.2    $70.3   $34.5   $29.0    $63.5
                               =====   =====    =====   =====   =====    =====   =====   =====    =====   =====   =====    =====

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

(1) Assets under management are credited to the operations that accumulated the
    assets.

    The table below shows the asset flow summary for our U.S. asset accumulation
operations for the periods indicated:

                            U.S. ASSET ACCUMULATION
                               ASSET FLOW SUMMARY

                                                              AS OF OR FOR THE   AS OF OR FOR THE
                                                                THREE MONTHS        YEAR ENDED
                                                              ENDED MARCH 31,      DECEMBER 31,
                                                              ----------------   ----------------
                                                                    2001          2000      1999
                                                              ----------------   ------    ------
                                                                        ($ IN BILLIONS)
                                                                                  
Assets Under Management, beginning of period................       $ 71.0        $ 70.3    $ 63.5
  Deposits..................................................          5.1          14.6      14.7
  Withdrawals...............................................         (3.5)        (14.3)    (11.9)
  Investment Performance....................................         (3.1)          1.0       5.6
  Other.....................................................          0.1          (0.6)     (1.6)
                                                                   ------        ------    ------
Assets Under Management, end of period......................       $ 69.6        $ 71.0    $ 70.3
                                                                   ======        ======    ======

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    The table below illustrates the various distribution channels used by our
U.S. asset accumulation operations:

                            U.S. ASSET ACCUMULATION
                                  DISTRIBUTION

                                     RETIREMENT
                                      SERVICES    AFFILIATED
                                       SALES      FINANCIAL    REGISTERED
                                     REPRESENT-   REPRESENT-   REPRESENT-   INDEPENDENT   PRINCIPAL
                                       ATIVES       ATIVES       ATIVES       BROKERS     CONNECTION   INTERNET   BANKS
                                     ----------   ----------   ----------   -----------   ----------   --------   -----
                                                                                             
Pension............................      X            X            X             X            X           X
Mutual Funds.......................      X            X            X             X            X
Individual Annuities...............                   X                          X            X                     X
Principal Bank.....................      X            X            X                          X           X

  STRATEGY

    Our goal is to enhance our position as a leading provider of asset
accumulation products and services to businesses in the United States,
particularly small and medium-sized businesses. To achieve this goal, we are
pursuing the following strategic initiatives:

    ACCELERATE THE GROWTH OF OUR U.S. ASSET ACCUMULATION OPERATIONS BY
LEVERAGING OUR STRENGTH IN PROVIDING RETIREMENT SERVICES TO SMALL AND
MEDIUM-SIZED BUSINESSES.  Our current success is built on our strong position in
the defined contribution pension plan market, in particular the 401(k) market,
to which we provided services to more 401(k) plans than any other bank, mutual
fund or insurance company in 1999.

    In particular, we have taken the following actions to achieve continued
leadership and growth in this market:

    Strengthen our distribution channels.  We are committed to building on our
existing distribution channels, as well as expanding into new distribution
channels:

    - We have increased the focus of our retirement services sales
      representatives on new sales of pension products. We have shifted the
      responsibility for servicing our customers from our retirement services
      sales representatives to a dedicated customer service staff and
      centralized many of the administrative functions related to our pension
      products in regional market centers. In addition, we now compensate our
      retirement services sales representatives with a greater emphasis on new
      sales of products instead of renewals of existing contracts.

    - We have also targeted new distribution channels for sales of our products
      and services, including third-party administrators, certified public
      accountants, registered investment advisors, registered representatives of
      other broker-dealers and direct sales through the Internet. For example,
      we have introduced a new 401(k) product, Principal Advantage, funded by
      mutual funds. Principal Advantage is targeted at non-affiliated
      distribution channels such as registered investment advisors and
      broker-dealers. We have also introduced Impact401k.com, our self-service
      Internet site. This pension product is targeted at smaller businesses that
      seek a low cost product, as well as businesses of any size that prefer to
      handle all administrative activities through the Internet.

    Provide customers with new investment choices.  We added new investment
choices that increased the range of investment styles, asset classes and asset
managers of our offerings. These additional choices complement those offered by
Principal Capital Management. We also offer self-directed brokerage accounts to
401(k) plan participants.

    Continue to use technology to enhance sales, customer service and
efficiency.  Our increasing use of the Internet as a tool to give plan sponsors
and plan participants access to information and the ability to administer their
defined contribution plans has resulted in significant productivity gains. We
have undertaken the following technology initiatives to allow us to better serve
the small and medium-sized business market and to enhance the quality and
efficiency of our U.S. pension operations:

    - Since its inception in 1998, Principal Direct Connect has become a
      preferred means for our pension plan sponsors to transfer retirement data
      via the Internet and to execute transactions online. The number of
      transactions processed through Principal Direct Connect has increased from
      approximately 23.0 million in 1999 to approximately 84.6 million in 2000.
      For the three months ended March 31, 2001, approximately 31.2 million
      transactions were processed through Direct Connect;

    - In 1998, we developed a customer workflow and processing system, Express
      Processing(SM), to support our full-service pension plan administration.
      This technology enables us to achieve significant efficiencies by
      automatically moving workflow to (1) employees with the correct skill-set
      to efficiently process the work and (2) any of five administration
      facilities in the United States with the greatest capacity;

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    - We have structured the "Retirement Service Center" portion of our Internet
      website as a full-service center through which plan sponsors and plan
      participants can access their complete plan information. During 2000,
      participants made approximately 7.7 million visits to our Retirement
      Service Center, resulting in approximately 5.9 million electronic
      transactions. For the three months ended March 31, 2001, participants made
      approximately 2.2 million visits, resulting in approximately 1.9 million
      electronic transactions; and

    - In April 2000, we launched what we believe is one of the first fully
      electronic 401(k) products, Impact401k.com. Through Impact401k.com, the
      plan sponsor can handle the purchase, enrollment and administration of a
      401(k) plan entirely through the Internet without use of paper forms, the
      mail or the administrative assistance of our employees.

    ENHANCE OUR ASSET RETENTION AND CROSS-SELLING.  In 1997, we created
Principal Connection, a direct response distribution channel for retail
financial services products to individuals. Principal Connection's services are
available over the phone, on the Internet or by mail. As of March 31, 2001,
Principal Connection had 48 professionally licensed sales counselors trained to
sell our products, answer questions regarding the customer's existing financial
product choices and help the customer meet specific financial needs. Through
Principal Connection, we seek to retain a significant portion of the assets that
pension plan participants normally roll over into a different accumulation or
payout product upon retirement or termination of employment. Of the $1.2 billion
of assets eligible for rollover for the three months ended March 31, 2001, we
retained $0.5 billion, or 42%, up from 30% in 1996. Through Principal
Connection, we also seek to cross-sell our products and services to pension plan
participants and banking and mortgage banking customers.

    MAINTAIN OUR POSITION IN THE INVESTMENT-ONLY PENSION MARKET.  We have been a
long-time participant in the investment-only pension market, which emphasizes
the sale of guaranteed investment contracts, funding agreements and other
investment-only products. We have capitalized on our strong claims paying and
financial strength ratings, investment advisory expertise and asset-liability
management expertise we offer to customers seeking investment-only pension
services. We intend to remain a participant in this market to an extent
consistent with our expected returns.

    IMPROVE OUR POSITION IN THE PENSION MARKET FOR LARGER EMPLOYERS.  We have an
advantage over many of our competitors in the larger employer pension market
since we offer both defined benefit and defined contribution plan services. Many
large employers offer both defined benefit and defined contribution plans to
their employees and prefer pension services providers that deliver consolidated
services to both plans. We are currently expanding the scope of our services to
offer:

    - employer-customized websites;

    - a more flexible billing process;

    - consulting services to existing retirement plan customers involved in
      mergers and acquisitions; and

    - customized service through regional customer relations managers dedicated
      to serving large customers.

  PENSION

    We offer a wide variety of investment and administrative 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.
A 403(b) plan is a plan described in section 403(b) of the Internal Revenue Code
that provides retirement benefits for employees of tax exempt organizations and
public schools.

    PENSION SERVICES

    We provide products and services responding to a broad range of
employer-sponsored pension plan needs. We offer administrative and investment
services, which are both available on a stand-alone basis or can be combined
according to the various needs of our customers.

    ADMINISTRATIVE SERVICES.  We believe that our ability to minimize the plan
sponsor's administrative tasks has contributed to our success, particularly
among small and medium-sized businesses. We differentiate ourselves from our
competitors by providing every plan administrative service that is generally
required or desired by a pension plan sponsor, regardless of the type or size of
the plan.

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    The table below describes the primary administrative services that we offer
to both plan sponsors and plan participants in defined contribution plans and
defined benefit plans, as of March 31, 2001:

                                                                           SERVICES OFFERED TO PLAN
                                   SERVICES OFFERED TO PLAN SPONSORS             PARTICIPANTS
                                   ---------------------------------   ---------------------------------
                                                                 
DEFINED CONTRIBUTION PLANS         - Government compliance and         - Account recordkeeping
                                   documentation                       - Education and reporting
                                   - Fund accounting                   - Phone center
                                                                       - Internet access and transaction
                                                                         capabilities
                                                                       - Voice response system
                                                                       - Benefit planning and benefit
                                                                         distribution
DEFINED BENEFIT PLANS              - Actuarial valuation services      - Benefit determination and
                                   - Government compliance and         benefit distribution
                                     documentation                     - Education and reporting
                                   - Fund accounting                   - Phone center
                                                                       - Internet access and transaction
                                                                         capabilities

    INVESTMENT SERVICES.  We provide a full range of guaranteed investment
contracts, money market, equity, fixed income, balanced, indexed and real estate
investment options to our customers. We provide these services through our
affiliated asset managers, Principal Capital Management and BT Financial Group,
and through third-party asset managers. As of March 31, 2001, we had
approximately 220 investment options available, including U.S. and international
fixed income and equity investment options. Our investment options are either in
the form of a separate account or a mutual fund.

    PENSION PRODUCTS

    We group our pension products into four categories:

    - full-service accumulation;

    - full-service payout;

    - investment-only; and

    - administration-only.

    Our full-service accumulation products and our full-service payout products
feature both administrative services and investment services. We focus primarily
on our full-service accumulation and full-service payout products, which
together represented 62% of our pension gross new deposits under management for
the three months ended March 31, 2001, and 74% of our pension assets under
management as of March 31, 2001.

    The tables below show, by product category, our pension assets under
management, pension asset flow summary and our pension gross new deposits under
management for the periods indicated:

                            U.S. ASSET ACCUMULATION
                        PENSION ASSETS UNDER MANAGEMENT

                                                                AS OF
                                                              MARCH 31,    AS OF DECEMBER 31,
                                                              ---------   ---------------------
                                                                2001      2000    1999    1998
                                                              ---------   -----   -----   -----
                                                                       ($ IN BILLIONS)
                                                                              
Full-service Accumulation...................................    $39.7     $42.0   $43.3   $38.5
Full-service Payout.........................................      4.9       4.5     4.3     3.9
Investment-Only.............................................     16.0      15.2    13.7    12.8
Administration-Only.........................................       --        --      --      --
                                                                -----     -----   -----   -----
         Total..............................................    $60.6     $61.7   $61.3   $55.2
                                                                =====     =====   =====   =====

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                            U.S. ASSET ACCUMULATION
                           PENSION ASSET FLOW SUMMARY

                                                                AS OF OR FOR       AS OF OR FOR THE
                                                              THE THREE MONTHS        YEAR ENDED
                                                              ENDED MARCH 31,        DECEMBER 31,
                                                              ----------------     -----------------
                                                                    2001            2000       1999
                                                              ----------------     ------     ------
                                                                         ($ IN BILLIONS)
                                                                                     
Assets Under Management, beginning of period................       $61.7           $61.3      $55.2
  Deposits..................................................         4.5            12.2       12.9
  Withdrawals...............................................        (3.1)          (12.4)     (10.2)
  Investment Performance....................................        (2.5)            0.9        5.4
  Other.....................................................          --            (0.3)      (2.0)
                                                                   -----           -----      -----
Assets Under Management, end of period......................       $60.6           $61.7      $61.3
                                                                   =====           =====      =====

                            U.S. ASSET ACCUMULATION
                  PENSION GROSS NEW DEPOSITS UNDER MANAGEMENT

                                                                FOR THE THREE
                                                                MONTHS ENDED     FOR THE YEAR ENDED
                                                                  MARCH 31,         DECEMBER 31,
                                                                -------------   ---------------------
                                                                    2001        2000    1999    1998
                                                                -------------   -----   -----   -----
                                                                           ($ IN BILLIONS)
                                                                                    
Full-service Accumulation...................................        $2.6        $ 8.1   $ 8.2   $ 7.5
Full-service Payout.........................................         0.2          0.5     0.6     0.3
Investment-Only.............................................         1.7          3.6     4.1     3.4
Administration-Only.........................................          --           --      --      --
                                                                    ----        -----   -----   -----
         Total..............................................        $4.5        $12.2   $12.9   $11.2
                                                                    ====        =====   =====   =====

    FULL-SERVICE ACCUMULATION.  Full-service accumulation products respond to
the needs of plan sponsors seeking both administrative and investment services
for defined contribution plans or defined benefit plans. The investment
component of our defined contribution plans may be in the form of a group
annuity contract or a mutual fund. The investment component of our defined
benefit plans is available only in the form of a group annuity contract.

    As of March 31, 2001, we provided full-service accumulation products to
33,493 defined contribution pension plans, of which 26,576 were 401(k) plans,
covering 2.4 million plan participants, and to 2,441 defined benefit pension
plans, covering 198,056 plan participants. As of March 31, 2001, approximately
93% of our pension assets under management were managed by Principal Capital
Management or BT Financial Group. Third-party asset managers provide asset
management services with respect to the remainder of the assets.

    Prior to 2001, annuities were the only product through which we delivered
both administrative and investment services to our defined contribution plan and
defined benefit plan customers. Under U.S. federal securities laws, neither the
annuity nor the underlying investment options are required to be registered with
the SEC. Beginning January 2001, we began to offer administrative and investment
services to defined contribution plan customers through Principal Advantage, a
new 401(k) product based on our recently expanded mutual fund, Principal
Investors Fund. We offer funds covering the full range of stable value, equity,
fixed income and non-domestic investment options managed by our affiliated asset
managers, Principal Capital Management and BT Financial Group, as well as
third-party asset managers.

    FULL-SERVICE PAYOUT.  Full-service payout products respond to the needs of
pension plan participants who, upon retirement or termination of their
employment, leave their pension plans, and who seek both administrative and
investment services for distributions from the plans they are leaving. Plan
participants who seek these services include those departing pension plans we
service, as well as pension plans other providers service. We offer both
flexible income option products and single premium group annuities. Flexible
income option products allow the customer to control the rate of distribution,
or payout, and provide limited performance guarantees. Single premium group
annuities are immediate or deferred annuities that provide a current or future
specific income amount, fully guaranteed by us. Both products are available to
defined contribution and defined benefit plan participants. For both products,
we make regular payments to individuals, invest the underlying assets on their
behalf and provide tax reporting to them.

    Single premium group annuities are traditionally used in conjunction with
defined benefit plans, particularly those where the plan is being terminated. In
such instances, the plan sponsor transfers all its obligations under the plan to
an insurer by paying a single premium. Increasingly, these products are
purchased by defined contribution plan participants who reach retirement age.
Plan sponsors restrict their purchases to insurance companies with superior or

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excellent financial quality ratings because the Department of Labor has mandated
that annuities be purchased only from the "safest available" insurer. We believe
that our strong financial strength ratings position us well to compete in this
market. See "-- Ratings" below. In 2000, we received $498.3 million of single
premium group annuities annualized new deposits, ranking us second in the United
States according to LIMRA International, Inc.'s 2000 U.S. Institutional Pension
Sales and Assets report.

    Deposits to full-service payout products are in the form of single payments.
As a result, the level of new deposits can fluctuate depending on the number of
retirements and large-scale annuity sales in a particular fiscal quarter. Assets
under management relating to single premium group annuities generate a spread
between the investment income earned by us and the amount credited to the
customer. Assets under management relating to flexible income option products
may generate either spread or fee revenue depending on the investment options
elected by the customer.

    INVESTMENT-ONLY.  The three primary products for which we provide
investment-only services are: (1) guaranteed investment contracts; (2) funding
agreements; and (3) other investment-only products.

    Guaranteed investment contracts and funding agreements pay a specified rate
of return. The rate of return can be a floating rate based on an external market
index or a fixed rate. Some of these investment-only products provide a feature
which permits plan participants to redeem or transfer funds in their accounts at
book value during the term of the contract. All of our investment-only products
contain provisions limiting early surrenders, including penalties for early
surrenders and minimum notice requirements. Put provisions give customers the
option to terminate a contract prior to maturity, provided they give us a
minimum notice period.

    The table below breaks down by notice period the put provisions of our
guaranteed investment contracts and funding agreements:

                            U.S. ASSET ACCUMULATION
         PENSION GUARANTEED INVESTMENT CONTRACTS AND FUNDING AGREEMENTS
                  GAAP RESERVES PUT PROVISIONS CHARACTERISTICS
                              AS OF MARCH 31, 2001

                                                              GUARANTEED
                                                              INVESTMENT    FUNDING
                                                              CONTRACTS    AGREEMENTS
                                                              ----------   ----------
                                                                  ($ IN MILLIONS)
                                                                     
INVESTMENT-ONLY:
  Less than 30 days' notice.................................  $      --     $     --
  30 to 89 days' notice.....................................      288.7        100.4
  90 to 179 days' notice....................................      458.4        226.1
  More than 179 days' notice................................         --        150.7
  No active put provision(1)................................      421.6           --
  No put provision..........................................    8,451.7      3,572.0
FULL-SERVICE ACCUMULATION:
  No put provision..........................................    4,968.6           --
                                                              ---------     --------
         Total..............................................  $14,589.0     $4,049.2
                                                              =========     ========

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

(1) Contracts currently under an initial lock-out period but which will become
    putable with 90 days' notice at some time in the future.

    Deposits to investment-only products are predominantly in the form of single
payments. As a result, the level of new deposits can fluctuate in a particular
fiscal quarter. Assets invested in guaranteed investment contracts and funding
agreements generate a spread between the investment income earned by us and the
amount credited to the customer. Our other investment-only products consist of
separate accounts invested in either equities or fixed income instruments.

    ADMINISTRATION-ONLY.  We provide fee-based administrative services for
defined contribution plans, including 401(k) plans, where a third-party provides
the investment choices. As of March 31, 2001, we provided administration-only
services to approximately 3,900 defined contribution plans covering
approximately 196,000 employees. In addition to defined contribution plans, we
currently provide administration-only services to approximately 289,000
individual retirement accounts.

    MANAGING RISK IN SPREAD-BASED PRODUCTS

    Because of the significant guarantees we provide as part of our spread-based
asset accumulation products, risk management is particularly important in this
line of business. To facilitate risk management, we segregate and manage the
assets supporting our spread-based products separately from the rest of our
general account. Our risk

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management strategy is more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quantitative and
Qualitative Information about Market Risk" and is based upon the following
guidelines:

    - Managing interest rate exposure by closely matching the relative
      sensitivity of asset and liability values to interest rate changes, i.e.
      creating a "duration match" of assets and liabilities. Our methodology
      recognizes both partial and total duration. Our tolerance for mismatch is
      +/-0.25 years for total duration and +/-0.10 years for partial durations.
      As of March 31, 2001, the difference between the asset and liability
      durations on our primary duration managed portfolio was 0.02 years.

    - Projecting cash flows for each asset and liability and measuring the
      sensitivity of assets and liabilities to interest rate changes. This
      measurement process provides our risk managers with a more complete
      picture of our liability structure, the appropriateness of pricing and the
      overall soundness of the management of the account than do conventional
      accounting techniques alone.

    - Restricting the portion of securities with redemption features held in our
      invested asset portfolio in order to minimize cash flow volatility.

    - Writing contracts that typically have a predictable maturity structure and
      limit discretionary withdrawal provisions. This allows us to better manage
      our liquidity exposure.

    - Monitoring contribution and withdrawal activity to anticipate deviations
      from expected cash flows. Any such deviations form the basis for new cash
      flow projections and may trigger a change in our portfolio hedging
      requirements.

    - Conducting studies to test our liquidity tolerance to stress situations
      such as sudden and intense outflows of cash. We model various
      "run-on-the-bank" scenarios to evaluate the liquidity needs of our
      portfolios and ensure that the appropriate amount of liquid assets are
      held. Based on these results, we believe that we have more than adequate
      capacity to meet commitments to policyholders.

    - Establishing portfolio management groups to facilitate interaction among
      our various activities, including portfolio management, sales management,
      risk management, financial management and pricing. We believe frequent
      interaction and effective communication across the various activities have
      been key components of our successful risk management strategy.

    The table below illustrates, for the periods indicated, gross new deposits
under management and reserves for the spread-based products in our U.S. asset
accumulation pension operations:

                            U.S. ASSET ACCUMULATION
             PENSION SPREAD-BASED PRODUCTS SELECTED FINANCIAL DATA

                                                       AS OF OR FOR
                                                        THE THREE
                                                       MONTHS ENDED      AS OF OR FOR THE YEAR ENDED
                                                        MARCH 31,               DECEMBER 31,
                                                       ------------   ---------------------------------
                                                           2001         2000        1999        1998
                                                       ------------   ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                  
GROSS NEW DEPOSITS UNDER MANAGEMENT:
Guaranteed investment contracts......................   $   958.2     $ 1,685.2   $ 3,221.1   $ 4,720.6
Funding agreements...................................       622.7       1,416.0     1,381.0       448.4
Full-service Payout..................................       249.4         519.7       562.4       281.0
                                                        ---------     ---------   ---------   ---------
         Total.......................................   $ 1,830.3     $ 3,620.9   $ 5,164.5   $ 5,450.0
                                                        =========     =========   =========   =========
RESERVES:
Guaranteed investment contracts......................   $14,589.0     $14,700.9   $15,839.7   $15,535.8
Funding agreements...................................     4,049.2       3,247.4     1,881.9       652.7
Full-service Payout..................................     4,968.4       4,762.2     4,390.5     3,951.2
                                                        ---------     ---------   ---------   ---------
         Total.......................................   $23,606.6     $22,710.5   $22,112.1   $20,139.7
                                                        =========     =========   =========   =========

    MARKETS AND DISTRIBUTION

    We offer our pension products and services to employer-sponsored pension
plans, including qualified and non-qualified defined contribution plans,
qualified defined benefit plans, and institutional investors. Our primary target
market is pension plans sponsored by small and medium-sized businesses, which we
believe remains under-penetrated. Only 14% of businesses with less than 100
employees, and 36% of businesses with between 100 and 500 employees, offered a
401(k) plan in 1999, according to the Spectrem Group. The same study indicates
that 81% of

                                       100
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employers with 500 or more employees offered a 401(k) plan in 1999. The tables
below break down, for the periods indicated, the number of plans and assets
under management for our full-service accumulation business by employer size:

                            U.S. ASSET ACCUMULATION
            PENSION FULL-SERVICE ACCUMULATION DATA BY EMPLOYER SIZE

                                                              AS OF MARCH 31,      AS OF DECEMBER 31,
                                                              ---------------   ------------------------
                                                                   2001          2000     1999     1998
                                                              ---------------   ------   ------   ------
                                                                                      
NUMBER OF PLANS:
1-99 employees..............................................      31,808        32,291   34,865   35,845
100-499 employees...........................................       3,502         3,616    3,514    3,587
500-999 employees...........................................         390           392      359      354
1000+ employees.............................................         234           231      238      215
                                                                  ------        ------   ------   ------
         Total..............................................      35,934        36,530   38,976   40,001
                                                                  ======        ======   ======   ======
Average Number of Employees Per Plan........................          71            67       64       60

                                                              AS OF MARCH 31,     AS OF DECEMBER 31,
                                                              ---------------   -----------------------
                                                                   2001         2000     1999     1998
                                                              ---------------   -----    -----    -----
                                                                           ($ IN BILLIONS)
                                                                                      
ASSETS UNDER MANAGEMENT:
1-99 employees..............................................       $18.2        $19.3    $20.4    $18.1
100-499 employees...........................................        11.1         11.7     12.1     11.0
500-999 employees...........................................         3.3          3.6      3.5      3.2
1000+ employees.............................................         7.1          7.4      7.3      6.2
                                                                   -----        -----    -----    -----
         Total..............................................       $39.7        $42.0    $43.3    $38.5
                                                                   =====        =====    =====    =====

    FULL-SERVICE ACCUMULATION.  We sell our full-service accumulation products
and services nationally, primarily through a captive retirement services sales
force. As of March 31, 2001, 122 retirement services sales representatives in 55
offices, operating as a wholesale distribution network, maintained relationships
with approximately 13,000 independent brokers, consultants and agents.
Retirement services sales representatives are an integral part of the sales
process alongside the referring consultant or independent broker. We compensate
retirement services sales representatives through a blend of salary and
production-based incentives, while we pay independent brokers, consultants and
agents a commission or fee.

    As of March 31, 2001, we had a separate staff of 151 service representatives
located in the sales offices who play a key role in the ongoing servicing of
pension plans by:

    - providing local services to our customers, such as renewing contracts,
      revising plans and solving any administration problems;

    - communicating the customers' needs and feedback to us; and

    - helping employees understand the benefits of their pension plans.

    We believe that our approach to pension plan services distribution gives us
a local sales and service presence that differentiates us from many of our
competitors.

    We sell our annuity-based products through sales representatives, agents and
brokers who are not required to register with the SEC.

    Principal Advantage, our mutual fund-based product, is targeted at defined
contribution plans with over $3 million of assets. We sell Principal Advantage
through affiliated registered representatives, stockbrokers, registered
investment advisors and fee-based consultants through sales agreements with
non-affiliated broker-dealers. Principal Advantage gives us access to
SEC-registered distributors who are not traditional sellers of annuity-based
products and opens new opportunities for us in the investment advisor and
broker-dealer distribution channels.

    We significantly expanded our marketing and product development efforts into
the "not-for-profit" market in 1999, with the acquisition of Professional
Pensions, Inc., which specializes in providing full-service accumulation 403(b)
pension plans to 501(c)(3) not-for-profit organizations. As of March 31, 2001,
we provided pension products and services to 746 pension plans sponsored by
educational and not-for-profit organizations with $1,043.7 million of assets
under management.

    Impact401k.com is our self-service Internet site, through which plan
sponsors can handle the purchase, enrollment and administration of a 401(k)
pension plan entirely through the Internet. Impact401k.com allows plan
participants to

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gain on-line access to their accounts, transfer funds between accounts and
review customized investment options. Accordingly, our employees do not have to
perform any administrative activities. Impact401k.com is targeted at smaller
businesses that seek a low cost product, as well as businesses of any size that
prefer to handle administrative activities through the Internet.

    FULL-SERVICE PAYOUT AND INVESTMENT-ONLY.  Our primary distribution channel
for full-service payout and investment-only products was comprised of 11
specialized home office marketers as of March 31, 2001, working through
consultants and brokers that specialize in this type of business. Our home
office marketers also make sales directly to institutions. Our nationally
dispersed retirement services sales representatives act as a secondary
distribution channel for these products. Principal Connection also distributes
full-service payout products to participants in plans we service who are
terminating employment or retiring.

    We market guaranteed investment contracts and funding agreements primarily
to pension plan sponsors and other institutions. We also offer them as part of
our full-service accumulation products. We sell our guaranteed investment
contracts primarily to plan sponsors for funding of tax-qualified retirement
plans. We sell our funding agreements to institutions that may or may not be
pension funds. Our primary market for funding agreements is institutional
investors in the United States and around the world. These investors purchase
debt obligations from a special purpose vehicle which, in turn, purchases a
funding agreement from us with terms similar to those of the debt obligations.
The strength of this market is dependent on debt capital market conditions. As a
result, our sales through this channel can vary widely from one fiscal quarter
to another.

    ADMINISTRATION-ONLY.  We sell our defined contribution plan
administration-only services primarily through business relationships with
investment management firms and insurance companies. These organizations package
our administrative services with their proprietary pension plan investment
services for sale through their own distribution channels. We have a small
number of regional consultants who facilitate the selling of our defined
contribution plan administrative services by these organizations. Our
administration-only individual retirement account services are distributed by a
specialized home office marketer that establishes business relationships with
security brokerage firms that offer individual retirement account programs
directly to the public.

  MUTUAL FUNDS

    We have been providing mutual funds to customers since 1969. We offer mutual
funds:

    - to individuals;

    - for use within variable life and variable annuity contracts; and

    - for use in employer-sponsored pension plans.

    PRODUCTS AND SERVICES

    We were ranked in the top quartile among U.S. mutual fund managers in terms
of total mutual fund assets under management as of February 28, 2001, according
to the Investment Company Institute. The value of mutual fund assets we managed
was $5.7 billion as of March 31, 2001, which included $2.1 billion derived from
our variable life insurance and variable annuity products. We provide
accounting, compliance, corporate governance, product development and transfer
agency functions for all mutual funds we organize. As of March 31, 2001, our
mutual fund operations served approximately 583,000 mutual fund shareholder
accounts.

    PRINCIPAL MUTUAL FUNDS.  Principal Mutual Funds is a family of mutual funds
offered to individuals and businesses, with 26 mutual funds as of March 31,
2001. We report the results for these funds in this segment under "Mutual
Funds".

                                       102
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    The table below shows a breakdown between our affiliated and third-party
asset managers within Principal Mutual Funds, by investment type, for the
periods indicated:

                            U.S. ASSET ACCUMULATION
                    PRINCIPAL MUTUAL FUNDS BY ASSET MANAGER
                              AS OF MARCH 31, 2001

                                          AFFILIATED                THIRD-PARTY                   TOTAL
                                   ------------------------   ------------------------   ------------------------
                                   ASSETS UNDER   NUMBER OF   ASSETS UNDER   NUMBER OF   ASSETS UNDER   NUMBER OF
INVESTMENT TYPE                     MANAGEMENT      FUNDS      MANAGEMENT      FUNDS      MANAGEMENT      FUNDS
- ---------------                    ------------   ---------   ------------   ---------   ------------   ---------
                                                                  ($ IN BILLIONS)
                                                                                      
Equity
  Domestic U.S. .................      $2.0           9           $0.1           6           $2.1          15
  International..................       0.4           5             --          --            0.4           5
Income...........................       0.7           5             --          --            0.7           5
Money Market.....................       0.4           1             --          --            0.4           1
                                       ----          --           ----          --           ----          --
         Total...................      $3.5          20           $0.1           6           $3.6          26
                                       ====          ==           ====          ==           ====          ==

    The table below shows our mutual funds asset flow summary for the periods
indicated:

                            U.S. ASSET ACCUMULATION
                   PRINCIPAL MUTUAL FUNDS ASSET FLOW SUMMARY

                                                                       AS OF OR FOR
                                                                        THE THREE        AS OF OR FOR THE
                                                                       MONTHS ENDED         YEAR ENDED
                                                                        MARCH 31,          DECEMBER 31,
                                                                     ----------------    ----------------
                                                                           2001          2000       1999
                                                                     ----------------    -----      -----
                                                                               ($ IN BILLIONS)
                                                                                           
Assets Under Management, beginning of period................              $ 3.9          $ 4.1      $ 3.7
  Deposits..................................................                0.3            1.3        1.3
  Withdrawals...............................................               (0.3)          (1.4)      (1.1)
  Investment Performance....................................               (0.3)          (0.1)       0.2
  Other.....................................................                 --             --         --
                                                                          -----          -----      -----
Assets Under Management, end of period......................              $ 3.6          $ 3.9      $ 4.1
                                                                          =====          =====      =====

    PRINCIPAL VARIABLE CONTRACTS FUND.  Principal Variable Contracts Fund is a
series mutual fund which, as of March 31, 2001, provided 26 investment options
for use as funding choices in variable annuity and variable life insurance
contracts issued by Principal Life. As of March 31, 2001, this fund had $2.1
billion in assets under management. We report the results for the funds backing
variable annuity contracts in this segment under "Individual Annuities." We
report the results for the funds backing variable life insurance contracts in
the Life and Health Insurance segment.

    PRINCIPAL INVESTORS FUND.  Principal Investors Fund is a newly expanded
series mutual fund which, as of March 31, 2001, offered 43 investment options.
This fund acts as the funding vehicle for Principal Advantage, the defined
contribution product described above under "-- U.S. Asset Management and
Accumulation -- U.S. Asset Accumulation -- Pension -- Products and
Services -- Full-service Accumulation." We report the results for this fund
under "Pension".

    MARKETS AND DISTRIBUTION

    Our markets for mutual funds are individuals seeking to accumulate savings
for retirement and other purposes and small businesses seeking to use mutual
funds as the funding vehicle for pension plans, as well as non-qualified
individual savings plans utilizing payroll deductions. We also market our retail
mutual funds to participants in pension plans who are departing their plans and
reinvesting their retirement assets into individual retirement accounts.

    Our mutual funds are sold primarily through our affiliated financial
representatives, independent brokers registered with our securities
broker-dealer Princor Financial Services Corporation, or Princor, registered
representatives from other broker-dealers, direct deposits from our employees
and others and Principal Connection. Princor, as the marketing arm of our mutual
fund business, recruits, trains and supervises registered representatives
selling our products who numbered approximately 2,700 at March 31, 2001,
including our affiliated financial representatives. Registered representatives
are responsible for understanding the customer's investment objectives and
financial

                                       103
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situation, complying with all regulations pertaining to the solicitation and/or
execution of securities transactions and providing current information to the
customer. Affiliated financial representatives produced 49%, or $75.6 million,
of our mutual fund sales for the three months ended March 31, 2001.

    The table below shows sales, as measured by deposits, of our mutual funds by
distribution channel for the periods indicated:

                            U.S. ASSET ACCUMULATION
                 MUTUAL FUNDS SALES BY DISTRIBUTION CHANNEL(1)

                                                              FOR THE THREE
                                                              MONTHS ENDED       FOR THE YEAR ENDED
                                                                MARCH 31,           DECEMBER 31,
                                                              -------------   ------------------------
                                                                  2001         2000     1999     1998
                                                              -------------   ------   ------   ------
                                                                          ($ IN MILLIONS)
                                                                                    
Affiliated financial representatives........................     $ 75.6       $326.9   $442.0   $517.6
Principal Connection........................................       48.6        141.5    114.2    104.4
Independent brokers and registered representatives of
  Princor...................................................        5.5         13.6      3.3       --
Other (non-affiliated) broker-dealers.......................       13.9         66.9     40.4     76.5
Direct deposits(2)..........................................        9.7         18.6     25.9     29.8
                                                                 ------       ------   ------   ------
Total.......................................................     $153.3       $567.5   $625.8   $728.3
                                                                 ======       ======   ======   ======

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

(1) Excludes deposits to money market funds totaling $174.7 million for the
    three months ended March 31, 2001, $732.8 million in 2000, $621.3 million in
    1999 and $2,067.4 million in 1998.
(2) Direct deposits from the Principal Financial Group employees and others.

  INDIVIDUAL ANNUITIES

    Individual annuities offer a tax-deferred means of accumulating retirement
savings and provide a tax-efficient source of income during the payout period.

    PRODUCTS AND SERVICES

    We offer both fixed and variable annuities to individuals. Individual
annuities may be deferred, in which case assets accumulate until the contract is
surrendered, the customer dies or the customer begins receiving benefits under
an annuity payout option, or immediately, in which case payments begin within
one year of issue and continue for a fixed period of time or for life.

    FIXED ANNUITIES.  Our individual fixed annuities are predominantly single
premium deferred annuity contracts. These contracts are savings vehicles through
which the customer makes a single deposit with us. Under the contract, the
principal amount is guaranteed and for a specified time period, typically one
year, we credit the customer's account at a fixed interest rate. Thereafter, we
reset, typically annually, the interest rate credited to the contract based upon
market and other conditions. Our major source of income from fixed annuities is
the spread between the investment income we earn on the underlying general
account assets and the interest rate we credit to customers' accounts. We bear
the investment risk because, while we credit customers' accounts with a stated
interest rate, we cannot be certain the investment income we earn on our general
account assets will exceed that rate.

    VARIABLE ANNUITIES.  Our individual variable annuity products consist almost
entirely of flexible premium deferred variable annuity contracts. These
contracts are savings vehicles through which the customer makes a single deposit
or a series of deposits of varying amounts and intervals. Customers have the
flexibility to allocate their deposits to investment sub-accounts managed by
Principal Capital Management, or third-party asset managers including Fidelity
Investments(R), AIM Advisors, Inc., Morgan Stanley Asset Management, J.P. Morgan
Investment Management, Inc., Janus Capital Corporation, Neuberger Berman
Management, Inc., The Dreyfus Corporation, Goldman Sachs Asset Management,
Duncan-Hurst Capital Management, Inc., Turner Investment Partners, Inc., and
Berger, LLC. As of March 31, 2001, 58% of our $2.2 billion in variable annuity
account balances were allocated to investment sub-accounts managed by Principal
Capital Management, 29% to investment sub-accounts managed by third-party asset
managers and 13% to our general account, also managed by Principal Capital
Management. The value of the annuity fluctuates in accordance with the
experience of the investment sub-accounts chosen by the customer. The customers
bear the investment risk and have the right to allocate their assets among
various separate investment sub-accounts. Customers have the option to allocate
all or a portion of their account to our general account, in which case we
credit interest at rates we determine, subject to contractual minimums.
Customers may also elect death benefit guarantees. Our major source of revenue
from variable annuities is mortality and expense fees we charge to the customer,
generally determined as a percentage of the market value of the assets held in a
separate investment sub-account.

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    The table below presents summary information regarding our annuity reserve
activity for the periods indicated:

                            U.S. ASSET ACCUMULATION
                   INDIVIDUAL ANNUITY ACCOUNT VALUE ACTIVITY

                                                         AS OF OR FOR THE
                                                           THREE MONTHS      AS OF OR FOR THE YEAR ENDED
                                                         ENDED MARCH 31,             DECEMBER 31,
                                                         ----------------   ------------------------------
                                                               2001           2000       1999       1998
                                                         ----------------   --------   --------   --------
                                                                          ($ IN MILLIONS)
                                                                                      
FIXED ANNUITIES:
Total Account Value, beginning of period...............      $2,364.5       $2,480.9   $2,641.4   $2,797.6
  Premiums and deposits................................          26.9          162.0      208.9      261.3
  Interest credited....................................          33.9          138.6      136.2      149.7
  Surrenders and benefits..............................        (104.6)        (412.5)    (500.8)    (562.3)
  Product charges......................................          (1.1)          (4.5)      (4.8)      (4.9)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $2,319.6       $2,364.5   $2,480.9   $2,641.4
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................        66,781         68,179     75,119     82,481
VARIABLE ANNUITIES:
Total Account Value, beginning of period...............      $2,348.5       $2,202.7   $1,762.8   $1,297.2
  Deposits.............................................         125.2          444.0      385.7      420.6
  Interest credited and investment performance.........        (257.9)         (75.1)     232.6      154.6
  Surrenders and benefits..............................         (50.9)        (193.0)    (153.1)     (91.0)
  Product charges......................................          (7.3)         (30.1)     (25.3)     (18.6)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $2,157.6       $2,348.5   $2,202.7   $1,762.8
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................        45,286         44,146     39,767     35,283
TOTAL ANNUITIES:
Total Account Value, beginning of period...............      $4,713.0       $4,683.6   $4,404.2   $4,094.8
  Premiums and deposits................................         152.1          606.0      594.6      681.9
  Interest credited and investment performance.........        (224.0)          63.5      368.8      304.3
  Surrenders and benefits..............................        (155.5)        (605.5)    (653.9)    (653.3)
  Product charges......................................          (8.4)         (34.6)     (30.1)     (23.5)
                                                             --------       --------   --------   --------
Total Account Value, end of period.....................      $4,477.2       $4,713.0   $4,683.6   $4,404.2
                                                             ========       ========   ========   ========
Number of Contracts, end of period.....................       112,067        112,325    114,886    117,764

    MARKETS AND DISTRIBUTION

    Our target markets for individual annuities include owners, executives and
employees of small and medium-sized businesses, and individuals seeking to
accumulate and/or eventually distribute assets for retirement. We market both
fixed and variable annuities to both qualified and non-qualified pension plans.

    We sell our individual annuity products largely through our affiliated
financial representatives, who accounted for over 75% of annuity sales for the
three months ended March 31, 2001, and the years ended December 31, 2000, 1999
and 1998. The remaining sales were made through brokerage general agencies,
banks, Principal Connection and unaffiliated broker-dealer firms.

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    The table below shows sales of our individual annuities by distribution
channel for the periods indicated:

                            U.S. ASSET ACCUMULATION
              INDIVIDUAL ANNUITY SALES BY DISTRIBUTION CHANNEL(1)

                                                              FOR THE THREE
                                                              MONTHS ENDED       FOR THE YEAR ENDED
                                                                MARCH 31,           DECEMBER 31,
                                                              -------------   ------------------------
                                                                  2001         2000     1999     1998
                                                              -------------   ------   ------   ------
                                                                          ($ IN MILLIONS)
                                                                                    
Affiliated financial representatives........................     $128.6       $499.4   $409.0   $443.0
Independent brokers and registered representatives of
  Princor...................................................        8.5         35.4     38.8     49.1
Other (non-affiliated) broker dealers.......................        0.5         18.3     14.9      3.1
Banks.......................................................       11.3         30.2     32.8     33.6
Principal Connection........................................        3.2         22.7     23.5     13.1
                                                                 ------       ------   ------   ------
         Total..............................................     $152.1       $606.0   $519.0   $541.9
                                                                 ======       ======   ======   ======

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

(1) Excludes deposits related to rollovers from Principal draft account
    products.

  PRINCIPAL BANK

    Principal Bank, our electronic banking operation, is a federal savings bank
that began its activities in February 1998. It offers traditional retail banking
products and services via the telephone, Internet, ATM or by mail. Our current
products and services offering includes checking and savings accounts,
certificates of deposit, consumer and home equity loans, credit cards, debit
cards, money market accounts and a college savings program. As of March 31,
2001, Principal Bank had approximately 46,552 customers and $690.5 million in
assets, principally representing checking account deposits and certificates of
deposit.

    We market our Principal Bank products and services through Principal
Connection to our existing customers, especially pension plan participants.
Through Principal Bank, we also pursue asset retention strategies with our
existing customers who seek to transfer assets from our other asset accumulation
products by offering them our banking products and services.

PRINCIPAL CAPITAL MANAGEMENT

    In 1999, we established Principal Capital Management to consolidate our
extensive investment management expertise and to focus on marketing our asset
management services to third-party institutional clients. Principal Capital
Management provides asset management services to our U.S. asset accumulation
businesses and third-party institutional clients, as well as our other
U.S.-based segments. Principal Capital Management provides a full range of asset
management services with a particular emphasis on three primary asset classes:
(1) equity investments; (2) fixed income investments; and (3) real estate
investments. Principal Capital Management manages both U.S. and international
assets.

    As of March 31, 2001, Principal Capital Management, through its affiliates,
Invista Capital Management, Principal Capital Income Investors and Principal
Capital Real Estate Investors, managed $81.8 billion in assets. Our third-party
institutional assets have increased since the establishment of Principal Capital
Management from $3.5 billion on January 1, 1999 to $6.1 billion as of March 31,
2001.

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    The following table shows Principal Capital Management's assets under
management by asset class for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
                     ASSETS UNDER MANAGEMENT BY ASSET CLASS

                                             AS OF MARCH 31,                      AS OF DECEMBER 31,
                                            -----------------      ------------------------------------------------
                                                  2001                 2000              1999            1998(1)
                                            -----------------      ------------      ------------      ------------
                                                                        ($ IN BILLIONS)
                                                                                        
U.S. Equity.............................    $   19.4       24%     $22.4     27%     $25.9     32%     $23.2     30%
International Equity....................         4.6        6        5.6      7        6.3      8        4.5      6
Fixed Income............................        36.3       44       33.7     40       28.4     34       27.2     35
Commercial Mortgages....................        14.1       17       14.1     17       14.8     18       15.0     19
Commercial Real Estate Equity...........         5.4        7        5.6      7        5.5      7        5.8      8
Other...................................         2.0        2        1.8      2        1.3      1        1.4      2
                                            --------    -----      -----    ---      -----    ---      -----    ---
         Total..........................    $   81.8      100%     $83.2    100%     $82.2    100%     $77.1    100%
                                            ========    =====      =====    ===      =====    ===      =====    ===

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

(1) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    The table below shows our asset flow summary for Principal Capital
Management operations for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
                               ASSET FLOW SUMMARY

                                                              AS OF OR FOR THE    AS OF OR FOR THE
                                                                THREE MONTHS         YEAR ENDED
                                                              ENDED MARCH 31,       DECEMBER 31,
                                                              ----------------    -----------------
                                                                    2001           2000       1999
                                                              ----------------    ------     ------
                                                                         ($ IN BILLIONS)
                                                                                    
Assets Under Management, beginning of period................       $ 83.2         $ 82.2     $ 77.1(1)
  Deposits..................................................          5.1           17.4       16.3
  Withdrawals...............................................         (3.9)         (17.7)     (12.9)
  Investment Performance....................................         (2.1)           2.9        6.7
  Other.....................................................         (0.5)          (1.6)      (5.0)
                                                                   ------         ------     ------
Assets Under Management, end of period......................       $ 81.8         $ 83.2     $ 82.2
                                                                   ======         ======     ======

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

(1) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

    STRATEGY

    We seek to provide asset management services that respond to the needs of
our asset accumulation operations and third-party institutional clients. Our
capabilities include expertise in equities, commercial real estate and fixed
income securities. Principal Capital Management pursues the following strategic
initiatives:

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSETS UNDER MANAGEMENT.  We are
developing relationships with customers and intermediaries through our expanded
institutional marketing staff. We have increased our third-party institutional
marketing and client service staff from five to more than forty over the past
three years. We have also increased the number of consultant informational
databases to which we provide product information. As a result, in 2000 we
gained 24 new institutional mandates, up from 16 new institutional mandates in
1999. We believe these marketing efforts have led to the considerable growth in
our third-party institutional assets under management since 1999. We also market
the combined expertise of Principal Capital Management and BT Financial Group to
third-party institutional clients through joint marketing offices in London,
Hong Kong and Singapore. BT Financial Group's asset management expertise is
complementary to the expertise of Principal Capital Management.

    IMPROVE OUR ASSET MANAGEMENT CAPABILITIES AND SERVICES.  During 2000, we
instituted greater discipline in our investment management process to better
ensure that our performance compares favorably to the appropriate benchmark. We
have also increased the number of experienced investment professionals we
employ. We believe these

                                       107
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actions will improve our ability to attract investment advisory allocations from
our asset accumulation operations and from investment mandates from third-party
institutions.

    INCREASE THE NUMBER OF AVAILABLE INVESTMENT STYLES AND ASSET CLASSES.  To
better serve our existing clients and attract new clients, we have made
additional investment styles and asset classes available to our customers. For
example, we offer U.S. equities, emerging market equities, international small
capitalization equities, international fixed income securities, commercial
mortgage-backed securities and real estate mezzanine/bridge loans. We believe
that increasing the number of asset classes we offer will help us increase our
assets under management.

    PRODUCTS AND SERVICES

    Principal Capital Management provides a full range of asset management
services, with a particular emphasis on three asset classes through a range of
vehicles including separate accounts, mutual funds, institutional accounts,
collateralized debt securities and Principal Life's general account:

    EQUITY INVESTMENTS.  Principal Capital Management, through its affiliate,
Invista Capital Management, managed equity portfolios, which represented $23.5
billion in assets as of March 31, 2001. Invista Capital Management provides our
clients with access to a broad array of domestic, international and emerging
markets equity capabilities. The domestic equity products are organized across
growth and value styles, with portfolios targeted to distinct capitalization
ranges. As of March 31, 2001, 76% of Invista Capital Management's assets under
management were derived from our pension products, 16% from other products of
the Principal Financial Group, and the remaining 8% from third-party
institutional clients.

    FIXED INCOME INVESTMENTS.  Principal Capital Management, through its
affiliate, Principal Capital Income Investors, managed $35.8 billion in fixed
income assets as of March 31, 2001. Principal Capital Income Investors provides
our clients with access to investment-grade corporate debt, mortgage-backed,
asset-backed and commercial mortgage-backed securities, high yield and municipal
bonds and private and syndicated debt instruments. As of March 31, 2001, 70% of
these assets were derived from our pension products, 28% from other products of
the Principal Financial Group, and the remaining 2% from third-party
institutional clients.

    REAL ESTATE INVESTMENTS.  Principal Capital Management, through its
affiliate, Principal Capital Real Estate Investors, managed a commercial real
estate portfolio of $20.4 billion of assets as of March 31, 2001. Principal
Capital Real Estate Investors provides our clients with a broad range of real
estate investment options, including private real estate equity, commercial
mortgages, credit tenant debt, construction-permanent financing,
bridge/mezzanine loans, commercial mortgage-backed securities and real estate
investment trusts. Principal Capital Management had $0.8 billion of assets under
management as of March 31, 2001, from bridge/mezzanine loans and commercial
mortgages which appear on its balance sheet. The commercial mortgages represent
the source of mortgages for our commercial mortgage-backed securitization
program. As of March 31, 2001, 53% of the commercial real estate portfolio was
derived from our pension products, 31% from other products of the Principal
Financial Group, and the remaining 16% from third-party institutional clients.

                                       108
   112

    INVESTMENT PERFORMANCE

    A primary measure of asset management services is investment performance.
The table below shows the number of funds and investment performance of
Principal Capital Management's managed separate accounts and mutual funds, by
investment type, compared to other funds by Morningstar as of March 31, 2001:

                          PRINCIPAL CAPITAL MANAGEMENT
                         PERFORMANCE BY INVESTMENT TYPE
                              AS OF MARCH 31, 2001

                                               SEPARATE ACCOUNTS                                 MUTUAL FUNDS
                                 ----------------------------------------------   -------------------------------------------
                                                                                                        FUNDS WITH 3 STARS OR
                                                                                                          ABOVE ON CLASS A
                                                         FUNDS WITH 3 STARS OR                              SHARES/FUNDS
                                                           ABOVE/FUNDS RANKED                                 RANKED(2)
                                                         ----------------------                         ---------------------
                                  NUMBER      ASSETS     NUMBER       ASSETS      NUMBER     ASSETS     NUMBER      ASSETS
                                    OF        UNDER        OF         UNDER         OF       UNDER        OF         UNDER
INVESTMENT TYPE                  FUNDS(1)   MANAGEMENT    FUNDS     MANAGEMENT    FUNDS    MANAGEMENT    FUNDS    MANAGEMENT
- ---------------                  --------   ----------   ------     ----------    ------   ----------   ------    ----------
                                                                       ($ IN BILLIONS)
                                                                                          
Equity
  Domestic U.S. ...............     24        $16.2        8/11    $14.9/$15.8       9        $2.0         3/8     $0.6/$1.9
  International................      6          2.6         2/3        2.5/2.6       5         0.4         2/3       0.1/0.4
Real Estate....................      1          1.2         N/A            N/A     N/A          --         N/A           N/A
Fixed Income...................      6          4.8         6/6        4.8/4.8       5         0.7         4/5       0.6/0.7
Money Market...................      1          2.4         N/A            N/A       1         0.4         N/A           N/A
                                    --        -----       -----    -----------     ---        ----      ------     ---------
        Total..................     38        $27.2       16/20    $22.2/$23.2      20        $3.5        9/16     $1.3/$3.0
                                    ==        =====       =====    ===========     ===        ====      ======     =========

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

(1) Includes funds that are not rated by Morningstar.

(2) According to Morningstar, a fund's ten year return accounts for 50% of its
    overall rating score, its five year return accounts for 30% and its three
    year return accounts for 20%. If only five years of history are available,
    the five year period is weighted 60% and the three year period is weighted
    40%. According to Morningstar, funds in the top 67.5% of their asset
    category receive 3 stars or above.

    MARKETS AND DISTRIBUTION

    Principal Capital Management employed 39 institutional sales, relationship
management and client service professionals as of March 31, 2001, who worked
with consultants and directly with large investors to acquire and retain
third-party institutional clients. For 2000, approximately 41% of new
institutional clients were originated through direct client contact by Principal
Capital Management representatives with the balance derived from consultants.

    We also market the combined expertise of Principal Capital Management and BT
Financial Group to third-party institutional clients through joint marketing
offices in London, Hong Kong and Singapore. BT Financial Group's asset
management expertise is complementary to the expertise of Principal Capital
Management.

                                       109
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    The table below shows Principal Capital Management's total assets by
accumulation source for the periods indicated:

                          PRINCIPAL CAPITAL MANAGEMENT
                     TOTAL ASSETS BY ACCUMULATION SOURCE(1)

                                                              AS OF MARCH 31,     AS OF DECEMBER 31,
                                                              ---------------   -----------------------
                                                                   2001         2000    1999    1998(2)
                                                              ---------------   -----   -----   -------
                                                                           ($ IN BILLIONS)
                                                                                    
ACCUMULATION SOURCE
Affiliated
  Pension
    General Account.........................................       $29.9        $28.6   $27.8    $27.1
    Separate Account........................................        26.4         28.8    30.9     27.0
  Mutual Funds..............................................         3.5          3.8     4.0      3.7
  Individual Annuities
    General Account.........................................         2.8          2.8     2.8      3.0
    Separate Account........................................         1.3          1.3     1.4      1.3
  Life and Health Insurance General Account.................         9.1          9.0     8.5      8.1
    Separate Account........................................         0.2          0.2     0.1      0.1
  Other.....................................................         2.5          2.4     2.0      3.3
                                                                   -----        -----   -----    -----
         Total Affiliated...................................        75.7         76.9    77.5     73.6
Third-party Institutional...................................         6.1          6.3     4.7      3.5
                                                                   -----        -----   -----    -----
         Total Assets Under Management......................       $81.8        $83.2   $82.2    $77.1
                                                                   =====        =====   =====    =====

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

(1) Includes all assets for which Principal Capital Management provides
    investment advisory services.

(2) Includes assets managed by Invista Capital Management and the former
    investment department of Principal Life prior to the formation of Principal
    Capital Management, effective January 1, 1999.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

    Our International Asset Management and Accumulation segment consists of BT
Financial Group and Principal International. As of March 31, 2001, BT Financial
Group was the fourth largest asset manager in Australia according to ASSIRT. As
of March 31, 2001, BT Financial Group had accumulated $22.2 billion of assets
under management and provided investment advisory services to $21.0 billion in
assets. Principal International has subsidiaries in Argentina, Chile, Mexico,
Indonesia and Hong Kong and joint ventures in Brazil, Japan and India. We focus
on countries with favorable demographics and a trend toward private sector
defined contribution pension systems. We entered these countries through
acquisitions and joint ventures.

    Our International Asset Management and Accumulation segment generated 6%,
7%, 4% and 3% of our total operating revenues and $(5.3) million, $(8.5)
million, $(38.4) million and $(35.4) million of our total operating earnings for
the three months ended March 31, 2001 and the years ended December 31, 2000,
1999 and 1998, respectively.

    The table below shows the operating revenues, operating earnings, assets and
assets under management of our International Asset Management and Accumulation
segment for the periods indicated:

                INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
                         SELECTED FINANCIAL HIGHLIGHTS

                                             FOR THE THREE
                                              MONTHS ENDED
                                               MARCH 31,                FOR THE YEAR ENDED DECEMBER 31,
                                             --------------    --------------------------------------------------
                                                  2001              2000            1999(3)             1998
                                             --------------    --------------    --------------    --------------
                                                                       ($ IN MILLIONS)
                                                                                      
OPERATING REVENUES(1):
  BT Financial Group.......................  $   63.5    44%   $  285.3    45%   $  113.8    30%   $     --    --%
  Principal International..................      80.9    56       345.4    55       265.8    70       223.1   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $  144.4   100%   $  630.7   100%   $  379.6   100%   $  223.1   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===

                                       110
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                INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION
                  SELECTED FINANCIAL HIGHLIGHTS -- (CONTINUED)

                                             FOR THE THREE
                                              MONTHS ENDED
                                               MARCH 31,                FOR THE YEAR ENDED DECEMBER 31,
                                             --------------    --------------------------------------------------
                                                  2001              2000            1999(3)             1998
                                             --------------    --------------    --------------    --------------
                                                                       ($ IN MILLIONS)
                                                                                      
OPERATING EARNINGS (LOSS):
  BT Financial Group(2)....................  $   (5.6)  N/A    $    6.3   N/A    $   (4.8)  N/A    $     --   N/A
  Principal International..................       0.3   N/A       (14.8)  N/A       (33.6)  N/A       (35.4)  N/A
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $   (5.3)  N/A    $   (8.5)  N/A    $  (38.4)  N/A    $  (35.4)  N/A
                                             ========   ===    ========   ===    ========   ===    ========   ===
ASSETS:
  BT Financial Group.......................  $3,246.2    66%   $3,716.8    67%   $4,472.8    75%   $     --    --%
  Principal International..................   1,681.9    34     1,809.1    33     1,454.0    25     1,239.4   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $4,928.1   100%   $5,525.9   100%   $5,926.8   100%   $1,239.4   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===
ASSETS UNDER MANAGEMENT:
  ($ in billions)
  BT Financial Group.......................  $   22.2    88%   $   25.4    89%   $   28.6    93%   $     --    --%
  Principal International..................       2.9    12         3.0    11         2.0     7         1.2   100
                                             --------   ---    --------   ---    --------   ---    --------   ---
         Total.............................  $   25.1   100%   $   28.4   100%   $   30.6   100%   $    1.2   100%
                                             ========   ===    ========   ===    ========   ===    ========   ===

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

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

(2) Reflects amortization of goodwill and other intangibles related to the
    acquisition of BT Financial Group.

(3) Reflects operations of BT Financial Group from August 31, 1999, the date of
    its acquisition.

BT FINANCIAL GROUP

    Our acquisition of BT Financial Group was a central element in our expansion
of our international asset management and accumulation businesses. BT Financial
Group's operations include:

    - retail funds management;

    - institutional asset management;

    - margin lending;

    - portfolio services; and

    - New Zealand.

    In November 1998, Deutsche Bank AG announced the purchase of Bankers Trust
Corporation, the parent company of Bankers Trust Australia Group. In March 1999,
Deutsche Bank announced its intention to sell Bankers Trust's Australian
operations while retaining its asset management operations in Japan, the U.K.
and New York. During the period that Bankers Trust's Australian operations were
for sale, many investment advisors in Australia suspended new deposits pending
clarification on the ownership of the business. On August 31, 1999, we purchased
Bankers Trust Australia Group, including BT Funds Management and related
businesses. We subsequently changed its name to BT Financial Group. Since the
transaction closed, deposits have resumed as demonstrated in the Asset Flow
Summary table below.

    We measure assets under management in two ways, both by the operation that
accumulates the assets and by the entity that manages the assets. BT Financial
Group both accumulates and manages assets. From an accumulation perspective, BT
Financial Group had assets under management of $22.2 billion as of March 31,
2001. As of that same date, BT Financial Group provided investment advisory
services for $21.0 billion. The difference represents assets accumulated by BT
Financial Group for which another asset manager provides investment advisory
services. BT Financial Group's assets under management increased A$1.9 billion
from December 31, 1999 to March 31, 2001. However, a 25% decline in the value of
the Australian dollar relative to the U.S. dollar resulted in a $6.4 billion
decrease.

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    The table below shows the amount of assets under management by operation for
BT Financial Group for the periods indicated:

                               BT FINANCIAL GROUP
                           ASSETS UNDER MANAGEMENT(1)

                                                                    AS OF
                                                                  MARCH 31,            AS OF DECEMBER 31,
                                                                  ---------      -------------------------------
                                                                    2001          2000        1999       1998(2)
                                                                  ---------      ------      ------      -------
                                                                                  (IN BILLIONS)
                                                                                             
Retail......................................................       A$22.4        A$23.3      A$20.9      A$18.7
Institutional...............................................         17.7          17.5        19.7        22.0
Margin Lending..............................................          1.1           1.1         1.0         1.0
Portfolio Services..........................................          2.9           2.5         0.9         0.1
New Zealand.................................................          1.2           1.1         1.0         1.2
Other.......................................................          0.1           0.2          --          --
                                                                  -------        ------      ------      ------
         Total..............................................       A$45.4        A$45.7      A$43.5      A$43.0
                                                                  =======        ======      ======      ======
         Total..............................................        $22.2         $25.4       $28.6       $26.4
                                                                  =======        ======      ======      ======

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

(1) A$ denotes Australian dollars.

(2) Includes assets managed by BT Financial Group prior to its acquisition by
    the Principal Financial Group. Assets are presented for comparative purposes
    only and are not included in segment or consolidated assets under management
    amounts reported elsewhere in this document.

    The table below shows BT Financial Group's asset flow summary for the
periods indicated:

                               BT FINANCIAL GROUP
                             ASSET FLOW SUMMARY(1)

                                                        AS OF OR FOR
                                                         THE THREE
                                                        MONTHS ENDED      AS OF OR FOR THE YEAR ENDED
                                                         MARCH 31,               DECEMBER 31,
                                                       --------------   -------------------------------
                                                            2001             2000           1999(2)
                                                       --------------   --------------   --------------
                                                                        (IN BILLIONS)
                                                                                
Assets Under Management, beginning of period.........  A$45.7   $25.4   A$43.5   $28.6   A$43.0   $26.4
  Net Deposits and Withdrawals.......................     0.4     0.2      1.3     0.7     (4.0)   (2.7)
  Investment Performance.............................    (0.3)   (0.1)     0.9     0.5      4.5     3.0
  Effect of Exchange Rates...........................      --    (3.1)      --    (4.4)      --     1.9
  Other..............................................    (0.4)   (0.2)      --      --       --      --
                                                       ------   -----   ------   -----   ------   -----
Assets Under Management, end of period...............  A$45.4   $22.2   A$45.7   $25.4   A$43.5   $28.6
                                                       ======   =====   ======   =====   ======   =====

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

(1) A$ denotes Australian dollars.

(2) Includes assets managed by BT Financial Group prior to its acquisition by
    the Principal Financial Group. Assets are presented for comparative purposes
    only and are not included in segment or consolidated assets under management
    amounts reported elsewhere in this document.

    STRATEGY

    Our strategic initiatives for BT Financial Group include:

    FURTHER INTEGRATE BT FINANCIAL GROUP'S ACTIVITIES.  We continue to look for
opportunities to capture synergies between BT Financial Group and our operating
segments, especially with respect to product distribution and operating
platforms. For example, we offer BT Financial Group-managed products in our U.S.
401(k) products. Similarly, we offer Principal Capital Management-managed
products to institutions in Australia through BT Financial Group's existing
distribution network.

    GROW OUR RETAIL FUNDS MANAGEMENT BUSINESS WITH EMPHASIS ON CORPORATE MASTER
TRUST SUPERANNUATION PLANS.  We believe that BT Financial Group has a strong
financial sector brand in Australia, in addition to an extensive family of

                                       112
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investment products. It also has distribution relationships with most major
Australian banks, life insurers, independent financial advisors and other
distributors of financial products.

    The Australian asset management market has grown in part from the
introduction of superannuation, a mandatory, tax-favored defined contribution
retirement system established in the early 1990s. According to Cerulli
Associates, Inc., from June 1995 to June 1999, Australian superannuation assets
grew from A$228.0 billion to A$408.0 billion, a compound annual growth rate of
15.7%. Under superannuation, all employers in Australia are required to
contribute 8%, increasing to 9% in July 2002, of an employee's salary to a
defined contribution pension plan. These mandatory contributions will provide
continued growth in assets under management in Australia generally and, we
believe, will provide the opportunity for attractive growth for BT Financial
Group specifically.

    Utilizing its brand recognition and extensive distribution channels, BT
Financial Group has increased its marketing efforts on the sale of corporate
master trust superannuation plans, especially those of small and medium-sized
businesses. These corporate master trust plans are similar to 401(k) plans in
the United States in that they are employer-sponsored defined contribution
plans. We believe that BT Financial Group's strong market position, together
with the expertise we have developed in the U.S. defined contribution pension
market, should provide for growth in our assets under management in Australia.

    GROW OUR THIRD-PARTY INSTITUTIONAL ASSET MANAGEMENT BUSINESS OUTSIDE OF
AUSTRALIA.  BT Financial Group and Principal Capital Management together target
markets abroad through joint marketing offices in London, Hong Kong and
Singapore. These offices market the institutional investment advisory services
of both operations. BT Financial Group also provides investment advisory
services to Principal International.

    GROW BT FINANCIAL GROUP'S WRAP PRODUCT.  BT Financial Group's Wrap product
is an Internet-based portfolio transaction and administration service targeted
at independent financial advisors. It enables a financial planner to track a
client's total portfolio and provide consolidated reporting and transaction
capabilities in a user-friendly and cost effective manner. Since its launch in
early 1998, Wrap assets under management have grown from $0.5 billion (A$0.9
billion) as of December 31, 1999 to $1.4 billion (A$2.9 billion) as of March 31,
2001. We believe that we have a competitive lead in the provision of this type
of administration service to financial advisors and their clients in Australia.

    PRODUCTS AND SERVICES

    BT Financial Group offers a wide range of investment products, margin
lending and portfolio services.

    RETAIL FUNDS MANAGEMENT.  To its retail clients, BT Financial Group offers
an extensive range of retirement and investment services, including retail
mutual funds, pensions, annuities and corporate superannuation plans to
approximately 500,000 retail customers as of December 31, 2000. BT Financial
Group makes available a client service call center and the "BT Online" Internet
site, both providing account information and transaction services for investors
and financial intermediaries.

    INSTITUTIONAL ASSET MANAGEMENT.  To its larger institutional clients, both
in Australia and in targeted global markets, BT Financial Group offers products
and services covering a full investment range, including actively managed
diversified and specialist funds, individual client mandates, pooled investment
funds, global equities and fixed income securities, as well as currency and
asset allocation overlays. An overlay is a portfolio strategy that allows an
institution to seek enhanced portfolio returns by changing its exposure to asset
classes without liquidating a portion of its portfolio.

    MARGIN LENDING.  BT Financial Group is one of the largest margin lenders in
the Australian market. According to Cannex's February 2001 margin lending
report, BT Financial Group was awarded a five star rating (out of 5) on one of
its margin lending products and a four star rating on four other margin lending
products. Margin lending products assigned five stars are described by Cannex as
"Excellent" while those assigned four stars are characterized as "Very Good."
Margin lending enables investors to borrow up to 70% of the value of mutual
funds and select listed securities. Rising levels of share ownership among
Australian investors has generated increased margin lending, with BT Financial
Group's margin lending portfolio balance of $0.5 billion (A$1.1 billion) as of
March 31, 2001. On November 30, 1999, BT Financial Group margin lending
operations securitized its margin lending portfolio with Westpac Banking
Corporation, an Australian Bank. Under the terms of the financing, BT Financial
Group margin lending operations are required to allocate capital equal to
approximately 7% of the outstanding borrowed amount, as a cushion for loan
defaults.

    PORTFOLIO SERVICES.  BT Financial Group is a leading provider of investment
administration, processing and registry services in Australia and New Zealand.
Wrap is our fastest growing portfolio services product. It provides independent
financial advisors with a range of investment choices for their clients
administered via a central Internet-based source with a choice of mutual funds
and listed equity securities. This product enables them, on behalf of their
clients, to manage all of a client's investment portfolio. Wrap also provides
for custody, settlement and accounting of all investments with online account
capabilities and reporting to the investor.

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   117

    NEW ZEALAND.  BT New Zealand provides a comprehensive range of retail and
institutional asset management services in New Zealand. BT Financial Group's New
Zealand business had $0.6 billion (A$1.2 billion) of assets under management as
of March 31, 2001.

    INVESTMENT PERFORMANCE

    As of March 31, 2001, BT Financial Group had a staff of 99 investment
professionals actively managing mutual funds, superannuation plans and other
related investment products. Within the funds management operations, it has
developed particular expertise managing equity and fixed income funds, both in
Australia and internationally.

    The table below shows investment performance of BT Financial Group's retail
mutual funds, superannuation plans and other retirement related products
compared to other funds by Morningstar:

                               BT FINANCIAL GROUP
                         PERFORMANCE BY INVESTMENT TYPE
                              AS OF MARCH 31, 2001

                                                                                   FUNDS WITH MORNINGSTAR
                                                                                       RATINGS IN THE
                                                                                   TOP 2 QUARTILES/FUNDS
                                                                                          RATED(1)
                                                                                ----------------------------
                                                 NUMBER OF     ASSETS UNDER     NUMBER OF     ASSETS UNDER
INVESTMENT TYPE                                    FUNDS        MANAGEMENT        FUNDS      MANAGEMENT(2)
- ---------------                                  ---------     ------------     ---------    -------------
                                                             (A$ IN BILLIONS)               (A$ IN BILLIONS)
                                                                                
Equity:
  Australian...................................      20            A$2.4          --/10       A$--/A$1.9
  International................................      32              7.6          10/11        5.6/5.6
Income.........................................      18              0.3           9/13        0.1/0.3
Balanced.......................................      39             10.6           7/22        3.4/9.5
Money Market...................................       8              0.9            2/6        0.2/0.8
Other..........................................      61              0.6          --/--         --/--
                                                    ---           ------          -----      -------------
         Total.................................     178           A$22.4          28/62      A$9.3/A$18.1
                                                    ===           ======          =====      =============

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

(1) Morningstar rates the performance of our funds by comparing the total return
    of each fund to the total return of mutual funds in the same asset category
    as the separate account. Morningstar ranks total returns on a scale of
    1-100, where 1 represents the highest-returning 1% of all funds in that
    asset category and 100 represents the lowest-returning 1% of all funds. For
    example, a quartile rank of 1 for the trailing five-year period would
    indicate that the fund's five-year total return places it in the top 25% of
    all funds in its asset category and a quartile rank of 2 would indicate that
    the fund's five year total return places it in the top 50% in its asset
    category.

(2) Includes assets that are not rated by Morningstar.

    MARKETS AND DISTRIBUTION

    BT Financial Group's products and services are primarily sold throughout
Australia and New Zealand in both the institutional and retail markets. BT
Financial Group also operates institutional asset management offices in Hong
Kong, Singapore and London, as well as a joint venture operation in Malaysia.

    As part of its marketing strategy, BT Financial Group has a comprehensive
brand and advertising strategy covering television, print media and the
Internet. Building on its successful brand campaign which positions BT Financial
Group in investment and superannuation, it is now also positioning itself as a
leading provider in the corporate superannuation market. For example, BT
Financial Group developed a television and print campaign to target employers.
It focuses on employee benefits from BT Financial Group's corporate
superannuation plan, referring to corporate sponsored retirement plans. BT
Financial Group has experienced growth in sales of its corporate superannuation
plans since the beginning of 1999. For 2000, BT Financial Group had 488 new
plans, as compared to 154 new plans in 1999.

    RETAIL FUNDS MANAGEMENT.  The retail funds management operations of BT
Financial Group provide a number of mutual funds and retirement services,
including superannuation for individuals, small and medium-sized businesses and
institutions, as well as pensions and annuities for retirees. These products are
primarily designed to meet the needs created by the superannuation market in
Australia. BT Financial Group has five investor centers in Australia, which
serve existing clients and advisors and promote BT Financial Group products and
services. Independent financial advisors are the main distribution channel for
retail investment products and superannuation products in Australia. BT
Financial Group also distributes these products through major banks, life
insurers and other mutual fund managers.

                                       114
   118

    INSTITUTIONAL ASSET MANAGEMENT.  BT Financial Group's institutional products
and services are designed for trustees of corporate superannuation funds
institutions, large corporations and quasi-governmental entities. BT Financial
Group distributes the majority of its institutional asset management products
and services through consultants such as Towers Perrin, Mercer, Watson Wyatt,
Frank Russell and others.

    MARGIN LENDING.  BT Financial Group's margin lending services target retail
clients and independent financial advisors. These services are marketed through
independent financial advisors and retail investor centers in addition to other
brokers. BT Financial Group's margin lending services allow independent
financial advisors to provide their clients a full range of financial services.

    PORTFOLIO SERVICES.  BT Financial Group provides portfolio services to large
institutions, corporations and mutual fund managers. Wrap is marketed to
independent financial advisors and other financial intermediaries for a fee.

    NEW ZEALAND.  BT Financial Group's New Zealand operations provide a
comprehensive group of products and services across both the retail and
institutional markets. Retail products are distributed through independent
financial advisors while institutional products are distributed through
consultants.

PRINCIPAL INTERNATIONAL

    The activities of Principal International reflect our efforts to accelerate
the growth of our assets under management by capitalizing on the international
trend toward private sector defined contribution pension systems. Through
Principal International, we offer retirement products and services, annuities,
mutual funds and life insurance. We operate through subsidiaries in Argentina,
Chile, Mexico, Indonesia and Hong Kong and joint ventures in Brazil, Japan and
India.

    The table below shows by country the amount on which we earned a fee as
compared to assets on which we earned a spread for the periods indicated:

                            PRINCIPAL INTERNATIONAL
                            ASSETS UNDER MANAGEMENT
                       FEE-BASED/SPREAD-BASED COMPOSITION

                             AS OF MARCH 31,                               AS OF DECEMBER 31,
                          ---------------------   ---------------------------------------------------------------------
                                  2001                    2000                    1999                    1998
                          ---------------------   ---------------------   ---------------------   ---------------------
                          FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL   FEE    SPREAD   TOTAL
                          ----   ------   -----   ----   ------   -----   ----   ------   -----   ----   ------   -----
                                                                 ($ IN BILLIONS)
                                                                              
Brazil..................  $ --    $0.9    $0.9    $ --    $0.8    $0.8    $ --    $0.6    $0.6    $ --    $ --    $ --
Chile...................    --     0.9     0.9     0.1     0.9     1.0     0.1     0.8     0.9      --     0.7     0.7
Mexico..................   0.4     0.1     0.5     0.4      --     0.4     0.2      --     0.2     0.1      --     0.1
Other countries.........   0.6      --     0.6     0.5     0.3     0.8     0.2     0.1     0.3     0.2     0.2     0.4
                          ----    ----    ----    ----    ----    ----    ----    ----    ----    ----    ----    ----
Total...................  $1.0    $1.9    $2.9    $1.0    $2.0    $3.0    $0.5    $1.5    $2.0    $0.3    $0.9    $1.2
                          ====    ====    ====    ====    ====    ====    ====    ====    ====    ====    ====    ====

    The table below shows the asset flow summary for Principal International for
the periods indicated:

                            PRINCIPAL INTERNATIONAL
                               ASSET FLOW SUMMARY

                                                               AS OF OR FOR THE      AS OF OR FOR THE
                                                              THREE MONTHS ENDED        YEAR ENDED
                                                                  MARCH 31,            DECEMBER 31,
                                                              ------------------     -----------------
                                                                     2001             2000       1999
                                                              ------------------     ------     ------
                                                                          ($ IN BILLIONS)
                                                                                       
Assets Under Management, beginning of period................        $ 3.0            $ 2.0      $ 1.2
  Deposits..................................................          0.5              1.2        0.4
  Withdrawals...............................................         (0.3)            (0.5)      (0.1)
  Investment performance....................................           --              0.2        0.1
  Operations acquired.......................................           --              0.2        0.6
  Other.....................................................         (0.2)             0.1       (0.1)
  Effect of exchange rates..................................         (0.1)            (0.2)      (0.1)
                                                                    -----            -----      -----
Assets Under Management, end of period......................        $ 2.9            $ 3.0      $ 2.0
                                                                    =====            =====      =====

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  STRATEGY

    Our goal is to leverage our U.S. product expertise and operating platform in
the provision of asset accumulation products and services in targeted
international markets. We focus on countries that we believe offer the greatest
long-term growth opportunities, favorable demographics and private defined
contribution systems, particularly those in which small and medium-sized
businesses sponsor the retirement plan. Our primary strategic initiative is to:

    INCREASE THE GROWTH AND PROFITABILITY OF PRINCIPAL INTERNATIONAL

    - Focus our operations on attractive markets.  We have exited
      under-performing operations that lacked scale, such as our pre-retirement
      accumulation business in Argentina, and have sold our operations in Spain
      in 2001. We remain focused on countries that have attractive long-term
      potential, such as Brazil, India and Japan. We believe this focus will
      lead to more rapid growth in our assets under management.

    - Leverage our domestic expertise in these markets.  We operate under a
      structure in which the U.S. business unit responsible for the equivalent
      U.S. product is actively involved in the planning and execution of each
      country's business plan for such product. For example, our U.S. mutual
      fund management team is actively involved in overseeing our mutual fund
      joint venture in India. We believe that this involvement is critical to
      help our local country managers grow these operations.

    - Leverage technology developed for U.S. operations into other
      countries.  We utilize a common client/server-based system in most
      countries. This system incorporates expertise from our U.S. operations
      into a version scaled to each of our international operations. This common
      platform allows us to spread our technology expenditures throughout our
      operations rather than incurring greater expense by operating a separate
      system in each country.

    - Grow revenues and manage expenses.  Our operating revenues for this
      segment increased from $223.1 million in 1998 to $345.4 million in 2000,
      while operating expenses as a percentage of operating revenues declined
      from 45.4% in 1998 to 30.1% in 2000. For the three months ended March 31,
      2001, operating expenses as a percentage of revenues were 28.8%.

  PRODUCTS AND SERVICES

    Through Principal International, we offer retirement products and services,
annuities, mutual funds and life insurance.

  MARKETS AND DISTRIBUTION

    ASIA/PACIFIC REGION

    HONG KONG.  Our subsidiary in Hong Kong is actively competing in the defined
contribution plan market. The government requires employers and employees each
to contribute 5% of an employee's income to a Mandatory Provident Fund. We
target small and medium-sized employers and distribute products through
strategic alliances with insurance companies, mutual funds or banks, direct
marketing and through our own sales representatives. Our strategic partners help
distribute our Mandatory Provident Fund products and services, or use our
administrative and investment services in their own products. Our Mandatory
Provident Fund products and services are marketed by agents under the various
distribution arrangements we have with our strategic partners.

    INDIA.  We own 50% of IDBI-Principal Asset Management Company, Ltd., or
IDBI-Principal, a mutual fund company. Our joint venture partner is the
Industrial Development Bank of India, or IDBI, a premier development bank in
India. In addition to the current mutual fund business, we are positioning
IDBI-Principal to compete in the emerging pension and long-term savings market
in India. We sell our mutual funds through regional offices located throughout
India and IDBI's banking offices.

    INDONESIA.  The focus of our Indonesian life insurance company is defined
contribution and defined benefit pension plans targeted at small and
medium-sized businesses. We distribute our products using employed sales
representatives who sell directly to employers or through brokers. We also have
a marketing alliance with Standard Chartered Bank, a leading banking group,
which assists us in marketing our products throughout Indonesia.

    JAPAN.  We own 50% of ING/Principal Pensions Company, Ltd., which upon
legislation adoption will sell a new defined contribution plan targeted at small
and medium-sized businesses and offers full-service record-keeping and plan
administration. Our joint venture partner is ING Insurance International B.V.,
or ING Life, a member of the ING Group. Our pension sales representatives
distribute our products through ING Life's independent agents to existing ING
Life business clients and also through additional third-party distribution
relationships developed by ING/Principal Pensions Company, Ltd.

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    LATIN AMERICA

    ARGENTINA.  In Argentina, we operate a life insurance company and a
retirement annuity company. Principal Life Compania de Seguros, S.A., our life
insurance company, targets small and medium-sized employers. We sell group and
individual life insurance products through independent brokers and through bank
branches of Societe Generale, with which we have an alliance. Societe Generale
is a leading French banking institution with offices throughout Argentina
through which we distribute our products. Principal Retiro Compania de Seguros
de Retiro, S.A., our annuity company, provides annuities to individuals exiting
the compulsory private pre-retirement asset accumulation system. We distribute
annuity products through dedicated sales representatives who sell directly to
customers and through independent brokers in Argentina.

    BRAZIL.  We own 46% of BrasilPrev, a private pension company in Brazil,
through a joint venture arrangement with Banco do Brasil, Brazil's largest bank.
We are Banco do Brasil's exclusive partner for distributing pension products.
BrasilPrev provides defined contribution products for the retirement needs of
employers and individuals. Banco do Brasil's employees sell directly to
individual clients through its bank branches. BrasilPrev reaches corporate
clients through two wholesale distribution channels. A wholesale distribution
channel distributes products through a network of independent brokers who sell
to the public, and another wholesale distribution channel coordinates with Banco
do Brasil's corporate account executives to reach Banco do Brasil's existing
corporate clients.

    CHILE.  We own Principal Compania de Seguros de Vida Chile S.A., a Chilean
insurance company, that primarily sells retirement annuities to individuals
exiting the pre-retirement accumulation system. In July 1998, we acquired
Compania de Seguros de Vida El Roble, S.A., or El Roble, a Chilean life
insurance company. We have fully integrated the operations of El Roble with
those of Principal Compania de Seguros de Vida Chile S.A. We distribute our
annuity products through a network that consisted of over 60 captive agents and
approximately 350 independent agents as of March 31, 2001. We also utilize sales
representatives who sell through brokers. We also market life and health
insurance products to small and medium-sized businesses and to individuals
through brokers. Based upon assets, we were ranked as the fourth largest life
insurance company in Chile as of March 31, 2001, according to the
Superintendencia de Valores y Seguros, the Chilean regulatory agency for
insurance companies. We also own 60% of Andueza & Principal Creditos
Hipotecarios S.A., in a joint partnership arrangement with Andueza y Compania
Agentes de Mutuos Hipotecarios S.A. Through this business, we sell and service
mortgage loans in Chile.

    MEXICO.  In Mexico, we own Principal Mexico Compania de Seguros S.A. de
C.V., or Principal Seguros, a life insurance company, Principal Afore S.A. de
C.V., a private pension company which manages and administers individual
retirement accounts under the mandatory privatized social security system in
effect for all employees in Mexico and Principal Pensiones S.A. de C.V., or
Principal Pensiones, an annuity company. Our focus is on both pre-retirement and
post-retirement savings plans. We distributed Principal Afore S.A. de C.V.'s
products and services through a dedicated sales force of approximately 550 sales
representatives as of March 31, 2001, who sold directly to individuals. As of
March 31, 2001, Principal Pensiones used 98 employed sales representatives and
independent brokers to distribute annuities directly to customers. Our life
insurance company, Principal Seguros, distributes its products through an array
of independent agents and brokers.

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LIFE AND HEALTH INSURANCE SEGMENT

    Our Life and Health Insurance segment offers (1) individual life and
disability insurance and (2) group life and health insurance throughout the
United States.

    Our Life and Health Insurance segment contributed 43%, 47%, 48% and 50% of
our total operating revenues and 24%, 26%, 19% and 19% of our total operating
earnings for the three months ended March 31, 2001 and for the years ended
December 31, 2000, 1999 and 1998, respectively. The table below shows the total
operating revenues, operating earnings and assets of our Life and Health
Insurance segment, by individual life and disability insurance, and group life
and health insurance, respectively, for the periods indicated:

                           LIFE AND HEALTH INSURANCE
                         SELECTED FINANCIAL HIGHLIGHTS

                                            AS OF OR FOR THE
                                              THREE MONTHS
                                                 ENDED
                                               MARCH 31,                AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                           ------------------    ------------------------------------------------------
                                                  2001                 2000               1999               1998
                                           ------------------    ----------------    ---------------    ---------------
                                                                         ($ IN MILLIONS)
                                                                                            
OPERATING REVENUES(1):
  Individual Life and Disability
    Insurance............................  $   381.0       38%   $ 1,472.9     36%   $1,409.8     35%   $1,386.0     36%
  Group Life and Health Insurance........      621.4       62      2,649.7     64     2,575.7     65     2,507.1     64
                                           ---------      ---    ---------    ---    --------    ---    --------    ---
         Total...........................  $ 1,002.4      100%   $ 4,122.6    100%   $3,985.5    100%   $3,893.1    100%
                                           =========      ===    =========    ===    ========    ===    ========    ===
OPERATING EARNINGS:
  Individual Life and Disability
    Insurance............................  $    26.6       63%   $    54.9     34%   $   86.8     96%   $   52.2    104%
  Group Life and Health Insurance........       15.9       37        107.4     66         3.9      4        (2.2)    (4)
                                           ---------      ---    ---------    ---    --------    ---    --------    ---
         Total...........................  $    42.5      100%   $   162.3    100%   $   90.7    100%   $   50.0    100%
                                           =========      ===    =========    ===    ========    ===    ========    ===
ASSETS:
  Individual Life and Disability
    Insurance............................  $ 8,635.5       83%   $ 8,534.2     82%   $7,965.1     80%   $7,501.7     82%
  Group Life and Health Insurance........    1,771.1       17      1,886.9     18     1,984.7     20     1,614.4     18
                                           ---------      ---    ---------    ---    --------    ---    --------    ---
         Total...........................  $10,406.6      100%   $10,421.1    100%   $9,949.8    100%   $9,116.1    100%
                                           =========      ===    =========    ===    ========    ===    ========    ===

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

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

INDIVIDUAL LIFE AND DISABILITY INSURANCE

    We began as an individual life insurer in 1879, and our U.S. operations
served approximately 750,000 individual policyholders with $80.8 billion of life
insurance in force as of March 31, 2001. Individual life and disability
insurance contributed 16%, 17%, 17% and 18% of our consolidated operating
revenues for the three months ended March 31, 2001 and for the years ended
December 31, 2000, 1999 and 1998, respectively.

    We offer a wide array of individual life and disability insurance products
aimed at serving our customers' financial needs throughout their lives.

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The table below shows selected GAAP financial information regarding our
individual insurance products for the periods indicated:

                    INDIVIDUAL LIFE AND DISABILITY INSURANCE
                          SELECTED PRODUCT HIGHLIGHTS

                                                      AS OF OR FOR
                                                    THE THREE MONTHS        AS OF OR FOR THE YEAR ENDED
                                                     ENDED MARCH 31,               DECEMBER 31,
                                                    -----------------    ---------------------------------
                                                          2001             2000        1999        1998
                                                    -----------------    ---------   ---------   ---------
                                                                       ($ IN MILLIONS)
                                                                                     
INTEREST-SENSITIVE LIFE INSURANCE:
  Number of policies..............................         91,889           90,682      80,459      71,229
  First-year premiums/Deposits....................      $    38.9        $   107.8   $    71.0   $   118.0
  Premiums/Deposits...............................           79.8            383.6       180.0       176.8
  Future policy benefits/Policy account balance...        1,575.4          1,559.2     1,231.2     1,068.2
  Life insurance in force.........................       20,233.9         19,566.8    15,633.2    12,726.6
TRADITIONAL LIFE INSURANCE:
  Number of policies..............................        603,048          609,326     632,551     659,288
  First-year premiums/Deposits....................      $     8.4        $    37.1   $    38.6   $    57.6
  Premiums/Deposits...............................          194.9            772.8       780.8       792.3
  Future policy benefits/Policy account balance...        5,499.6          5,468.1     5,289.1     5,083.6
  Life insurance in force.........................       60,582.0         60,389.0    59,581.1    59,415.9
DISABILITY INSURANCE:
  Number of policies..............................         67,154           65,497      65,781      55,773
  New sales (annualized first-year premium).......      $     4.2        $    17.2   $    15.1   $    12.7
  Premiums/Deposits...............................           20.1             74.2        64.6        55.5
  Future policy benefits/Policy account balance...          262.8            254.0       190.1       169.6

  STRATEGY

    We seek to provide individual life and disability insurance products
tailored to the needs of the owners and executives of small and medium-sized
businesses, as well as other individuals. These products also complement the
asset accumulation and group insurance products that we offer to businesses. Our
strategic initiatives are to:

    PROVIDE A TAILORED APPROACH TO BUSINESS NEEDS THAT CAN BE MET WITH LIFE
INSURANCE.  We create marketing materials, customized policy illustrations and
ongoing reports for our customers and agent/brokers that show how our insurance
policies can meet the needs of the customer. For example, when highly paid
individuals, such as owners of small and medium-sized businesses, use variable
life insurance to fund an "excess" 401(k)-like program, they receive reports
similar to those they received from their actual 401(k) plans. We believe that
the ability to provide more than a basic life insurance policy illustration is
critical to success in this market. We also market retirement products and
services to businesses for their executives. We believe there is significant
opportunity to sell products and services providing retirement and other
benefits to executives in addition to pension plans. We have specialized sales
representatives to sell these products to businesses.

    DESIGN OUR INDIVIDUAL DISABILITY PRODUCTS TO TARGET SMALL AND MEDIUM-SIZED
BUSINESSES.  We offer products to pay business overhead expenses for a disabled
business owner and for the purchase by the other business owners of the disabled
business owner's interests in the business. We also offer specialized multi-life
underwriting programs that facilitate the provision of coverage to multiple
executives in a single business.

    INCREASE OUR DISTRIBUTION REACH TO SMALL AND MEDIUM-SIZED BUSINESSES.  In
2000, we acquired a minority stake in Highland Capital Holding Corporation, a
distribution company specializing in sales of insurance to businesses and high
net worth individuals. Our products will be among those marketed by Highland
Capital. In 2001, we acquired Executive Benefit Services, Inc., a company that
specializes in the sale of executive benefit products and services to
businesses. Through Executive Benefit Services, Inc., we have begun marketing
our executive benefit products and services to our existing pension customers.
We constantly seek to hire individuals experienced in selling insurance to small
and medium-sized businesses.

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  PRODUCTS AND SERVICES

    Our individual life and disability insurance products include:

    - interest-sensitive life insurance, including universal life and variable
      universal life;

    - traditional life insurance; and

    - disability insurance.

    INTEREST-SENSITIVE LIFE INSURANCE.  Interest-sensitive life products include
universal life and variable universal life insurance and offer life insurance
protection for which both the premium and the death benefit may be adjusted by
the policyholder. Our growth in individual life and disability insurance sales
through December 31, 2000 has come mainly from variable universal life insurance
products, which have grown at a compound annual growth rate of 49% from 1997 to
1999. Variable universal life insurance products represented 67% of our
interest-sensitive life insurance premiums for the three months ended March 31,
2001. We credit premiums, net of specified expenses, to an account maintained
for the policyholder. Specific charges are made against the account for the cost
of insurance protection and expenses. For universal life contracts, the entire
account balance is invested in our general account. Interest is credited to the
policyholder's account based on the earnings on general account investments. For
variable universal life contracts, the policyholder may allocate the account
balance among our general account and a variety of separate account choices.
Interest is credited on amounts allocated to the general account in the same
manner as for universal life. Net investment performance on separate account
investments is allocated directly to the policyholder accounts. The policyholder
bears the investment risk on separate account investments. Our profitability is
based on charging sufficient asset-based, premium-based and risk-based fees to
cover the cost of insurance and expenses.

    We believe that interest-sensitive life insurance products best meet the
financial objectives of our target customers in the United States because they
provide flexibility, protection and cash value accumulation. In particular,
sales of life insurance in non-qualified executive benefit plans are primarily
variable universal life products. Our variable universal life insurance products
offer asset managers low policy charges and a range of features allowing them to
tailor the policy to the needs of each client.

    TRADITIONAL LIFE INSURANCE.  Traditional life insurance includes
participating whole life, adjustable life products and term life insurance
products. Participating products and term life insurance products represented
13% and 4%, respectively, of our individual life and disability insurance sales
for the three months ended March 31, 2001. Adjustable life insurance products
provide a guaranteed benefit in return for the payment of a fixed premium and
allow the policyholder to change the premium and face amount combination.
Participating policyholders may receive policy dividends if the combined result
of interest earnings, mortality experience and expenses is better than the
assumptions used in setting the premium. Our profitability is based on keeping a
portion of the favorable experience before crediting the remainder to
policyholders. Term insurance products provide a guaranteed benefit for a
specified period of time in return for the payment of a fixed premium. Policy
dividends are not paid on term insurance. Our profitability is based on charging
a premium that is sufficient to cover the cost of insurance and expenses while
providing us with an appropriate return.

    DISABILITY INSURANCE.  Individual disability insurance products provide a
benefit in the event of the disability of the insured. In most instances, this
benefit is in the form of a monthly income. Disability insurance products
represented 8% of our individual life and disability insurance sales for the
three months ended March 31, 2001. In addition to income replacement, we offer
products to pay business overhead expenses for a disabled business owner, and
for the purchase by the other business owners of the disabled business owner's
interests in the business. Our profitability is based on charging a premium that
is sufficient to cover claims and expenses while providing us with an
appropriate return.

  MARKETS AND DISTRIBUTION

    We sell our individual products in all 50 states and the District of
Columbia. Our target market is owners and executives of small and medium-sized
businesses, as well as other individuals. Cash value life insurance provides
valuable benefits at death and funding for needs prior to death, including
funding employee benefit liabilities, estate planning, business continuation or
buy-out. We design, market and administer our products to meet these needs.
Variable universal life insurance is popular for many reasons, including higher
historical performance of equity investments resulting in a lower cost of
insurance and an increase in values available while still alive. We also offer
products specifically designed to meet the estate planning needs of business
executives. Our individual disability products are also tailored to the needs of
this market. Small and medium-sized businesses, their owners and executives
represented 64% of individual life insurance sales and 46% of individual
disability sales for the three months ended March 31, 2001, based on first-year
annualized premium.

    We distribute our individual insurance products primarily through our
affiliated financial representatives and secondarily through independent
brokers. Affiliated financial representatives were responsible for 74% of
individual life insurance sales, based on first-year annualized premium for the
three months ended March 31, 2001. We had

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1,008 affiliated financial representatives in 50 offices as of March 31, 2001.
Although they are independent contractors, we have a close tie with affiliated
financial representatives and offer them benefits, training and access to tools
and expertise. Independent brokers represented a larger percentage of individual
disability sales with 53% of first-year annualized premium for the three months
ended March 31, 2001.

GROUP LIFE AND HEALTH INSURANCE

    We began offering group insurance in 1941. We served approximately 82,000
employers and provided products and services to 5.0 million covered members as
of March 31, 2001. We were the 11th largest writer of group insurance in the
United States based on combined group life and health premium for 1999,
according to the 1999 National Underwriter Life and Health Statistical Report.
We offer a broad array of group insurance products including medical, life,
disability, dental and vision insurance. In addition, we also offer
administrative services on a fee-for-service basis to large employers in the
United States.

    The tables below show the premium and premium equivalents, reserves, and the
incurred loss ratios for our group insurance products sold in the United States
for the periods indicated:

                        GROUP LIFE AND HEALTH INSURANCE
                        PREMIUM AND PREMIUM EQUIVALENTS

                                                           FOR THE THREE
                                                              MONTHS
                                                               ENDED             FOR THE YEAR ENDED
                                                             MARCH 31,              DECEMBER 31,
                                                           -------------   ------------------------------
                                                               2001          2000       1999       1998
                                                           -------------   --------   --------   --------
                                                                          ($ IN MILLIONS)
                                                                                     
Life Insurance(1)........................................    $   59.3      $  277.7   $  273.6   $  350.8
Disability Insurance.....................................        24.0          94.5       86.8       83.3
Medical Insurance(2).....................................       410.0       1,815.6    1,876.7    1,817.3
Dental and Vision Insurance..............................        90.1         340.4      270.0      216.6
Fee-for-service..........................................       422.3       1,502.2    1,287.6    1,083.8
                                                             --------      --------   --------   --------
         Total...........................................    $1,005.7      $4,030.4   $3,794.7   $3,551.8
                                                             ========      ========   ========   ========

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

(1) Includes $58.6 million of premium in 1998 related to our decision to
    terminate two large government reinsurance pools.
(2) Includes $98.4 million, $164.6 million and $121.2 million of Medicare
    supplement insurance, for the years ended December 31, 2000, 1999 and 1998,
    respectively, all of which we reinsured effective July 1, 2000.

                        GROUP LIFE AND HEALTH INSURANCE
                       RESERVES AND INCURRED LOSS RATIOS

                                                              AS OF OR FOR
                                                               THE THREE
                                                                 MONTHS
                                                                 ENDED        AS OF OR FOR THE YEAR
                                                               MARCH 31,        ENDED DECEMBER 31,
                                                              ------------   ------------------------
                                                                  2001        2000     1999     1998
                                                              ------------   ------   ------   ------
                                                                          ($ IN MILLIONS)
                                                                                   
RESERVES:
Life Insurance..............................................     $254.6      $259.5   $262.2   $256.3
Disability Insurance........................................      271.6       269.0    259.5    254.0
Medical and Medicare Supplement Insurance(1)................      308.8       316.5    396.7    300.3
Dental and Vision Insurance.................................       30.4        28.2     23.8     20.6
                                                                 ------      ------   ------   ------
         Total Reserves.....................................     $865.4      $873.2   $942.2   $831.2
                                                                 ======      ======   ======   ======
INCURRED LOSS RATIOS:
Life Insurance..............................................         69%         70%      71%      79%
Disability Insurance........................................         86          85       80      102
Medical and Medicare Supplement Insurance...................         82          83       90       85
Dental and Vision Insurance.................................         77          76       77       77

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

(1) Includes $41.5 million, $46.7 million, $68.2 million and $40.6 million of
    Medicare supplement insurance, for the three months ended March 31, 2001,
    and the years ended December 31, 2000, 1999 and 1998, respectively, all of
    which we reinsured effective July 1, 2000.

  STRATEGY

    Our goal is to provide a broad range of employee benefit products and
services, particularly to small and medium-sized businesses. These products and
services complement those of our other businesses. Our strategic initiatives in
our group life and health insurance business are:

    IMPROVE THE PROFITABILITY OF OUR GROUP MEDICAL BUSINESS

    - Emphasize sale of medical insurance to groups of 51 to 500 employees.  Our
      ability to adjust pricing based on our underwriting standards for these
      groups is subject to less regulation than for the more regulated 50
      employee and under market, which comprised 78% of our medical premium for
      the three months ended March 31, 2001.

    - Exit areas of the group medical business with unsatisfactory returns.  We
      believe the following changes helped us improve the profitability of our
      group insurance business:

     -- We exited the "single life" group medical business for individuals under
        age 65 during 1997 and 1998 to focus on small and medium-sized
        businesses, where we believe we are well-positioned for success.

     -- In 1998, after determining that the HMO business did not meet our
        targeted financial returns on capital deployed, we terminated our active
        participation within that business.

     -- In 1998 and 1999, we exited the group medical insurance business in
        fourteen states where this business did not achieve our financial
        objectives.

     -- In January 2000, we ceased new sales, and in July 2000, we fully
        reinsured our Medicare supplement business due to poor financial results
        and an increasingly difficult regulatory environment, in order to focus
        on small and medium-sized businesses.

    - Strengthen pricing discipline.  For the year ended December 31, 2000, we
      have increased average premiums by 33% on renewals. These price increases
      contributed to an improvement in our medical loss ratio from 90% in 1999
      to 82% for the three months ended March 31, 2001, for our ongoing medical
      business.

    - Increase efficiency and decrease unit costs.  Through the use of
      technology, we have achieved strong gains in productivity. We plan to
      deliver during 2001 an Internet-based service platform to handle
      employer/employee changes, electronic bill presentment and payment,
      communication of claim information and on-line contracts and employee
      booklets. We expect this service platform to ultimately lower our unit
      costs and make it easier to do business with us.

    GROW OUR NON-MEDICAL PRODUCTS (LIFE, DISABILITY, DENTAL AND VISION)

    - Dedicate more sales efforts to non-medical products.  We intend to
      dedicate 30 non-medical sales representatives, wholesalers, to increase
      our focus on sales of our group, life, disability, dental and vision
      products. We are also expanding distribution through affiliated marketing
      arrangements such as general agents, non-proprietary alliances and
      Internet-based sales channels.

    - Emphasize the sale of non-medical products separately from the sale of our
      medical products.  Approximately 54% of our non-medical in-force contracts
      as of December 31, 1999 were not tied to a medical contract, whereas
      approximately 65% of our new non-medical sales for the year ended December
      31, 2000 are independent of a medical contract.

    - Concentrate on cross-selling additional non-medical products to existing
      non-medical customers including our asset accumulation customers.  Many
      small and medium-sized businesses do not offer dental insurance to their
      employees. We believe the dental insurance market has the potential for
      sales growth.

  PRODUCTS AND SERVICES

    Our U.S. group insurance products and services include:

    - life insurance;

    - disability insurance;

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    - medical insurance;

    - dental and vision insurance; and

    - fee-for-service.

    GROUP LIFE INSURANCE.  Group life insurance provides coverage to employees
and their dependents for a specified period. As of March 31, 2001, we had $71.5
billion of group life insurance in force covering 2.9 million individuals. We
carry both traditional group life insurance that does not provide for
accumulation of cash values and interest-sensitive group life insurance,
commonly known as group universal life, which provides for accumulation of cash
values. Our group life insurance business remains focused on the traditional
annually renewable term product. Group term life and group universal life
accounted for 90% and 10%, respectively, of our total group life insurance in
force as of March 31, 2001. According to the 2000 LIMRA International, Inc.
Sales and In Force Reports, we were ranked first in the United States in terms
of the number of contracts/employer groups for both sales and existing business
in 2000.

    GROUP DISABILITY INSURANCE.  Group disability insurance provides partial
replacement of earnings to insured employees who become disabled. Our group
disability products include both short-term and long-term disability. Long-term
disability represented 58% of our group disability premiums for the three months
ended March 31, 2001. In addition, we provide disability management services, or
rehabilitation services, to assist individuals in returning to work as quickly
as possible following disability. We also work with disability claimants to
improve the approval rate of Social Security benefits, thereby reducing payment
of benefits by the amount of Social Security payments received. For claims
incurred more than two years prior to March 31, 2001, we achieved an 88%
approval rate for such Social Security benefits. Our group disability business
was ranked seventh in the United States as of December 31, 2000 in terms of
number of contracts/employer groups in force, according to the 2000 LIMRA
International, Inc. Sales and In Force Reports.

    GROUP MEDICAL INSURANCE.  Group medical insurance provides partial
reimbursement of medical expenses for insured employees and their dependents.
Employees are responsible for deductibles, co-payments and co-insurance. We
believe our products are well-positioned to address our customers' preference
for a variety of provider choices and preferred provider discounts. We do not
offer unrestricted indemnity and no longer offer the pure HMO model.

    GROUP DENTAL AND VISION INSURANCE.  Group dental and vision insurance plans
provide partial reimbursement for dental and vision expenses. As of March 31,
2001, we had over 36,000 group dental and vision insurance plans in force. As of
December 31, 2000, we were the largest group indemnity dental insurer in terms
of 2000 sales based on total indemnity, and the largest in terms of number of
contracts/employer groups in force in 2000 based on total indemnity, according
to the 2000 LIMRA International, Inc. Sales and In Force Reports.

    FEE-FOR-SERVICE.  We offer administration of group disability, medical,
dental and vision services on a fee basis to larger employers.

  MARKETS AND DISTRIBUTION

    We market our group life, disability, medical, dental and vision insurance
products to small and medium-sized businesses to complement our retirement
services and individual insurance products. We market our fee-for-service
administration capabilities to larger employers that self-insure their
employees' health insurance benefits.

    We sell our group life, disability, dental and vision coverages in all 50
states and the District of Columbia. We have chosen to market our medical
insurance in 36 states which we believe have attractive market conditions. We
consider a market to be attractive if there is a lack of deep penetration by
HMOs and a favorable regulatory environment. We continually adapt our products
and pricing to meet local market conditions.

    We distribute our group insurance products through independent benefit
brokers, consultants, financial planners and the same channels that sell our
U.S. asset accumulation products. To reach these independent benefit brokers,
consultants and financial planners, we employ three types of wholesale
distributors:

    - our medical sales representatives;

    - our non-medical sales representatives; and

    - an independent wholesale organization, Rogers Benefit Group, dedicated to
      marketing group life, health and disability insurance products.

    As of March 31, 2001, we had 101 medical and non-medical sales
representatives and 32 service representatives in 57 offices. Our medical and
non-medical sales representatives accounted for 65%, 60%, 64% and 69% of our
group insurance sales for the three months ended March 31, 2001 and for the
years ended December 31, 2000, 1999 and 1998, respectively. These
representatives act as a unique combination of wholesalers and brokers. They are
an integral

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part of the sales process alongside the agent or independent broker. In addition
to a high level of involvement in the sales process, the group sales force plays
a key role in the ongoing servicing of the case by:

    - providing local responsive services to our customers, such as renewing
      contracts, revising plans and solving any administrative issues;

    - communicating the customers' needs and feedback to us; and

    - helping employees understand the benefits of their plan.

    Compensation for the group sales force is a blend of salary and
production-based incentives.

    Rogers Benefit Group is a marketing and service organization that represents
major high quality insurance carriers specializing in individual and group
medical programs, and group life, disability and dental plans. Our relationship
with Rogers Benefit Group dates back to its creation in 1970. It accounted for
35%, 40%, 36% and 31% of our group insurance sales, for the three months ended
March 31, 2001 and for the years ended December 31, 2000, 1999 and 1998,
respectively.

MORTGAGE BANKING SEGMENT

    We began our residential lending activities in 1936. Our Mortgage Banking
segment is primarily engaged in residential loan production and loan servicing
in the United States. Through our wholly owned subsidiary, Principal Residential
Mortgage, Inc., or PRMI, we originate, purchase, securitize, sell and service
mortgage loans. We principally originate "A" quality home mortgages and do not
originate sub-prime mortgages to any material degree, nor do we service or
purchase any sub-prime mortgage loans. "A" quality loans are generally defined
as loans eligible for sale to the Federal National Mortgage Association, or
Fannie Mae, Federal Home Loan Mortgage Corporation, or Freddie Mac and the
Government National Mortgage Association, or Ginnie Mae. According to Inside
Mortgage Finance, based on the unpaid balance of $57.3 billion in mortgage loans
in its servicing block, PRMI was ranked as the fourteenth largest mortgage
servicer in the United States as of March 31, 2001 and was ranked seventeenth in
production with $4.9 billion of new loans for the three months ended March 31,
2001.

    Our Mortgage Banking segment contributed 5%, 4%, 5% and 4% of our total
operating revenues and 14%, 8%, 12% and 22% of our total operating earnings for
the three months ended March 31, 2001 and the years ended December 31, 2000,
1999 and 1998, respectively. The table below shows operating revenues, operating
earnings and assets of our Mortgage Banking segment by loan production and loan
servicing for the periods indicated:

                                MORTGAGE BANKING
                         SELECTED FINANCIAL HIGHLIGHTS

                                                AS OF OR FOR
                                                 THE THREE
                                                MONTHS ENDED
                                                 MARCH 31,          AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                               --------------   ------------------------------------------------
                                                    2001             2000             1999             1998
                                               --------------   --------------   --------------   --------------
                                                                        ($ IN MILLIONS)
                                                                                     
OPERATING REVENUES:(1)
  Loan Servicing.............................  $   88.9    74%  $  313.8    87%  $  286.5    72%  $  235.4    69%
  Loan Production............................      30.7    26       46.0    13      111.8    28      105.2    31
                                               --------   ---   --------   ---   --------   ---   --------   ---
         Total...............................  $  119.6   100%  $  359.8   100%  $  398.3   100%  $  340.6   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===
OPERATING EARNINGS:
  Loan Servicing.............................  $   19.1    80%  $   63.9   128%  $   29.3    52%  $   35.5    60%
  Loan Production............................       4.8    20      (13.9)  (28)      27.5    48       23.3    40
                                               --------   ---   --------   ---   --------   ---   --------   ---
         Total...............................  $   23.9   100%  $   50.0   100%  $   56.8   100%  $   58.8   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===
ASSETS:
         Total...............................  $1,915.2   100%  $1,556.3   100%  $1,737.7   100%  $1,810.4   100%
                                               ========   ===   ========   ===   ========   ===   ========   ===

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

(1) Excludes net realized capital gains and their impact on recognition of
    front-end fee revenues.

  STRATEGY

    We pursue a balanced approach encompassing both loan servicing and loan
production activities. Periods of low interest rates increase the value and
volume of our loan production activities, while high interest rates increase the
value of our loan servicing rights since mortgage prepayments decline as
interest rates rise.

                                       124
   128

    We believe that residential mortgages play a central role in the financial
planning activities of Americans, as home ownership is a high priority for many
households. As such, residential mortgages represent a component of our overall
portfolio of customer-driven financial products and services. Our strategic
initiatives include:

    LEVERAGE OUR STRONG SERVICING PLATFORM

    - Concentrate on operating efficiencies and lowering our unit costs.  Our
      focus on servicing only "A" or "A-" quality loans ensures not only
      relatively high loan credit quality, but also allows us to better
      streamline our systems and processes, resulting in significant economies
      of scale. According to the 1999 Cost of Servicing Survey conducted by
      Mortgage Bankers Association of America, we serviced 1,670 loans per
      employee compared to an industry average of 1,119 as of December 31, 1999.
      For the three months ended March 31, 2001, we serviced 1,666 loans per
      employee. We decreased our servicing costs per loan from $62.54 in 1998 to
      $60.74 for the three months ended March 31, 2001, a reduction of 2.9%.

    - Increase servicing revenue per loan.  We have two sources of servicing
      revenues. First, we receive loan servicing fees from the guarantors or
      buyers of the mortgage-backed securities and loans we sell. Our servicing
      fee revenue per loan increased from $329 at the end of 1997 to $444 as of
      March 31, 2001, an increase of nearly 35%. The second source of revenue is
      ancillary fees we receive from the sale of optional products and services
      to our mortgage customers. For the three months ended March 31, 2001, we
      generated $13.81 per loan from the sale of such products and services,
      compared to $9.44 per loan in 1998.

    - Use technology to enhance our customer service.  We offer both an Internet
      site and touch-tone phone access to loan information. Both systems allow
      our customers to initiate various information and account requests which
      are performed entirely electronically.

    RETAIN EXISTING CUSTOMERS.  We believe we can profit from having existing
mortgage customers conduct repeat business with us, either by refinancing an
existing loan or by obtaining financing for a new home purchase. We actively
market refinance and new home purchase opportunities to our existing customers
via direct customer approaches such as targeted mail campaigns, in-bound and
out-bound telephone sales and web-based lending applications. We offer
simplified loan application, processing and closing services to existing
customers, thereby lowering the cost of refinancing to both the customer and to
us. We also offer a new mortgage application process to existing customers with
less documentation than would be required by another lender.

    CAPITALIZE ON THE CROSS-SALE OPPORTUNITIES WITH OUR OTHER LINES OF
BUSINESS.  While we have historically operated our mortgage banking operations
independently of our other businesses, as of March 31, 2001, 63,612 of our
583,860 mortgage customers owned one or more of our other products. We believe
this demonstrates potential for the cross-sale of our retirement investments and
insurance products and services to our residential mortgage customers. We
further believe that there is potential to cross-sell our mortgage banking
offerings to the approximately 13 million customers of our other lines of
business that did not have a residential mortgage relationship with us as of
March 31, 2001.

  LOAN PRODUCTION

    Our loan production strategy is to manage our four distribution channels,
correspondent lending, retail origination, wholesale lending and Mortgage
Direct, in a manner that is consistent with our loan servicing strategy. We
obtain new customers through each of our four production channels, with the
majority being obtained through our correspondent lending and wholesale lending
operations. Our Mortgage Direct operation, which is primarily involved with the
retention of current servicing portfolio customers, refinances current loans and
makes new loans to customers on new properties they purchase.

    We originate and purchase conventional mortgage loans, mortgage loans
insured by the Federal Housing Administration, or FHA, and mortgage loans
partially guaranteed by the Department of Veterans Affairs, or VA. A majority of
our conventional loans are conforming loans that qualify for inclusion in
guarantee programs sponsored by Fannie Mae or Freddie Mac. The remainder of the
conventional loans are non-conforming loans, such as jumbo loans with an
original balance in excess of $275,000 or other loans that do not meet Fannie
Mae or Freddie Mac guidelines. We neither originate nor purchase "B" or "C"
mortgages, defined as lower credit quality loans. However, we are beginning to
originate or purchase "A-" quality residential loans that are eligible for sale
to Fannie Mae or Freddie Mac. We believe this segment presents opportunities to
further penetrate the expanding U.S. housing market without presenting the types
of risks inherent in the subprime sector.

                                       125
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    The table below shows our loan production by loan type for the periods
indicated:

                                MORTGAGE BANKING
                          LOAN PRODUCTION BY LOAN TYPE

                                                        FOR THE THREE
                                                        MONTHS ENDED           FOR THE YEAR ENDED
                                                          MARCH 31,               DECEMBER 31,
                                                        -------------   --------------------------------
                                                            2001          2000       1999        1998
                                                        -------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                   
CONVENTIONAL LOANS:
  Number of loans.....................................      22,124        35,418      56,731      64,630
  Volume of loans.....................................    $3,244.8      $4,969.1   $ 7,307.4   $ 7,865.5
  Percent of total volume.............................          67%           60%         55%         65%
FHA/VA LOANS:
  Number of loans.....................................      13,797        31,093      57,592      44,009
  Volume of loans.....................................    $1,610.1      $3,342.7   $ 5,999.9   $ 4,255.0
  Percent of total volume.............................          33%           40%         45%         35%
TOTAL LOANS:
  Number of loans.....................................      35,921        66,511     114,323     108,639
  Volume of loans.....................................    $4,854.9      $8,311.8   $13,307.3   $12,120.5
  Average loan amount
  ($ in thousands)....................................    $  135.2      $  125.0   $   116.4   $   111.6

    The table below shows our loan production by purpose and by interest rate
type for the periods indicated:

                                MORTGAGE BANKING
               LOAN PRODUCTION BY PURPOSE AND INTEREST RATE TYPE

                                                        FOR THE THREE
                                                        MONTHS ENDED           FOR THE YEAR ENDED
                                                          MARCH 31,               DECEMBER 31,
                                                        -------------   --------------------------------
                                                            2001          2000       1999        1998
                                                        -------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                   
Purchase..............................................    $2,177.6      $6,930.1   $ 9,106.8   $ 6,294.0
Refinance.............................................     2,677.3       1,381.7     4,200.5     5,826.5
                                                          --------      --------   ---------   ---------
         Total........................................    $4,854.9      $8,311.8   $13,307.3   $12,120.5
                                                          ========      ========   =========   =========
Fixed Rate............................................    $4,798.0      $7,400.7   $12,449.4   $11,645.7
Adjustable Rate.......................................        52.3         854.1       683.8       388.9
Balloon...............................................         4.6          57.0       174.1        85.9
                                                          --------      --------   ---------   ---------
         Total........................................    $4,854.9      $8,311.8   $13,307.3   $12,120.5
                                                          ========      ========   =========   =========

    We are actively engaged in the loan production business via the following
distribution channels: correspondent lending; retail origination; wholesale and
Mortgage Direct.

    The table below shows our loan production by distribution channel for the
periods indicated:

                                MORTGAGE BANKING
                    LOAN PRODUCTION BY DISTRIBUTION CHANNEL

                                                        FOR THE THREE
                                                        MONTHS ENDED           FOR THE YEAR ENDED
                                                          MARCH 31,               DECEMBER 31,
                                                        -------------   --------------------------------
                                                            2001          2000       1999        1998
                                                        -------------   --------   ---------   ---------
                                                                        ($ IN MILLIONS)
                                                                                   
VOLUME OF LOANS:
  Correspondent Lending...............................    $3,499.9      $6,378.6   $10,545.4   $ 9,353.8
  Retail Origination..................................       363.4         734.4     1,088.8     1,721.1
  Wholesale...........................................       926.5       1,079.7     1,247.1       761.3
  Mortgage Direct.....................................        65.1         119.1       426.0       284.3
                                                          --------      --------   ---------   ---------
         Total........................................    $4,854.9      $8,311.8   $13,307.3   $12,120.5
                                                          ========      ========   =========   =========

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    CORRESPONDENT LENDING.  As of March 31, 2001, we had contracts with 420
lending institutions across the United States to purchase prime credit quality
loans on an ongoing basis. According to Inside Mortgage Finance, as of March 31,
2001, we were the tenth largest correspondent lender in the United States. High
quality financial institutions are approved to do business with us only after we
review their reputation, financial strength and lending expertise. Our
"Correspondent Lending Service Center" on the Internet currently offers online
access to loan registration, an interactive sellers' procedure manual,
seller-specific rate/price quotations and simplified contact information. We are
developing online technologies to offer automated underwriting systems, pipeline
reporting and account management tools and electronic business-to-business
capabilities for our correspondent sellers. Additionally, we are forging
numerous alliances with third-party service providers to further streamline
processes, improve productivity and provide outstanding customer service.

    RETAIL ORIGINATION.  Our retail channel originates prime credit quality
mortgages through referrals from real estate agents, builders and personal
contact with consumers through our nationwide network, which was comprised of
197 mortgage loan officers located in 51 offices as of March 31, 2001. We are
developing automated exchange service agreements which will allow retail loan
officers to establish reciprocal agreements with partners including realtors,
builders, attorneys, title companies and others to and from our Internet
website. This will enable us to build better relationships with such partners by
providing access to relevant information via the Internet for their convenience.

    WHOLESALE.  Our wholesale channel, which we acquired in 1998, originates or
purchases prime credit quality loans through 8 regional offices that worked
directly with 1,492 participating mortgage loan brokers across the United States
as of March 31, 2001. Mortgage loan brokers are approved only after a review of
their reputation and mortgage lending expertise. Through the "Wholesale Lending
Service Center" on our Internet website, wholesale lenders can retrieve contact
information and seller specific interest rate quotations. We have developed
plans and are working to provide online registration, automated underwriting
system, pipeline reporting and account management services to our brokers. We
are also developing electronic document delivery and execution capabilities for
wholesale sellers to exchange secure documents with wholesale purchasers.

    MORTGAGE DIRECT.  Our Mortgage Direct channel originates prime credit
quality mortgage loans through direct contact with current and new customers via
telephone and the Internet. The goal of our Internet channel is to give our
current customers access to a customer-focused website, allowing them to obtain
home financing quickly, confidently and at an attractive value, while preserving
acceptable profit margins for us. We believe that providing current customers
with choice, ease of access, convenient processes and simplified procedures will
cause a growing percentage of our customers to choose us for all of their home
financing needs.

    LOAN UNDERWRITING

    Our guidelines for underwriting conventional conforming loans comply with
the underwriting criteria employed by Fannie Mae and Freddie Mac. Our guidelines
for underwriting FHA-insured and VA-guaranteed loans comply with the criteria
established by those government entities. Our underwriting guidelines and
property standards for conventional non-conforming loans are based on the
underwriting standards employed by private investors for such loans. In
addition, conventional loans having a loan-to-value ratio greater than 80% at
origination, which are originated or purchased by us, are required to have
private mortgage insurance. Insurance is either paid for by the borrower or the
lender. Our underwriting standards generally allow loan-to-value at origination
of up to 97% for mortgage loans with an original principal balance of up to
$275,000. To determine whether a prospective borrower has sufficient monthly
income available to meet: (1) the borrower's monthly obligation on the proposed
mortgage loan and (2) monthly housing expenses and other financial obligations,
we generally use the guidelines, techniques and technology tools provided by our
investors.

    SALE OF LOANS

    As a mortgage banker, substantially all loans we originate or purchase are
sold without recourse, subject in the case of VA loans to the limits of the VA's
guaranty. Conforming conventional loans are generally pooled by us and exchanged
for securities guaranteed by Fannie Mae or Freddie Mac. These securities are
then sold to national or regional broker-dealers. Substantially all conventional
loans securitized through Fannie Mae or Freddie Mac are sold, subject to
representations and warranties made by us on a non-recourse basis, whereby
foreclosure losses are generally a liability of Fannie Mae or Freddie Mac. We
securitize substantially all of our FHA-insured and VA-guaranteed mortgage loans
through Ginnie Mae. The FHA insures us against foreclosure loss and the VA
provides partial guarantees against foreclosure loss. To guarantee timely and
full payment of principal and interest on Fannie Mae, Freddie Mac and Ginnie Mae
securities, we pay guarantee fees to these agencies.

  LOAN SERVICING

    We service residential mortgages in return for a servicing fee. Our
servicing division receives and processes mortgage payments for home owners,
remits payments to investors, holds escrow funds, contacts delinquent borrowers,
supervises foreclosures and property dispositions and performs other
miscellaneous duties related to loan

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administration. We acquire only "A" or "A-" quality home mortgages for
servicing. This practice simplifies the systems necessary for servicing and
reduces the amount of time and money spent on collections and foreclosure
administration activities. Our goal is to service, on a non-recourse basis, a
majority of the loans that we originate. In addition, we periodically purchase
bulk-servicing contracts, also on a non-recourse basis to us, on prime quality
mortgage loans originated by other lenders. Our bulk purchases focus primarily
on the acquisition of agency servicing packages. Factors which influence the
management of the servicing portfolio include the expected long-term and
short-term profitability of the servicing rights, customer retention objectives
and the potential cross-selling of retirement investments and insurance products
to home owners. Servicing contracts acquired through bulk purchases accounted
for 31% of our mortgage servicing portfolio as of March 31, 2001.

    The table below shows the composition of our servicing portfolio by type and
performance for the periods indicated:

                                MORTGAGE BANKING
           COMPOSITION OF SERVICING PORTFOLIO BY TYPE AND PERFORMANCE

                                                             AS OF
                                                           MARCH 31,          AS OF DECEMBER 31,
                                                           ---------   ---------------------------------
                                                             2001        2000        1999        1998
                                                           ---------   ---------   ---------   ---------
                                                                          ($ IN MILLIONS)
                                                                                   
Conventional Mortgage Loans..............................  $35,868.6   $34,396.3   $30,679.4   $22,839.6
FHA-Insured Mortgage Loans...............................  15,404.8     15,463.8    15,028.8    13,419.6
VA-Guaranteed Mortgage Loans.............................   6,031.4      6,127.3     6,167.3     5,713.8
                                                           ---------   ---------   ---------   ---------
         Total Servicing Portfolio.......................  $57,304.8   $55,987.4   $51,875.5   $41,973.0
                                                           =========   =========   =========   =========
DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT
  PERIOD END(1):
  30 Days................................................       3.5%         4.4%        3.4%        4.3%
  60 Days................................................       0.8          1.2         1.1         1.2
  90 Days or more........................................       0.3          0.5         0.5         0.8
                                                           ---------   ---------   ---------   ---------
         Total Delinquencies.............................       4.6%         6.1%        5.0%        6.3%
                                                           =========   =========   =========   =========
Foreclosures Pending.....................................       1.4%         1.3%        1.1%        1.1%

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

(1) Expressed as a percentage of the total number of loans serviced excluding
    sub-serviced loans.

    The table below shows the composition of our servicing portfolio by interest
rate as of March 31, 2001:

                                MORTGAGE BANKING
                      SERVICING PORTFOLIO BY INTEREST RATE
                              AS OF MARCH 31, 2001

                                                                                         AVERAGE MATURITY
INTEREST RATE                                  PRINCIPAL BALANCE   PERCENTAGE OF TOTAL       (YEARS)
- -------------                                  -----------------   -------------------   ----------------
                                                                    ($ IN MILLIONS)
                                                                                
7% and under.................................      $24,005.8                42%                24.1
7.01-8%......................................       26,014.5                45                 25.6
8.01-9%......................................        6,966.5                12                 25.7
9.01-10%.....................................          275.5                 1                 19.4
Over 10%.....................................           42.5                --                 12.8
                                                   ---------               ---
         Total...............................      $57,304.8               100%                25.0
                                                   =========               ===

    The weighted-average interest rate in our servicing portfolio as of March
31, 2001 was 7.36%. As of March 31, 2001, fixed rate loans comprised 94% of the
servicing portfolio and the weighted-average interest rate of the fixed-rate
loans was 7.33%.

                                       128
   132

    The table below shows the geographic distribution of our loan servicing
portfolio as of March 31, 2001:

                                MORTGAGE BANKING
               GEOGRAPHIC DISTRIBUTION OF LOAN SERVICING BY SIZE
                              AS OF MARCH 31, 2001

                                                               PERCENTAGE OF PRINCIPAL
                                                                  BALANCE SERVICED
                                                               -----------------------
                                                            
California..................................................             11.3%
Texas.......................................................              6.6
Virginia....................................................              5.7
Ohio........................................................              4.8
Minnesota...................................................              4.6
Pennsylvania................................................              4.2
North Carolina..............................................              4.2
Florida.....................................................              3.4
New Jersey..................................................              3.4
Others(1)...................................................             51.8
                                                                        -----
                                                                        100.0%
                                                                        =====

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

(1) No other state constitutes more than 3.4%.

  RISK MANAGEMENT

    Because mortgage lending is subject to asset valuation risk associated with
changes in interest rates, we manage and hedge our servicing assets and our "in
process" mortgage loan production pipeline. Using a balanced blend of
proprietary analytical models and purchased interest rate risk management tools,
we have developed a risk management protocol designed to reduce volatility.

    We use derivatives, such as interest rate swaps and floors, principal-only
swaps, Treasury futures contracts and options on Treasury futures contracts to
hedge a portion of our portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. To further minimize our exposure
to interest rate fluctuations, we seek a balance between loan servicing and loan
production, which are counter cyclical in nature. Historically, during periods
of low interest rates and the resulting increase in refinancings, revenue
generated by mortgage originations generally offsets revenue loss related to
prepayment of mortgages for which we provide servicing.

    In the normal course of business, our Mortgage Banking segment protects its
position in mortgages by taking positions in the options, futures and cash
markets. We hedge in the cash market by entering into forward delivery
contracts, which require us to deliver loans or mortgage-backed securities at a
future date at a preset price. All risk management activity is reviewed and
approved by a committee of our senior management.

  SEASONALITY

    The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of selling and reselling of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. This activity typically peaks during the spring and
summer seasons and declines to lower levels from mid-November through February.

CORPORATE AND OTHER SEGMENT

    Our Corporate and Other segment manages the assets representing capital that
has not been allocated to any other segment. These assets are primarily
comprised of fixed income securities, common stock and real estate investments.
Included among the common stock are our holdings in Coventry Health Care, Inc.,
which had a carrying value of $128.9 million as of March 31, 2001. All debt
service and interest expense and all inter-segment eliminations are included in
this segment. The assets in excess of that needed by the four operating segments
are held in the Corporate and Other segment.

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   133

    Our Corporate and Other segment generated 2%, 1%, 1% and 5% of our total
operating revenues and total operating earnings of $23.8 million, $67.7 million,
$9.5 million and operating loss of $(44.3) million for the three months ended
March 31, 2001 and for the years ended December 31, 2000, 1999 and 1998,
respectively. The table below shows operating revenues, operating earnings and
assets for our Corporate and Other segment for the periods indicated:

                              CORPORATE AND OTHER
                         SELECTED FINANCIAL HIGHLIGHTS

                                                              AS OF OR FOR THE
                                                                THREE MONTHS
                                                                   ENDED         AS OF OR FOR THE YEAR ENDED
                                                                 MARCH 31,               DECEMBER 31,
                                                              ----------------   ----------------------------
                                                                    2001          2000      1999       1998
                                                              ----------------   ------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                         
OPERATING REVENUES(1).......................................      $   35.0       $ 97.1   $   61.9   $  342.5
                                                                  ========       ======   ========   ========
OPERATING EARNINGS (LOSS)...................................      $   23.8       $ 67.7   $    9.5   $  (44.3)
                                                                  ========       ======   ========   ========
ASSETS......................................................      $1,017.9       $957.8   $1,121.5   $3,075.9
                                                                  ========       ======   ========   ========

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

(1) Total revenues, excluding net realized capital gains and their impact on
    recognition of front-end fee revenues.

COMPETITION

    Competition in our operating segments is based on a number of factors,
including service, product features, price, investment performance, commission
structure, distribution capacity, financial strength ratings and name
recognition. We compete for customers and distributors with a large number of
financial services companies such as banks, mutual funds, broker-dealers,
insurers and asset managers. Some of these companies offer a broader array of
products, more competitive pricing, greater diversity of distribution sources,
better brand recognition or, with respect to insurers, higher financial strength
ratings. Some may also have greater financial resources with which to compete or
may have better investment performance at various times.

    Competition in the retirement services market is very fragmented. Our main
competitors in this market include Fidelity, Nationwide, AXA, Mass Mutual and
Manulife. We believe the infrastructure and system support needed to meet the
needs of the small and medium-sized business market is a significant barrier to
entry for our competitors. Many of our competitors in the mutual fund industry
are larger, have been established for a longer period of time, offer less
expensive products, have deeper penetration in key distribution channels and
have more resources than we do. There were over 8,171 mutual funds in the United
States as of December 31, 2000, according to the Investment Company Institute
2001 Mutual Fund Fact Book. The institutional asset management market has grown
at a rapid pace over the last decade. Our primary competitors in this market are
large institutional asset management firms, such as J.P. Morgan Chase, Morgan
Stanley Asset Management and T. Rowe Price, many of which offer a broader array
of investment products and services and are better known. The asset management
business has relatively few barriers to entry and continually attracts new
entrants. The variable annuity market is also highly competitive. As we expand
into additional distribution channels for this product, we will face strong
competition from Nationwide and Hartford. Competition in the international
markets in which we operate comes primarily from local financial services firms
and other international companies operating on a stand-alone basis or in a
partnership with local firms, including ING, AXA, Allianz and AIG. In the highly
competitive group life and health insurance business, our competitors include
other insurers and health maintenance organizations such as The Northwestern
Mutual Life Insurance Company, Manulife and Aetna. The mortgage banking industry
is also highly competitive and fragmented and we compete with other mortgage
bankers, commercial banks, savings and loan associations, credit unions and
insurance companies such as Countrywide and Wells Fargo.

    We believe we distinguish ourselves from our competitors through our:

    - full-service platform;

    - strong customer relationships;

    - focus on financial performance; and

    - performance-oriented culture.

    On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the United States. The Act
permits mergers

                                       130
   134

that combine commercial banks, insurers and securities firms under one holding
company. Under the Act, national banks retain their existing ability to sell
insurance products in some circumstances. In addition, bank holding companies
that qualify and elect to be treated as "financial holding companies" may engage
in activities, and acquire companies engaged in activities, that are "financial"
in nature or "incidental" or "complementary" to such financial activities. This
includes acting as principal, agent or broker in selling life, property and
casualty and other forms of insurance, including annuities. A financial holding
company can own any kind of insurance company or insurance broker or agent, but
its bank subsidiary cannot own the insurance company. Under state law, the
financial holding company would need to apply to the insurance commissioner in
the insurer's state of domicile for prior approval of the acquisition of the
insurer. With the passage of the Gramm-Leach-Bliley Act, among other things,
bank holding companies may acquire insurers, and insurance holding companies may
acquire banks. The ability of banks to affiliate with insurance companies in the
United States may materially adversely affect all of our product lines by
substantially increasing the number, size and financial strength of potential
competitors.

RATINGS

    Insurance companies are assigned financial strength ratings by rating
agencies based upon factors relevant to policyholders. Ratings provide both
industry participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
stronger ability to pay claims.

    Principal Life has been assigned the following ratings as of March 31, 2001:

RATING AGENCY                           FINANCIAL STRENGTH RATING                RATING STRUCTURE
- --------------------------------------  --------------------------------------   ----------------------------------
                                                                           
A.M. Best Company, Inc.                 A+ ("Superior") with a stable outlook    Second highest of 16 rating levels
Fitch IBCA, Inc. (formerly Duff &       AA+ ("Very Strong") with a stable        Second highest of 24 rating levels
Phelps Credit Rating Company)           outlook
Moody's Investors Service               Aa2 ("Excellent") with a stable          Third highest of 21 rating levels
                                        outlook
Standard & Poor's Rating Services       AA ("Very Strong") with a stable         Third highest of 21 rating levels
                                        outlook

    A.M. Best's ratings for insurance companies range from "A++" to "S". A.M.
Best indicates that "A++" and "A+" ratings are assigned to those companies that
in A.M. Best's opinion have achieved superior overall performance when compared
to the norms of the life insurance industry and have demonstrated a strong
ability to meet their policyholder and other contractual obligations. Fitch's
ratings for insurance companies range from "AAA" to "D". Fitch indicates that
"AA" ratings are assigned to those companies that have demonstrated financial
strength and a very strong capacity to meet policyholder and contractholder
obligations on a timely basis. Moody's ratings for insurance companies range
from "Aaa" to "C". Moody's indicates that "A ("Excellent")" ratings are assigned
to those companies that have demonstrated excellent financial security. Standard
& Poor's ratings for insurance companies range from "AAA" to "R". Standard &
Poor's indicates that "AA" ratings are assigned to those companies that have
demonstrated very strong financial security. In evaluating a company's financial
and operating performance, these rating agencies review its profitability,
leverage and liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its policy reserves and the experience and competency of
its management.

    We believe that our strong ratings are an important factor in marketing our
products to our distributors and customers, since ratings information is broadly
disseminated and generally used throughout the industry. Our ratings reflect
each rating agency's opinion of our financial strength, operating performance
and ability to meet our obligations to policyholders and are not evaluations
directed toward the protection of investors. Such ratings are neither a rating
of securities nor a recommendation to buy, hold or sell any security, including
our common stock.

REINSURANCE

    Principal Life follows the standard industry practice of ceding portions of
its life insurance risks to other insurance companies. This permits us to write
larger policies than we would otherwise be comfortable retaining. Principal Life
usually enters into annually renewable term insurance contracts, which focus on
pure mortality risk. As of December 31, 2000, the amount of statutory premiums
ceded to third-party reinsurers totaled $44.1 million. Principal Life's primary
third-party reinsurer of individual life insurance policies at December 31, 2000
was Transamerica Occidental Life, which was rated A+ by A.M. Best. As of
December 31, 2000, the individual life insurance in force ceded to Transamerica
Occidental Life Insurance Company was $13.4 billion, which represented 9% of our
total net life insurance in force. Of the remaining individual life reinsurers,
no reinsurer has more than two percent of the total net insurance in force.

    For U.S. individual life insurance, we reinsure mortality risk in excess of
$7.5 million on any single life, whether that amount is from only one policy or
multiple policies. For individual disability insurance, we generally retain
between $4,000 and $10,000 of monthly benefit per insured life depending on the
type of coverage.

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    We acquire reinsurance on both our U.S. group life and disability insurance.
For group life insurance, we purchase catastrophic coverage for claims in excess
of $1.0 million where three or more insureds are involved in a catastrophe. We
also reinsure accidental death claims in excess of $500,000 for our group
universal life product. For group disability, we retain no more than $3,500 of
monthly benefit per insured life for cases with 2,000 or fewer employees. On
larger cases, we cede 80% of the claim risk. Effective July 1, 2000, we entered
into a reinsurance agreement with General & Cologne Life Re of America to
reinsure 100% of our Medicare supplement insurance business. We do not reinsure
our group dental or group vision products.

    Reinsurance does not discharge our obligation to pay policy claims on the
reinsured business. We remain responsible for paying claims, to the extent the
reinsurer fails to pay such claims. As a result, we seek to work only with
highly rated reinsurers that have passed an internal due diligence review.
Nevertheless, there can be no assurance that all our reinsurers will pay the
claims we make against them.

INSURANCE RESERVES

    We establish and report liabilities on our balance sheet to meet our future
obligations using both actuarial and GAAP principles. The reserves are based on
actuarially recognized methods using prescribed mortality and morbidity tables
and assumptions for estimating future policy benefits and claim experience. We
expect these reserve amounts, along with future premiums to be received on the
policy and investment earnings on these amounts, to be sufficient to meet our
contractual and policy obligations. Reserves include amounts for claims incurred
but not yet reported, claims reported but not yet paid and claims in the process
of settlement. Our GAAP-based reserves may vary from those calculated using
statutory accounting practices.

  GROUP HEALTH INSURANCE RESERVES

    The liability for unpaid group health claims, including medical, dental and
short term disability insurance, is an estimate of the ultimate net cost of both
reported and unreported losses not yet settled. We estimate this liability using
actuarial analyses and case basis evaluations. The primary reserve technique is
an evaluation of historical claim runout patterns and includes a provision for
adverse claim development. We also consider factors such as new sales,
terminations, seasonality, medical trend, claim backlog and past estimate
accuracy. Although considerable variability is inherent in such estimates, we
believe that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.

  DISABILITY INSURANCE RESERVES

    Reserves for long term disability insurance represent the present value of
benefits for current claimants. Claim benefit payments on long term disability
insurance policies consist of payments made monthly, in accordance with the
contractual terms of the policy. These payments begin at the claimant's
eligibility date as defined in the policy and end upon the earliest of the
claimant's recovery, the expiration of contract limitations included in the
policy or the claimant's death. The liability is estimated using industry
mortality and morbidity data, adjusted for our experience under these policies
and discounted at an appropriate rate of interest. Most policies provide for an
elimination period between the occurrence of the event causing a claimant's
disability and the date when such a claimant is eligible to receive disability
payments. In addition, some claims may not be filed promptly on the eligibility
date under the policy. Reserves for these incurred but not reported claims are
based upon industry factors for disability incidence, rates of termination from
disability and interest rates as modified by our experience under these
policies.

  LIFE INSURANCE RESERVES

    We calculate reserves for incurred but unreported claims using our
historical loss experience with due consideration to current in force volumes.
Reserves for claims that are in course of settlement and/or resisted are
calculated on a similar basis. The life waiver reserve liability measures the
present value of waiver of premium benefits under our group life and group
universal life insurance contracts. We use industry mortality and morbidity
tables and an appropriate rate of interest discount to calculate this liability.
Reserves for interest-sensitive life insurance are equal to cumulative premiums
less charges plus interest which represents the account balances that accrue to
the benefit of the policyholders. The reserve is identical to the current value
of the customer's account on deposit with us.

UNDERWRITING AND PRICING

    We follow detailed underwriting practices and procedures to assess and
quantify the nature and size of risks we are willing to accept as well as the
amount and type of reinsurance level appropriate for a particular type of risk.

    For U.S. individual life insurance, the level of medical and other data
collected on the insured varies by the size of the death benefit requested. For
small death benefits, we gather limited medical information. For large death
benefits, we require extensive medical, financial and other data from the
insured. These practices and procedures are designed to result in policies that
produce mortality experience consistent with the assumptions used in pricing the
product. The

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pricing of our products varies depending on the age, occupational
classification, type/amount of coverage/features purchased, and additional
ratings or exclusions based on medical history. For individual cases, we
underwrite each prospective insured based on the client's occupation, financial
and medical history.

    For U.S. group medical insurance, we have created a sophisticated claim
system that has the ability to automatically adjudicate a percentage of our
claims without claims examiner intervention. We receive and convert claims to an
electronic and imaged format to enable a paperless environment and to enhance
work flow processes. Once the claim is in the system, it is identified to the
member's account, verifying eligibility. We then determine if the services are
covered under the contract and the amount of benefit payable, using the contract
information built into our system. The adjudication process can be completed
automatically by the system, if the claim meets all system requirements. If the
claim cannot be processed automatically by the system, it will be assigned to a
claims examiner to process. Once the benefit has been determined, a disbursement
or explanation relative to our actions is submitted. As a quality control
measure, we review selected claims. For group insurance sold to smaller
employers, those with fewer than 50 employees, we obtain individual employee
health statements that are used to determine the initial medical premium for the
group or for non-medical coverages or to determine whether we will decline the
business. For larger groups, we assess the health of the group through a variety
of sources such as employee health statements, risk appraisal questionnaire or
prior claim history.

    For all of our U.S. individual insurance and group insurance products, we
base our underwriting practices on the historical claims experience for that
particular product. This experience includes not only the historical mortality
and/or morbidity experience of our existing individual insurance contracts, but
also the experience of the overall individual insurance industry and the general
population. We actively monitor our underwriting standards relative to those of
our competitors and our emerging claims experience to mitigate our exposure to
higher risk business and to stay abreast of market trends. Our underwriters
evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of medical tests to evaluate policy
applications, depending on the size of the policy, the age of the applicant and
other factors.

    Product pricing is reflective of our underwriting standards and is based on
our expected policyholder benefits, expenses, persistency and investment
returns. We designed product specifications to protect us against greater than
expected mortality and morbidity experience. We review pricing frequently to
ensure that it is consistent with recent claims experience. We also employ both
prospective and retroactive experience rating. Experience rating is the process
by which the premium charged to a group policyholder reflects a credit for
positive historical experience or a charge for poor experience. Small group
pricing must also meet stringent regulatory requirements.

    In developing pricing proposals for new general account guaranteed
investment contracts, our underwriters estimate both base-line cash flows and
also likely variance from the base-line due to plan participants reallocating
assets from the "stable value" option of their defined contribution plans. Our
underwriters utilize customized pricing models that generate plan-specific risk
charges for each customer's book value payment provision. If these pricing
models project the risk of losses exceeding customary thresholds, instead of
rejecting the business, our underwriters can modify the proposal by suggesting
the use of risk reduction techniques designed to shift some of the risk of
redemptions back to the plan or to a third-party.

    We underwrite immediate annuities using recent mortality experience and an
assumption of continued improvement in longevity. We underwrite deferred
annuities by analyzing not only mortality risk but also the expected time to
retirement.

    In Argentina, Chile and Mexico, we use underwriting and pricing practices
appropriate for the specific market where we conduct our operations.

PROPERTIES

    We own 26 properties in our home office complex in Des Moines, Iowa and in
various other locations. We lease office space for various offices located
throughout the United States and internationally. The normal lease term is 3 to
5 years, but some leases have terms of up to 10 years. Our annual rental expense
under these leases aggregated approximately $48.8 million for leases in place as
of March 31, 2001. We believe that our owned and leased properties are suitable
and adequate for our current business operations.

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 medical
insurance, life insurance, annuities and residential mortgages. In addition,
state 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.

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    Recently, companies in the life insurance business have faced extensive
claims, including class action lawsuits, alleging improper life insurance sales
practices. Principal Life is currently a defendant in two purported class action
lawsuits alleging improper sales practices. We have reached an agreement in
principle to settle both of those lawsuits. The settlement has received court
approval. We have established reserves at a level we believe sufficient to cover
the cost of the settlement.

    While we cannot predict the outcome of any pending or future litigation,
examination or investigation, we do not believe that any pending matter will
have a material adverse effect on our business, financial condition or results
of operations.

CUSTOMERS

    We had approximately thirteen million customers as of March 31, 2001, which
include employer sponsors of retirement and group insurance products and
services, employees and their covered dependents under employee benefit
arrangements, institutional investment management clients, individual insurance
policyholders, residential mortgage loan borrowers, mutual fund shareholders and
banking customers.

EMPLOYEES

    As of March 31, 2001, we had 17,363 employees. None of our employees is
subject to collective bargaining agreements governing employment with us. We
believe that our employee relations are satisfactory.

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                                  INVESTMENTS

    We had total consolidated assets as of March 31, 2001 of $82.4 billion, of
which $44.0 billion were invested assets. The rest of our total consolidated
assets are comprised primarily of separate account assets for which we do not
bear investment risk. Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $42.9 billion were held by
our U.S. operations and the remaining $1.1 billion were held by our
International Asset Management and Accumulation segment.

U.S INVESTMENT OPERATIONS

    Our U.S. invested assets are managed by Principal Capital Management, 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:

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

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

    - 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,
establishes all investment policies and reviews and approves all investments.
There are nine members on the Investment Committee, two of whom are members of
our board of directors. The remaining seven members are senior management
members representing various areas of our company.

    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 specializing in residential mortgage-backed
securities, commercial mortgage-backed securities and public below investment
grade securities monitor these investments. 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 6 months unless removed by our
analyst. The analyst monitors issuers on the list on a continuous basis with a
formal review documented every 6 months.

    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:

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

    - significant management or organizational changes;

    - significant uncertainty regarding the issuer's industry;

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

    - violation of financial covenants; and

    - other business factors that relate to the issuer.

    A dedicated risk management team is responsible for centralized monitoring
of the commercial mortgage portfolio. We apply a variety of strategies to
minimize credit risk in our commercial mortgage loan portfolio. When considering
the origination of new commercial mortgage loans, we review the cash flow
fundamentals of the property, make a physical assessment of the underlying
security, conduct a comprehensive market analysis and compare against industry
lending practices. We use a proprietary risk rating model to evaluate all new
and a majority of existing loans within the portfolio. The proprietary risk
model is designed to stress projected cash flows under simulated economic and
market downturns. Our lending guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze investments outside of these guidelines based on cash flow quality,
tenancy and other factors. From 1998 through March 31, 2001, the weighted
average loan-to-value ratio at origination for brick and mortar commercial
mortgages in our portfolio was in the 65%-68% range and debt service coverage
ratios at loan inception in the 1.6-1.7 times range.

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    We have limited exposure to equity risk in our common stock portfolio.
Equity securities accounted for only 1% of our U.S. invested assets as of March
31, 2001.

    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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Information
about Market Risk".

  OVERALL COMPOSITION OF U.S. INVESTED ASSETS

    U.S. invested assets as of March 31, 2001 were predominantly of high quality
and broadly diversified across asset class, individual credit, industry and
geographic location. As shown in the following table, the major categories of
U.S. invested assets are fixed maturity securities and commercial mortgages. The
remainder is invested in real estate, equity securities and other assets. In
addition, policy loans are included in our invested assets. We combined our
invested assets in the Closed Block with invested assets outside the Closed
Block in view of the similar asset quality characteristics of the two
portfolios. The following discussion analyzes the composition of U.S. invested
assets, which includes $3,987.0 million in invested assets of the Closed Block
as of March 31, 2001, but excludes invested assets of the participating separate
accounts.

                              U.S. INVESTED ASSETS

                                                 AS OF MARCH 31,                          AS OF DECEMBER 31,
                                                ------------------    -----------------------------------------------------------
                                                       2001                 2000                 1999                 1998
                                                ------------------    -----------------    -----------------    -----------------
                                                CARRYING     % OF     CARRYING    % OF     CARRYING    % OF     CARRYING    % OF
                                                 AMOUNT      TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL
                                                --------     -----    --------    -----    --------    -----    --------    -----
                                                                                 ($ IN MILLIONS)
                                                                                                    
Fixed maturity securities, available-for-sale
  Public......................................  $16,779.2      39%    $14,263.6     35%    $ 9,632.8     24%    $ 8,157.6     21%
  Private.....................................   11,523.3      27      11,611.4     28      12,951.5     32      13,674.9     34
Equity securities, available-for-sale.........      580.9       1         666.0      2         768.1      2         995.7      2
Mortgage loans
  Commercial..................................   10,491.7      24      10,775.3     26      12,588.9     31      12,157.2     31
  Residential.................................      716.8       2         550.5      1         651.0      2         997.4      2
Real estate held for sale.....................      488.8       1         695.4      2       1,033.4      3       1,049.8      3
Real estate held for investment...............      689.0       2         696.4      2       1,167.8      3       1,535.4      4
Policy loans..................................      819.3       2         803.6      2         780.5      2         766.2      2
Other investments.............................      767.8       2         681.2      2         514.0      1         339.8      1
                                                ---------    ----     ---------   ----     ---------   ----     ---------   ----
Total invested assets.........................  $42,856.8     100%    $40,743.4    100%    $40,088.0    100%    $39,674.0    100%
                                                             ====                 ====                 ====                 ====
Cash and cash equivalents.....................      408.5                 750.1                368.4                416.2
                                                ---------             ---------            ---------            ---------
Total invested assets and cash................  $43,265.3             $41,493.5            $40,456.4            $40,090.2
                                                =========             =========            =========            =========

    We actively manage public fixed maturity securities, including our portfolio
of residential mortgage-backed securities, in order to provide liquidity and
enhance yield and total return. Our residential mortgage-backed securities are
managed to ensure that the securities we hold trade close to or below par in
order to manage prepayment risk. This active management has resulted in the
realization of capital gains and losses with respect to such investments. In
1999 and 1998, we repositioned our investment portfolio by selling invested
assets with lower yields, primarily equity securities and real estate, and
reinvesting the proceeds in assets with higher yields, primarily debt
securities.

  U.S. INVESTMENT RESULTS

    The yield on U.S. invested assets and on cash and cash equivalents,
excluding net realized gains and losses, was 7.7% as of March 31, 2001 and 7.5%,
7.4% and 7.2% for the years ended December 31, 2000, 1999 and 1998,
respectively.

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    The table below illustrates the yields on average assets for each of the
components of our investment portfolio for the three months ended March 31,
2001, and the years ended December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
                              YIELDS BY ASSET TYPE

                                                   AS OF OR FOR THE
                                                     THREE MONTHS
                                                   ENDED MARCH 31,             AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                  ------------------   ---------------------------------------------------------
                                                         2001                2000                1999                1998
                                                  ------------------   -----------------   -----------------   -----------------
                                                  YIELD     AMOUNT     YIELD    AMOUNT     YIELD    AMOUNT     YIELD    AMOUNT
                                                  ------   ---------   -----   ---------   -----   ---------   -----   ---------
                                                                                 ($ IN MILLIONS)
                                                                                               
Fixed maturity securities, available-for-sale
  Gross investment income(1)....................     7.7%  $   523.5    7.5%   $ 1,813.3    7.4%   $ 1,651.4    7.2%   $ 1,546.0
  Net realized capital gains (losses)...........    (0.4)      (25.3)  (0.5)      (129.6)  (0.5)      (104.3)   0.1         28.8
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $   498.2           $ 1,683.7           $ 1,547.1           $ 1,574.8
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $28,302.5           $25,875.0           $22,584.3           $21,832.5
Equity securities, available-for-sale
  Gross investment income(1)....................     2.4%  $     3.8    9.4%   $    67.1    4.4%   $    39.2    2.7%   $    30.5
  Net realized capital gains (losses)...........   (23.0)      (35.8)  11.2         80.3   43.2        381.4   27.3        302.7
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $   (32.0)          $   147.4           $   420.6           $   333.2
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $   580.9           $   666.0           $   768.1           $   995.7
Mortgage loans -- Commercial
  Gross investment income(1)....................     7.8%  $   207.3    8.2%   $   955.6    8.1%   $ 1,005.8    8.5%   $ 1,053.8
  Net realized capital gains (losses)...........     0.3         8.8    0.1          8.6   (0.1)        (8.4)   0.1          6.3
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $   216.1           $   964.2           $   997.4           $ 1,060.1
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $10,491.7           $10,775.3           $12,588.9           $12,157.2
Mortgage loans -- Residential
  Gross investment income(1)....................     7.1%  $    11.2    9.3%   $    56.1   11.9%   $    98.3   10.3%   $    89.2
  Net realized capital gains (losses)...........      --          --     --           --     --           --     --           --
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $    11.2           $    56.1           $    98.3           $    89.2
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $   716.8           $   550.5           $   651.0           $   997.4
Real estate
  Gross investment income(1)....................    19.7%  $    63.2    9.5%   $   170.8    7.8%   $   187.1    5.6%   $   143.2
  Net realized capital gains (losses)...........     6.5        20.9    4.6         82.3    2.4         56.4    4.7        120.6
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $    84.1           $   253.1           $   243.5           $   263.8
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $ 1,177.8           $ 1,391.8           $ 2,201.2           $ 2,585.2
Policy loans
  Gross investment income(1)....................     7.0%  $    14.3    7.0%   $    55.1    6.5%   $    50.2    6.7%   $    50.9
  Net realized capital gains (losses)...........      --          --     --           --     --           --     --           --
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $    14.3           $    55.1           $    50.2           $    50.9
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $   819.3           $   803.6           $   780.5           $   766.2
Cash and cash equivalents
  Gross investment income(1)....................    (1.1)% $    (1.6)   4.3%   $    24.0    5.1%   $    20.0    1.1%   $     5.1
  Net realized capital gains (losses)...........      --          --   (0.5)        (2.7)    --         (0.1)  (0.1)        (0.2)
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $    (1.6)          $    21.3           $    19.9           $     4.9
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $   408.5           $   750.1           $   368.4           $   416.2
Other investments
  Gross investment income(1)....................    10.4%  $    18.9   10.4%   $    62.0    9.2%   $    39.4   47.3%   $   106.5
  Net realized capital gains (losses)...........    (6.5)      (11.8)  16.4         98.2   16.6         70.8   (2.6)        (5.9)
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $     7.1           $   160.2           $   110.2           $   100.6
                                                           =========           =========           =========           =========
  Ending assets (at carrying value).............           $   767.8           $   681.2           $   514.0           $   339.8
Total before investment expenses
  Gross investment income.......................     7.9%  $   840.6    7.8%   $ 3,204.0    7.7%   $ 3,091.4    7.5%   $ 3,025.2
  Net realized capital gains (losses)...........    (0.4)      (43.2)   0.3        137.1    1.0        395.8    1.1        452.3
                                                           ---------           ---------           ---------           ---------
  Total.........................................           $   797.4           $ 3,341.1           $ 3,487.2           $ 3,477.5
                                                           =========           =========           =========           =========
Investment expenses.............................     0.3%  $    27.0    0.3%   $   136.7    0.3%   $   113.5    0.3%   $   139.2
Net investment income...........................     7.7%  $   813.6    7.5%   $ 3,067.3    7.4%   $ 2,977.9    7.2%   $ 2,886.0

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

(1) Yields, which are annualized for interim periods, are based on quarterly
    average asset carrying values for the three months ended March 31, 2001, and
    annual average asset carrying values for the years ended December 31, 2000,
    1999 and 1998.

    FIXED MATURITY SECURITIES

    We have classified all of our fixed maturity and equity securities as
available-for-sale. Accordingly, we mark such securities to market, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity on our balance sheet. We write down to fair value securities
whose value is deemed other than temporarily

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impaired. We record writedowns as realized losses included in earnings and
adjust the cost basis of such securities to fair value. The new cost basis is
not changed for subsequent recoveries in value.

    Fixed maturity securities consist of short-term investments, publicly traded
debt securities, privately placed debt securities and small amounts of
redeemable preferred stock, and represented 66% of total U.S. invested assets as
of March 31, 2001 and 63%, 56% and 55% as of December 31, 2000, 1999 and 1998,
respectively. The fixed maturity securities portfolio was comprised, based on
carrying amount, of 59% in publicly traded fixed maturity securities and 41% in
privately placed fixed maturity securities as of March 31, 2001, and 55% in
publicly traded fixed maturity securities and 45% in privately placed fixed
maturity securities as of December 31, 2000. Included in the privately placed
category as of March 31, 2001 were $3.6 billion of securities eligible for
resale to qualified institutional buyers under Rule 144A under the Securities
Act of 1933. Fixed maturity securities were diversified by category of issuer as
of March 31, 2001, and for the years ended December 31, 2000, 1999 and 1998 as
shown in the table below:

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

                                                    AS OF MARCH 31,                       AS OF DECEMBER 31,
                                                   -----------------   ---------------------------------------------------------
                                                         2001                2000                1999                1998
                                                   -----------------   -----------------   -----------------   -----------------
                                                   CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                                    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                   ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                                  ($ IN MILLIONS)
                                                                                                   
U.S. Treasury securities and obligations of U.S.
  Government corporations and agencies...........  $    10.6     --%   $    21.3     --%   $   161.3      1%   $   300.0      1%
States and political subdivisions................      295.6      1        295.7      1        167.5      1        147.7      1
Non-U.S. governments.............................      662.6      2        604.3      2        490.4      2        295.2      1
Corporate-public.................................   10,972.7     39      8,740.8     34      5,104.3     22      3,925.1     18
Corporate-private................................    9,706.9     34      9,796.6     38     11,218.0     50     12,085.7     56
Mortgage-backed securities and other asset backed
  securities.....................................    6,654.1     24      6,416.3     25      5,442.8     24      5,078.8     23
                                                   ---------    ---    ---------    ---    ---------    ---    ---------    ---
        Total fixed maturities...................  $28,302.5    100%   $25,875.0    100%   $22,584.3    100%   $21,832.5    100%
                                                   =========    ===    =========    ===    =========    ===    =========    ===

    The international exposure in our U.S. invested assets totaled $4,015.3
million, or 14% of total fixed maturity securities, as of March 31, 2001,
comprised of corporate and foreign government fixed maturity securities. Of the
$4,015.3 million, investments totaled $1,090.1 million in the United Kingdom,
$798.9 million in the continental European Union, $495.1 million in Asia, $375.6
million in Australia, $373.1 million in South America and $27.8 million in
Japan. The remaining $854.7 million was invested in 16 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 15% of total statutory general account assets
with a 4% limit in emerging markets.

    The Securities Valuation Office of the NAIC evaluates most of the fixed
maturity securities that we and other U.S. insurance companies hold. The
Securities Valuation Office 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.

                                       138
   142

    The tables below present our publicly traded, privately placed and total
fixed maturity securities by NAIC Designation and the equivalent ratings of the
nationally recognized securities rating organizations as of March 31, 2001, and
December 31, 2000, 1999 and 1998, as well as the percentage, based on estimated
fair value, that each designation comprises:

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

                                                      AS OF MARCH 31, 2001             AS OF DECEMBER 31, 2000
                                                --------------------------------   --------------------------------
                                                                          % OF                               % OF
                                                                         TOTAL                              TOTAL
NAIC                                            AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING         RATING AGENCY EQUIVALENT           COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
- ------  --------------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                          ($ IN MILLIONS)
                                                                                      
1       Aaa/Aa/A..............................  $10,209.8   $10,635.6      63%     $9,029.4    $ 9,283.0      65%
2       Baa...................................   5,403.3      5,545.4      33       4,432.3      4,492.8      32
3       Ba....................................     439.3        444.5       3         451.7        434.1       3
4       B.....................................     109.6        103.9       1          44.4         21.9      --
5       Caa and lower.........................      36.8         25.1      --          27.7         27.3      --
6       In or near default....................      54.5         24.7      --          14.9          4.5      --
                                                ---------   ---------     ---      ---------   ---------     ---
        Total public fixed maturities.........  $16,253.3   $16,779.2     100%     $14,000.4   $14,263.6     100%
                                                =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999           AS OF DECEMBER 31, 1998
        -------------------------------   -------------------------------
                                 % OF                              % OF
                                TOTAL                             TOTAL
NAIC    AMORTIZED   CARRYING   CARRYING   AMORTIZED   CARRYING   CARRYING
RATING    COST       AMOUNT     AMOUNT      COST       AMOUNT     AMOUNT
- ------  ---------   --------   --------   ---------   --------   --------
                                 ($ IN MILLIONS)
                                               
1       $6,991.9    $6,888.4      72%     $6,051.4    $6,294.3      77%
2        2,458.3    2,424.8       25       1,423.9    1,491.7       19
3          234.8      233.0        3         325.2      345.2        4
4           35.7       36.0       --           6.8        6.5       --
5           27.3       28.3       --          14.9        3.8       --
6           58.0       22.3       --          50.9       16.1       --
        --------    --------     ---      --------    --------     ---
        $9,806.0    $9,632.8     100%     $7,873.1    $8,157.6     100%
        ========    ========     ===      ========    ========     ===

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

                                                    AS OF MARCH 31, 2001             AS OF DECEMBER 31, 2000
                                              --------------------------------   --------------------------------
                                                                        % OF                               % OF
                                                                       TOTAL                              TOTAL
NAIC                                          AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING        RATING AGENCY EQUIVALENT          COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
- ------  ------------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                        ($ IN MILLIONS)
                                                                                    
1       Aaa/Aa/A............................  $5,055.0    $ 5,189.8      45%     $5,155.9    $ 5,213.9      45%
2       Baa.................................   4,625.5      4,743.2      41       4,749.2      4,822.0      42
3       Ba..................................   1,157.6      1,159.3      10       1,151.3      1,126.5      10
4       B...................................     319.6        310.6       3         349.5        335.4       3
5       Caa and lower.......................      55.1         25.1      --          73.3         40.7      --
6       In or near default..................     134.8         95.3       1         111.0         72.9      --
                                              ---------   ---------     ---      ---------   ---------     ---
        Total public fixed maturities.......  $11,347.6   $11,523.3     100%     $11,590.2   $11,611.4     100%
                                              =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999            AS OF DECEMBER 31, 1998
        --------------------------------   --------------------------------
                                  % OF                               % OF
                                 TOTAL                              TOTAL
NAIC    AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING    COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
- ------  ---------   ---------   --------   ---------   ---------   --------
                                  ($ IN MILLIONS)
                                                 
1       $5,775.8    $ 5,652.9      44%     $5,525.4    $ 5,837.6      42%
2        5,648.6      5,561.8      43       5,968.2      6,285.9      46
3        1,403.7      1,355.9      10       1,174.9      1,215.7       9
4          223.9        210.7       2         251.6        249.8       2
5          112.4        110.0       1           9.3          9.2      --
6           81.1         60.2      --         105.5         76.7       1
        ---------   ---------     ---      ---------   ---------     ---
        $13,245.5   $12,951.5     100%     $13,034.9   $13,674.9     100%
        =========   =========     ===      =========   =========     ===

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

                                                     AS OF MARCH 31, 2001             AS OF DECEMBER 31, 2000
                                               --------------------------------   --------------------------------
                                                                         % OF                               % OF
                                                                        TOTAL                              TOTAL
NAIC                                           AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING        RATING AGENCY EQUIVALENT           COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
- ------  -------------------------------------  ---------   ---------   --------   ---------   ---------   --------
                                                                         ($ IN MILLIONS)
                                                                                     
1       Aaa/Aa/A.............................  $15,264.8   $15,825.4      56%     $14,185.3   $14,496.9      56%
2       Baa..................................  10,028.8     10,288.6      36        9,181.5     9,314.8      36
3       Ba...................................   1,596.9      1,603.8       6        1,603.0     1,560.6       6
4       B....................................     429.2        414.5       2          393.9       357.3       2
5       Caa and lower........................      91.9         50.2      --          101.0        68.0      --
6       In or near default...................     189.3        120.0      --          125.9        77.4      --
                                               ---------   ---------     ---      ---------   ---------     ---
        Total public fixed maturities........  $27,600.9   $28,302.5     100%     $25,590.6   $25,875.0     100%
                                               =========   =========     ===      =========   =========     ===

            AS OF DECEMBER 31, 1999            AS OF DECEMBER 31, 1998
        --------------------------------   --------------------------------
                                  % OF                               % OF
                                 TOTAL                              TOTAL
NAIC    AMORTIZED   CARRYING    CARRYING   AMORTIZED   CARRYING    CARRYING
RATING    COST       AMOUNT      AMOUNT      COST       AMOUNT      AMOUNT
- ------  ---------   ---------   --------   ---------   ---------   --------
                                  ($ IN MILLIONS)
                                                 
1       $12,767.7   $12,541.3      56%     $11,576.8   $12,131.9      55%
2        8,106.9      7,986.6      35       7,392.1      7,777.6      36
3        1,638.4      1,588.9       7       1,500.1      1,560.9       7
4          259.6        246.7       1         258.4        256.3       1
5          139.8        138.3       1          24.2         13.0      --
6          139.1         82.5      --         156.4         92.8       1
        ---------   ---------     ---      ---------   ---------     ---
        $23,051.5   $22,584.3     100%     $20,908.0   $21,832.5     100%
        =========   =========     ===      =========   =========     ===

    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. We typically invest up to 7% of
general account cash flow 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 portfolio.

    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. As of March 31, 2001, 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 92%.

                                       139
   143

    The tables below show the carrying amount of our corporate fixed maturity
securities by industry category, as well as the percentage of the total
corporate portfolio that each industry category comprises as of March 31, 2001,
and December 31, 2000, 1999, and 1998. The tables also show by industry category
the relative amounts of publicly traded and privately placed securities.

                              U.S. INVESTED ASSETS
 CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF MARCH 31, 2001

                                                          PUBLICLY TRADED    PRIVATELY PLACED         TOTAL
                                                         -----------------   ----------------   -----------------
                                                         CARRYING    % OF    CARRYING   % OF    CARRYING    % OF
                                                          AMOUNT     TOTAL    AMOUNT    TOTAL    AMOUNT     TOTAL
                                                         ---------   -----   --------   -----   ---------   -----
                                                                             ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Transportation and Public Utilities....................  $ 4,102.8     37%   $1,987.0     20%   $ 6,089.8     29%
Finance, Insurance and Real Estate.....................    3,325.9     30    2,170.4      22      5,496.3     27
Manufacturing..........................................    2,150.3     20    2,825.9      29      4,976.2     24
Mining.................................................      611.5      6      946.8      10      1,558.3      8
Retail.................................................      416.3      4      793.5       8      1,209.8      6
Services...............................................      323.8      3      723.2       8      1,047.0      5
Agriculture, Forestry and Fishing......................       35.7     --       50.9       1         86.6     --
Construction...........................................        3.2     --      121.4       1        124.6      1
Public Administration..................................        3.2     --       87.8       1         91.0     --
                                                         ---------    ---    --------    ---    ---------    ---
Total..................................................  $10,972.7    100%   $9,706.9    100%   $20,679.6    100%
                                                         =========    ===    ========    ===    =========    ===

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      2000

                                                          PUBLICLY TRADED    PRIVATELY PLACED         TOTAL
                                                          ----------------   ----------------   -----------------
                                                          CARRYING   % OF    CARRYING   % OF    CARRYING    % OF
                                                           AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT     TOTAL
                                                          --------   -----   --------   -----   ---------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Transportation and Public Utilities.....................  $3,197.1     37%   $1,957.9     20%   $ 5,155.0     28%
Finance, Insurance and Real Estate......................  2,657.1      30    2,300.9      24      4,958.0     27
Manufacturing...........................................  1,678.9      19    2,845.9      29      4,524.8     24
Mining..................................................    496.1       6      936.8      10      1,432.9      8
Services................................................    351.5       4      686.3       7      1,037.8      5
Retail..................................................    295.2       3      795.9       8      1,091.1      6
Agriculture, Forestry and Fishing.......................     34.7       1       41.2      --         75.9     --
Public Administration...................................     20.3      --      111.4       1        131.7      1
Construction............................................      9.9      --      120.3       1        130.2      1
                                                          --------    ---    --------    ---    ---------    ---
Total...................................................  $8,740.8    100%   $9,796.6    100%   $18,537.4    100%
                                                          ========    ===    ========    ===    =========    ===

                                       140
   144

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      1999

                                                         PUBLICLY TRADED    PRIVATELY PLACED          TOTAL
                                                         ----------------   -----------------   -----------------
                                                         CARRYING   % OF    CARRYING    % OF    CARRYING    % OF
                                                          AMOUNT    TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                         --------   -----   ---------   -----   ---------   -----
                                                                             ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.....................  $2,178.0     43%   $ 2,426.8     22%   $ 4,604.8     28%
Manufacturing..........................................  1,280.3      25      3,793.4     34      5,073.7     31
Transportation and Public Utilities....................    655.1      13      2,033.0     18      2,688.1     16
Services...............................................    374.2       7        803.6      7      1,177.8      7
Mining.................................................    296.3       6        963.9      9      1,260.2      8
Retail.................................................    247.8       5        923.9      8      1,171.7      7
Agriculture, Forestry and Fishing......................     60.1       1         42.6     --        102.7      1
Public Administration..................................      9.6      --         70.0      1         79.6      1
Construction...........................................      2.9      --        160.8      1        163.7      1
                                                         --------    ---    ---------    ---    ---------    ---
Total..................................................  $5,104.3    100%   $11,218.0    100%   $16,322.3    100%
                                                         ========    ===    =========    ===    =========    ===

                              U.S. INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      1998

                                                                PUBLICLY
                                                                 TRADED        PRIVATELY PLACED          TOTAL
                                                            ----------------   -----------------   -----------------
                                                            CARRYING   % OF    CARRYING    % OF    CARRYING    % OF
                                                             AMOUNT    TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                                            --------   -----   ---------   -----   ---------   -----
                                                                                ($ IN MILLIONS)
                                                                                             
INDUSTRY CLASS
Finance, Insurance and Real Estate........................  $1,713.6     44%   $ 2,241.1     18%   $ 3,954.7     25%
Manufacturing.............................................  1,131.3      29      4,582.8     38      5,714.1     36
Transportation and Public Utilities.......................    459.6      12      2,245.0     18      2,704.6     17
Retail....................................................    244.1       6        944.7      8      1,188.8      7
Mining....................................................    221.8       6        953.0      8      1,174.8      7
Services..................................................    100.2       2        788.4      7        888.6      6
Public Administration.....................................     35.9       1        127.7      1        163.6      1
Construction..............................................     18.6      --        142.6      1        161.2      1
Agriculture, Forestry and Fishing.........................       --      --         60.4      1         60.4     --
                                                            --------    ---    ---------    ---    ---------    ---
         Total............................................  $3,925.1    100%   $12,085.7    100%   $16,010.8    100%
                                                            ========    ===    =========    ===    =========    ===

    As of March 31, 2001, our largest unaffiliated single concentration of fixed
maturity securities consisted of $345.7 million of corporate bonds by Ford Motor
Company and its affiliates. This represented approximately 1% of our total U.S.
invested assets as of March 31, 2001. No other individual non-government issuer
represented more than 1% of U.S. invested assets.

    We held $6,654.1 million of mortgage-backed and asset-backed securities as
of March 31, 2001, and $6,416.3 million, $5,442.8 million and $5,078.8 million
as of December 31, 2000, 1999 and 1998, respectively. The table below presents
the types of mortgage-backed securities ("MBSs"), as well as other asset-backed
securities, held as of the dates indicated.

                              U.S. INVESTED ASSETS
                      MORTGAGE AND ASSET-BACKED SECURITIES

                                                              CARRYING AMOUNT       CARRYING AMOUNT AS OF
                                                              AS OF MARCH 31,            DECEMBER 31,
                                                              ---------------   ------------------------------
                                                                   2001           2000       1999       1998
                                                              ---------------   --------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                          
Residential pass-through securities.........................     $3,449.7       $3,426.5   $2,971.6   $2,968.8
Commercial MBS..............................................      1,586.7        1,403.4      969.4      677.4
Asset-backed securities.....................................      1,617.7        1,586.4    1,501.8    1,432.6
                                                                 --------       --------   --------   --------
         Total MBSs and asset-backed securities.............     $6,654.1       $6,416.3   $5,442.8   $5,078.8
                                                                 ========       ========   ========   ========

                                       141
   145

    We believe that it is desirable to hold residential mortgage-backed
securities due to their credit quality and liquidity as well as portfolio
diversification characteristics. Our portfolio is comprised of GNMA, FNMA and
FHLMC pass-through securities and is actively managed to ensure that the
securities held are trading close to or below par, in order to reduce risk of
prepayments. As of March 31, 2001, we held no collateralized mortgage
obligations in our U.S. invested asset portfolio.

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

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

                              U.S. INVESTED ASSETS
                        ASSET-BACKED SECURITIES BY TYPE

                                                              CARRYING AMOUNT       CARRYING AMOUNT AS OF
                                                              AS OF MARCH 31,            DECEMBER 31,
                                                              ---------------   ------------------------------
                                                                   2001           2000       1999       1998
                                                              ---------------   --------   --------   --------
                                                                              ($ IN MILLIONS)
                                                                                          
Credit cards................................................     $  209.4       $  220.0   $  260.9   $  115.1
Automobile receivables......................................         71.2           72.2       81.0       46.1
Collateralized debt obligations.............................        634.4          579.1      654.2      545.8
Lease receivables...........................................        182.4          198.9      289.1      402.4
Consumer loans..............................................        141.1          145.0      168.5       42.9
Other.......................................................        379.2          371.2       48.1      280.3
                                                                 --------       --------   --------   --------
         Total ABS..........................................     $1,617.7       $1,586.4   $1,501.8   $1,432.6
                                                                 ========       ========   ========   ========

                                       142
   146

    In accordance with our asset liability risk management techniques, we manage
the expected lives of U.S. invested assets to be similar to the lives of our
liabilities. Significant amounts of our liabilities have an expected life of six
years or less. Therefore, comparable amounts of assets have a similar expected
life. The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, excluding scheduled sinking funds, as of March
31, 2001, and as of December 31, 2000 and 1999, respectively is as follows:

                              U.S. INVESTED ASSETS
            FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES

                                                                                   AS OF DECEMBER 31,
                                                                    -------------------------------------------------
                                           AS OF MARCH 31, 2001              2000                      1999
                                          -----------------------   -----------------------   -----------------------
                                           AMORTIZED    CARRYING     AMORTIZED    CARRYING     AMORTIZED    CARRYING
                                             COST        AMOUNT        COST        AMOUNT        COST        AMOUNT
                                          -----------   ---------   -----------   ---------   -----------   ---------
                                                                        ($ IN MILLIONS)
                                                                                          
Due in one year or less.................   $ 1,142.7    $ 1,147.2    $ 1,093.6    $ 1,083.8    $ 1,263.5    $ 1,261.6
Due after one year through five years...    10,362.9     10,512.0      9,691.0      9,687.7      8,263.0      8,130.0
Due after five years through ten
  years.................................     5,556.9      5,738.5      5,058.0      5,135.6      4,908.4      4,820.6
Due after ten years.....................     4,118.5      4,250.7      3,505.4      3,551.6      3,056.4      2,929.3
                                           ---------    ---------    ---------    ---------    ---------    ---------
  Subtotal..............................    21,181.0     21,648.4     19,348.0     19,458.7     17,491.3     17,141.5
Mortgage-backed and other securities
  without a single maturity date........     6,419.9      6,654.1      6,242.6      6,416.3      5,560.2      5,442.8
                                           ---------    ---------    ---------    ---------    ---------    ---------
         Total..........................   $27,600.9    $28,302.5    $25,590.6    $25,875.0    $23,051.5    $22,584.3
                                           =========    =========    =========    =========    =========    =========

    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 (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 management as to the likely future industry
conditions and developments with respect to the issuer. We define restructured
securities in our fixed maturity portfolio as securities where a concession has
been granted to the borrower related to the borrower's financial difficulties
that would not have otherwise been considered. We determine that restructures
should occur in those instances where greater economic value will be realized
under the new terms than through liquidation or other disposition and may
involve a change in contractual cash flows.

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

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

                                                             AS OF MARCH 31,          AS OF DECEMBER 31,
                                                             ---------------   ---------------------------------
                                                                  2001           2000        1999        1998
                                                             ---------------   ---------   ---------   ---------
                                                                               ($ IN MILLIONS)
                                                                                           
Total fixed maturity securities (public and private).......     $28,302.5      $25,875.0   $22,584.3   $21,832.5
                                                                =========      =========   =========   =========
Problem fixed maturity securities..........................     $    69.2      $    79.0   $    85.1   $    92.5
Potential problem fixed maturity securities................         139.9          132.5       150.1        76.5
Restructured fixed maturity securities.....................          44.4           48.6        27.6        73.5
                                                                ---------      ---------   ---------   ---------
Total problem, potential problem and restructured fixed
  maturity securities......................................     $   253.5      $   260.1   $   262.8   $   242.5
                                                                =========      =========   =========   =========
Total problem, potential problem and restructured fixed
  maturity securities as a percent of total fixed maturity
  securities...............................................             1%             1%          1%          1%

    EQUITY SECURITIES

    Our equity securities consist primarily of investments in common stocks. We
classify our investment in common stocks as available for sale and report them
at estimated fair value. We report unrealized gains and losses on common

                                       143
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stocks as a separate component of other comprehensive income, net of deferred
income taxes and an adjustment for the effect on deferred acquisition costs that
would have occurred if such gains and losses had been realized.

    Investments in equity securities totaled $580.9 million, which represented
1% of U.S. invested assets as of March 31, 2001 and $666.0 million, $768.1
million and $995.7 million, which represented 2% of U.S. invested assets as of
December 31, 2000, 1999 and 1998, respectively. Investments in company-sponsored
funds totaled $465.1 million, or 80%, of our U.S. equity securities as of March
31, 2001. These sponsored funds are intended to be marketed to our asset
management clients. Of company-sponsored funds, $329.1 million represented
underlying investments in publicly-traded equities, $130.9 million represented
investments in publicly-traded fixed income securities and $5.1 million in
balanced funds which represented investments in both publicly-traded equities
and fixed income securities as of March 31, 2001. The remaining balance of
equity securities is a mixture of public and private securities acquired for
investment purposes or which were acquired through equity participation features
of below investment grade bonds or through recoveries of defaulted securities.
In the period from 1996 to 1999, we repositioned our investment portfolio by
selling invested assets with lower yields, primarily equities and real estate,
and reinvesting the proceeds in assets with higher yields, primarily debt
securities.

    MORTGAGE LOANS

    Mortgage loans comprised 26% of total U.S. invested assets as of March 31,
2001, 27% as of December 31, 2000 and 33% at each of December 31, 1999 and 1998.
Mortgage loans consist of commercial and residential loans. As of March 31, 2001
and December 31, 2000, 1999 and 1998, commercial mortgage loans comprised
$10,491.7 million, $10,775.3 million, $12,588.9 million and $12,157.2 million,
or 94%, 95%, 95% and 92%, of total mortgage loan investments, respectively.
Residential mortgages comprised $716.8 million, $550.5 million, $651.0 million
and $997.4 million, or 6%, 5%, 5% and 8%, of total mortgage loan investments as
of March 31, 2001 and December 31, 2000, 1999 and 1998, respectively. Principal
Residential Mortgage, Inc. as part of its securitization inventory, holds the
majority of residential loans.

    On September 30, 2000, we completed a securitization of $598.0 million of
general account commercial loans comprised of 102 loans. We sold $578.4 million
of investment grade bonds into the market and we retained $28.7 million of
interest only bonds.

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

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

    - enhancing total returns; and

    - 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 21% of our commercial mortgage loan portfolio as of
March 31, 2001. 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.

                                       144
   148

    The following is a summary of our commercial mortgage loans by property type
and geographic area as of March 31, 2001, and December 31, 2000, 1999 and 1998,
respectively.

                              U.S. INVESTED ASSETS
                 COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY TYPE

                                             AS OF MARCH 31,                       AS OF DECEMBER 31,
                                            -----------------   ---------------------------------------------------------
                                                  2001                2000                1999                1998
                                            -----------------   -----------------   -----------------   -----------------
                                            CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                             AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                            ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                           ($ IN MILLIONS)
                                                                                            
Office....................................  $ 3,378.3     32%   $ 3,273.5     30%   $ 3,841.0     31%   $ 3,500.8     29%
Retail....................................    3,376.0     32      3,612.7     34      4,194.7     33      4,082.8     33
Industrial................................    3,225.5     31      3,381.6     31      4,048.3     32      4,050.5     33
Apartments................................      400.3      4        419.7      4        423.9      3        348.2      3
Mixed Use/other...........................      138.0      1        130.2      1        127.8      1        199.4      2
Hotel.....................................       65.6      1         65.6      1         71.0      1         88.5      1
Valuation allowance.......................      (92.0)    (1)      (108.0)    (1)      (117.8)    (1)      (113.0)    (1)
                                            ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total............................  $10,491.7    100%   $10,775.3    100%   $12,588.9    100%   $12,157.2    100%
                                            =========    ===    =========    ===    =========    ===    =========    ===

                              U.S. INVESTED ASSETS
                COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY REGION

                                             AS OF MARCH 31,                       AS OF DECEMBER 31,
                                            -----------------   ---------------------------------------------------------
                                                  2001                2000                1999                1998
                                            -----------------   -----------------   -----------------   -----------------
                                            CARRYING    % OF    CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                             AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                            ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                           ($ IN MILLIONS)
                                                                                            
Region:
Pacific...................................  $ 2,598.8     25%   $ 2,774.8     26%   $ 3,410.2     27%   $ 3,371.8     28%
South Atlantic............................    2,559.3     24      2,630.5     24      3,175.2     25      3,024.9     25
Middle Atlantic...........................    1,691.5     16      1,664.9     15      1,775.2     14      1,687.6     14
East North Central........................    1,061.6     10      1,006.2      9      1,235.4     10      1,222.1     10
West South Central........................      846.0      8        886.4      8        904.9      7        810.9      7
Mountain..................................      583.9      6        600.2      6        643.5      5        553.9      4
New England...............................      469.9      5        495.9      5        598.7      5        616.0      5
West North Central........................      418.1      4        439.9      4        535.1      5        579.3      5
East South Central........................      354.6      3        384.5      4        428.5      3        403.7      3
Valuation allowance.......................      (92.0)    (1)      (108.0)    (1)      (117.8)    (1)      (113.0)    (1)
                                            ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total............................  $10,491.7    100%   $10,775.3    100%   $12,588.9    100%   $12,157.2    100%
                                            =========    ===    =========    ===    =========    ===    =========    ===

    Our commercial loan portfolio is highly diversified by borrower. As of March
31, 2001, 43% of the U.S. commercial mortgage loan portfolio was comprised of
mortgage loans with principal balances of less than $10 million. The table below
shows our U.S. commercial mortgage loan portfolio by loan size, as of the
periods indicated.

                              U.S. INVESTED ASSETS
               COMMERCIAL MORTGAGE LOAN PORTFOLIO -- BY LOAN SIZE

                                           AS OF MARCH 31,                              AS OF DECEMBER 31,
                                     ----------------------------   -----------------------------------------------------------
                                                 2001                           2000                           1999
                                     ----------------------------   ----------------------------   ----------------------------
                                      NUMBER    PRINCIPAL   % OF     NUMBER    PRINCIPAL   % OF     NUMBER    PRINCIPAL   % OF
                                     OF LOANS    BALANCE    TOTAL   OF LOANS    BALANCE    TOTAL   OF LOANS    BALANCE    TOTAL
                                     --------   ---------   -----   --------   ---------   -----   --------   ---------   -----
                                                                          ($ IN MILLIONS)
                                                                                               
Under $5 million...................   1,214     $ 2,506.6     24%    1,236     $ 2,553.5     24%    1,451     $ 3,110.8     24%
$5 million but less than $10
 million...........................     296       2,068.9     19       304       2,116.5     19       380       2,622.6     21
$10 million but less than $20
 million...........................     175       2,334.8     22       187       2,515.2     23       204       2,733.2     21
$20 million but less than $30
 million...........................      63       1,487.9     14        63       1,495.3     14        67       1,617.6     13
$30 million and over...............      48       2,199.3     21        48       2,204.5     20        56       2,640.2     21
                                      -----     ---------    ---     -----     ---------    ---     -----     ---------    ---
      Total........................   1,796     $10,597.5    100%    1,838     $10,885.0    100%    2,158     $12,724.4    100%
                                      =====     =========    ===     =====     =========    ===     =====     =========    ===

                                          AS OF DECEMBER 31,
                                     ----------------------------
                                                 1998
                                     ----------------------------
                                      NUMBER    PRINCIPAL   % OF
                                     OF LOANS    BALANCE    TOTAL
                                     --------   ---------   -----
                                           ($ IN MILLIONS)
                                                   
Under $5 million...................   1,515     $ 3,179.2     26%
$5 million but less than $10
 million...........................     384       2,649.9     22
$10 million but less than $20
 million...........................     204       2,776.2     23
$20 million but less than $30
 million...........................      58       1,408.4     11
$30 million and over...............      47       2,257.2     18
                                      -----     ---------    ---
      Total........................   2,208     $12,270.9    100%
                                      =====     =========    ===

    The total number of commercial mortgage loans outstanding as of March 31,
2001 and December 31, 2000, 1999 and 1998, was 1,796, 1,838, 2,158 and 2,208,
respectively. The average loan size of our commercial mortgage portfolio

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was $5.9 million as of March 31, 2001, $5.9 million as of December 31, 2000 and
1999, and $5.6 million as of December 31, 1998. The largest loan on any single
property at such dates aggregated $100.0 million for March 31, 2001 and December
31, 2000, 1999 and 1998, respectively, and represented 0.2% of U.S. invested
assets on these dates. Total mortgage loans to the 10 largest borrowers
accounted in the aggregate for approximately 7% of the total carrying amount of
the commercial mortgage loan portfolio as of March 31, 2001 and December 31,
2000 and 6% as of December 31, 1999 and 1998, respectively, and 2% of total U.S.
invested assets as of March 31, 2001, and December 31, 2000, 1999 and 1998,
respectively. As of such dates, all such loans were performing.

    The table below presents the disposition of maturities for the three months
ended March 31, 2001, and for the years ended December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
       DISPOSITIONS OF SCHEDULED MATURITIES OF COMMERCIAL MORTGAGE LOANS

                                                                AS OF
                                                              MARCH 31,            AS OF DECEMBER 31,
                                                              ---------    -----------------------------------
                                                                2001         2000         1999         1998
                                                              ---------    ---------    ---------    ---------
                                                              AMORTIZED    AMORTIZED    AMORTIZED    AMORTIZED
                                                                COST         COST         COST         COST
                                                              ---------    ---------    ---------    ---------
                                                                              ($ IN MILLIONS)
                                                                                         
Paid as scheduled...........................................   $ 62.4       $395.0       $401.9       $300.0
Extended....................................................    136.4        174.8        164.9        361.0
Refinanced..................................................      3.8         82.7        204.4        203.9
Foreclosed..................................................       --           --           --          8.0
Expired maturities..........................................      6.8         59.1           --         35.1
                                                               ------       ------       ------       ------
         Total..............................................   $209.4       $711.6       $771.2       $908.0
                                                               ======       ======       ======       ======

    The amortized cost of commercial mortgage loans by contractual maturity
dates, excluding scheduled sinking funds as of March 31, 2001, and December 31,
2000, 1999 and 1998, respectively, are as follows:

                              U.S. INVESTED ASSETS
              COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE

                                     AS OF MARCH 31,                           AS OF DECEMBER 31,
                                   -------------------   ---------------------------------------------------------------
                                          2001                  2000                  1999                  1998
                                   -------------------   -------------------   -------------------   -------------------
                                    AMORTIZED    % OF     AMORTIZED    % OF     AMORTIZED    % OF     AMORTIZED    % OF
                                      COST       TOTAL      COST       TOTAL      COST       TOTAL      COST       TOTAL
                                   -----------   -----   -----------   -----   -----------   -----   -----------   -----
                                                                      ($ IN MILLIONS)
                                                                                           
Due in one year or less..........   $   686.8       6%    $   675.8       6%    $   735.4       6%    $   806.3       7%
Due after one year through five
  years..........................     3,270.0      31       3,033.4      28       3,045.0      24       2,629.2      21
Due after five years through ten
  years..........................     3,441.5      33       3,900.7      36       4,862.1      38       4,711.1      38
Due after ten years..............     3,185.4      30       3,273.4      30       4,064.1      32       4,123.6      34
                                    ---------     ---     ---------     ---     ---------     ---     ---------     ---
         Total...................   $10,583.7     100%    $10,883.3     100%    $12,706.6     100%    $12,270.2     100%
                                    =========     ===     =========     ===     =========     ===     =========     ===

    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
writedowns for impairment. We provide a valuation allowance for commercial
mortgage loans based on past loan loss experience and for specific loans
considered to be impaired. Mortgage loans are considered impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement may not be collected. When we
determine that a loan is impaired, we establish a valuation allowance for 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 such losses in our consolidated

                                       146
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results of operations. Such increases (decreases) in valuation allowances
aggregated $(16.0) million as of March 31, 2001, and $(9.8) million, $4.8
million and $(8.4) million for the years ended December 31, 2000, 1999 and 1998,
respectively.

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

    We charge mortgage loans deemed to be uncollectible against the allowance
for losses and credit subsequent recoveries to the allowance for losses. We
maintain the allowance for losses at a level management believes to be adequate
to absorb estimated probable credit losses. Management bases its periodic
evaluation of the adequacy of the allowance for losses on our past loan loss
experience, 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.

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

                              U.S. INVESTED ASSETS
                    COMMERCIAL MORTGAGE VALUATION ALLOWANCE

                                                                AS OF
                                                              MARCH 31,      AS OF DECEMBER 31,
                                                              ---------   ------------------------
                                                                2001       2000     1999     1998
                                                              ---------   ------   ------   ------
                                                                        ($ IN MILLIONS)
                                                                                
Beginning Balance...........................................   $108.0     $117.8   $113.0   $121.4
Provision...................................................      0.8        3.0      9.2      7.3
Release due to writedowns, sales and foreclosures...........    (16.8)     (12.8)    (4.4)   (15.7)
                                                               ------     ------   ------   ------
Ending Balance..............................................   $ 92.0     $108.0   $117.8   $113.0
                                                               ======     ======   ======   ======
Valuation allowance as a percentage of carrying value before
  reserves..................................................        1%         1%       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 as of the dates indicated:

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

                                                                AS OF
                                                              MARCH 31,          AS OF DECEMBER 31,
                                                              ---------   ---------------------------------
                                                                2001        2000        1999        1998
                                                              ---------   ---------   ---------   ---------
                                                                             ($ IN MILLIONS)
                                                                                      
Total commercial mortgages..................................  $10,491.7   $10,775.3   $12,588.9   $12,157.2
                                                              =========   =========   =========   =========
Problem commercial mortgages(1).............................  $   26.3    $     8.9   $    38.7   $    73.4
Potential problem commercial mortgages......................      38.9         58.9        39.9        24.9
Restructured commercial mortgages...........................      83.2         92.6       101.5       126.2
                                                              ---------   ---------   ---------   ---------
Total problem, potential problem and restructured commercial
  mortgages.................................................  $  148.4    $   160.4   $   180.1   $   224.5
                                                              =========   =========   =========   =========
  Total problem, potential problem and restructured
    commercial mortgages as a percent of total commercial
    mortgages...............................................         1%           1%          1%          2%

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

(1) Problem commercial mortgages included mortgage loans in foreclosure of $6.0
    million, $23.8 million and $27.4 million as of December 31, 2000, 1999 and
    1998, respectively. There were no mortgage loans in foreclosure as of March
    31, 2001.

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    The delinquency and loss performance of our U.S. invested loan portfolio has
generally outperformed the life insurance industry averages as reported by the
American Council Life Insurers. The table below presents mortgage loan
delinquency rates for the industry and Principal Life on a statutory basis,
expressed as a percentage of the total commercial loan portfolio at year end:

                              U.S. INVESTED ASSETS
                          MORTGAGE LOAN DELINQUENCY(1)

                                         AS OF
                                       MARCH 31,                           AS OF DECEMBER 31,
                                       ---------   -------------------------------------------------------------------
                                         2001      2000   1999   1998   1997   1996   1995   1994   1993   1992   1991
                                       ---------   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----
                                                                                 
Industry(2)..........................     0.3%     0.2%   0.3%   0.5%   0.9%   1.8%   2.4%   3.4%   4.5%   6.4%   5.9%
Principal Life.......................     0.1      0.1    0.3    0.5    0.7    1.0    1.3    2.9    1.8    3.9    2.1

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

(1) Includes loans that are delinquent and in process of foreclosure. As defined
    by the American Council of Life Insurers, mortgage loans are classified as
    delinquent when they are 60 days or more past due as to the payment of
    interest or principal.

(2) As reported by the American Council of Life Insurers.

    EQUITY REAL ESTATE

    We hold commercial equity real estate as part of our investment portfolio.
As of March 31, 2001 and December 31, 2000, 1999 and 1998, the carrying amount
of equity real estate investment was $1,177.8 million, $1,391.8 million,
$2,201.2 million and $2,585.2 million, respectively, or 3%, 4%, 6% and 7%, of
U.S. invested assets. We own real estate, real estate acquired upon foreclosure
of commercial mortgage loans and interests, both majority owned and non-
majority owned, in real estate joint ventures. We continue to focus on a
long-term strategy of reducing our real estate equity portfolio.

    Equity real estate is categorized as either "real estate held for
investment" or "real estate held for sale". Real estate held for investment
totaled $689.0 million as of March 31, 2001 and $696.4 million, $1,167.8 million
and $1,535.4 million as of December 31, 2000, 1999 and 1998, respectively. 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 three months ended March 31, 2001
and years ended December 31, 2000, 1999 and 1998, there were no such impairment
adjustments.

    The carrying amount of real estate held for sale as of March 31, 2001 and
December 31, 2000, 1999 and 1998 was $488.8 million, $695.4 million, $1,033.4
million and $1,049.8 million, net of valuation allowances of $35.0 million,
$40.8 million, $70.4 million and $33.1 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, Pacific, and West South
Central regions of the United States as of March 31, 2001. By property type,
there is a concentration in office buildings that represented approximately 44%
of the equity real estate portfolio as of March 31, 2001. Our largest equity
real estate holding as of March 31, 2001 consisted of an office/industrial park
located in Durham, North Carolina with an aggregate carrying value of
approximately $138.7 million and represented approximately 12% of total U.S.
equity real estate assets and 0.3% of U.S. invested assets. The ten largest real
estate properties as of March 31, 2001 comprised 51% of total U.S. equity real
estate assets and 1% of total U.S. invested assets.

                                       148
   152

    The tables below present information concerning the geographic and property
type breakdown of the equity real estate portfolio as of March 31, 2001, and
December 31, 2000, 1999 and 1998:

                              U.S. INVESTED ASSETS
                          EQUITY REAL ESTATE BY REGION

                                AS OF MARCH 31,                                  AS OF DECEMBER 31,
                             ----------------------   ------------------------------------------------------------------------
                                      2001                     2000                     1999                     1998
                             ----------------------   ----------------------   ----------------------   ----------------------
                             CARRYING                 CARRYING                 CARRYING                 CARRYING
                              AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE
                             ---------   ----------   ---------   ----------   ---------   ----------   ---------   ----------
                                                                      ($ IN MILLIONS)
                                                                                            
Region(1):
South Atlantic.............  $  405.7        34%      $  431.7        31%      $  676.1        31%      $  714.8        28%
West South Central.........     299.2        25          362.2        26          449.2        20          486.7        19
Pacific....................     252.7        21          384.6        28          534.3        24          634.8        25
East North Central.........     117.6        10          120.7         9          152.0         7          150.2         6
East South Central.........      42.8         4           21.5         1           28.0         1           34.6         1
West North Central.........      18.8         2           19.0         1          119.2         6          115.3         4
Middle Atlantic............      18.2         2           28.7         2           48.0         2          208.4         8
New England................      14.3         1           14.5         1          112.5         5          142.4         5
Mountain...................       8.5         1            8.9         1           81.9         4           98.0         4
                             --------       ---       --------       ---       --------    ------       --------       ---
         Total.............  $1,177.8       100%      $1,391.8       100%      $2,201.2       100%      $2,585.2       100%
                             ========       ===       ========       ===       ========    ======       ========       ===

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

(1) Regions are as defined by the American Council of Life Insurers.

                              U.S. INVESTED ASSETS
                      EQUITY REAL ESTATE BY PROPERTY TYPE

                                 AS OF MARCH 31,                                  AS OF DECEMBER 31,
                              ----------------------   ------------------------------------------------------------------------
                                       2001                     2000                     1999                     1998
                              ----------------------   ----------------------   ----------------------   ----------------------
                              CARRYING                 CARRYING                 CARRYING                 CARRYING
                               AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE    AMOUNT     PERCENTAGE
                              ---------   ----------   ---------   ----------   ---------   ----------   ---------   ----------
                                                                       ($ IN MILLIONS)
                                                                                             
Office......................  $  518.8        44%      $  615.5        44%      $  721.7        33%      $  979.8        38%
Retail......................     180.9        15          152.7        11          691.4        31          689.9        27
Industrial..................     282.4        24          413.6        30          462.2        21          557.6        21
Service center..............     118.2         7          120.1         9          205.6         9          308.1        12
Land........................      77.5        10           89.9         6          120.3         6           49.8         2
                              --------       ---       --------       ---       --------       ---       --------       ---
         Total..............  $1,177.8       100%      $1,391.8       100%      $2,201.2       100%      $2,585.2       100%
                              ========       ===       ========       ===       ========       ===       ========       ===

    DERIVATIVES

    We use various derivative financial instruments to manage our exposure to
fluctuations in interest rates, including interest rate futures and interest
rate swaps and swaptions. We use interest rate futures contracts 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 primarily to more closely match
the interest rate characteristics of assets and liabilities. They can be used to
change the interest rate characteristics 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 take that risk, we
price for it accordingly.

    Foreign currency risk is the risk that we will incur economic losses due to
adverse fluctuations in foreign currency exchange rates. This risk arises from
our international operations and foreign currency-denominated funding agreements
issued to non-qualified institutional investors in the international market. The
notional amount of our currency swap agreements associated with
foreign-denominated liabilities as of March 31, 2001 was $3,061.2 million.

                                       149
   153

We also have fixed maturity securities that are denominated in foreign
currencies. However, we use derivatives to hedge the foreign currency risk of
these funding agreements and securities. As of March 31, 2001, the fair value of
our foreign currency denominated fixed maturity securities was $406.5 million.
We use currency swap agreements of the same currency to hedge the foreign
currency exchange risk related to these investments. The notional amount of our
currency swap agreements associated with foreign-denominated fixed maturity
securities as of March 31, 2001 was $428.7 million.

    In conjunction with the interest rate swaps, interest rate swaptions and
other 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:

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

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

    - limiting exposure to AA- credit or better;

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

    - 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 remote and that such losses, if any, would not be material.
Futures contracts trade on organized exchanges and, therefore, effectively have
no credit risk.

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

    The following tables present our position in, and credit exposure to,
derivative financial instruments as of March 31, 2001, and December 31, 2000,
1999 and 1998, respectively:

                              U.S. INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                      AS OF MARCH 31,                       AS OF DECEMBER 31,
                                     -----------------   ---------------------------------------------------------
                                           2001                2000                1999                1998
                                     -----------------   -----------------   -----------------   -----------------
                                     NOTIONAL    % OF    NOTIONAL    % OF    NOTIONAL    % OF    NOTIONAL    % OF
                                      AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                     ---------   -----   ---------   -----   ---------   -----   ---------   -----
                                                                    ($ IN MILLIONS)
                                                                                     
Foreign currency swaps.............  $ 3,489.9     18%   $ 2,745.0     26%   $ 1,571.5     15%   $   485.9      4%
Interest rate floors...............    3,200.0     16      2,450.0     23      5,550.0     52      5,250.0     46
Interest rate swaps................    4,108.2     21      2,391.5     23      1,298.5     12      1,533.0     13
Mortgage-backed forwards and
  options..........................    5,951.7     30      1,898.3     18      1,546.7     14         81.5      1
Swaptions..........................    2,512.0     13        697.7      7        469.7      4        259.0      2
Call options.......................       30.0     --         30.0     --         30.0     --         30.0     --
Put options........................         --     --           --     --           --     --         18.0     --
Mandatory forwards, options, and
  futures..........................         --     --           --     --           --     --      2,369.0     21
U.S. Treasury futures..............      255.3      1        183.2      2        287.6      3        840.7      7
Currency forwards..................       39.4     --         39.4     --         13.0     --           --     --
Options on futures contract........         --     --           --     --           --     --        681.7      6
Principal Only swaps...............      150.0      1           --     --           --     --           --     --
Treasury rate guarantees...........       27.0     --         60.0      1           --     --           --     --
                                     ---------    ---    ---------    ---    ---------    ---    ---------    ---
         Total.....................  $19,763.5    100%   $10,495.1    100%   $10,767.0    100%   $11,548.8    100%
                                     =========    ===    =========    ===    =========    ===    =========    ===

                                       150
   154

                              U.S. INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                                        AS OF MARCH 31,                      AS OF DECEMBER 31,
                                                        ----------------   ------------------------------------------------------
                                                              2001               2000               1999               1998
                                                        ----------------   ----------------   ----------------   ----------------
                                                         CREDIT    % OF     CREDIT    % OF     CREDIT    % OF     CREDIT    % OF
                                                        EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL
                                                        --------   -----   --------   -----   --------   -----   --------   -----
                                                                                     ($ IN MILLIONS)
                                                                                                    
Foreign currency swaps................................   $ 39.9      31%    $ 45.3      42%    $ 69.2      50%    $35.2       54%
Interest rate floors..................................     10.0       8       20.0      18       15.1      11       5.9        9
Interest rate swaps...................................     26.2      20       14.1      13       21.6      15      18.6       28
Call options..........................................      8.1       6       12.3      11       19.0      14        --       --
Swaptions.............................................     34.2      27       11.8      11        8.7       6       5.6        9
Put options...........................................       --      --         --      --         --      --       0.3       --
U.S. Treasury futures.................................       --      --         --      --         --      --        --       --
Currency forwards.....................................     10.3       8        5.5       5         --      --        --       --
Mortgage-backed forwards and options..................       --      --         --      --        6.0       4        --       --
                                                         ------     ---     ------     ---     ------     ---     -----      ---
        Total.........................................   $128.7     100%    $109.0     100%    $139.6     100%    $65.6      100%
                                                         ======     ===     ======     ===     ======     ===     =====      ===

    OTHER INVESTMENTS

    Our other investments totaled $767.8 million as of March 31, 2001, compared
to $681.2 million as of December 31, 2000 and $514.0 million as of December 31,
1999. Our investment in Coventry is included in other investments as we
accounted for it using the equity method. As of March 31, 2001, our carrying
value in Coventry was $128.9 million. Also included in other investments is a
$129.9 million investment in an Australian hotel trust, which we acquired in
connection with our acquisition of BT Financial Group. With the adoption of SFAS
133 on January 1, 2001, derivatives were reflected on our balance sheet and
accounted for $86.0 million in other investments as of March 31, 2001. The
remaining investment assets include leases and other private equity investments.

    SECURITIES LENDING

    The terms of our securities lending program, approved in 1999, allow us to
lend our securities to major brokerage firms. Our policy requires an initial
minimum of 102% of the fair value of the loaned securities as collateral.
Although we lend from time to time during the financial reporting quarters, we
had no securities on loan as of December 31, 2000 and December 31, 1999. Our
securities on loan as of March 31, 2001 had an estimated fair value of $434.3
million.

INTERNATIONAL INVESTMENT OPERATIONS

    As of March 31, 2001, our international investment operations consist of the
investments of Principal International and BT Financial Group and comprise $1.1
billion in invested assets, which primarily represent the assets of Principal
International. Principal Capital Management 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 Capital Management. Each international affiliate is
required to submit a compliance report relative to its strategy to Principal
Capital Management. A credit committee comprised of Principal Capital Management
employees and international affiliate company chief investment officer's review
each corporate credit annually. In addition, employees from our U.S. operations
who serve on the credit committee hold investment positions in at least two of
our international affiliates. Principal Capital Management provides annual
credit approval training to Principal International personnel.

                                       151
   155

    OVERALL COMPOSITION OF INTERNATIONAL INVESTED ASSETS

    As shown in the table below, the major categories of international invested
assets as of March 31, 2001, were fixed maturity securities and residential
mortgage loans:

                         INTERNATIONAL INVESTED ASSETS

                                               AS OF MARCH 31,                        AS OF DECEMBER 31,
                                              -----------------    ---------------------------------------------------------
                                                    2001                 2000                1999                1998
                                              -----------------    -----------------   -----------------   -----------------
                                              CARRYING    % OF     CARRYING    % OF    CARRYING    % OF    CARRYING    % OF
                                               AMOUNT     TOTAL     AMOUNT     TOTAL    AMOUNT     TOTAL    AMOUNT     TOTAL
                                              ---------   -----    ---------   -----   ---------   -----   ---------   -----
                                                                             ($ IN MILLIONS)
                                                                                               
Fixed maturity securities, available for
  sale
  Public....................................  $  796.4      70%    $  948.6      70%   $  857.0      68%   $  653.1      64%
  Private...................................      11.9       1         16.3       1         2.6      --       242.4      24
Equity securities, available for sale.......      37.7       3         76.9       6        96.1       8       106.6      11
Mortgage loans
  Residential...............................     170.1      15        166.9      12        92.3       7          --      --
Real estate held for investment.............       8.3       1          8.7       1        10.8       1          --      --
Other investments...........................     121.4      10        129.8      10       196.4      16        10.6       1
                                              --------     ---     --------     ---    --------     ---    --------     ---
         Total invested assets..............  $1,145.8     100%    $1,347.2     100%   $1,255.2     100%   $1,012.7     100%
                                                           ===                  ===                 ===                 ===
Cash and cash equivalents...................     117.1                176.5               201.1                44.6
                                              --------             --------            --------            --------
         Total invested assets and cash.....  $1,262.9             $1,523.7            $1,456.3            $1,057.3
                                              ========             ========            ========            ========

    INTERNATIONAL INVESTMENT RESULTS

    The yield on international invested assets, excluding net realized gains and
losses, was 7.5% as of March 31, 2001 and 7.1%, 7.5% and 6.2% for the years
ended December 31, 2000, 1999 and 1998, respectively.

                                       152
   156

    The table below illustrates the yields on average assets for each of the
components of our investment portfolio for the three months ended March 31,
2001, and for the years ended December 31, 2000, 1999 and 1998:

                         INTERNATIONAL INVESTED ASSETS
                              YIELDS BY ASSET TYPE

                                                   AS OF MARCH 31,           AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                  -----------------   ------------------------------------------------------
                                                        2001                2000               1999               1998
                                                  -----------------   ----------------   ----------------   ----------------
                                                  YIELD     AMOUNT    YIELD    AMOUNT    YIELD    AMOUNT    YIELD    AMOUNT
                                                  ------   --------   -----   --------   -----   --------   -----   --------
                                                                               ($ IN MILLIONS)
                                                                                            
Fixed maturity securities, available-for-sale
  Gross investment income(1)....................     7.9%   $ 17.5     7.4%    $ 67.4     6.9%    $ 61.0     6.6%    $ 41.5
  Net realized capital gains (losses)...........     0.4       0.9     0.4        3.7     0.8        7.4    (0.1)      (0.9)
                                                            ------             ------             ------             ------
  Total.........................................            $ 18.4             $ 71.1             $ 68.4             $ 40.6
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $808.3             $964.9             $859.6             $895.5
Equity securities, available-for-sale
  Gross investment income(1)....................      --%   $   --     0.6%    $  0.5     6.9%    $  7.0     1.4%    $  1.1
  Net realized capital gains (losses)...........     1.4       0.2    (1.3)      (1.1)    1.6        1.6     0.3        0.2
                                                            ------             ------             ------             ------
  Total.........................................            $  0.2             $ (0.6)            $  8.6             $  1.3
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $ 37.7             $ 76.9             $ 96.1             $106.6
Mortgage loans -- Residential
  Gross investment income(1)....................     7.6%   $  3.2     8.6%    $ 11.2    15.2%    $  7.0      --%    $   --
  Net realized capital gains (losses)...........      --        --      --         --      --         --      --         --
                                                            ------             ------             ------             ------
  Total.........................................            $  3.2             $ 11.2             $  7.0             $   --
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $170.1             $166.9             $ 92.3             $   --
Real estate
  Gross investment income(1)....................    37.1%   $  0.8     5.1%    $  0.5     8.6%    $  0.4      --%    $   --
  Net realized capital gains (losses)...........      --        --      --         --      --         --      --         --
                                                            ------             ------             ------             ------
  Total.........................................            $  0.8             $  0.5             $  0.4             $   --
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $  8.3             $  8.7             $ 10.8             $   --
Cash and cash equivalents
  Gross investment income(1)....................     5.2%   $  1.9     4.4%    $  8.3     4.8%    $  5.9     8.7%    $  3.7
  Net realized capital gains (losses)...........      --        --      --         --      --         --    (0.2)      (0.1)
                                                            ------             ------             ------             ------
  Total.........................................            $  1.9             $  8.3             $  5.9             $  3.6
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $117.1             $176.5             $201.1             $ 44.6
Other investments
  Gross investment income(1)....................     9.5%   $  3.0    11.7%    $ 19.1    15.4%    $ 15.9    10.7%    $  1.6
  Net realized capital gains (losses)...........  (123.6)    (38.8)    0.1        0.2    (0.3)      (0.3)   94.9       14.3
                                                            ------             ------             ------             ------
  Total.........................................            $(35.8)            $ 19.3             $ 15.6             $ 15.9
                                                            ======             ======             ======             ======
  Ending assets (at carrying value).............            $121.4             $129.8             $196.4             $ 10.6
Total before investment expenses
  Gross investment income.......................     7.6%   $ 26.4     7.2%    $107.0     7.7%    $ 97.2     6.2%    $ 47.9
  Net realized capital gains (losses)...........   (10.8)    (37.7)    0.2        2.8     0.7        8.7     1.8       13.5
                                                            ------             ------             ------             ------
  Total.........................................            $(11.3)            $109.8             $105.9             $ 61.4
                                                            ======             ======             ======             ======
Investment expenses.............................     0.1%   $  0.3     0.1%    $  2.0     0.2%    $  3.1      --%    $   --
                                                            ------             ------             ------             ------
Net investment income...........................     7.5%   $ 26.1     7.1%    $105.0     7.5%    $ 94.1     6.2%    $ 47.9

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

(1) Yields, which are annualized for interim periods, are based on quarterly
    average asset carrying values for the three months ended March 31, 2001, and
    annual average asset carrying values for the years ended December 31, 2000,
    1999 and 1998.

                                       153
   157

    FIXED MATURITY SECURITIES

    Fixed maturity securities consist primarily of publicly traded debt
securities and represented 71% of total international invested assets for both
March 31, 2001, and December 31, 2000, 68% as of December 31, 1999, and 88% as
of December 31, 1998. Fixed maturity securities were diversified by type of
issuer as of March 31, 2001 and for the years ended December 31, 2000, 1999 and
1998 as shown in the following table:

                         INTERNATIONAL INVESTED ASSETS
                  FIXED MATURITY SECURITIES BY TYPE OF ISSUER

                                         AS OF MARCH 31,                      AS OF DECEMBER 31,
                                         ----------------   ------------------------------------------------------
                                               2001               2000               1999               1998
                                         ----------------   ----------------   ----------------   ----------------
                                         CARRYING   % OF    CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                          AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                         --------   -----   --------   -----   --------   -----   --------   -----
                                                                      ($ IN MILLIONS)
                                                                                     
U.S. Treasury securities and
  obligations of U.S. Government
  corporations and agencies............   $  0.6      --%    $  1.8      --%    $  0.7      --%    $305.4      34%
States and political subdivisions......       --      --         --      --         --      --         --      --
Non-U.S. governments...................    270.6      34      313.6      32      333.3      39       77.0       9
Corporate-public.......................    279.6      35      376.5      39      254.9      30      253.2      28
Corporate-private......................     11.9       1       16.3       2        2.6      --      242.4      27
Mortgage-backed securities and other
  asset backed securities..............    245.6      30      256.7      27      268.1      31       17.5       2
                                          ------     ---     ------     ---     ------     ---     ------     ---
         Total fixed maturities........   $808.3     100%    $964.9     100%    $859.6     100%    $895.5     100%
                                          ======     ===     ======     ===     ======     ===     ======     ===

    The fixed maturity securities held by the international operations have not
been rated by external agencies and cannot be presented in a comparable rating
agency equivalent.

    The issuers of the majority of our fixed maturity corporate securities are
mainly banks and are categorized in the finance, insurance and real estate
category as shown in the tables below:

                         INTERNATIONAL INVESTED ASSETS
 CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF MARCH 31, 2001

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $151.0      54%    $11.9      100%    $162.9      56%
Manufacturing............................................      0.3      --        --       --        0.3      --
Transportation and Public Utilities......................     26.6      10        --       --       26.6       9
Services.................................................     38.6      14        --       --       38.6      13
Mining...................................................       --      --        --       --         --      --
Retail...................................................     24.6       9        --       --       24.6       9
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................      1.0      --        --       --        1.0      --
Construction.............................................     37.5      13        --       --       37.5      13
                                                            ------     ---     -----      ---     ------     ---
         Total...........................................   $279.6     100%    $11.9      100%    $291.5     100%
                                                            ======     ===     =====      ===     ======     ===

                                       154
   158

                         INTERNATIONAL INVESTED ASSETS
  CORPORATE FIXED MATURITY SECURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31,
                                      2000

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $240.3      64%    $  --       --%    $240.3      61%
Manufacturing............................................      0.3      --      13.3       82       13.6       3
Transportation and Public Utilities......................    100.6      27        --       --      100.6      26
Services.................................................      9.1       2       2.7       17       11.8       3
Mining...................................................       --      --        --       --         --      --
Retail...................................................     26.2       7        --       --       26.2       7
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................       --      --        --       --         --      --
Construction.............................................       --      --       0.3        1        0.3      --
                                                            ------     ---     -----      ---     ------     ---
         Total...........................................   $376.5     100%    $16.3      100%    $392.8     100%
                                                            ======     ===     =====      ===     ======     ===

                         INTERNATIONAL INVESTED ASSETS
    CORPORATE FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1999

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $174.5      69%     $2.6      100%    $177.1      69%
Manufacturing............................................      0.4      --        --       --        0.4      --
Transportation and Public Utilities......................     28.6      11        --       --       28.6      11
Services.................................................     26.7      10        --       --       26.7      10
Mining...................................................       --      --        --       --         --      --
Retail...................................................     15.0       6        --       --       15.0       6
Agriculture, Forestry and Fishing........................       --      --        --       --         --      --
Public Administration....................................      9.7       4        --       --        9.7       4
Construction.............................................       --      --        --       --         --      --
                                                            ------     ---      ----      ---     ------     ---
         Total...........................................   $254.9     100%     $2.6      100%    $257.5     100%
                                                            ======     ===      ====      ===     ======     ===

                         INTERNATIONAL INVESTED ASSETS
    CORPORATE FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1998

                                                           PUBLICLY TRADED    PRIVATELY PLACED        TOTAL
                                                           ----------------   ----------------   ----------------
                                                           CARRYING   % OF    CARRYING   % OF    CARRYING   % OF
                                                            AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                                           --------   -----   --------   -----   --------   -----
                                                                              ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance, Insurance and Real Estate.......................   $253.2     100%    $   --      --%    $253.2      51%
Manufacturing............................................       --      --      242.4     100      242.4      49
Transportation and Public Utilities......................       --      --         --      --         --      --
Services.................................................       --      --         --      --         --      --
Mining...................................................       --      --         --      --         --      --
Retail...................................................       --      --         --      --         --      --
Agriculture, Forestry and Fishing........................       --      --         --      --         --      --
Public Administration....................................       --      --         --      --         --      --
Construction.............................................       --      --         --      --         --      --
                                                            ------     ---     ------     ---     ------     ---
         Total...........................................   $253.2     100%    $242.4     100%    $495.6     100%
                                                            ======     ===     ======     ===     ======     ===

                                       155
   159

    The international operations held $245.6 million of residential pass-through
securities as of March 31, 2001, and $256.7 million, $268.1 million and $17.5
million as of December 31, 2000, 1999 and 1998, respectively.

                         INTERNATIONAL INVESTED ASSETS
                      MORTGAGE AND ASSET-BACKED SECURITIES

                                                              CARRYING AMOUNT    CARRYING AMOUNT AS OF
                                                              AS OF MARCH 31,        DECEMBER 31,
                                                              ---------------   -----------------------
                                                                   2001          2000     1999    1998
                                                              ---------------   ------   ------   -----
                                                                           ($ IN MILLIONS)
                                                                                      
Residential pass-through securities.........................      $245.6        $256.7   $268.1   $17.5
Commercial MBS..............................................          --            --       --      --
Asset-backed securities.....................................          --            --       --      --
                                                                  ------        ------   ------   -----
         Total MBSs and asset-backed securities.............      $245.6        $256.7   $268.1   $17.5
                                                                  ======        ======   ======   =====

    The amortized cost and estimated fair value of fixed maturity securities, by
contractual maturity dates excluding scheduled sinking funds, as of March 31,
2001, and December 31, 2000 and 1999 were as follows:

                         INTERNATIONAL INVESTED ASSETS
            FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES

                                                    AS OF MARCH 31,       AS OF DECEMBER 31,     AS OF DECEMBER 31,
                                                  --------------------   --------------------   --------------------
                                                          2001                   2000                   1999
                                                  --------------------   --------------------   --------------------
                                                  AMORTIZED   CARRYING   AMORTIZED   CARRYING   AMORTIZED   CARRYING
                                                    COST       AMOUNT      COST       AMOUNT      COST       AMOUNT
                                                  ---------   --------   ---------   --------   ---------   --------
                                                                           ($ IN MILLIONS)
                                                                                          
Due in one year or less.........................   $ 31.7      $ 31.4     $ 31.6      $ 29.2     $ 49.7      $ 50.5
Due after one year through five years...........     77.0        79.0       91.8        95.3       63.8        65.8
Due after five years through ten years..........    160.0       184.1      215.6       217.2      122.7       132.1
Due after ten years.............................    291.6       268.2      356.4       366.5      334.7       343.1
                                                   ------      ------     ------      ------     ------      ------
         Subtotal...............................    560.3       562.7      695.4       708.2      570.9       591.5
Mortgage-backed and other securities without a
  single maturity date..........................    242.2       245.6      253.5       256.7      272.0       268.1
                                                   ------      ------     ------      ------     ------      ------
         Total..................................   $802.5      $808.3     $948.9      $964.9     $842.9      $859.6
                                                   ======      ======     ======      ======     ======      ======

    EQUITY SECURITIES

    Our equity securities represented 3% of international invested assets as of
March 31, 2001, and 6%, 8% and 11% as of December 31, 2000, 1999 and 1998,
respectively. Our equity securities consisted of $14.2 million in mutual funds
and $23.5 million in common stock as of March 31, 2001.

    RESIDENTIAL MORTGAGE LOANS

    Our Chilean operations originate residential mortgage loans. Residential
mortgage loans comprised $170.1 million, or 15%, of international invested
assets as of March 31, 2001 and $166.9 million, or 12%, as of December 31, 2000.

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    DERIVATIVES

    Our use of derivative instruments includes foreign currency swaps, interest
rate swaps and currency forwards. The following tables present our position in,
and credit exposure to, derivative financial instruments as of March 31, 2001,
and December 31, 2000 and 1999, respectively. We did not use derivatives prior
to 1999.

                         INTERNATIONAL INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                         AS OF MARCH 31,                      AS OF DECEMBER 31,
                                         ----------------   ------------------------------------------------------
                                               2001               2000               1999               1998
                                         ----------------   ----------------   ----------------   ----------------
                                         NOTIONAL   % OF    NOTIONAL   % OF    NOTIONAL   % OF    NOTIONAL   % OF
                                          AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
                                         --------   -----   --------   -----   --------   -----   --------   -----
                                                                      ($ IN MILLIONS)
                                                                                     
Foreign currency swaps.................  $  665.1     39%   $  665.0     39%   $  670.0     39%     $--       --%
Interest rate swaps....................     665.0     39       665.0     39       665.0     39       --       --
Currency forwards......................     380.0     22       380.0     22       380.0     22       --       --
                                         --------    ---    --------    ---    --------    ---      ---       --
         Total.........................  $1,710.1    100%   $1,710.0    100%   $1,715.0    100%     $--       --%
                                         ========    ===    ========    ===    ========    ===      ===       ==

                         INTERNATIONAL INVESTED ASSETS
                        DERIVATIVE FINANCIAL INSTRUMENTS

                                     AS OF MARCH 31,                      AS OF DECEMBER 31,
                                     ----------------   ------------------------------------------------------
                                           2001               2000               1999               1998
                                     ----------------   ----------------   ----------------   ----------------
                                      CREDIT    % OF     CREDIT    % OF     CREDIT    % OF     CREDIT    % OF
                                     EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL   EXPOSURE   TOTAL
                                     --------   -----   --------   -----   --------   -----   --------   -----
                                                                  ($ IN MILLIONS)
                                                                                 
Interest rate swaps................   $ 44.9      25%    $39.1       42%    $  --       --%     $--       --%
Foreign currency swaps.............     76.8      44      28.4       30      14.8      100       --       --
Currency forwards..................     54.6      31      26.2       28        --       --       --       --
                                      ------     ---     -----      ---     -----      ---      ---       --
         Total.....................   $176.3     100%    $93.7      100%    $14.8      100%     $--       --%
                                      ======     ===     =====      ===     =====      ===      ===       ==

    OTHER INVESTMENTS

    Our other investments totaled $121.4 million as of March 31, 2001, compared
to $129.8 million as of December 31, 2000 and $196.4 million as of December 31,
1999. Of the $121.4 million, $38.2 million is related to subordinated notes in
BT Financial Group's margin lending program, $37.8 million represents our
investment in subsidiaries including Brazil, Japan and India, $23.8 million
represents BT Financial Group's investment in unit trusts, $12.9 million
represents our investment in Chilean operations, $8.3 million represents our
investment in Hong Kong, and $0.4 million represents our investment in Mexican
operations.

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                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

    The following table lists our directors and executive officers, their ages
and their positions:

NAME OF OFFICER                        AGE(1)                             POSITION
- ---------------                        ------                             --------
                                          
David J. Drury.......................    56     Chairman of the Board, Chairman and Director
J. Barry Griswell....................    51     President and Chief Executive Officer and Director
Betsy J. Bernard.....................    45     Director
Jocelyn Carter-Miller................    43     Director
Daniel Gelatt........................    53     Director
Sandra L. Helton.....................    51     Director
Charles S. Johnson...................    62     Director
William T. Kerr......................    59     Director
Lee Liu..............................    67     Director
Victor H. Loewenstein................    62     Director
Ronald D. Pearson....................    60     Director
Federico F. Pena.....................    53     Director
Donald M. Stewart....................    62     Director
Elizabeth E. Tallett.................    51     Director
John E. Aschenbrenner................    51     Executive Vice President
Michael T. Daley.....................    44     Executive Vice President
Dennis P. Francis....................    57     Senior Vice President
Michael H. Gersie....................    52     Executive Vice President and Chief Financial Officer
Ellen Z. Lamale......................    47     Senior Vice President and Chief Actuary
Mary A. O'Keefe......................    44     Senior Vice President
Richard L. Prey......................    59     Executive Vice President
Karen E. Shaff.......................    46     Senior Vice President and General Counsel
Norman R. Sorensen...................    56     Senior Vice President
Carl C. Williams.....................    63     Senior Vice President and Chief Information Officer

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

(1) At December 31, 2000.

    The following is biographical information for our directors and executive
officers:

    DAVID J. DRURY has been Chairman of Principal Financial Group, Inc. since
April 25, 2001, Chairman of Principal Life since January 2000, a director of
Principal Financial Group, Inc. since April 24, 2001 and a Principal Life
director since 1993. Mr. Drury has announced his retirement as Chairman of
Principal Financial Group, Inc. and Principal Life, which he expects to occur
following completion of the demutualization. Prior to 2000, Mr. Drury was
Chairman and Chief Executive Officer of Principal Life from 1995 to 1999. He is
a director of Coventry Health Care, Inc., a managed health care company, and a
Fellow of the Society of Actuaries and a member of the American Academy of
Actuaries. He chairs the Executive and Investment Committees of the board of
directors of Principal Life and is a member of the Board-Management Committee
and, effective August 21, 2001, will assume the same positions with Principal
Financial Group, Inc.

    J. BARRY GRISWELL has been President and Chief Executive Officer of
Principal Financial Group, Inc. since April 25, 2001, President and Chief
Executive Officer of Principal Life since January 2000, a director of Principal
Financial Group, Inc. since April 24, 2001 and a Principal Life director since
March 1998. Effective upon Mr. Drury's retirement, Mr. Griswell will assume the
additional title of Chairman of Principal Financial Group, Inc. and Principal
Life. Prior to his current position, Mr. Griswell held the following positions
with Principal Life: President 1998-2000, Executive Vice President 1996-1998,
Senior Vice President 1991-1996. He is a Chartered Life Underwriter, a Chartered
Financial Consultant and a LIMRA Leadership Institute Fellow. He is Chair of the
Board-Management Committee and is a member of the Executive and Investment
Committees of the board of directors of Principal Life and, effective August 21,
2001, will assume the same positions with Principal Financial Group, Inc. Mr.
Griswell serves as a director of the 28 mutual funds that comprise the Principal
Family of Mutual Funds.

    BETSY J. BERNARD has been a director of Principal Financial Group, Inc.
since April 24, 2001, and a Principal Life director since February 1999. Ms.
Bernard has been President and Chief Executive Officer of AT&T Consumer since
April 2001. Prior to April 2001, she was Executive Vice President -- National
Mass Markets of Qwest Communications, formerly U S WEST, July 2000-January 2001.
Prior to July 2000, she was Executive Vice President -- Retail Markets of U S
WEST August 1998-June 2000; President and Chief Executive Officer of U S WEST
Long Distance June 1998-August 1998; President and Chief Executive Officer of
Avirnex Communications Group December 1997-June 1998; President and Chief
Operating Officer of Avirnex July 1997-December 1997; President and Chief
Executive Officer of Pacific Bell Communications, Pacific Telesis from 1995-July
1997; Vice President, Business Market Group of Pacific

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   162

Telesis in 1995; Customer Service Vice President, Data Communication Services of
AT&T 1994-1995. She is a director of Astracon Inc., a company specializing in
connectivity intelligence software, Zantaz.com, a firm that provides Internet
based services, Portview Communications, a telecommunications company, and Serco
Group PLC in the UK. She is a member of the Nominating Committee of the board of
directors of Principal Life. Effective August 21, 2001, Ms. Bernard will be
Chair of the Nominating Committee and a member of the Board-Management Committee
of the board of directors of Principal Life and Principal Financial Group, Inc.

    JOCELYN CARTER-MILLER has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since February 1999. Ms.
Carter-Miller has been Corporate Vice President and Chief Marketing Officer of
Motorola, Inc. since February 1999. Prior to February 1999, she held the
following positions with Motorola: Vice President, CLQC, Consumer Solutions
Group, Personal Communications Sector 1998-1999; Vice President and General
Manager, Worldwide Networks Division 1997-1998; Vice President of Latin American
and Caribbean Operations 1994-1997. She is a member of the Audit and Strategic
Issues Committees of the board of directors of Principal Life and, effective
August 21, 2001, will assume the same positions with Principal Financial Group,
Inc.

    DANIEL GELATT has been a director of Principal Financial Group, Inc. since
April 24, 2001 and a Principal Life director since August 1988. Mr. Gelatt has
been President of NMT Corporation, a computer software and microfilm service
business, since 1986. He is the Chair of the Human Resources Committee and a
member of the Executive and Board-Management Committees of the board of
directors of Principal Life. Effective August 21, 2001, Mr. Gelatt will be a
member of the Executive, Human Resources and Board-Management Committees of the
board of directors of Principal Life and Principal Financial Group, Inc.

    SANDRA L. HELTON has been a director of Principal Financial Group, Inc.
since May 21, 2001 and a Principal Life director since May 21, 2001. Ms. Helton
has been Executive Vice President and Chief Financial Officer of Telephone &
Data Systems, Inc. since 1998. Prior to 1998, she was Vice President and
Corporate Controller of Compaq Computer Corporation from 1997-1998. From
1994-1997, Ms. Helton was Senior Vice President and Treasurer of Corning
Incorporated. She is director of Telephone & Data Systems, Inc., a diversified
telecommunications corporation. She is a member of the Audit Committee of the
board of directors of Principal Life and, effective August 21, 2001, Ms. Helton
will assume the same position with Principal Financial Group, Inc.

    CHARLES S. JOHNSON has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since October 1995. Mr.
Johnson is the retired Executive Vice President of DuPont, a position he held in
1999. Prior to his position with DuPont, he was Chairman, President and Chief
Executive Officer of Pioneer Hi-Bred International, Inc. from December
1996-1999, President and Chief Executive Officer from September 1995-December
1996. He is a director of Gaylord Container Corporation, a manufacturer of
corrugated containers. He is a member of the Audit and Strategic Issues
Committees of the board of directors of Principal Life and, effective August 21,
2001, Mr. Johnson will assume the same positions with Principal Financial Group,
Inc. and will become a member of the Pricing Committee of the board of directors
of Principal Financial Group, Inc.

    WILLIAM T. KERR has been a director of Principal Financial Group, Inc. since
April 24, 2001 and a Principal Life director since February 1995. Mr. Kerr has
been Chairman and Chief Executive Officer of Meredith Corporation since January
1998. He served as President and Chief Executive Officer of Meredith from
1997-1998 and as Meredith's President and Chief Operating Officer from
1994-1997. He is a director of Meredith Corporation, a media and marketing
company, Maytag Corporation, a manufacturer of household appliances, and Storage
Technology Corporation, a manufacturer of information storage and retrieval
devices. He is the Chair of the Nominating and Strategic Issues Committees and a
member of the Executive and Board-Management Committees of the board of
directors of Principal Life. Effective August 21, 2001, Mr. Kerr will be Chair
of the Human Resources and Strategic Issues Committees and a member of the
Executive and Board-Management Committees of Principal Life and Principal
Financial Group, Inc. and a member of the Pricing Committee of the board of
directors of Principal Financial Group, Inc.

    LEE LIU has been a director of Principal Financial Group, Inc. since April
24, 2001 and a Principal Life director since August 1990. Mr. Liu is the retired
Chairman of the Board of Alliant Energy Corporation, a position he held from
1998-2000. Prior to his position with Alliant, he was Chairman and Chief
Executive Officer of IES Industries from 1996-1999 and was IES's Chairman,
President and Chief Executive Officer from 1993-1996. He is a director of
Alliant Energy Corporation and Eastman Chemical Company, a manufacturer of
industrial products. He is a member of the Executive, Human Resources and
Board-Management Committees of the board of directors of Principal Life.
Effective August 21, 2001, Mr. Liu will be a member of the Executive and Human
Resources Committees of the board of directors of Principal Life and Principal
Financial Group, Inc.

    VICTOR H. LOEWENSTEIN has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a director of Principal Life since August 1991. Mr.
Loewenstein has been managing partner of Egon Zehnder International, a
management consulting firm, since 1979. He is a member of the Nominating
Committee of the board of directors of Principal Life and, effective August 21,
2001, will assume the same position with Principal Financial Group, Inc.

    RONALD D. PEARSON has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since June 1996. Mr. Pearson
has been Chairman, President and Chief Executive Officer of Hy-Vee, Inc., a

                                       159
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retail grocer, since 1989. He is a member of the Human Resources Committee of
the board of directors of Principal Life and, effective August 21, 2001, will
assume the same position with Principal Financial Group, Inc.

    FEDERICO F. PENA has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since November 1999. Mr. Pena
has been Managing Director of Vestar Capital Partners, an investment firm
specializing in management buyouts, recapitalizations and growth capital
investments, since 2000. He served as Vestar's Senior Advisor from 1998-2000.
Prior to his employment with Vestar, Mr. Pena was Secretary of the U.S.
Department of Energy from 1996-1998 and Secretary of the U.S. Department of
Transportation from 1993-1996. He is a director of Marsico Funds, which are
mutual funds, Valor Communications, a telecommunications company, and Sonic,
Inc. He is a member of the Nominating Committee of the board of directors of
Principal Life and, effective August 21, 2001, will assume the same position
with Principal Financial Group, Inc.

    DONALD M. STEWART has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since June 1979. Mr. Stewart
has been President and Chief Executive Officer of The Chicago Community Trust, a
philanthropic organization, since June 2000. Prior to June 2000, he was Senior
Program Officer and Special Advisor to the President at the Carnegie Corporation
of New York from July 1999-May 2000, and President of The College Board from
1986-June 1999. He is a director of The Campbell Soup Company, a food and
beverage manufacturing firm, and The New York Times Company, a diversified media
company. He is a member of the Human Resources Committee of the board of
directors of Principal Life. Effective August 21, 2001, Mr. Stewart will be a
member of the Nominating Committee of the board of directors of Principal Life
and Principal Financial Group, Inc.

    ELIZABETH E. TALLETT has been a director of Principal Financial Group, Inc.
since April 24, 2001 and a Principal Life director since May 1992. Ms. Tallett
has been President and Chief Executive Officer of Galenor Inc., a research
pharmaceutical company, since 1999 and has also been President and Chief
Executive Officer of Dioscor Inc., a pharmaceutical and biotechnology firm,
since 1996. Prior to 1996, she was President and Chief Executive Officer of
Transcell Technologies, Inc. She is a director of Coventry Health Care, Inc., a
managed health care company; IntegraMed America, Inc., a health services
company, Varian, Inc., a supplier of scientific instruments, and Varian
Semiconductor Equipment Associates, Inc., a semiconductor equipment company. She
is Chair of the Audit Committee and a member of the Board-Management Committee
of the board of directors of Principal Life. Effective August 21, 2001, Ms.
Tallett will be Chair of the Audit Committee and a member of the
Board-Management Committee of the board of directors of Principal Life and
Principal Financial Group, Inc. and a member of the Pricing Committee of
Principal Financial Group, Inc.

    JOHN E. ASCHENBRENNER who heads the Life and Health Insurance and Mortgage
Banking segments of our operations has been Executive Vice President of
Principal Financial Group, Inc. since April 25, 2001 and Executive Vice
President of Principal Life since January 2000. From 1996-1999, he was Senior
Vice President of Principal Life and from 1990-1995, he was Vice
President -- Individual Markets of Principal Life. Mr. Aschenbrenner serves as a
director of the 28 mutual funds that comprise the Principal Family of Mutual
Funds.

    MICHAEL T. DALEY who heads Marketing and Distribution has been Executive
Vice President of Principal Financial Group, Inc. since April 25, 2001 and
Executive Vice President of Principal Life since June 2000. From 1997-2000, he
was Senior Vice President of CIGNA Retirement and Investment Services and from
1992-1997, he was Managing Director of Bankers Trust Company.

    DENNIS P. FRANCIS has been Chief Executive Officer of Principal Capital
Management since 1999. He has been Senior Vice President of Principal Financial
Group, Inc. since April 25, 2001 and Senior Vice President and Chief Investment
Officer of Principal Life since 1998. From 1990-1997, he was Vice
President -- Commercial Real Estate of Principal Life.

    MICHAEL H. GERSIE has been Executive Vice President and Chief Financial
Officer of Principal Financial Group, Inc. since April 25, 2001 and Executive
Vice President and Chief Financial Officer of Principal Life since January 2000.
From 1994-1999, he was Senior Vice President of Principal Life.

    ELLEN Z. LAMALE has been Senior Vice President and Chief Actuary of
Principal Financial Group, Inc. since April 25, 2001 and Senior Vice President
and Chief Actuary of Principal Life since June 1999. From 1992-1999, she was
Vice President and Chief Actuary of Principal Life.

    MARY A. O'KEEFE who heads Corporate Relations and Human Resources has been
Senior Vice President of Principal Financial Group, Inc. since April 25, 2001
and Senior Vice President of Principal Life since January 1998. From 1994-1997,
she was Vice President -- Corporate Relations of Principal Life.

    RICHARD L. PREY who heads the U. S. Asset Accumulation business has been
Executive Vice President of Principal Financial Group, Inc. since April 25, 2001
and Executive Vice President of Principal Life since January 2000. From
1997-1999, he was Senior Vice President of Principal Life, from 1996-1997, he
was Vice President -- Pension of Principal Life and from 1993-1996, he was
President and Chief Executive Officer of Delaware Charter Guarantee & Trust
Company, an indirect subsidiary of Principal Life.

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    KAREN E. SHAFF has been Senior Vice President and General Counsel of
Principal Financial Group, Inc. since April 25, 2001 and Senior Vice President
and General Counsel of Principal Life since January 2000. From June 1999-
December 1999, she was Senior Vice President and Deputy General Counsel of
Principal Life, and from 1995-May 1999, she was Vice President and Associate
General Counsel of Principal Life. She is a director of HealthExtras, Inc.

    NORMAN R. SORENSEN has been President of Principal International, Inc. since
1998 and has been Senior Vice President of Principal Financial Group, Inc. since
April 25, 2001 and Senior Vice President of Principal Life since December 1998.
From 1989-November 1998, he was Vice President and Senior Executive -- Latin
America, American International Group.

    CARL C. WILLIAMS has been Senior Vice President and Chief Information
Officer of Principal Financial Group, Inc. since April 25, 2001 and Senior Vice
President and Chief Information Officer of Principal Life since July 1997. From
1993-1997, he was Vice President -- Information Technology of Amoco Oil.

COMPOSITION OF BOARD AND COMMITTEES

    Principal Financial Group, Inc. is managed under the direction of its board
of directors. Its board of directors was initially composed of 13 directors, 11
of whom were not officers, and has added one additional director, who is not an
officer. Principal Financial Group, Inc. has also established the following
standing committees of the board of directors:

  AUDIT COMMITTEE

    The Audit committee of Principal Financial Group, Inc. was chosen by the
board of directors from those members who are not officers of Principal
Financial Group, Inc. or its subsidiaries. The Audit committee will recommend to
the board of directors a firm of independent certified public accountants to
annually audit the books and records. The Audit committee will review and report
on the activities of the independent certified public accountants to the board
of directors and review and advise the board of directors as to the adequacy of
Principal Financial Group, Inc.'s system of internal accounting controls.

  HUMAN RESOURCES COMMITTEE

    The Human Resources committee of Principal Financial Group, Inc. was chosen
by the board of directors from those members who are not officers of Principal
Financial Group, Inc. or its subsidiaries. The Human Resources committee will
make recommendations to the board of directors regarding salaries and any
supplemental employee compensation of the executive officers and act upon
management's recommendations for salary and supplemental employee compensation
policies for all other employees.

  OTHER COMMITTEES

    The board of directors may form such other committees of the board of
directors as it deems appropriate.

COMPENSATION OF DIRECTORS

    The compensation for our directors who are not officers or employees of
Principal Mutual Holding Company or its subsidiaries consists of a $31,500
annual retainer plus a $2,500 per day attendance fee for each regular or special
board meeting attended in person. These directors are also compensated for
participation on committees. We anticipate that, following the conversion, the
directors of Principal Financial Group, Inc. will be identical to the directors
of Principal Life. We do not currently plan to pay any additional compensation
to directors for also participating on the board of directors of Principal Life.

    In addition, following the conversion, directors who are not officers or
employees will receive initial and annual grants of options and are eligible for
discretionary grants of options pursuant to the directors stock plan.
Non-employee directors also receive an initial grant of RESTRICTED STOCK UNITS
and a grant of Restricted Stock Units upon re-election to the board, and are
eligible for discretionary grants of RESTRICTED STOCK or Restricted Stock Units
pursuant to the directors stock plan. The annual retainer payable to directors
will be reduced by $7,500 upon the grant of awards under the directors stock
plan. A description of our directors stock plan is provided below.

    Principal Financial Group, Inc. intends to adopt a directors deferred
compensation plan pursuant to which each non-employee director who receives a
cash retainer and meeting fees would have the right to defer all or a portion of
such payments into an account and would be deemed to be invested in common
stock.

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   165

COMPENSATION OF NAMED EXECUTIVE OFFICERS

    The following table sets forth the compensation paid to our chief executive
officer and the four other most highly compensated executive officers employed
as of December 31, 2000, for services rendered during the fiscal year ended
December 31, 2000:

                           SUMMARY COMPENSATION TABLE

                                                                                               ALL OTHER
NAME AND PRINCIPAL POSITION                  YEAR    SALARY    BONUS(1)   LTIP PAYOUTS(2)   COMPENSATION(3)
- ---------------------------                  ----   --------   --------   ---------------   ---------------
                                                                             
J. Barry Griswell..........................
President, CEO                               2000   $841,346   $378,606      $316,888           $33,783
David J. Drury.............................
Chairman                                     2000    825,000   371,250        479,538            37,205
Michael H. Gersie..........................
EVP, CFO                                     2000    333,269   134,974        303,737            13,978
Richard L. Prey............................
EVP                                          2000    328,269   132,949        301,087            12,592
John E. Aschenbrenner......................
EVP                                          2000    318,269   128,899        295,727            13,211

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

(1) The amounts shown represent the 2000 incentive compensation awards paid in
    2001 under the Principal Financial Group incentive pay plan.

(2) The amounts shown represent the payout of the 1998 long-term performance
    award in respect of the 1998 through 2000 cycle under the Principal
    Financial Group long-term performance plan. Amounts shown include amounts
    paid as well as deferred.

(3) The amounts shown represent the total of our contributions to our employees
    savings plan in which all of our employees are generally eligible to
    participate, and contributions to our excess plan, our non-qualified
    supplemental executive retirement plan. For the year ending December 31,
    2000, our contribution to the employees savings plan for each named
    executive officer was $3,938 (the maximum allowable contribution under the
    plan). Our contributions to the excess plan for the year ending December 31,
    2000, for these officers were as follows: Mr. Griswell, $29,845; Mr. Drury,
    $33,268; Mr. Gersie, $10,041; Mr. Prey, $8,654; and Mr. Aschenbrenner,
    $9,273. The amount set forth for Mr. Prey in this column does not include
    matching contributions made by us in the year 2000 in respect of his salary
    and bonus for 1999.

EMPLOYMENT AGREEMENTS

    We have previously entered into an employment agreement with J. Barry
Griswell, pursuant to which Mr. Griswell will continue in his capacity as our
president and chief executive officer for an employment term of three years from
the date of the employment agreement. This three-year term will automatically be
extended for additional two-year terms unless either Mr. Griswell or we notify
the other of the intention not to extend the agreement. Mr. Griswell's annual
salary under this agreement is $850,000, periodically increased in accordance
with our regular policy, and he participates in our incentive compensation
plans, long-term performance plan and qualified and non-qualified savings and
retirement plans.

    The employment agreement provides that Mr. Griswell would be entitled to
certain severance benefits in the event that his employment terminates under
certain circumstances. These benefits are substantially similar to the severance
benefits to which Mr. Griswell would be entitled pursuant to the "change in
control" agreement described below, except that in the case of a termination of
his employment where there has not been a change of control, Mr. Griswell,
pursuant to the terms of his employment agreement, will generally be entitled to
two times the amounts indicated below, not three times.

    We have entered into "change in control" employment agreements with Mr.
Griswell and with each of the other named executive officers that provide each
executive with assurances as to the terms and conditions of his employment and
as to the termination benefits that would be payable to him upon a termination
of employment relating to a change of control (as defined in the agreements and
as set forth below). The purpose of these agreements is to assure the covered
executive that, following a change of control or related events, he will receive
substantially comparable compensation and benefits and have substantially
comparable terms and conditions of employment as those he enjoyed prior to the
occurrence of such event. To that end, in the event of a change of control,
these agreements:

    - mandate that the executive receive specified levels of salary, incentive
      compensation and benefits for a period of not less than two years
      following the occurrence of a change of control;

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   166

    - provide for the immediate vesting of all options and shares of Restricted
      Stock then held by each executive, unless the applicable merger agreement
      provides that the options are to be assumed by the acquirer, in which case
      only the Restricted Stock will vest; however, there can be no exercise of
      options nor distribution of Restricted Stock awards until eighteen months
      following the completion of the demutualization;

    - provide for a payment to be made to each executive, within 10 days of a
      change of control, of a pro rata portion of any annual bonus and/or
      long-term incentive award then outstanding, in respect of the applicable
      periods prior to the change of control;

    - provide that each executive will vest and be paid, within 10 days of a
      change of control, the outstanding account balances under any
      non-qualified deferral or supplemental benefits program, whether vested or
      unvested; and

    - assure each executive of receiving a specified level of termination
      benefits in the event that his employment is terminated without "cause" or
      by the executive voluntarily for "good reason."

    For this purpose, good reason means adverse changes in the terms and
conditions of the executive's employment, including:

    - any failure to pay the executive's base salary or any required increase in
      salary;

    - any failure to pay the executive's annual bonus or any reduction in the
      executive's annual bonus opportunity;

    - any material adverse change in the executive's position (including
      offices, titles or reporting requirements, but not reporting
      responsibilities), authority or duties under the agreement; or

    - any material reduction in the executive's aggregate compensation and
      benefits or requiring the executive to be based at any office or location
      other than the location at which he worked prior to the change of control.

    The benefits to be paid or provided under the agreements upon a qualifying
termination include:

    - a lump sum severance benefit equal to three times the sum of the
      executive's annual base salary, target annual bonus and annualized target
      long-term bonus; provided that the annualized target long-term bonus will
      not be included as part of the severance benefits if the executive's
      termination occurs on or after the third anniversary of the date we first
      make a grant of stock options to a peer executive;

    - the immediate vesting of all stock options and shares of Restricted Stock
      or similar awards then held, except that there can be no option exercise
      or distribution of Restricted Stock until eighteen months following the
      completion of the demutualization;

    - a pro-rated annual bonus for the year of termination and a pro-rated
      long-term incentive plan payment for each cycle then in progress, minus,
      in each case, the amount, if any, paid in respect of such annual or
      long-term incentive plan at the time of the change of control;

    - the unpaid account balances under any non-qualified deferral or
      supplemental benefits program, whether vested or unvested;

    - the lump sum value of the additional retirement benefits the executive
      would have accrued had he or she become fully vested in all such
      previously-unvested benefits, accrued three additional years of service
      and received the lump-sum severance benefits described above, excluding
      the long-term incentive plan bonuses, as covered compensation during such
      assumed additional years of service;

    - an additional payment to offset any excise tax imposed under section 4999
      of the Internal Revenue Code, but only if the after-tax amount of the
      additional payment would exceed 10% of the after-tax benefits the
      executive would receive if the executive's benefits were limited to an
      amount such that the payments would not be subject to the excise tax; and

    - the reimbursement for legal fees and other related expenses required to
      secure, preserve or obtain benefits under the agreement.

    In addition, until the third anniversary of the date of the executive's
termination, the executive shall continue to receive welfare benefits, including
medical, prescription, dental, disability, salary continuance, individual life,
group life, accidental death and travel accident insurance plans and programs,
which are at least as favorable as the most favorable programs at the same costs
applicable to peer executives and their families who are actively employed after
such termination date.

    In exchange for these benefits, Mr. Griswell has agreed that for two years,
and the other named executive officers have agreed that for one year, following
a termination of employment that results in the executive receiving severance
benefits as described above, the executive will not engage or participate in, or
become employed by or serve as a director of or consultant to, a competing
business; nor will the executive solicit employees or customers, or interfere
with the relationship we have with our employees or customers.

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    For purposes of these agreements, following the effective date of this
offering, a change of control will mean any one or more of the following events:

    - any person becoming the beneficial owner of 25% or more of our common
      stock;

    - the individuals then serving as members of our board of directors who were
      members of such board as of the date of the agreement cease for any reason
      to constitute at least a majority of the board of directors, provided
      that, for this purpose, any subsequently-appointed or elected member of
      the board of directors whose election or nomination for election (unless
      such election, nomination or appointment was in connection with an actual
      or threatened proxy contest) was approved by a vote or written consent of
      at least a majority of the incumbent directors then in office and the
      directors elected or nominated in a manner consistent with the conditions
      of this provision shall be treated as an incumbent director; or

    - the consummation of a merger, reorganization, consolidation or similar
      transaction other than a transaction immediately following which the
      stockholders of Principal Financial Group, Inc. continue to own more than
      60% of the voting securities of the surviving corporation or its ultimate
      parent corporation; or approval by the stockholders of Principal Financial
      Group, Inc. of a plan or agreement for the sale or other disposition of
      all or substantially all of its consolidated assets or a plan of
      liquidation.

    However, if specific conditions are met, a reorganization transaction of the
type outlined in the third item above may not trigger the full protection
otherwise afforded to management under such agreements because the requisite
conditions will afford management reasonable protection that there will be a
reasonable continuity of the business conditions that existed prior to the
occurrence of such event. These conditions are that:

    - immediately following any such transaction, the stockholders of Principal
      Financial Group, Inc. must continue to own more than 40% of the voting
      securities of the surviving corporation or its ultimate parent
      corporation;

    - no person is or becomes the beneficial owner of 25% or more of the voting
      securities of the corporation surviving such reorganization transaction,
      or its parent;

    - for two years, directors who were in office immediately preceding the
      reorganization transaction continue to constitute not less than (i) a
      majority of the board of directors if, immediately following any such
      transaction, the stockholders of Principal Financial Group, Inc. continue
      to own more than 50% of the voting securities of the surviving corporation
      or its ultimate parent corporation or (ii) one member less than a majority
      of the board of directors, if immediately following any such transaction,
      the stockholders of Principal Financial Group, Inc. continue to own more
      than 40% but less than 50% of the voting securities of the surviving
      corporation or its ultimate parent corporation; and

    - the person who was the chief executive officer of Principal Financial
      Group, Inc. immediately prior to the first to occur of (x) the day prior
      to the first occurrence of certain events leading to the transaction or
      (y) the day prior to the effective date of the transaction shall serve as
      the chief executive officer of the surviving corporation at all times
      during the period commencing on the effective date and ending on the first
      anniversary of the effective date.

    If any of the conditions described in the second, third or fourth items
above cease to be satisfied, then the full benefit of the protection afforded
under such agreements will become operative.

STOCK INCENTIVE PLAN

    Our Human Resources committee will be responsible for administering the
Principal Financial Group, Inc. stock incentive plan. Under the stock incentive
plan, the Human Resources committee may from time to time grant to our officers,
employees and agents stock options, STOCK APPRECIATION RIGHTS, Restricted Stock
and Restricted Stock Units. The Human Resources committee may not grant any
awards to employees or agents under the stock incentive plan that will take
effect prior to 30 days following the completion of the demutualization and may
not make any grants to any of our executive officers until six months after the
completion of the demutualization.

    The maximum number of shares of common stock that may be issued under the
stock incentive plan, together with the excess plan (our non-qualified defined
contribution retirement plan), the directors stock plan (described below), the
long-term performance plan (described below) and any new plan awarding our
common stock, in the five years following the completion of the demutualization,
is 6% of the number of shares outstanding immediately following the completion
of the demutualization, unless shareholders vote to increase the maximum number.
The number of shares that may be awarded in the eighteen months following the
completion of the demutualization is limited to 40% of such maximum. During any
three-year period, no individual participant may be granted awards in respect of
more than 10% of the total shares available for issuance under the plan.

    The Human Resources committee may permit participants to defer receipt of
shares of common stock that would otherwise be issued in connection with an
award under the plan.

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    It is expected that the Human Resources committee will make a one-time,
nonrecurring grant of options to most of our employees including, at the
discretion of the Human Resources committee, our agents who are statutory
employees, 30 days after the completion of the demutualization. The purpose of
this one-time company-wide grant is to encourage the work force to be aware of
the impact that their performance can have on the financial success of the
enterprise taken as a whole. Employees with a title equivalent or senior to
Second Vice President will not participate in the one-time company-wide grant.
None of the participants in the long-term performance plan described below will
participate in the one-time company-wide grant. Each option granted in the
one-time company-wide grant will become exercisable in full on the date which is
three years from the date of the one-time company-wide grant.

    The shares to be issued under the stock incentive plan may be unissued
shares or treasury shares. Upon the occurrence of events that affect our
capitalization, appropriate adjustments may be made in the number and kind of
shares that may be issued under the stock incentive plan in the future and in
the number and kind of shares and price per share under all outstanding stock
options and Stock Appreciation Rights granted before the event. Notwithstanding
the foregoing, if any grant made under the stock incentive plan is for any
reason canceled, terminated or otherwise settled without the issuance of some or
all of the shares of common stock subject to the grant, such shares will be
available for future grants.

    The Human Resources committee may condition the grant of any option or other
award upon the recipient agreeing to conditions or covenants in favor of
Principal Financial Group, Inc. and/or one or more of its subsidiaries that may
have effect following the termination of the recipient's employment. These
conditions and covenants may include restrictions on the ability to transfer the
underlying shares of common stock or covenants not to compete, not to solicit
employees and customers and not to disclose confidential information. The Human
Resources committee may also require that, after an option or other award has
been exercised, the recipient disgorge any profit, gain or other benefit
received from the option if the optionee breaches any of these commitments.
These provisions will not apply to the one-time company-wide grant described
above.

    The Human Resources committee may grant nonqualified stock options to
officers, employees and agents and may grant stock options qualifying as
incentive stock options under the Internal Revenue Code to officers and
employees, including agents who are statutory employees. The maximum number of
shares issuable pursuant to incentive stock options that may be awarded under
the plan is 10,000,000. The exercise price per share of common stock subject to
either a nonqualified stock option or an incentive stock option will be not less
than the fair market value, as defined in the stock incentive plan, of such
share on the date of grant. To exercise an option, an option holder may pay the
exercise price in cash or, if permitted by the Human Resources committee, by
delivering on the date of exercise other shares of common stock having an
aggregate fair market value equal to the exercise price of the option or by
delivering some combination of cash and other shares of common stock. An option
may also be exercised through an arrangement with a broker approved by the Human
Resources committee whereby payment of the exercise price is accomplished with
the sale of common stock.

    Other than options granted with respect to the one-time company-wide grant
as described above, each option will generally become exercisable in three
approximately equal installments on each of the first three anniversaries of the
date of the grant of the option. The term of each option will be fixed by the
Human Resources committee but may not be more than ten years from its date of
grant. Notwithstanding any other provision of the plan, no option shall become
exercisable earlier than 18 months following the completion of the
demutualization, except in cases of accelerated exercisability due to death or
disability of any employee, due to the approved retirement of any employee who
is below the level of Second Vice President or, in limited circumstances, as
approved by the Insurance Commissioner of the State of Iowa.

    In the event an employee terminates service by reason of disability or
death, all options then held by the employee, whether or not then exercisable,
will become immediately exercisable and will generally remain exercisable for a
period of three years or for such shorter period as the Human Resources
committee shall determine at the time of grant. In the event an employee
terminates service by reason of normal or approved early retirement, all options
then held by the employee will become immediately exercisable and will remain
exercisable for a period of three years or for such other period as the Human
Resources committee shall determine at the time of grant, subject to the last
sentence in the previous paragraph. In the event an employee's service
terminates for cause or by resignation, other than in the circumstances
addressed above, he or she will lose all of his or her outstanding options,
whether or not then exercisable. In general, in the event an employee terminates
service for any reason other than those listed above, all options then held by
the employee that are then exercisable will remain exercisable for a period of
90 days. Of course, regardless of the rules regarding when an option can be
exercised after termination, no option will be exercisable after its stated
maximum term.

    The Human Resources committee may also grant Stock Appreciation Rights to
employees, officers and agents that can either be free standing awards or awards
that are related to a stock option in such a way that the exercise of either the
Stock Appreciation Right or the stock option will cause the cancellation of the
other award. The terms and conditions applicable with respect to any grant of a
Stock Appreciation Right will be substantially the same as apply to the grant of
a stock option. This means that the vesting of a Stock Appreciation Right, and
the time that a recipient of a

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Stock Appreciation Right will have to exercise the Stock Appreciation Right
after the termination of his or her service with Principal Financial Group, Inc.
and its affiliates, will be substantially the same as applies to a stock option.

    Upon the exercise of a nonqualified option, the option holder will generally
recognize ordinary income in an amount equal to the difference between the then
fair market value of the common stock being purchased and the exercise price
paid to acquire such stock. We will generally be entitled to take a federal
income tax deduction in the amount of ordinary income recognized by the
employee. Upon the sale of the underlying stock after satisfying the holding
period requirement that the stock be held for one year following the exercise of
the option, an employee will recognize long-term capital gain (loss) to the
extent that the sale price received exceeds (or is less than) the fair market
value of the stock at the time of exercise. The tax treatment of a Stock
Appreciation Right is essentially the same as is applicable in respect of a
nonqualified stock option.

    The exercise of an incentive stock option generally does not result in any
federal income tax consequences. Upon the sale of the underlying stock after
satisfying the applicable holding period requirements, including a requirement
that the stock be held until one year following the exercise of the option and
two years following the date of grant, an employee will recognize long-term
capital gain (loss) to the extent that the sale price received exceeds (or is
less than) the price paid to purchase the stock. If the holding periods are not
satisfied, the tax consequences with respect to an incentive stock option are
generally the same as those that apply to a nonqualified stock option, except
that the amount of ordinary income realized by the employee will not exceed the
excess of the amount received by an employee in any sale over the employee's
exercise price to purchase the stock.

    The Human Resources committee also has the right to grant awards of
Restricted Stock to our employees, officers and agents at such times and for
such number of shares of common stock as the Human Resources committee may
determine. The Human Resources committee may elect to grant any such person
Restricted Stock Units, which are contractual rights to receive shares of common
stock or cash in an amount equal to the value of a specified number of shares of
common stock in the future, after the satisfaction of specified vesting
conditions, that is the economic equivalent of an award of Restricted Stock. Any
such award of Restricted Stock Units shall be in substantially the same terms as
an award of Restricted Stock. Notwithstanding any other provision of the plan,
no award shall become exercisable or distributable earlier than 18 months
following the completion of the demutualization, except in cases of accelerated
exercisability or distribution due to death or disability of any employee, due
to the approved retirement of any employee who is below the level of Second Vice
President or, in limited circumstances, with the approval of the Insurance
Commissioner of the State of Iowa.

    Unless the Human Resources committee otherwise specifies at the time of
grant, a pro rata portion of any shares related to Restricted Stock held by an
employee, officer or agent whose service terminates due to his or her death,
disability or approved retirement, will vest at such termination, based upon his
or her service completed through such date of termination, subject to the
requirements of the last sentence in the previous paragraph. Upon any other
termination, any shares of Restricted Stock that have not previously vested will
be forfeited unless the Human Resources committee otherwise determines.

    Generally, an employee, officer or agent who receives Restricted Stock will
be entitled to receive all dividends and other distributions paid with respect
to those shares. However, if any dividends or distributions are paid in shares
of common stock, the shares received as a dividend or distribution will be
subject to the same forfeiture restrictions and restrictions on transferability
as apply to the Restricted Stock with respect to which they were paid.
Additionally, the Human Resources committee may specify at the date of grant
that any cash dividends on shares of Restricted Stock will not be paid
currently, but rather be credited to an account established for the benefit of
the recipient of the Restricted Stock and invested in shares of common stock on
the distribution date of such dividend. Any additional shares credited in
respect of dividends shall become vested and nonforfeitable, if at all, on the
same terms and conditions as are applicable in respect of the Restricted Stock
with respect to which such dividends were payable.

    Generally, an employee, officer or agent who receives Restricted Stock will
have ordinary income at the time that the Restricted Stock is no longer subject
to forfeiture in an amount equal to the fair market value of the common stock at
that time less the amount, if any, paid for the Restricted Stock. Such a person
may elect, within 30 days of the date of any Restricted Stock grant, to be taxed
at the time of the grant based on the then current value of the common stock.

    Upon the occurrence of a change of control, as defined above with respect to
the change of control employment agreements, all outstanding options and Stock
Appreciation Rights shall immediately become exercisable, the restrictions
applicable to any Restricted Stock or Restricted Stock Unit award shall lapse
and any such award may be cashed out at the discretion of the Human Resources
committee; except that no such acceleration of exercisability or lapse of
restrictions shall occur prior to eighteen months following the completion of
the demutualization. However, unless provided otherwise in change of control
employment agreements, if the Human Resources committee determines that the
acquiring or surviving entity, or a parent of such entity, will replace the
outstanding options, Stock Appreciation Rights and awards of Restricted Stock
and Restricted Stock Units or otherwise assume and honor such options, Stock
Appreciation Rights or awards on terms that preserve their economic value at the
time of the change of control and protect the employees against a forfeiture
arising out of an involuntary or specified types of constructive

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termination, the ability of the employees to exercise options or Stock
Appreciation Rights will not accelerate and the restrictions related to
Restricted Stock and Restricted Stock Units will not lapse at the time of the
change of control.

    Our board of directors may terminate, suspend or amend the stock incentive
plan at any time, but such termination, suspension or amendment may not
adversely affect any stock options, Stock Appreciation Rights or Restricted
Stock or Restricted Stock Unit awards then outstanding under the stock incentive
plan without the consent of the recipients of such an award. No amendment to the
plan may be made without the approval of the Insurance Commissioner of the State
of Iowa in the eighteen months following the completion of the demutualization.
Unless earlier terminated by action of our board of directors, the stock
incentive plan will continue in effect until the tenth anniversary of the date
the stock incentive plan was adopted. Stock options and Stock Appreciation
Rights granted prior to such date will continue in effect until they expire in
accordance with their terms.

LONG-TERM PERFORMANCE PLAN

    We also maintain the Principal Financial Group, Inc. long term performance
plan, which provides the opportunity for eligible executives to share in the
success of Principal Financial Group, Inc., if specified minimum corporate
performance objectives are achieved over a three calendar year period. Under the
long-term plan, senior officers are awarded a number of performance units at the
discretion of the Human Resources committee. Over the three year performance
period, the number of performance units held by an executive will be adjusted by
a performance multiplier. This multiplier is a percentage determined based on a
matrix established by the Human Resources committee at the beginning of the
performance period. The matrix will establish the various performance objectives
to be achieved and the levels of reward that participating employees will
receive at stated levels of performance. The amount payable to each eligible
executive is equal to the product of the number of performance units initially
awarded, multiplied by the percentage derived from the performance matrix, and
by the value of such unit as determined at the end of the performance period.
Currently, the value of a performance unit is determined using a multiple of 10
times the product of the average return on equity for the prior three years and
the adjusted consolidated GAAP equity as of the end of the performance period,
divided by the number of initial performance units for that performance period.
For the performance period commencing after the date of this offering, the value
of a performance unit will be equal to the average 20 day trading price of the
common stock at the end of the last year in the performance period. For
performance periods already commenced but not completed when this offering
occurs, the Human Resources committee may determine the value of a performance
unit based on the above formula or the price of the common stock on a date
determined by the Human Resources committee. For this purpose, to assure that
each participant does not receive a penalty or a windfall in the event
performance units are based on the stock price, the number of performance units
outstanding will be adjusted by the Human Resources committee to reflect the
relative values of the common stock and the outstanding performance units at
such time. Notwithstanding the foregoing, in no event shall any payment be made
in respect of any performance period if the threshold performance objectives
established by the Human Resources committee with respect to such performance
period are not satisfied. Unless the Human Resources committee shall otherwise
determine, payment of such amount shall be made in cash, stock or a combination
of cash and stock. If any stock is used for payment, the maximum number of
shares that can be awarded under this plan, together with our stock incentive
plan (described above), the excess plan (our non-qualified defined contribution
retirement plan), the directors plan (described below), and any new plan
awarding our common stock, in the five years following the completion of the
demutualization is 6% of the number of shares outstanding immediately following
the completion of the demutualization, unless the shareholders vote to increase
the maximum number, and the number of shares that may be awarded in the eighteen
months following the completion of the demutualization is limited to 40% of such
maximum. No awards or payments in the form of stock may be made under the
long-term performance plan prior to six months following the completion of the
demutualization.

    Generally, an executive who receives a grant of performance units must
remain employed by Principal Financial Group, Inc. or one of its subsidiaries
for the entire performance period to receive any payment under the long-term
plan. In the event of termination of employment due to an executive's death,
disability or qualifying retirement, all or, if the termination occurs in the
first year of the performance period, a pro-rated portion of the amount that
would have been payable to the executive had he or she continued to be employed
will still be paid to such executive. An executive may elect to defer payment of
all or a portion of amounts otherwise payable under the long-term performance
plan for up to five years or until the termination of the executive's
employment. No amounts other than those previously deferred will be payable to
an executive whose employment is terminated for cause.

    Listed below are the awards granted in 2000 under the terms of the long-term
plan with respect to the 2000-2002 performance period. The threshold objectives
for this period are:

    - consolidated GAAP equity, as adjusted, for the year ending simultaneously
      with the end of the performance period, stated as a percentage of the
      general account assets of Principal Life, must be at least 6%;

    - the risk based capital ratio of Principal Life must be at least 150%;

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    - the return on equity for the last calendar year in the performance period
      must exceed a minimum level established for such performance period in the
      performance matrix; and

    - operating earnings must exceed a minimum level established for such
      performance period in the performance matrix.

    The sum of all awards payable pursuant to any performance period shall not
exceed 5% of pre-tax GAAP operating earnings for the third year of the
performance period.

    Within ten (10) days following a change of control or the date the full
conditions protecting management in the event of a reorganization transaction
fail to be satisfied, as outlined above under the heading "Employment
Agreements", executive officers and specified other senior officers including
the executive officers shall receive under the plan a pro-rated award for
service rendered prior to such date.

            LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR

                                                                            PERFORMANCE      ESTIMATED FUTURE PAYOUTS BASED ON
                                                              NUMBER OF    PERIOD UNTIL               CURRENT FORMULA
                                                             PERFORMANCE   MATURATION OR   --------------------------------------
NAME                                                          UNITS(1)        PAYOUT       THRESHOLD(2)   TARGET(3)    MAXIMUM(4)
- ----                                                         -----------   -------------   ------------   ----------   ----------
                                                                                                        
J. Barry Griswell...........................................    13,314       12/31/02        $      0     $1,373,472
President, CEO
David J. Drury..............................................    12,922       12/31/02               0      1,333,033
Chairman
Michael H. Gersie...........................................     4,198       12/31/02               0        433,065
EVP, CFO
Richard L. Prey.............................................     4,135       12/31/02               0        426,566
EVP
John E. Aschenbrenner.......................................     4,010       12/31/02               0        413,671
EVP

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

(1) The number of performance units granted is determined by reference to the
    three year average return on equity for calendar years 1997 through 1999 and
    other factors including job level. Following this offering, the number of
    performance units may be adjusted by the Human Resources committee to
    reflect the relative values of common stock and the number of performance
    units outstanding at such time.

(2) Payouts under the plan will be zero if minimum performance targets are not
    met.

(3) Principal Life did not achieve target in the year 2000. See the Summary
    Compensation Table above for payout information with respect to the year
    2000.

(4) Because the formula may be based on the Principal Financial Group, Inc.
    common stock price in December 2002, the payout under the plan could be
    unlimited.

INCENTIVE PAY PLAN (PRINPAY)

    We also maintain the Principal Financial Group, Inc. incentive pay plan,
which each year provides the opportunity for most of our employees to receive
additional incentive compensation if specified minimum corporate performance
objectives are met for that year. Each eligible employee under the incentive pay
plan is given an award opportunity, which is a fixed percentage of the
employee's base salary. The amount actually payable in respect of such award
opportunity will be adjusted, up or down, based on our actual performance
against one or more corporate financial or non-financial measures established by
the Human Resources committee for the plan year. Business unit performance
measures are determined by the plan administrator. Awards to the named executive
officers and other senior officers are based entirely on corporate performance.
The measures of corporate performance that may be used under the plan include,
but are not limited to, return on equity, operating earnings, earnings before
income taxes, depreciation and amortization, budget, customer satisfaction and
total shareholder return. Individual performance objectives are also established
with respect to more senior employees. Different measures of performance may be
used for different employees and the weight afforded to any performance measure
may also vary from employee to employee.

    However, if any threshold performance objective is not met, no amount will
be payable under the incentive pay plan for the applicable year. For 2001 and
beyond, unless otherwise specified by the Human Resources committee by March 15
in a subsequent plan year, the threshold objectives are:

    - Principal Life must maintain the minimum rating from 2 of the 3 specified
      rating agencies;

    - adjusted consolidated GAAP equity for the end of the plan year, stated as
      a percentage of the general account assets of Principal Life, must be at
      least 6%; and

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    - Principal Life must have a risk based capital ratio of at least 150%.

    In no event will the sum of all annual awards under the plan exceed 6% of
our pre-tax GAAP operating earnings for the fiscal year. No payment shall be
made to any participant who is on final warning any time during the plan year.

    Award payments under the incentive pay plan are made in cash following the
release of audited results after the end of the plan year in which it is earned,
but no later than March 15 of the year following the year in which the services
are performed. Generally, a participant must remain in our employ through the
end of the plan year, which corresponds to the calendar year, to receive any
payment with respect to that plan year. If a participant's employment is
terminated due to death during the plan year, his or her beneficiary will
receive an early distribution based on the participant's salary received during
the plan year multiplied by the deceased employee's award opportunity. If a
participant dies after the end of a plan year, his or her beneficiary shall
receive a distribution in accordance with the plan at the same time as other
participants. If a participant terminates employment due to disability,
retirement or such other involuntary termination, he or she will receive a
prorated distribution at the same time as the other participants. If a
participant's employment is terminated for cause, he or she will not be entitled
to receive any further payment with respect to any plan year.

    Within ten (10) days following a change of control or the date the full
conditions protecting management in the event of a reorganization transaction
fail to be satisfied, as outlined above under the heading "Employment
Agreements," executive officers and specified other senior officers including
the executive officers shall receive under the plan a pro-rated award for
service rendered prior to such date.

EMPLOYEE STOCK PURCHASE PLAN

    We also have an employee stock purchase plan called the Principal Financial
Group, Inc. employee stock purchase plan. The purchase plan offers virtually all
employees the opportunity to buy shares of common stock of Principal Financial
Group, Inc. at a discount from the prevailing fair market value of our stock.
Participation under the plan will commence no earlier than 30 days following the
completion of the demutualization, except that executives may not commence
participation until six months after the completion of the demutualization. The
number of shares of common stock issuable pursuant to options under the plan may
not exceed 2% of the total number of shares outstanding immediately following
this offering.

    Generally, all employees of Principal Financial Group, Inc. and its
subsidiaries will be eligible to join the purchase plan. However, the plan
administrator has discretion to exclude all of the employees of specific
subsidiaries, as well as employees whose customary employment is 20 hours or
less per week, employees whose customary employment is not for more than five
months in any calendar year and highly compensated employees (but only to the
extent necessary to comply with demutualization requirements). Additionally, any
employee who owns 5% or more of the total voting power of all classes of stock
is excluded from participating in the plan.

    Under the purchase plan, participating employees are granted options, each
with a term of not more than 2 years, to purchase shares of common stock of
Principal Financial Group, Inc. at a price no less than 85% of the share's fair
market value as of the date of grant. The Human Resources committee may also
allow the exercise price to be as low as 85% of the share's fair market value as
of the exercise date, provided that the exercise date price is less than the
grant date price. The phrase "fair market value" is defined by the purchase plan
to be the per share closing price of the shares reported on the principal
exchange, or the last reported trade on the national quotation system, on which
such transactions are reported for the trading day immediately preceding the
grant date, or the exercise date, if applicable.

    An employee may join the purchase plan by authorizing after-tax payroll
contributions to be deducted from gross wages. Additionally, if an employee is
making payroll contributions, the administrator of the plan may permit him or
her to also make cash contributions. The maximum amount which an employee may
contribute during any plan year is the lesser of $10,000 (or such greater or
lesser amount as determined by the Human Resources committee) and 10% of the
employee's salary. An employee may change the amount of payroll contributions to
his or her individual account at such intervals as are permitted under the
purchase plan. An employee also has the right to completely cease making any
further contributions at any time.

    There will be at least one exercise date each year. Generally, this date
will be the last business day of the calendar year. The plan administrator may
select other exercise dates, in its discretion. Prior to any exercise date, each
employee may elect to withdraw the contributions made to the employee's account
during that offering period. Unless an employee elects such a withdrawal, on the
exercise date the cash balance in the employee's account will be used to
purchase the maximum number of shares of common stock that can be purchased with
such balance. An employee is not permitted to purchase shares pursuant to
options granted under the purchase plan which exceed $25,000 in fair market
value in any calendar year, due to the Internal Revenue Code requirements. If
the employee elects not to have his or her options exercised, his or her
contributions for that offering period will be distributed to him or her.
Purchased shares will be held by the plan custodian until such time as the
participating employee either requests a distribution or terminates employment.

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    Generally, if an employee leaves Principal Financial Group, Inc. or one of
its subsidiaries for any reason other than death or permanent disability, any
outstanding options granted to him or her will terminate and his or her
individual account will be returned to him or her. If an employee's employment
terminates due to death or permanent disability, the employee or his or her
designated beneficiary, as applicable, will have the option to elect either to
have the employee's contributions distributed or to have the employee's options
exercised at the next date of exercise.

    Our board of directors may terminate, suspend or amend the purchase plan at
any time, but such termination, suspension or amendment may not adversely affect
any options then outstanding under the purchase plan without the consent of the
recipients of those options. No amendment to the plan may be made without the
approval of the Insurance Commissioner of the State of Iowa in the eighteen
months following the completion of the demutualization. The shares to be issued
under the purchase plan may be authorized but unissued shares. Upon the
occurrence of events that affect our capitalization, appropriate adjustments may
be made in the number and kind of shares that may be issued under the purchase
plan in the future and in the number and kind of shares and price per share
under all outstanding grants made before the event. If any grant is for any
reason canceled, terminated or otherwise settled without the issuance of some or
all of the shares subject to the grant, such shares will be available for future
grants.

    If a third party acquires Principal Financial Group, Inc., employee
contributions are protected and will never be forfeited. With respect to granted
options, generally, one of two scenarios will occur: (1) unless the board of
directors determines otherwise, the purchase plan will terminate and all shares
and cash contributions in each employee's account will be distributed to the
employees; or (2) the third-party or new entity may offer to substitute options
for its shares in exchange for the employees' options to buy shares. For shares
an employee has already purchased, the employee will be treated like every other
stockholder.

    The grant of an option to purchase shares will not have any tax
consequences. Upon the exercise of an option, an employee will not be required
to report any taxable income or pay any tax provided that the employee is
employed by Principal Financial Group, Inc. or a subsidiary at the time of
exercise.

    Upon the sale of shares acquired through the purchase plan, an employee will
recognize ordinary income to the extent that the price he or she paid for the
shares was less than the fair market value of the shares at the date of grant of
the opportunity to purchase the shares. Any excess over that amount which is
realized upon the sale of such shares will be treated as long-term capital gain.
However, to receive this special tax treatment, the employee must hold the
shares for at least one year from the date of purchase and until the second
anniversary of the date the purchase opportunity was granted.

DIRECTORS STOCK PLAN

    Our Human Resources committee administers the directors stock plan. The
purpose of the plan is to enable us to attract, retain and motivate the best
qualified non-employee directors and to enhance a long-term aligning of
interests between such directors and the holders of our common stock. Under the
plan, the committee may, from time to time, grant options, Restricted Stock, or
Restricted Stock Units to non-employee directors. No committee member may
participate in any decisions with respect to that member's benefits under the
plan unless the decision applies generally to all non-employee directors.

    Six months after the completion of the demutualization, all directors then
in office will each receive options to purchase 2,000 shares of common stock.
Directors first elected to the board of directors after the six month
anniversary of the demutualization will receive an amount of options prorated
with respect to the amount of time remaining until the next annual meeting of
shareholders. At each annual meeting thereafter, each director then in office
will receive options to purchase 2,000 shares of common stock. The exercise
price shall not be less than the fair market value of the shares on the date the
option is granted. Except as otherwise determined by the committee, options will
become exercisable in four approximately equal installments on the third, sixth,
ninth and twelfth month anniversaries of the grant date; however, no options
shall become exercisable earlier than eighteen months following the completion
of the demutualization. To exercise the option, payment must be made in cash,
stock, through an arrangement with a broker whereby payment of the exercise
price is accomplished with the proceeds of the sale of the shares or any
combination of the foregoing. We may not make a loan to a director to facilitate
option exercise. Notwithstanding the foregoing, each option shall expire, if not
previously exercised in accordance with the terms of the plan, on the tenth
anniversary of the grant date.

    If a director ceases to provide service to us, the director or, in the case
of death, the director's estate or beneficiary, may exercise any option
exercisable by such director at the date his or her services terminates for a
period of three years, or until the tenth anniversary of the grant date of the
option, whichever is earlier.

    Six months after the completion of the demutualization, all directors then
in office and any subsequently elected director will receive a grant of
Restricted Stock Units. The number received by each director will be prorated
with respect to the amount of time remaining in such director's term, so that
directors whose initial term is the longest will each receive 1,500 Restricted
Stock Units. Upon re-election, each director will receive 1,500 Restricted Stock
Units. Restrictions on the sale or transfer of Restricted Stock Units shall
lapse in substantially equal installments from the date of grant to the date of
the end of such director's term, so that portions of each award vest four times
per year.
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However, no restrictions shall lapse earlier than the eighteen months following
the completion of the demutualization. In the event a director's service shall
terminate, any Restricted Stock or Restricted Stock Units awarded to such
director as to which the period of restriction has not lapsed shall be
forfeited.

    Subject to the terms and conditions of the plan, the committee may also
grant options, Restricted Stock or Restricted Stock Units to any director at any
time, except that (i) no grant may be made before the six month anniversary of
the completion of the demutualization; and (ii) during the 18 month period after
the completion of the demutualization, the aggregate number of shares granted
pursuant to such discretionary option awards shall not exceed 20,000 shares, and
the aggregate number of shares granted pursuant to such discretionary Restricted
Stock or Restricted Stock Unit awards shall not exceed 15,000 shares. The
maximum number of shares that can be awarded under this plan is 500,000 shares
of common stock, and such number is counted against the limits referred to in
the second paragraph of the description of the stock incentive plan.

RETIREMENT PROGRAM

    Principal Life maintains a qualified defined benefit retirement plan, The
Principal pension plan, and a nonqualified supplemental pension plan,
supplemental executive retirement plan for employees, or SERP. The SERP provides
for supplemental pension benefits in excess of the benefit limits provided by
the Employee Retirement Income Security Act of 1974 and benefit and compensation
limits provided under the Internal Revenue Code.

    The table below provides for the estimated maximum annual retirement
benefits that a hypothetical participant would be entitled to receive under the
combined retirement plans. These benefits are computed on a straight-life
annuity basis, age 65 retirement, reduction of an annual social security benefit
of $20,028 (maximum allowed in 2001), and the number of credited years of
service and average annual recognized earnings equal to the amounts indicated. A
participant whose maximum credited years of service exceed 35 years upon
retirement at age 65 will be entitled to benefits substantially comparable to
the benefits available to a participant whose credited years of service equal 35
years upon retirement at age 65.

                               PENSION PLAN TABLE

                                                                      YEARS OF SERVICE
                                               ---------------------------------------------------------------
REMUNERATION                                      10         15         20         25         30         35
- ------------                                   --------   --------   --------   --------   --------   --------
                                                                                    
$300,000.....................................  $ 49,992   $ 74,988   $ 99,984   $124,980   $149,976   $174,972
$350,000.....................................    59,268     88,908    118,548    148,188    177,828    207,228
$400,000.....................................    68,556    102,840    137,124    171,408    205,680    239,964
$450,000.....................................    77,844    116,772    155,688    194,616    233,544    272,472
$500,000.....................................    87,132    130,692    174,264    217,836    261,408    304,968
$550,000.....................................    96,420    144,636    192,840    241,056    289,260    337,476
$600,000.....................................   105,708    158,556    211,416    264,264    317,124    369,972
$650,000.....................................   114,996    172,488    229,980    287,484    344,976    402,468
$700,000.....................................   124,272    186,420    248,556    310,692    372,828    434,976
$750,000.....................................   133,560    200,340    267,132    333,936    400,692    467,472
$800,000.....................................   142,848    214,272    285,696    357,120    428,544    499,968
$850,000.....................................   152,136    228,204    304,272    380,340    456,408    532,476
$900,000.....................................   161,424    242,136    322,836    403,548    484,260    564,972
$950,000.....................................   170,712    256,056    341,412    426,768    512,124    597,468
$1,000,000...................................   179,988    269,988    359,988    449,976    539,976    629,976

    The plans will provide pension benefits for Messrs. Drury, Griswell,
Aschenbrenner, Gersie and Prey. "Average final compensation" under the
retirement plans will be determined with respect to each executive's salary and
bonus under the incentive pay plan. These amounts with respect to 2000 are shown
under the "Salary" and "Bonus" columns opposite the names of these executives in
the Summary Compensation Table. The years of service with the Company of each of
the named executives for eligibility and benefit purposes as of December 31,
2000 were as follows: David J. Drury, 34 years; J. Barry Griswell, 12 years;
John E. Aschenbrenner, 28 years; Michael H. Gersie, 30 years; and Richard L.
Prey, 35 years. These executives will also receive an additional benefit based
on the service they earned prior to January 1, 1989.

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                                   REGULATION

U.S. OPERATIONS

    Our business is subject to extensive regulation at both the state and
federal level, including regulation under state insurance and federal and state
securities laws.

  STATE INSURANCE REGULATION

    GENERAL.  Principal Life and its insurance subsidiaries are subject to
regulation and supervision by the insurance authorities in each jurisdiction in
which they transact business. Currently, Principal Life is licensed to transact
business in all fifty states, the District of Columbia, Puerto Rico, the U.S.
Virgin Islands and seven Canadian provinces, and therefore is subject to
regulation in all these jurisdictions. State insurance laws generally establish
supervisory agencies with broad administrative and supervisory powers related to
granting and revoking licenses, transacting business, establishing guaranty fund
associations, licensing agents, approving policy forms, regulating premium rates
for some lines of business, establishing reserve requirements, prescribing the
form and consent of required financial statements and reports, determining the
reasonableness and adequacy of statutory capital and surplus and regulating the
type and amount of investments permitted. State insurance departments
periodically review the business and operations of an insurance company by
examining its financial condition and how it conducts its business in the
marketplace and how its agents sell its products. Principal Life and its
insurance subsidiaries are also required to file various reports relating to
their financial condition, including detailed annual and summary quarterly
statutory-basis financial statements. Filings are required in each jurisdiction
where Principal Life or an insurance subsidiary is licensed.

    State insurance regulatory authorities and other state law enforcement
agencies and attorneys general from time to time make inquiries concerning
whether our insurance subsidiaries are in compliance with the regulations
covering their businesses. We respond to such inquiries in a manner we deem
appropriate and take corrective action if warranted.

    State insurance regulators and the NAIC are continually reexamining existing
laws and regulations and developing new legislation for passage by state
legislatures and new regulations for adoption by insurance authorities. Proposed
laws and regulations or those still underdeveloped pertain to insurer solvency
and market conduct and in recent years have focused on:

    - insurance company investments,

    - risk-based capital guidelines, which consist of regulatory targeted
      surplus level based on the relationship of statutory capital and surplus,
      with prescribed adjustments, to the sum of stated percentages of each
      element of a specified list of company risk exposures,

    - the implementation of non-statutory guidelines and the circumstances under
      which dividends may be paid,

    - product approvals,

    - agent licensing,

    - underwriting practices, and

    - insurance and annuity sales practices.

    For example, the NAIC has promulgated proposed changes to statutory
accounting standards. These initiatives may be adopted by the various states in
which we are licensed, but the ultimate content, timing and impact of any
statutes and regulations adopted by the states cannot be determined at this
time.

    DIVIDENDS.  We are a holding company whose assets include all of the
outstanding shares of the common stock of Principal Life. As a holding company,
we will depend on dividends from our subsidiaries. The Iowa insurance laws may
restrict the ability of Principal Life to pay dividends to us. Our ability to
pay dividends to our stockholders and meet our obligations, including paying
operating expenses and any debt service, depends upon the receipt of dividends
from Principal Life. Any inability of Principal Life to pay dividends to us in
the future in an amount sufficient for us to pay dividends to our stockholders
and meet our other obligations may materially adversely affect our business,
financial condition or results of operations.

    The payment of dividends to us by Principal Life is regulated under Iowa
insurance laws. Under Iowa insurance laws, Principal Life may pay dividends only
out of the earned profits arising from its business. Principal Life must seek
regulatory approval prior to paying a shareholder dividend or distributing cash
or other property whose fair market value, together with that of other
shareholder dividends or distributions made within the preceding 12 month
period, exceeds the greater of:

    - 10% of Principal Life statutory surplus as of the previous calendar year
      end; or

    - the net gain from operations of Principal Life determined on a statutory
      basis for the previous calendar year.

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  HOLDING COMPANY REGULATION

    We and our insurance subsidiaries are subject to regulation under the
insurance holding company laws of various jurisdictions. The insurance holding
company laws and regulations vary from jurisdiction to jurisdiction, but
generally require an insurer that is a subsidiary of an insurance holding
company or the insurance holding company to register with state regulatory
authorities and to file with those authorities reports, including information
concerning capital structure, ownership, financial condition, intercompany
transactions and general business operations, including transactions involving
the transfer of assets, loans or payment of dividends between an insurer and its
affiliates.

    In addition, insurance regulators periodically examine an insurer's
financial condition. Applicable state insurance laws, rather than federal
bankruptcy laws, apply to the liquidation or the restructuring of insurance
companies. Insurance company subsidiaries of the holding company would be
subject to such state insurance laws; however, the holding company would
generally be subject to federal bankruptcy laws.

  SURPLUS AND CAPITAL REQUIREMENTS

    Insurance regulators have the discretionary authority, in connection with
the ongoing licensing of our insurance subsidiaries, to limit or prohibit the
ability to issue new policies if, in the regulators' judgment, the insurer is
not maintaining a minimum amount of surplus or is in hazardous financial
condition. Limits may also be established on the ability to issue new life
insurance policies and annuity contracts above an amount based upon the face
amount and premiums of policies of a similar type issued in the prior year. We
do not believe that the current or anticipated levels of statutory surplus of
Principal Life present a material risk that any such regulator would limit the
amount of new insurance business Principal Life may issue. Statutory surplus is
the excess of admitted assets over statutory liabilities, as shown on Principal
Life's statutory financial statements.

  RISK-BASED CAPITAL

    The NAIC has established risk-based capital standards for life insurance
companies as well as a model act to apply such standards at the state level. The
model act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their risk-based capital
based on four categories of risk: asset risk, insurance risk, interest rate risk
and business risk. For each category, the capital requirement is determined by
applying factors to various asset, premium and reserve items, with the factor
being higher for those items with greater underlying risk and lower for less
risky items. The formula is intended to be used by insurance regulators as an
early warning tool to identify possible weakly capitalized companies for
purposes of initiating further regulatory action.

    If an insurer's total adjusted capital falls below specified levels, the
insurer would be subject to different degrees of regulatory action depending
upon the level. These actions range from requiring the insurer to propose
actions to correct the capital deficiency to placing the insurer under
regulatory control. At March 31, 2001, Principal Life's total adjusted capital
exceeded the level of risk-based capital that would require it to take any
corrective action.

  GUARANTY FUNDS

    All fifty states of the United States, the District of Columbia and Puerto
Rico have insurance laws requiring companies licensed to do life or health
insurance business within those jurisdictions to participate as members of the
state's life and health insurance guaranty associations. These associations are
organized to pay contractual obligations under life and health insurance
policies and annuity contracts issued by impaired or insolvent insurance
companies. To meet these obligations, these associations levy assessments on all
member insurers based on the proportionate share of the premiums written by each
member in the lines of business in which the impaired or insolvent insurer is
engaged. Some states permit member insurers to recover assessments paid through
full or partial premium tax offsets, usually over a period of years. For the
three months ended March 31, 2001, and the years ended December 31, 2000, 1999,
and 1998, we paid $0.5 million, $0.1 million, $2.2 million, and $6.5 million,
respectively, in assessments, net of returns, made under state guaranty
association laws. While the amount of future assessments cannot be accurately
predicted, we believe that assessments with respect to other pending insurance
company impairments and insolvencies will not be material to our business,
financial condition or results of operations.

  STATUTORY INVESTMENT VALUATION RESERVES

    Life insurance companies are required to establish an asset valuation
reserve to stabilize statutory policyholder surplus from fluctuations in the
market value of and/or realized gains or losses on bonds, stocks, mortgage
loans, real estate and other invested assets, other than fluctuations captured
by the INTEREST MAINTENANCE RESERVE. Although

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classified as a reserve account, asset valuation reserve does not represent an
obligation of the company. Asset valuation reserve has two components:

    - a "default component," which provides for future credit-related losses on
      fixed maturity investments; and

    - an "equity component," which provides for losses on all types of equity
      investments, including equity securities and real estate.

    Asset valuation reserve generally captures all realized and unrealized gains
or losses on invested assets, other than those resulting from changes in
interest rates. Each year the amount of an insurer's asset valuation reserve
will fluctuate as additional gains or losses are absorbed by the reserve. To
adjust for such changes over time, an annual contribution must be made to the
asset valuation reserve equal to a basic contribution plus 20% of the difference
between the reserve objective and the actual asset valuation reserve. Insurers
also are required to establish an Interest Maintenance Reserve for net realized
capital gains and losses on fixed maturity securities, net of tax, related to
changes in interest rates. The Interest Maintenance Reserve applies to all types
of fixed maturity investments, including bonds, preferred stocks,
mortgage-backed securities and mortgage loans. The Interest Maintenance Reserve
is required to be amortized into statutory earnings on a basis reflecting the
remaining period to maturity of the fixed maturity securities sold. These
reserves are required by state insurance regulatory authorities to be
established as a liability on a life insurer's statutory financial statements,
but do not affect our financial statements prepared in accordance with GAAP.
Although future additions to asset valuation reserve will reduce Principal
Life's future statutory capital and surplus, we do not believe that the impact
under current regulations of such reserve requirements will materially affect
the ability of Principal Life to increase its statutory capital and surplus and
pay future dividends to us.

  NAIC INSURANCE REGULATORY INFORMATION SYSTEM RATIOS

    The NAIC has developed a set of financial tests known as the Insurance
Regulatory Information System for early identification of companies which may
require special attention by insurance regulators. Insurance companies submit
data on an annual basis to the NAIC. This data is used to calculate ratios
covering various categories of financial data, with defined "usual ranges" for
each category. The Insurance Regulatory Information System consists of 12 key
financial ratios for life insurance companies. Departure from the usual range on
four or more of the ratios may lead to inquiries from individual states'
insurance departments. For the year ended December 31, 2000, Principal Life was
within the "usual range" for all of the ratios.

  REGULATION OF INVESTMENTS

    Our insurance subsidiaries are subject to state laws and regulations that
require diversification of their investment portfolios. Some of these laws and
regulations also limit the amount of investments in specified investment
categories, such as below investment grade fixed maturity securities, equity
real estate, other equity investments and derivatives. Failure to comply with
these laws and regulations would cause investments exceeding regulatory
limitations to be treated as non-admitted assets for purposes of measuring
statutory surplus, in some instances, requiring divestiture. Non-admitted assets
are assets or portions of those assets which are not permitted to be reported as
admitted assets in an insurance company's Annual Statement. As a result, assets
which normally would be accorded value in the financial statements of
non-insurance companies are accorded no value and thus reduce the reported
statutory policyholder surplus of the insurance company. State regulatory
authorities from the domiciliary states of our insurance subsidiaries have not
indicated any non-compliance with any such regulations.

  VALUATION OF LIFE INSURANCE POLICIES MODEL REGULATION

    The NAIC has adopted a revision to the Valuation of Life Insurance Policies
Model Regulation (known as Revised XXX), which Iowa adopted effective January 1,
2000. This regulation establishes new minimum statutory reserve requirements for
some individual life insurance policies written in the future. Under this
regulation, companies selling specified individual life insurance products, such
as term life insurance with guaranteed premium periods and universal life
insurance products with no-lapse guarantees, are required to redesign their
products or hold increased reserves to be consistent with the new minimum
standards with respect to policies issued after the effective date of the
regulation. Principal Life has taken action to either redesign or increase
reserves with respect to these products, and we do not believe these actions
will result in a material adverse effect on our business, financial condition or
results of operations.

  STATUTORY EXAMINATION

    As part of their routine regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books, records and
accounts of insurers domiciled in their states. These examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. On August 21, 2000, the Iowa insurance
division completed an examination of Principal Life for the three-year period
ended December 31, 1998. No material violations of law were found.

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    State insurance departments also periodically conduct market conduct
examinations of the sales practices of insurance companies, including our life
insurance subsidiaries. In recent years, a number of life and annuity insurers
have been the subject of regulatory proceedings and litigation relating to
alleged improper life insurance pricing and sales practices. Some of these
insurers have incurred or paid substantial amounts in connection with the
resolution of such matters. Regulatory authorities in a small number of states,
including both insurance departments and attorneys general, have ongoing
investigations of our sales of individual life insurance policies or annuities,
including investigations of alleged improper replacement transactions and
alleged improper sales of insurance with inaccurate or inadequate disclosures as
to the period for which premiums would be payable.

  REGULATION OF SAVINGS AND LOAN HOLDING COMPANY

    Due to our indirect control of Principal Bank, a federal savings bank, we
are a savings and loan holding company regulated by the Office of Thrift
Supervision; however, since we control only one savings bank, our activities are
not subject to all of the limitations on business activities otherwise
applicable to savings and loan holding companies.

  FEDERAL INSURANCE INITIATIVES

    Although the Federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on our business.
Current and proposed measures that may significantly affect the insurance
business generally include limitations on anti-trust immunity, minimum solvency
requirements and health care reform.

    Congressional committees have held hearings with respect to the optional
federal chartering and regulation of insurance companies and agencies. Although
no legislative bills have yet been introduced, there are currently proposals
made by insurance and banking trade associations providing for uniform federal
regulation of the insurance industry. We cannot predict what other proposals may
be made in connection with the federal chartering, what legislation, if any, may
be introduced or enacted and what the effect of any such legislation may have on
us.

    On November 21, 2000, the Department of Labor issued new regulations to
create a rapid process for employees to appeal claims rejected by their health
insurance plans. The new regulations apply to all claims filed on or after
January 1, 2002.

    On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the United States. The act
permits the transformation of the already converging banking, insurance and
securities industries by permitting mergers that combine commercial banks,
insurers and securities firms under one holding company. Under the act, national
banks retain their existing ability to sell insurance products in some
circumstances. In addition, bank holding companies that qualify and elect to be
treated as "financial holding companies" may engage in activities, and acquire
companies engaged in activities, that are "financial" in nature or "incidental"
or "complementary" to such financial activities, including acting as principal,
agent or broker in selling life, property and casualty and other forms of
insurance, including annuities. A financial holding company can own any kind of
insurance company or insurance broker or agent, but its bank subsidiary cannot
own the insurance company. Under state law, the financial holding company would
need to apply to the insurance commissioner in the insurer's state of domicile
for prior approval of the acquisition of the insurer, and the act provides that
the commissioner, in considering the application, may not discriminate against
the financial holding company because it is affiliated with a bank. Under the
act, no state may prevent or interfere with affiliations between banks and
insurers, insurance agents or brokers, or the licensing of a bank or affiliate
as an insurer or agent or broker.

    Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933,
had limited the ability of banks to engage in securities-related businesses, and
the Bank Holding Company Act of 1956, had restricted banks from being affiliated
with insurance companies. With the passage of the Gramm-Leach-Bliley Act, bank
holding companies may acquire insurers, and insurance holding companies may
acquire banks. The ability of banks to affiliate with insurance companies may
materially adversely affect all of our product lines by substantially increasing
the number, size and financial strength of potential competitors.

  TAX LEGISLATION

    Currently, the Internal Revenue Code provides favorable federal income tax
treatment to holders of various types of life insurance and annuity products.
For example, increases in the cash value of life insurance and annuity products
are tax-deferred during the product's accumulation period and life insurance
death benefits paid to the beneficiary after the insured's death are generally
not subject to federal income taxation. Withdrawals from life insurance and
annuity products also receive generally favorable tax treatment. In addition,
interest, within limitations, on loans up to $50,000 secured by the cash value
of life insurance policies owned by businesses on key employees is eligible for
deduction even though investment earnings during the accumulation period are
tax-deferred.

    In the past, legislation has been proposed that would have curtailed the
tax-favored treatment of some of Principal Life's insurance and annuity
products. In May 2001, Congress passed legislation that would lower individual
tax rates. If

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these or similar proposals directed at limiting the tax-favored treatment of
life insurance policies or annuity contracts were enacted, market demand for
such products would be adversely affected. Repeal of the federal estate tax is
an important component of President Bush's plan for tax relief. In May 2001,
Congress passed legislation that would increase the size of estates exempt from
taxation and phase in tax rate reductions between 2003 and 2009 and eliminate
the federal estate tax entirely in 2010. Under the legislation, the estate tax
would be reinstated, without the increased exemption or reduced rate, in 2011
and thereafter. President Bush supports this proposal. Many insurance products
are designed and sold to help policyholders reduce the effect of federal estate
taxation on their estates. Thus, the enactment of any legislation that
eliminates or significantly reduces federal estate taxation would likely result
in a significant reduction in sales of our products.

  SECURITIES LAWS

    Our investment advisory activities are subject to federal and state
securities laws and regulations. Our mutual funds are registered under the
Investment Company Act of 1940. The shares issued by the mutual funds are
registered under the Securities Act. Additionally, two of our separate
investment accounts fund variable annuity contracts and variable life insurance
policies we issue are registered under the Investment Company Act. Some of the
variable annuity contracts and variable life insurance policies we issue are
registered under the Securities Act. Two of our subsidiaries are registered as
broker/dealers under the Exchange Act, and are members of the National
Association of Securities Dealers, Inc. A number of our subsidiaries are
registered as investment advisers under the Investment Advisers Act of 1940. We
are also subject to similar laws and regulations in the states and foreign
countries in which we provide investment advisory services, offer the products
described above or non-variable life and annuity products or conduct other
securities and investment related activities.

  PRIVACY OF CUSTOMER INFORMATION

    Federal law and regulation requires financial institutions to protect the
security and confidentiality of customer information and to notify customers
about their policies and practices relating to their collection and disclosure
of customer information and their policies relating to protecting the security
and confidentiality of that information. Federal and state laws also regulate
disclosures of customer information. Congress and state legislatures are
expected to consider additional regulation relating to privacy and other aspects
of customer information.

  ENVIRONMENTAL CONSIDERATIONS

    As owner and operator of real property, we are subject to extensive federal,
state and local environmental laws and regulations. Inherent in such ownership
and operation is the risk that there may be potential environmental liabilities
and costs in connection with any required remediation of such properties. When
deemed appropriate, we routinely conduct environmental assessments for real
estate being acquired for investment and before taking title to property
acquired through foreclosure or deed in lieu of foreclosure. Based on these
environmental assessments and compliance with our internal environmental
procedures, we believe that any costs associated with compliance with
environmental laws and regulations or any remediation of such properties would
not be material to our consolidated financial position. Furthermore, although we
hold equity positions in subsidiaries and investments that could potentially be
subject to environmental liabilities, we believe that we would not be subject to
any environmental liabilities with respect to these investments which would have
a material adverse effect on our business, financial position or results of
operations.

  ERISA CONSIDERATIONS

    We engage in several lines of business, including our management of employee
benefit plan assets held in our separate accounts that are subject to the
requirements of ERISA. The Small Business Job Protection Act offered insurers
some protection from potential litigation exposure prompted by the 1993 U.S.
Supreme Court decision in John Hancock Mutual Life Insurance Company v. Harris
Trust & Savings Bank. In Harris Trust, the Court held that, with respect to a
portion of the funds held under general account group annuity contracts, an
insurer is subject to the fiduciary requirements of ERISA under some
circumstances. The pertinent provisions of the Small Business Job Protection Act
provide that insurers are protected from liability for prohibited transactions
and for breaches of fiduciary duties under ERISA for past actions with respect
to their general account contracts. However, insurers remain subject to federal
criminal law and liable for actions brought by the U.S. Secretary of Labor
alleging breaches of fiduciary duties that also constitute a violation of
federal or state criminal law.

    The Small Business Job Protection Act also provides that contracts issued
from an insurer's general account on or before December 31, 1998, that are not
guaranteed benefit policies, will not subject an insurer's general account to
ERISA's fiduciary requirements if they meet the requirements of regulations to
be issued by the United States Department of Labor. Contracts issued from an
insurer's general account after December 31, 1998, that are not guaranteed
benefit policies will potentially subject the insurer's general account to
ERISA. On January 5, 2000, the Department of Labor published regulations under
the Small Business Job Protection Act which provide, among other things, that if
an employee benefit plan acquired an insurance policy, other than a guaranteed
benefit policy, issued on

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or before December 31, 1998 that is supported by the assets of the insurer's
general account, the plan's assets for purposes of ERISA will not be deemed to
include any of the assets of the insurer's general account, provided that the
requirements of the regulation are met. Accordingly, if those requirements are
met, the insurer would not be subject to the fiduciary obligations of ERISA as a
result of issuing such an insurance policy. These requirements include detailed
disclosures to be made to the employee benefit plan and the requirement that the
insurer must permit the policyholder to terminate the policy on 90 days' notice
and receive without penalty, at the policyholder's option, either: (1) the
accumulated fund balance, which may be subject to market value adjustment, or
(2) a book value payment of such amount in annual installments with interest. In
the event we elect to comply with the requirements to secure the exemption
provided by the regulations from the fiduciary obligations of ERISA, our
exposure to disintermediation risk could increase due to the termination options
that we would be required to provide to policyholders. Since there has been no
final ruling in the Harris Trust litigation regarding whether John Hancock
Mutual Life Insurance Company violated ERISA, we are unable at this time to
determine the effects of the decision. In the absence of relief under the
regulations, the Harris Trust decision could substantially increase
administrative costs, may require the segregation of assets currently in the
general account, result in potential liability arising from the application of
ERISA's fiduciary rules to our general account or adversely affect future
business.

    With respect to employee welfare benefit plans subject to ERISA, the
Congress periodically has considered amendments to the law's federal preemption
provision, which would expose us, and the insurance industry generally, to state
law causes of action, and accompanying extra-contractual damages, such as
punitive damages, in lawsuits involving, for example, group life and group
disability claims. To date, all such amendments to ERISA have been defeated.

INTERNATIONAL OPERATIONS

  BT FINANCIAL GROUP

    The Australian Securities and Investments Commission is the primary
regulator of the Australian securities industry. The Australian Prudential
Regulatory Authority is primarily responsible for the regulation of
superannuation and life insurance product providers.

    A number of BT Financial Group companies hold securities licenses. Several
BT Financial Group companies have been approved by the Australian Prudential
Regulatory Authority to act as trustees for superannuation products. BT Tactical
Asset Management Pty Limited holds a futures brokers license and is a member of
the Sydney Futures Exchange. BT Life Limited is registered as a life company
under the Life Insurance Act. BT Securities Limited is registered as a financial
corporation under the Financial Corporations Act. BT Financial Group companies
are also subject to various regulations in foreign jurisdictions in which they
operate.

    Australia's risk-based capital adequacy guidelines are generally consistent
with the approach agreed upon by the Bank Committee on Banking Regulation and
Supervisory Practices (Bank for International Settlements).

  PRINCIPAL INTERNATIONAL

    Principal International operates in a number of countries around the world.
The degree of regulation and supervision of our businesses varies from minimal
in some countries to stringent in others.

    Generally, we and those of our subsidiaries conducting business
internationally must obtain licenses from local authorities and satisfy local
regulatory requirements. The licenses local authorities issue to us and our
subsidiaries are subject to modification and revocation by such authorities and,
thus, we and our subsidiaries could be prevented from conducting business in
jurisdictions where we currently operate.

    Local authorities also regulate our international asset accumulation
operations by imposing requirements relating to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits that must be returned to
policyholders on participating policies. Some local authorities regulate rates
on various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede portion of their business on terms which do not always
allow foreign insurers, including us, for compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.

    ARGENTINA.  In Argentina, the National Insurance Superintendence regulates
our insurance and annuity operations, including by restricting the types of
entities that may engage in the insurance business. The National Insurance
Superintendence, at its sole discretion, may award or reject authorizations for
the formation of a new insurance company and requires notice of any transfers of
shares of previously authorized insurance companies. Insurance companies are
subject to reporting requirements which mandate the filing of, among other
things, copies of resolutions passed at shareholders' meetings, financial
statements and statistical information relating to the types of insurance sold
and geographical distribution of such sales.

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    BRAZIL.  The National Council of Private Insurance is responsible for
adopting policies, rules and regulations governing private pension companies in
Brazil. The Superintendent of Private Insurance is responsible for the
audit/review of the activities of private pension companies, including
accounting, actuarial and statistical audits/reviews, and for authorizing the
establishment and operations of these companies. All products sold by private
pension companies must be approved by the Superintendent of Private Insurance.
Our private pension company, BrasilPrev Previdencia Privada S.A., has been
authorized to operate through a license granted by the Superintendent of Private
Insurance, as well as previous authorization from the Superintendent of Private
Insurance to administer all the products that BrasilPrev currently sells.

    CHILE.  The Superintendent of Securities and Insurance is the regulator
responsible for supervising all insurance company activities in Chile. The
investments of insurance companies are highly regulated. The Superintendent of
Securities and Insurance has established limits with respect to equity and
leverage ratios for insurance company investments. Compliance with these limits
is regularly monitored.

    HONG KONG.  As a long term life insurance provider, Principal Insurance
Company (Hong Kong) Limited is regulated by the Hong Kong Insurance Authority
and its investment products are regulated by the Hong Kong Securities & Futures
Commission, which is also responsible for overseeing its pension operations. The
Insurance Authority requires that, so long as Principal Insurance Company (Asia)
Limited holds an insurance license, it must maintain a minimum capital of HK$300
million and a solvency margin in respect of each particular product it is
underwriting. Mandatory Provident Fund Schemes must be under a trust. As such,
Principal Trust Company (Asia) Limited, the trustee of all Mandatory Provident
Fund Schemes, along with the delegated administrator Principal Insurance Company
(Hong Kong) Limited and its investment manager Principal Asset Management
Company (Asia) Limited, are regulated by the Mandatory Provident Fund Schemes
Authority.

    INDIA.  In India, the Securities and Exchange Board of India supervises the
registration, regulation and working of collective investment schemes including
mutual funds. Indian law governs the structure of a mutual fund, the rights,
duties and obligations of sponsors, the trustees, the asset management company,
the custodian, the registrar, investment guidelines/limits and valuation
policies, advertisement and marketing code, accounting policies and standards,
code of conduct and disclosure requirements.

    MEXICO.  The Ministry of Treasury is responsible for oversight of the
insurance industry in Mexico, but it is handled through the National Insurance
and Bonding Commission. All claims against insurance companies are handled
through the National Commission for the Rights of the Financial Services Users.

    The National Commission for the Retirement Savings System supervises the
private pension fund managers who administer Mexico's pension system, and the
pension funds, they manage. As of March 31, 2001, each pension fund manager must
keep an initial minimum capital requirement of $2.5 million in reserve in order
to operate and each private pension fund must have initial capital of $450,000.
In order to prevent any pension fund manager from gaining control of the market,
no pension fund manager is permitted to manage assets for more than 17 percent
of the number of individuals in the mandatory privatized social security system
in the first four years after the public pension system begins. Thereafter, a
pension fund manager's market share is limited to 20 percent.

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                           OWNERSHIP OF COMMON STOCK

    The following table presents selected information regarding the beneficial
ownership of our common stock as of the effective date of the demutualization
by:

        (1) each of our directors and named executive officers; and

        (2) all of our directors and executive officers as a group.

    The number of shares of our common stock beneficially owned by each director
and executive officer and all directors and executive officers as a group is
based upon the number of shares that we estimate each director and executive
officer, and persons and entities affiliated with each director and executive
officer, will receive in their capacity as policyholders entitled to receive
compensation in the demutualization. Except as otherwise indicated below, each
of the persons named in the table will have sole voting and investment power
with respect to the shares beneficially owned by such person as indicated
opposite such person's name.

                                                              NUMBER OF SHARES TO BE
NAME                                                          BENEFICIALLY OWNED(1)
- ----                                                          ----------------------
                                                           
David J. Drury..............................................                *
J. Barry Griswell...........................................                *
Betsy J. Bernard............................................                *
Jocelyn Carter-Miller.......................................                *
Daniel Gelatt...............................................                *
Sandra L. Helton............................................                *
Charles S. Johnson..........................................                *
William T. Kerr.............................................                *
Lee Liu.....................................................                *
Victor H. Loewenstein.......................................                *
Ronald D. Pearson...........................................                *
Federico F. Pena............................................                *
Donald M. Stewart...........................................                *
Elizabeth B. Tallett........................................                *
John E. Aschenbrenner.......................................                *
Michael T. Daley............................................                *
Dennis P. Francis...........................................                *
Michael H. Gersie...........................................                *
Ellen Z. Lamale.............................................                *
Mary A. O'Keefe.............................................                *
Richard L. Prey.............................................                *
Karen E. Shaff..............................................                *
Norman R. Sorensen..........................................                *
Carl C. Williams............................................                *
All directors and executive officers as a group (24
  persons)..................................................                *

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

 *  Less than 1% of the number of shares of our common stock expected to be
    outstanding on the effective date of the demutualization.

(1) Based on an estimated allocation of shares based upon policy ownership
    records as of March 31, 2000.

    We believe no person will beneficially own more than 5% of our outstanding
shares of common stock as of the effective date of the demutualization.

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               DESCRIPTION OF CAPITAL STOCK AND CHANGE OF CONTROL
                               RELATED PROVISIONS

    The authorized capital stock of Principal Financial Group, Inc. consists of
2.5 billion shares of common stock and 500 million shares of preferred stock.

COMMON STOCK

    Holders of common stock are entitled to receive such dividends as may from
time to time be declared by our board of directors out of funds legally
available for the payment of such dividends. See "Stockholder Dividend Policy".
Holders of common stock are entitled to one vote per share on all matters on
which the holders of common stock are entitled to vote and do not have any
cumulative voting rights. Holders of common stock have no preemptive,
conversion, redemption or sinking fund rights. In the event of a liquidation,
dissolution or winding up of Principal Financial Group, Inc., holders of common
stock are entitled to share equally and ratably in the assets of Principal
Financial Group, Inc., if any, remaining after the payment of all liabilities of
Principal Financial Group, Inc. and the liquidation preference of any
outstanding class or series of preferred stock. The outstanding shares of common
stock are, and the shares of common stock offered by Principal Financial Group,
Inc. in this offering, when issued, will be, fully paid and nonassessable. The
rights and privileges of holders of common stock are subject to any series of
preferred stock that Principal Financial Group, Inc. may issue in the future, as
described below.

PREFERRED STOCK

    Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and the
voting rights, designations, preferences and qualifications, limitations and
restrictions of the shares constituting any series, without any further vote or
action by our stockholders. The issuance of preferred stock by our board of
directors could adversely affect the rights of holders of common stock.

    We will authorize shares of Series A Junior Participating Preferred Stock in
connection with our stockholder rights plan. See "-- Stockholder Rights Plan".

CHANGE OF CONTROL RELATED PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND
BY-LAWS, AND DELAWARE LAW

    A number of provisions of our certificate of incorporation and by-laws deal
with matters of corporate governance and rights of stockholders. The following
discussion is a general summary of selected provisions of our certificate of
incorporation and by-laws and regulatory provisions that might be deemed to have
a potential antitakeover effect. See "Risk Factors -- 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". These provisions may have the effect of discouraging a
future takeover attempt which is not approved by our board of directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the incumbent board of directors or management more
difficult. Some provisions of the Delaware General Corporation Law and the Iowa
Insurance Law may also have an antitakeover effect. The following description of
selected provisions of our certificate of incorporation and bylaws and selected
provisions of the Delaware General Corporation Law and the Iowa Insurance Law
are necessarily general and reference should be made in each case to our
certificate of incorporation and by-laws, which are filed as exhibits to our
registration statement, and to the provisions of those laws. See "Additional
Information" for information on where to obtain a copy of our certificate of
incorporation and by-laws.

  UNISSUED SHARES OF CAPITAL STOCK

    COMMON STOCK.  Based upon the assumptions described under "Unaudited Pro
Forma Condensed Consolidated Financial Information," we currently plan to issue
an estimated 370.0 million shares of our authorized common stock in this
offering and the demutualization. The remaining shares of authorized and
unissued common stock will be available for future issuance without additional
stockholder approval. While the additional shares are not designed to deter or
prevent a change of control, under some circumstances we could use the
additional shares to create voting impediments or to frustrate persons seeking
to effect a takeover or otherwise gain control by, for example, issuing those
shares in private placements to purchasers who might side with our board of
directors in opposing a hostile takeover bid.

    PREFERRED STOCK.  Our board of directors has the authority to issue
preferred stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by our stockholders. The existence of authorized but unissued preferred
stock could reduce our attractiveness as a target for an unsolicited takeover
bid since we could, for example, issue shares of preferred stock to parties who
might oppose such a takeover bid or shares that contain terms the potential
acquiror may find unattractive. This may have the effect of delaying or
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preventing a change in control, may discourage bids for the common stock at a
premium over the market price of the common stock, and may adversely affect the
market price of, and the voting and other rights of the holders of, common
stock.

    CLASSIFIED BOARD OF DIRECTORS AND REMOVAL OF DIRECTORS.  Our certificate of
incorporation provides that the directors shall be divided into three classes,
as nearly equal in number as possible, with the term of office of each class to
be three years. The classes serve staggered terms, such that the term of one
class of directors expires each year. Any effort to obtain control of our board
of directors by causing the election of a majority of the board of directors may
require more time than would be required without a staggered election structure.
Our certificate of incorporation also provides that directors may be removed
only for cause at a meeting of stockholders by a vote of a majority of the
shares then entitled to vote. This provision may have the effect of slowing or
impeding a change in membership of our board of directors that would effect a
change of control.

    RESTRICTION ON MAXIMUM NUMBER OF DIRECTORS AND FILLING OF VACANCIES ON OUR
BOARD OF DIRECTORS.  Our by-laws provide that the number of directors shall be
fixed and increased or decreased from time to time by resolution of the board of
directors, but the board of directors shall at no time consist of fewer than
three directors. Stockholders can only remove a director for cause by a vote of
a majority of the shares entitled to vote, in which case the vacancy caused by
such removal may be filled at such meeting by the stockholders entitled to vote
for the election of the director so removed. Any vacancy on the board of
directors, including a vacancy resulting from an increase in the number of
directors or resulting from a removal for cause where the stockholders have not
filled the vacancy, may be filled by a majority of the directors then in office,
although less than a quorum. If the vacancy is not so filled, it shall be filled
by the stockholders at the next annual meeting of stockholders. The stockholders
are not permitted to fill vacancies between annual meetings except where the
vacancy resulted from a removal for cause. These provisions give incumbent
directors significant authority that may have the effect of limiting the ability
of stockholders to effect a change in management.

    ADVANCE NOTICE REQUIREMENTS FOR NOMINATION OF DIRECTORS AND PRESENTATION OF
NEW BUSINESS AT MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT.  Our
by-laws provide for advance notice requirements for stockholder proposals and
nominations for director. In addition, under the provisions of both our
certificate of incorporation and by-laws, action may not be taken by written
consent of stockholders; rather, any action taken by the stockholders must be
effected at a duly called meeting. The chief executive officer, or, under some
circumstances, the president or any vice president, and the board of directors
may call a special meeting. These provisions make it more procedurally difficult
for a stockholder to place a proposal or nomination on the meeting agenda or to
take action without a meeting, and therefore may reduce the likelihood that a
stockholder will seek to take independent action to replace directors or seek a
stockholder vote with respect to other matters that are not supported by
management.

  LIMITATIONS ON DIRECTOR LIABILITY

    Our certificate of incorporation contains a provision that is designed to
limit our directors' liability. Specifically, directors will not be held liable
to Principal Financial Group, Inc. for monetary damages for breach of their
fiduciary duty as a director, except to the extent that this limitation on or
exemption from liability is not permitted by the Delaware General Corporation
Law and any amendments to that law.

    The principal effect of the limitation on liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of Principal Financial Group, Inc. unless the stockholder can
demonstrate a basis for liability for which indemnification is not available
under the Delaware General Corporation Law. This provision, however, does not
eliminate or limit director liability arising in connection with causes of
action brought under the federal securities laws. Our certificate of
incorporation does not eliminate our directors' duty of care. The inclusion of
this provision in our certificate of incorporation may, however, discourage or
deter stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited Principal Financial Group, Inc. and our
stockholders. This provision should not affect the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care.

    Our by-laws also provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law. We are required to indemnify
our directors and officers for all judgments, fines, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with Principal
Financial Group, Inc. or another entity that the director or officer serves at
our request, subject to various conditions, and to advance funds to our
directors and officers to enable them to defend against such proceedings. To
receive indemnification, the director or officer must have been successful in
the legal proceeding or have acted in good faith and in what was reasonably
believed to be a lawful manner in the best interest of Principal Financial
Group, Inc.

    SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF OUR
CERTIFICATE OF INCORPORATION AND BY-LAWS.  The provisions of our certificate of
incorporation governing, among other things the classified board, the director's
discretion in determining what he or she reasonably believes to be in the best
interests of Principal Financial

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Group, Inc., the liability of directors and the elimination of stockholder
actions by written consent may not be amended, altered or repealed unless the
amendment is approved by the vote of holders of three/fourths of the shares then
entitled to vote at an election of directors. This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by the
Delaware General Corporation Law for the repeal or amendment of such provisions
of the certificate of incorporation. Our by-laws may be amended by the board of
directors or by the vote of holders of three/fourths of the shares then entitled
to vote. These provisions make it more difficult for any person to remove or
amend any provisions that have an antitakeover effect.

    BUSINESS COMBINATION STATUTE.  In addition, as a Delaware corporation, we
are subject to Section 203 of the Delaware General Corporation Law, unless we
elect in our certificate of incorporation not to be governed by the provisions
of Section 203. We have not made that election. Section 203 can affect the
ability of an "interested stockholder" of Principal Financial Group, Inc. to
engage in business combinations, such as mergers, consolidations or acquisitions
of additional shares of Principal Financial Group, Inc., for a period of three
years following the time that the stockholder becomes an "interested
stockholder." An "interested stockholder" is defined to include persons owning
directly or indirectly 15% or more of the outstanding voting stock of a
corporation. The provisions of Section 203 are not applicable in some
circumstances, including those in which (a) the business combination or
transaction which results in the stockholder becoming an "interested
stockholder" is approved by the corporation's board of directors prior to the
time the stockholder becomes an "interested stockholder" or (b) the "interested
stockholder," upon consummation of such transaction, owns at least 85% of the
voting stock of the corporation outstanding prior to such transaction.

  LIMITATIONS ON ACQUISITIONS OF SECURITIES

    Iowa law prohibits for a period of 5 years following the date of
distribution of consideration to the policyholders in exchange for their
membership interests:

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company from, directly or indirectly, acquiring or offering to acquire the
      beneficial ownership of more than 5% of any class of voting security of
      the reorganized company, and

    - any person, other than the reorganized company, or other than an employee
      benefit plan or employee benefit trust sponsored by the reorganized
      company, who acquires 5% or more of any class of voting security of the
      reorganized company prior to the conversion from, directly or indirectly,
      acquiring or offering to acquire the beneficial ownership of additional
      voting securities of the reorganized company,

unless the acquisition is approved by the Insurance Commissioner of the State of
Iowa and by the board of directors of the reorganized company.

    By virtue of these provisions, we may not be subject to an acquisition by
another company during the 5 years following the distribution of consideration
to Principal Life's policyholders entitled to receive compensation in the
demutualization.

    The insurance holding company and other insurance laws of many states also
regulate changes of control of insurance holding companies, such as Principal
Financial Group, Inc. A change of control is generally presumed upon
acquisitions of 10% or more of voting securities. The Iowa, Arizona and Vermont
insurance holding company laws, which we expect to be applicable to us following
the demutualization, require filings in connection with proposed acquisitions of
control of domestic insurance companies. These insurance holding company laws
prohibit a person from acquiring direct or indirect control of an insurer
incorporated in the relevant jurisdiction without prior insurance regulatory
approval.

STOCKHOLDER RIGHTS PLAN

    Our board of directors has adopted a stockholder rights plan under which
each outstanding share of our common stock issued between the date on which
Principal Financial Group, Inc. enters into the underwriting agreement for the
initial public offering and the distribution date (as described below) will be
coupled with a stockholder right. Initially, the stockholder rights will be
attached to the certificates representing outstanding shares of common stock,
and no separate rights certificates will be distributed. Each right will entitle
the holder to purchase one one-thousandth of a share of our Series A Junior
Participating Preferred Stock. Each one one-thousandth of a share of Series A
Junior Participating Preferred Stock will have economic and voting terms
equivalent to one share of Principal Financial Group, Inc.'s common stock. Until
it is exercised, the right itself will not entitle the holder of the right to
any rights as a stockholder, including the right to receive dividends or to vote
at stockholder meetings. The description and terms of the rights are found in a
rights agreement entered into between Principal Financial Group, Inc. and Mellon
Investor Services, L.L.C., as rights agent. Although the material provisions of
the rights agreement have been accurately summarized, the statements below
concerning the rights agreement are not necessarily complete, and in each
instance reference is made to the form of rights agreement itself, a copy of
which has been filed as an exhibit to the

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Registration Statement of which this prospectus forms a part. Each statement is
qualified in its entirety by such reference.

    Stockholder rights are not exercisable until the distribution date and will
expire at the close of business on the tenth anniversary of the date on which
the initial public offering price is determined, unless earlier redeemed or
exchanged by us. A distribution date would occur upon the earlier of:

    - the tenth day after the first public announcement or communication to us
      that a person or group of affiliated or associated persons (referred to as
      an acquiring person) has acquired beneficial ownership of 10% or more of
      our outstanding common stock (the date of such announcement or
      communication is referred to as the stock acquisition time); or

    - the tenth business day after the commencement or announcement of the
      intention to commence a tender offer or exchange offer that would result
      in a person or group becoming an acquiring person.

If any person becomes an acquiring person, each holder of a stockholder right
will be entitled to exercise the right and receive, instead of Series A Junior
Participating Preferred Stock, common stock or, in some circumstances, cash, a
reduction in purchase price, property or other securities of Principal Financial
Group, Inc., having a value equal to two times the purchase price of the
stockholder right. All stockholder rights that are beneficially owned by an
acquiring person or its transferee will become null and void.

    If at any time after a public announcement has been made or Principal
Financial Group, Inc. has received notice that a person has become an acquiring
person:

    - Principal Financial Group, Inc. is acquired in a merger or other business
      combination, or

    - 50% or more of Principal Financial Group, Inc.'s assets, cash flow or
      earning power is sold or transferred,

each holder of a stockholder right, except rights which previously have been
voided as described above, will have the right to receive, upon exercise, common
stock of the acquiring company having a value equal to two times the purchase
price of the right.

    The purchase price payable, the number of one one-thousandth of a share of
Series A Junior Participating Preferred Stock or other securities or property
issuable upon exercise of stockholder rights and the number of such rights
outstanding, are subject to adjustment from time to time to prevent dilution.
Except as provided in the rights agreements, no adjustment in the purchase price
or the number of shares of Series A Junior Participating Preferred Stock
issuable upon exercise of a stockholder right will be required until the
cumulative adjustment would require an increase or decrease of at least one
percent in the purchase price or number of shares for which a right is
exercisable.

    At any time until the earlier of (1) the stock acquisition time or (2) the
final expiration date of the rights agreement, we may redeem all the stockholder
rights at a price of $0.001 per right. At any time after a person has become an
acquiring person and prior to the acquisition by such person of 50% or more of
the outstanding shares of our common stock, we may exchange the stockholder
rights, in whole or in part, at an exchange ratio of one share of common stock,
or one one-thousandth of a share of Series A Junior Participating Preferred
Stock or of a share of a class or series of preferred stock having equivalent
rights, preferences and privileges, per right.

    The stockholder rights plan is designed to protect stockholders in the event
of unsolicited offers to acquire Principal Financial Group, Inc. and other
coercive takeover tactics which, in the opinion of the company's board of
directors, could impair its ability to represent stockholder interests. The
provisions of the stockholder rights plan may render an unsolicited takeover
more difficult or less likely to occur or may prevent such a takeover, even
though such takeover may offer our stockholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by a
majority of our stockholders.

TRANSFER AGENT AND REGISTRAR

    The transfer agent and registrar for our common stock and our Series A
Junior Participating Preferred Stock is Mellon Investor Services, L.L.C.

                                       183
   187

                     COMMON STOCK ELIGIBLE FOR FUTURE SALE

    Substantially all of the estimated 260.5 million shares of our common stock
distributed to policyholders entitled to receive compensation in the
demutualization or to the separate account to be established for the Separate
Account Policy Credits will be eligible for resale in the public market without
restriction. However, eligible policyholders will receive a written confirmation
of their share ownership or Separate Account Policy Credits within 75 days from
the closing of this offering, unless the Insurance Commissioner of the State of
Iowa approves a later date. Until they receive the written confirmation, they
will effectively be precluded from selling shares or the shares underlying their
Separate Account Policy Credits because they will not know how many shares or
Separate Account Policy Credits they will receive.

    We estimate that these 260.5 million shares will equal approximately 70% of
our outstanding common stock after the offering. See "The Demutualization." We
have been advised by counsel that the distribution of shares to policyholders in
the demutualization or to the separate account to be established for the
Separate Account Policy Credits will be exempt from registration under the
Securities Act by virtue of the exemption provided by Section 3(a)(10) of the
Securities Act, and policyholders entitled to receive compensation in the
demutualization who are not our "affiliates" within the meaning of Rule 144
under the Securities Act will be able to resell their shares, or to direct the
sale of shares underlying Separate Account Policy Credits, immediately in the
public market without registration or compliance with the time, volume, manner
of sale and other limitations in Rule 144.

    In addition, in accordance with the plan of conversion, in the event there
are policyholders entitled to receive compensation in the demutualization who
receive 99 or fewer shares of our common stock, we must, for a three-month
period commencing no sooner than the first business day after the six-month
anniversary, and no later than the first business day after the twelve-month
anniversary, of the date of the closing of this offering, provide for the public
sale, at prevailing market prices and without brokerage commissions or similar
fees to stockholders, of all shares of our common stock held by policyholders
entitled to receive compensation in the demutualization who receive 99 or fewer
shares of our common stock. The commission-free sales program may be extended by
us with the approval of the Insurance Commissioner of the State of Iowa. We
would also, simultaneously and in conjunction with the commission-free sales
program, offer to each such stockholder entitled to participate in the
commission-free sales program the opportunity to purchase that number of shares
of our common stock necessary to increase such stockholder's holdings to 100
shares without paying brokerage commissions or other similar expenses.

    No prediction can be made as to the effect, if any, such future sales of
shares, or the availability of shares for such future sales, will have on the
market price of our common stock prevailing from time to time. The sale of
substantial amounts of our common stock in the public market, or the perception
that such sales could occur, could harm prevailing market prices for our common
stock. See "Risk Factors -- Sales of shares distributed in the demutualization
may reduce the market price of our common stock".

                                       184
   188

                                  UNDERWRITING

    Principal Financial Group, Inc. and the underwriters for the U.S. offering
named below, referred to as the U.S. underwriters, have entered into an
underwriting agreement with respect to the shares offered in the United States.
Subject to certain conditions, each U.S. underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co. and          are the representatives of the U.S. underwriters.

                        Underwriters                           Number of Shares
                        ------------                           ----------------
                                                            
Goldman, Sachs & Co. .......................................

                                                                   --------
         Total..............................................
                                                                   --------

    If the U.S. underwriters sell more shares than the total number listed in
the table above, the U.S. underwriters have an option to buy up to an additional
         shares from Principal Financial Group to cover such sales. They may
exercise that option for 30 days. If any shares are purchased under this option,
the U.S. underwriters will severally purchase shares in approximately the same
proportion as shown in the table above.

    The following table shows the per share and total underwriting discounts and
commissions to be paid to the U.S. underwriters by Principal Financial Group,
Inc. Such amounts are shown assuming both no exercise and full exercise of the
U.S. underwriters' option to purchase          additional shares.

                    Paid by Principal Financial Group, Inc.

                                                              No Exercise   Full Exercise
                                                              -----------   -------------
                                                                      
Per Share...................................................   $              $
Total.......................................................   $              $

    Shares sold by the U.S. underwriters to the public will initially be offered
at the initial public offering price provided on the cover of this prospectus.
Any shares sold by the U.S. underwriters to securities dealers may be sold at a
discount of up to $         per share from the initial public offering price.
Any such securities dealers may resell any shares purchased from the U.S.
underwriters to certain other brokers or dealers at a discount of up to
$         per share from the initial public offering price. If all the shares
are not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.

    Principal Financial Group, Inc. has entered into an underwriting agreement
with the underwriters for the sale of          shares outside of the United
States. The terms and conditions of both offerings are the same and the sale of
shares in both offerings are conditioned on each other. Goldman Sachs
International and          are representatives of the underwriters for the
international offering outside the United States, referred to as the
international underwriters. Principal Financial Group, Inc. has granted the
international underwriters a similar option to purchase up to an aggregate of an
additional          shares.

    The underwriters for both of the offerings will enter into an agreement in
which they will agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters will also agree that they may sell shares among each of
the underwriting groups.

    Principal Financial Group, Inc. has agreed with the underwriters not to
dispose of or hedge any shares of common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
restriction does not apply to          . See "Common Stock Eligible for Future
Sale" for a discussion of transfer restrictions.

    Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among us and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be the historical performance of Principal Financial Group,
Inc., estimates of its business potential and earnings prospects, an assessment
of its management and the consideration of the above factors in relation to
market valuation of companies in related businesses.

    Application will be made to list the common stock of Principal Financial
Group, Inc. on the New York Stock Exchange under the symbol "PFG".

    In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created
                                       185
   189

by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of the
offering.

    The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

    Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common stock, and together with the imposition of the penalty bid may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.

    The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

    Principal Financial Group, Inc. estimates that its share of the total
expenses of this offering, excluding underwriting discounts and commissions,
will be approximately $         .

    Principal Financial Group, Inc. and Principal Life Insurance Company have
agreed to, jointly and severally, indemnify the several underwriters against
liabilities, including liabilities under the Securities Act of 1933.

    The underwriters and their affiliates have in the past provided, and may in
the future from time to time provide, investment banking and general financing
and banking services to Principal Financial Group and its affiliates for which
they have in the past received, and may in the future receive, customary fees.

                                       186
   190

                            VALIDITY OF COMMON STOCK

    The validity of the shares of our common stock offered hereby will be passed
upon for Principal Financial Group, Inc. by Debevoise & Plimpton, New York, New
York and for the underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a
limited liability partnership including professional corporations, New York, New
York. LeBoeuf, Lamb, Greene, & MacRae, L.L.P. has in the past performed, and
continues to perform, legal services for us and our affiliates.

                                    EXPERTS

    Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, as described in their report. We
have included our consolidated financial statements in this prospectus and in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

    Daniel J. McCarthy, F.S.A., a consulting actuary associated with Milliman &
Robertson, Inc., has rendered an opinion, dated March 31, 2001, to our board of
directors. See "The Demutualization -- Actuarial Opinion." This opinion is
included as Annex A of this prospectus. This opinion is included in reliance
upon the authority of such actuary as an expert in actuarial matters generally
and in the application of actuarial concepts to insurance matters.

                             ADDITIONAL INFORMATION

    We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the common stock offered by this prospectus. This prospectus which forms a
part of the registration statement does not contain all the information found in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. For
further information with respect to Principal Financial Group, Inc. and our
common stock, we refer you to the registration statement. Statements made in
this prospectus describing the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference. The registration statement may be inspected and copied at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet
site, http://www.sec.gov that contains periodic and current reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Securities and Exchange Commission.

    As a result of the offering we will become subject to the information
reporting requirements of the Securities Exchange Act of 1934. We will fulfill
our obligations with respect to such requirements by filing periodic and current
reports, proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and information may be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission referenced above. We intend to furnish holders of our common
stock with annual reports that include our annual consolidated financial
statements audited by an independent certified public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.

    We intend to list our common stock on the New York Stock Exchange. Upon such
listing, copies of the registration statement, including all exhibits to the
registration statement, and periodic reports, proxy statements and other
information will be available for inspection at the offices of the New York
Stock Exchange, Inc. located at 20 Broad Street, New York, New York 10005.

                                       187
   191

                                    GLOSSARY

    The following Glossary includes definitions of terms which are unique to
this offering. Each term defined in this Glossary is printed in boldface the
first time it appears in this prospectus.

Account Value Policy
Credits....................Policy credits, in the form of an increase in the
                           value of the applicable group annuity contract,
                           issued to a Qualified Plan Customer or a Non-Rule 180
                           Qualified Plan Customer. The increase in value will
                           be allocated to participants' accounts, where
                           appropriate, based on account balances for which
                           records are kept by Principal Life Insurance Company
                           unless the Qualified Plan Customer or Non-Rule 180
                           Qualified Plan Customer directs otherwise.

Closed Block...............A mechanism established by Principal Life Insurance
                           Company for the benefit of the participating policies
                           and contracts included in the Closed Block, in
                           connection with its reorganization to the mutual
                           insurance holding company structure effective July 1,
                           1998. Assets of Principal Life Insurance Company were
                           allocated to the Closed Block in an amount that
                           produces cash flows which, together with anticipated
                           revenue from the Closed Block policies and contracts,
                           are expected to be sufficient to support the Closed
                           Block policies and contracts including, but not
                           limited to, provisions for payment of claims and
                           certain expenses and taxes, and to provide for
                           continuation of policy and contract dividends in
                           aggregate in accordance with the 1997 dividend scales
                           if the experience underlying those scales continues,
                           and to allow for appropriate adjustments in those
                           scales if such experience changes.

Interest Maintenance
Reserve....................The reserve required by insurance regulators to
                           capture non-credit, interest-related realized capital
                           gains and losses (net of taxes) on fixed income
                           investments (primarily bonds and mortgage loans),
                           which are amortized into net income over the
                           estimated otherwise remaining periods to maturity of
                           the investments sold. The Interest Maintenance
                           Reserve has no effect on financial statements
                           prepared in conformity with GAAP.

Mandatory Policy Credits...Policy credits issued to holders of policies required
                           to receive policy credits under the plan of
                           conversion. Mandatory Policy Credits may take the
                           form of an increase in cash value, account value,
                           dividend accumulations, face amount, extended term
                           period or benefit payment, as appropriate, depending
                           on the policy.

NAIC Designations..........Evaluation made by the Securities Valuation Office of
                           the National Association of Insurance Commissioners
                           of the bond investments of insurers for regulatory
                           reporting purposes and assignments of securities to
                           one of six investment categories.

Non-Rule 180 Qualified Plan
  Customers................Owners of group annuity contracts issued by Principal
                           Life Insurance Company designed to fund benefits
                           under a retirement plan which is qualified under
                           Section 401(a) or Section 403(a) of the Internal
                           Revenue Code and which covers employees described in
                           Section 401(c) of the Internal Revenue Code but which
                           does not meet the requirements of Rule 180
                           promulgated under the Securities Act of 1933.

Qualified Plan Customers...Owners of group annuity contracts issued by Principal
                           Life Insurance Company designed to fund benefits
                           under a retirement plan which is qualified under
                           Section 401(a) or Section 403(a) of the Internal
                           Revenue Code (including a plan covering employees
                           described in Section 401(c) of the Internal Revenue
                           Code, provided such plan meets the requirements of
                           Rule 180 promulgated under the Securities Act of
                           1933) or which is a governmental plan described in
                           Section 414(d) of the Internal Revenue Code,
                           excluding (i) group annuity contracts that fund only
                           guaranteed deferred annuities or annuities in the
                           course of payments and (ii) group annuity contracts
                           for which Principal Life does not perform retirement
                           plan record keeping services and whose group annuity
                           contracts do not provide for investments in Principal
                           Life's pooled unregistered separate accounts.

Restricted Stock...........Awards of common stock subject to restrictions on
                           transferability and a risk of forfeiture.

                                       G-1
   192

Restricted Stock Units.....Contractual rights to receive cash or common stock in
                           the future that are the economic equivalent of an
                           award of Restricted Stock.

Separate Account Policy
Credits....................Policy credits issued to a Qualified Plan Customer in
                           the form of an addition to the Qualified Plan
                           Customer's group annuity contract of an interest in a
                           separate account holding shares of our common stock
                           and maintained by Principal Life Insurance Company.
                           The separate account interests issued as Separate
                           Account Policy Credits to a Qualified Plan Customer
                           will be allocated to plan participants' accounts,
                           where appropriate, based on account balances for
                           which records are kept by Principal Life Insurance
                           Company unless the Qualified Plan Customer directs
                           otherwise.

Stock Appreciation
Rights.....................Rights to receive cash or stock based on the
                           appreciation in value of the common stock from the
                           date of grant.

                                       G-2
   193

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED FINANCIAL STATEMENTS

                                    CONTENTS

                                                           
AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- FOR THE YEARS
  ENDED DECEMBER 31, 2000, 1999 AND 1998

Report of Independent Auditors..............................   F-2

Consolidated Statements of Operations.......................   F-3

Consolidated Statements of Financial Position...............   F-4

Consolidated Statements of Equity...........................   F-5

Consolidated Statements of Cash Flows.......................   F-6

Notes to Consolidated Financial Statements..................   F-7

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- FOR THE THREE
  MONTHS ENDED MARCH 31, 2001 AND 2000

Consolidated Statements of Operations.......................  F-39

Consolidated Statements of Financial Position...............  F-40

Consolidated Statements of Equity...........................  F-41

Consolidated Statements of Cash Flows.......................  F-42

Notes to Consolidated Financial Statements..................  F-43

                                       F-1
   194

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Principal Mutual Holding Company

    We have audited the accompanying consolidated statements of financial
position of Principal Mutual Holding Company (the Company) as of December 31,
2000 and 1999, and the related consolidated statements of operations, equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Principal
Mutual Holding Company at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

                                                           /s/ Ernst & Young LLP

Des Moines, Iowa
February 2, 2001, except for Note 16,
as to which the date is April 30, 2001

                                       F-2
   195

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
                                                                           
REVENUES
Premiums and other considerations...........................  $3,996.4   $3,937.6   $3,818.4
Fees and other revenue......................................   1,576.3    1,287.3      978.8
Net investment income.......................................   3,172.3    3,072.0    2,933.9
Net realized capital gains..................................     139.9      404.5      465.8
                                                              --------   --------   --------
Total revenues..............................................   8,884.9    8,701.4    8,196.9

EXPENSES
Benefits, claims and settlement expenses....................   5,232.3    5,260.9    5,089.0
Dividends to policyholders..................................     312.7      304.6      298.7
Operating expenses..........................................   2,479.4    2,070.3    2,074.0
                                                              --------   --------   --------
Total expenses..............................................   8,024.4    7,635.8    7,461.7
                                                              --------   --------   --------

Income before income taxes..................................     860.5    1,065.6      735.2

Income taxes................................................     240.3      323.5       42.2
                                                              --------   --------   --------
Net income..................................................  $  620.2   $  742.1   $  693.0
                                                              ========   ========   ========

                            See accompanying notes.
                                       F-3
   196

                        PRINCIPAL MUTUAL HOLDING COMPANY

                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                  (IN MILLIONS)
                                                                    
ASSETS
Fixed maturities, available-for-sale........................  $26,839.9   $23,443.9
Equity securities, available-for-sale.......................      742.9       864.2
Mortgage loans..............................................   11,492.7    13,332.2
Real estate.................................................    1,400.5     2,212.0
Policy loans................................................      803.6       780.5
Other investments...........................................      811.0       710.4
                                                              ---------   ---------
         Total investments..................................   42,090.6    41,343.2

Cash and cash equivalents...................................      926.6       569.5
Accrued investment income...................................      530.8       472.0
Premiums due and other receivables..........................      357.8       419.5
Deferred policy acquisition costs...........................    1,333.3     1,430.9
Property and equipment......................................      507.0       507.7
Goodwill and other intangibles..............................    1,375.9     1,471.5
Mortgage loan servicing rights..............................    1,084.4     1,081.0
Separate account assets.....................................   34,916.2    34,992.3
Other assets................................................    1,134.4     1,544.6
                                                              ---------   ---------
         Total assets.......................................  $84,257.0   $83,832.2
                                                              =========   =========

LIABILITIES
Contractholder funds........................................  $24,300.2   $24,519.8
Future policy benefits and claims...........................   13,198.1    12,491.2
Other policyholder funds....................................      597.4       676.9
Short-term debt.............................................      459.5       547.3
Long-term debt..............................................    1,336.5     1,492.9
Income taxes currently payable..............................      108.4       153.2
Deferred income taxes.......................................      487.4       271.7
Separate account liabilities................................   34,916.2    34,992.3
Other liabilities...........................................    2,600.8     3,134.0
                                                              ---------   ---------
         Total liabilities..................................   78,004.5    78,279.3

EQUITY
Retained earnings...........................................    6,312.5     5,692.3
Accumulated other comprehensive income (loss):
  Net unrealized gains (losses) on available-for-sale
    securities..............................................      129.9       (79.1)
  Net foreign currency translation adjustment...............     (189.9)      (60.3)
                                                              ---------   ---------
         Total equity.......................................    6,252.5     5,552.9
                                                              ---------   ---------
         Total liabilities and equity.......................  $84,257.0   $83,832.2
                                                              =========   =========

                            See accompanying notes.
                                       F-4
   197

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED STATEMENTS OF EQUITY

                                                                                               NET
                                                                        NET UNREALIZED       FOREIGN
                                                                      GAINS (LOSSES) ON     CURRENCY
                                                          RETAINED    AVAILABLE-FOR-SALE   TRANSLATION     TOTAL
                                                          EARNINGS        SECURITIES       ADJUSTMENT     EQUITY
                                                         ----------   ------------------   -----------   ---------
                                                                               (IN MILLIONS)
                                                                                             
BALANCES AT JANUARY 1, 1998............................   $4,257.2        $ 1,037.5          $ (10.5)    $ 5,284.2
Comprehensive income:
  Net income...........................................      693.0               --               --         693.0
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --           (203.3)              --        (203.3)
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (291.3)              --        (291.3)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --             37.1               --          37.1
    Unearned revenue reserves..........................         --             (3.6)              --          (3.6)
  Provision for deferred income tax benefit............         --            169.5               --         169.5
  Change in net foreign currency translation
    adjustment.........................................         --               --            (18.4)        (18.4)
                                                                                                         ---------
Comprehensive income...................................                                                      383.0
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 1998..........................    4,950.2            745.9            (28.9)      5,667.2
Comprehensive loss:
  Net income...........................................      742.1               --               --         742.1
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --         (1,375.4)              --      (1,375.4)
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (119.2)              --        (119.2)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --            246.1               --         246.1
    Unearned revenue reserves..........................         --            (29.5)              --         (29.5)
  Provision for deferred income tax benefit............         --            453.0               --         453.0
  Change in net foreign currency translation
    adjustment.........................................         --               --            (31.4)        (31.4)
                                                                                                         ---------
Comprehensive loss.....................................                                                     (114.3)
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 1999..........................    5,692.3            (79.1)           (60.3)      5,552.9
Comprehensive income:
  Net income...........................................      620.2               --               --         620.2
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................         --            721.8               --         721.8
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................         --           (285.3)              --        (285.3)
  Adjustments for assumed changes in amortization
    patterns:
    Deferred policy acquisition costs..................         --           (122.6)              --        (122.6)
    Unearned revenue reserves..........................         --             15.1               --          15.1
  Provision for deferred income taxes..................         --           (120.0)              --        (120.0)
  Change in net foreign currency translation
    adjustment.........................................         --               --           (129.6)       (129.6)
                                                                                                         ---------
Comprehensive income...................................                                                      699.6
                                                          --------        ---------          -------     ---------
BALANCES AT DECEMBER 31, 2000..........................   $6,312.5        $   129.9          $(189.9)    $ 6,252.5
                                                          ========        =========          =======     =========

                            See accompanying notes.
                                       F-5
   198

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                    YEAR ENDED DECEMBER 31,
                                                              ------------------------------------
                                                                 2000         1999         1998
                                                              ----------   ----------   ----------
                                                                         (IN MILLIONS)
                                                                               
OPERATING ACTIVITIES
Net income..................................................  $    620.2   $    742.1   $    693.0
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Amortization of deferred policy acquisition costs.........       238.6        173.7        219.0
  Additions to deferred policy acquisition costs............      (263.6)      (253.8)      (229.1)
  Accrued investment income.................................       (58.8)       (41.2)        22.9
  Premiums due and other receivables........................       (11.4)        52.0        (16.1)
  Contractholder and policyholder liabilities and
    dividends...............................................     1,451.6      1,633.0      1,616.1
  Current and deferred income taxes.........................        75.0        155.6       (266.2)
  Net realized capital gains................................      (139.9)      (404.5)      (465.8)
  Depreciation and amortization expense.....................       128.0         90.8        110.5
  Amortization and impairment/recovery of mortgage servicing
    rights..................................................       157.3         94.4        142.3
  Other.....................................................       384.7       (182.6)        90.0
                                                              ----------   ----------   ----------
Net adjustments.............................................     1,961.5      1,317.4      1,223.6
                                                              ----------   ----------   ----------
Net cash provided by operating activities...................     2,581.7      2,059.5      1,916.6
INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.................................................   (13,051.0)   (11,510.2)    (7,475.1)
  Sales.....................................................     7,366.0      7,031.0      5,857.2
  Maturities................................................     2,675.3      2,599.2      1,376.7
Mortgage loans acquired or originated.......................   (10,507.5)   (16,594.6)   (14,261.4)
Mortgage loans sold or repaid...............................    12,026.8     16,361.5     14,477.8
Net change in mortgage servicing rights.....................      (182.9)      (307.5)      (387.4)
Real estate acquired........................................      (324.4)      (449.7)      (436.3)
Real estate sold............................................       796.9        869.8        661.6
Net change in property and equipment........................       (11.5)       (14.7)       (23.1)
Proceeds from sales of subsidiaries.........................          --         41.7         95.5
Purchases of interest in subsidiaries, net of cash
  acquired..................................................       (27.4)    (1,154.6)      (217.7)
Net change in other investments.............................        22.0       (166.6)      (360.9)
                                                              ----------   ----------   ----------
Net cash used in investing activities.......................    (1,217.7)    (3,294.7)      (693.1)
FINANCING ACTIVITIES
Issuance of debt............................................       230.4        885.2        243.0
Principal repayments of debt................................      (120.7)       (40.2)       (50.9)
Proceeds of short-term borrowings...........................     2,417.5      5,150.9      8,627.7
Repayment of short-term borrowings..........................    (2,505.4)    (4,895.7)    (8,924.3)
Investment contract deposits................................     3,982.6      5,325.4      5,854.1
Investment contract withdrawals.............................    (5,011.3)    (5,081.7)    (7,058.3)
                                                              ----------   ----------   ----------
Net cash provided by (used in) financing activities.........    (1,006.9)     1,343.9     (1,308.7)
                                                              ----------   ----------   ----------
Net increase (decrease) in cash and cash equivalents........       357.1        108.7        (85.2)
Cash and cash equivalents at beginning of year..............       569.5        460.8        546.0
                                                              ----------   ----------   ----------
Cash and cash equivalents at end of year....................  $    926.6   $    569.5   $    460.8
                                                              ==========   ==========   ==========
SCHEDULE OF NONCASH OPERATING AND INVESTING ACTIVITIES
Net transfer of noncash assets and liabilities to an
  unconsolidated limited liability company in exchange for a
  minority interest.........................................  $   (255.0)
                                                              ==========
Net transfer of noncash assets and liabilities of Principal
  Health Care Inc. on April 1, 1998 in exchange for common
  shares of Coventry Health Care, Inc.......................                            $   (160.0)
                                                                                        ==========

                            See accompanying notes.
                                       F-6
   199

                        PRINCIPAL MUTUAL HOLDING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2000

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

REORGANIZATION

    Effective July 1, 1998, Principal Mutual Life Insurance Company formed a
mutual insurance holding company ("Principal Mutual Holding Company") and
converted to a stock life insurance company ("Principal Life Insurance
Company"). All of the shares of Principal Life Insurance Company ("Principal
Life") were issued to Principal Mutual Holding Company through two newly formed
intermediate holding companies, Principal Financial Group, Inc. and Principal
Financial Services, Inc. The reorganization itself did not have a material
financial impact on Principal Mutual Holding Company and its consolidated
subsidiaries, as the net assets so transferred to achieve the change in legal
organization were accounted for at historical carrying amounts in a manner
similar to that in pooling-of-interests accounting.

PLAN OF DEMUTUALIZATION

    In 2000, the Board of Directors approved management's recommendation to
develop a plan of demutualization to convert Principal Mutual Holding Company
into a stock company. Management expects to complete development of the plan of
demutualization in the first half of 2001. The plan will primarily address how
the organization will be restructured, required approvals, and eligibility for
and allocation of policyholder compensation. The proposed plan, when completed,
will be subject to approval by the Board of Directors, eligible policyholders of
Principal Life Insurance Company and the Insurance Commissioner of the State of
Iowa. See Note 16.

DESCRIPTION OF BUSINESS

    Principal Mutual Holding Company and its consolidated subsidiaries ("the
Company") is a diversified financial services organization engaged in the
marketing and management of retirement savings, investment and insurance
products and services in the United States and selected international markets
and residential mortgage loan origination and servicing in the United States.

BASIS OF PRESENTATION

    The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). Less than
majority-owned entities in which the Company has at least a 20% interest are
reported on the equity basis in the consolidated statements of financial
position as other investments. All significant intercompany accounts and
transactions have been eliminated.

    Total assets of the unconsolidated entities amounted to $3,098.5 million at
December 31, 2000 and $3,276.6 million at December 31, 1999. Total revenues of
the unconsolidated entities were $2,226.3 million in 2000, $1,978.9 million in
1999 and $1,749.9 million in 1998. During 2000, 1999 and 1998, the Company
included $39.1 million, $107.7 million and $18.2 million, respectively, in net
investment income representing the Company's share of current year net income of
the unconsolidated entities.

CLOSED BLOCK

    In conjunction with the formation of the mutual insurance holding company,
Principal Life established a closed block for the benefit of individual
participating dividend-paying policies in force on that date. The closed block
was designed to provide reasonable assurance to policyholders included therein
that, after the Reorganization, assets would be available to maintain dividends
in aggregate in accordance with the 1997 policy dividend scales if the
experience underlying such scales continued. Assets were allocated to the closed
block in amounts such that their cash flows together with anticipated revenues
from policies included in the closed block, were reasonably expected to be
sufficient to support such policies, including provision for payment of claims,
expenses, charges and taxes, and to provide for the continuation of dividends in
aggregate in accordance with the 1997 policy dividend scales if the experience
underlying such scales continued, and to allow for appropriate adjustments in
such scales if the experience changes.

    Assets allocated to the closed block inure to the benefits of the holders of
policies included in the closed block. Closed block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
Principal Life will continue to pay guaranteed benefits under all policies,
including the policies included in the closed block, in accordance with their
terms. If the assets allocated to the closed block, the investment cash flows
from those assets and the revenues from the policies included in the closed
block, including investment income thereon, prove to

                                       F-7
   200
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

be insufficient to pay the benefits guaranteed under the policies included in
the closed block, Principal Life will be required to make such payments from its
general funds. See Note 6.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

    The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.

CASH AND CASH EQUIVALENTS

    Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.

INVESTMENTS

    Investments in fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 13 for
policies related to the determination of fair value.) The cost of fixed
maturities is adjusted for amortization of premiums and accrual of discounts,
both computed using the interest method. The cost of fixed maturities and equity
securities is adjusted for declines in value that are other than temporary. For
the loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using a constant effective yield based on currently
anticipated prepayments as determined by broker-dealer surveys or internal
estimates and the estimated lives of the securities.

    Real estate investments are reported at cost less accumulated depreciation.
The initial cost bases of properties acquired through loan foreclosures are fair
market values of the properties at the time of foreclosure. Buildings and land
improvements are generally depreciated on the straight-line method over the
estimated useful life of improvements, and tenant improvement costs are
depreciated on the straight-line method over the term of the related lease. The
Company recognizes impairment losses for its properties when indicators of
impairment are present and a property's expected undiscounted cash flows are not
sufficient to recover the property's carrying value. In such cases, the cost
bases of the properties are reduced to fair value. Real estate expected to be
disposed is carried at the lower of cost or fair value, less cost to sell, with
valuation allowances established accordingly and depreciation no longer
recognized. Any impairment losses and any changes in valuation allowances are
reported as net realized capital losses.

    Commercial and residential mortgage loans are generally reported at cost
adjusted for amortization of premiums and accrual of discounts, computed using
the interest method, and net of valuation allowances. Any changes in the
valuation allowances are reported as net realized capital gains (losses). The
Company measures impairment based upon the present value of expected cash flows
discounted at the loan's effective interest rate. If foreclosure is probable,
the measurement of any valuation allowance is based upon the fair value of the
collateral. The Company has residential mortgage loans held for sale in the
amount of $251.7 million and $432.1 million and commercial mortgage loans held
for sale in the amount of $520.9 million and $280.1 million at December 31, 2000
and 1999, respectively, which are carried at lower of cost or fair value and
reported as mortgage loans in the statements of financial position.

    Net realized capital gains and losses on investments are determined using
the specific identification basis.

    Policy loans and other investments, excluding investments in unconsolidated
entities, are primarily reported at cost.

SECURITIZATIONS

    The Company sells commercial mortgage loans to an unconsolidated trust which
then issues mortgage-backed securities. The Company may retain interests in the
loans by purchasing portions of the securities from the issuance. Gain or loss
on the sales of the mortgages depends in part on the previous carrying amounts
of the financial assets involved in the transfer, which is allocated between the
assets sold and the retained interests based on their relative fair value at the
date of transfer. Fair values are determined by quoted market prices of external
buyers of each class of security purchased. The retained interests are
thereafter carried at fair value as is the case of other fixed maturity
investments.

    The Company also sells residential mortgage loans in securitization
transactions, and retains servicing rights which are retained interests in the
securitized loans. Gain or loss on the sales of the loans depends in part on the
previous carrying amounts of the financial assets sold and the retained
interests based on their relative fair values at the date of

                                       F-8
   201
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

the transfer. To obtain fair values, quoted market prices are used if available.
However, quotes are generally not available for retained interests, so the
Company estimates fair value based on the present value of the future expected
cash flows using management's best estimates of the key
assumptions -- prepayment speeds and option adjusted spreads commensurate with
the risks involved.

    The Company has developed a margin lending securitization program whereby
the Company sells receivables to an unconsolidated trust that packages and sells
interests to investors. The Company retains interest bearing subordinated
tranches. The receivables are sold at face value, which approximates cost and
fair value, to an unconsolidated trust, with no gain or loss recognized on the
sale. Retained interests are initially carried at cost based on their relative
fair values at the date of transfer, then carried at fair value thereafter.

DERIVATIVES

    Derivatives are generally held for purposes other than trading and are
primarily used to hedge or reduce exposure to interest rate and foreign currency
risks associated with assets held or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. Additionally, derivatives are
used to change the characteristics of the Company's asset/liability mix
consistent with the Company's risk management activities.

    The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.

    The Company's use of derivatives is further described in Note 5. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market. Futures contracts and mortgage-backed
forwards are used to hedge anticipated transactions. Futures contracts are
marked to market value and settled daily. However, changes in the market value
of such contracts have not qualified for inclusion in the measurements of
subsequent transactions or represent hedges of items reported at fair value.
Accordingly, such changes in market value are reported in net income in the
period of change.

    Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.

CONTRACTHOLDER AND POLICYHOLDER LIABILITIES

    Contractholder and policyholder liabilities (contractholder funds, future
policy benefits and claims, and other policyholder funds) include reserves for
investment contracts and reserves for universal life, limited payment,
participating and traditional life insurance policies. Investment contracts are
contractholders' funds on deposit with the Company and generally include
reserves for pension and annuity contracts. Reserves on investment contracts are
equal to the cumulative deposits less any applicable charges plus credited
interest.

    Reserves for universal life insurance contracts are equal to cumulative
premiums less charges plus credited interest which represents the account
balances that accrue to the benefit of the policyholders. Reserves for non-
participating term life insurance contracts are computed on a basis of assumed
investment yield, mortality, morbidity and expenses, including a provision for
adverse deviation, which generally vary by plan, year of issue and policy
duration. Investment yield is based on the Company's experience. Mortality,
morbidity and withdrawal rate assumptions are based on experience of the Company
and are periodically reviewed against both industry standards and experience.

    Reserves for participating life insurance contracts are based on the net
level premium reserve for death and endowment policy benefits. This net level
premium reserve is calculated based on dividend fund interest rate and mortality
rates guaranteed in calculating the cash surrender values described in the
contract.

                                       F-9
   202
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

    Participating business represented approximately 34%, 34% and 36% of the
Company's life insurance in force and 79%, 78% and 81% of the number of life
insurance policies in force at December 31, 2000, 1999 and 1998, respectively.
Participating business represented approximately 61%, 63% and 76% of life
insurance premiums for the years ended December 31, 2000, 1999 and 1998,
respectively.

    The amount of dividends to policyholders is approved annually by Principal
Life's Board of Directors. The amount of dividends to be paid to policyholders
is determined after consideration of several factors including interest,
mortality, morbidity and other expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by Principal Life.
At the end of the reporting period, Principal Life establishes a dividend
liability for the pro-rata portion of the dividends expected to be paid on or
before the next policy dividend anniversary date.

    Some of the Company's policies and contracts require payment of fees in
advance for services that will be rendered over the estimated lives of the
policies and contracts. These payments are established as unearned revenue
reserves upon receipt and included in other policyholder funds in the
consolidated statements of financial position. These unearned revenue reserves
are amortized to operations over the estimated lives of these policies and
contracts in relation to the emergence of estimated gross profit margins.

    The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.

RECOGNITION OF PREMIUMS AND OTHER CONSIDERATIONS, FEES AND OTHER REVENUES AND
BENEFITS

    Traditional individual life and health insurance products include those
products with fixed and guaranteed premiums and benefits, and consist
principally of whole life and term life insurance policies and certain immediate
annuities with life contingencies. Premiums from these products are recognized
as premium revenue when due.

    Immediate annuities with life contingencies include products with fixed and
guaranteed annuity considerations and benefits, and consist primarily of group
and individual single premium annuities with life contingencies. Annuity
considerations from these products are recognized as revenue when due.

    Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.

    Related policy benefits and expenses for individual and group life and
health insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.

    Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.

    Investment contracts do not subject the Company to risks arising from
policyholder mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts ("GICs") and certain deferred annuities. Amounts received
as payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.

    Fees and other revenues are earned for asset management services provided to
retail and institutional clients based largely upon contractual rates applied to
the market value of the client's portfolio. Additionally, fees and other
revenues are earned for administrative services performed including
recordkeeping and reporting services for retirement savings plans. Fees and
other revenues received for performance of asset management and administrative
services are recognized as revenue when the service is performed.

                                       F-10
   203
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

    Fees and other revenues arising from the residential mortgage banking
operations consist of revenues earned for servicing and originating residential
mortgage loans as well as marketing other products to servicing portfolio
customers. Servicing revenues are recognized as the mortgage loan is serviced
over the life of the mortgage loan. Mortgage loans originated are sold in the
secondary mortgage markets, shortly after origination. As a result, mortgage
loan origination fee revenues are recognized when the mortgage loans are sold.
Fee revenues received for marketing other products to servicing portfolio
customers are recognized when the service is performed. Net revenues are also
recognized upon the sale of residential mortgage loans and residential mortgage
loan servicing rights and are determined using the specific identification
basis.

DEFERRED POLICY ACQUISITION COSTS

    Commissions and other costs (underwriting, issuance and agency expenses)
that vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.

    Deferred policy acquisition costs for universal life-type insurance
contracts and participating life insurance policies and investment contracts are
being amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
policy acquisition costs of non-participating term life insurance policies are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyholder liabilities.

    Deferred policy acquisition costs are subject to recoverability testing at
the time of policy issue and loss recognition testing at the end of each
accounting period. Deferred policy acquisition costs would be written off to the
extent that it is determined that future policy premiums and investment income
or gross profit margins would not be adequate to cover related losses and
expenses.

REINSURANCE

    The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Premiums and expenses are reported net of
reinsurance ceded. The Company is contingently liable with respect to
reinsurance ceded to other companies in the event the reinsurer is unable to
meet the obligations it has assumed. At December 31, 2000, 1999 and 1998
respectively, the Company had reinsured $13.2 billion, $10.2 billion and $6.9
billion of life insurance in force, representing 9%, 7% and 5% of total net life
insurance in force through a single third-party reinsurer. To minimize the
possibility of losses, the Company evaluates the financial condition of its
reinsurers and continually monitors concentrations of credit risk.

    The effect of reinsurance on premiums and other considerations and policy
and contract benefits and changes in reserves is as follows (in millions):

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Premiums and other considerations:
  Direct....................................................  $4,142.1   $3,990.0   $3,799.9
  Assumed...................................................      24.6        4.1       62.2
  Ceded.....................................................    (170.3)     (56.5)     (43.7)
                                                              --------   --------   --------
Net premiums and other considerations.......................  $3,996.4   $3,937.6   $3,818.4
                                                              ========   ========   ========
Benefits, claims and settlement expenses:
  Direct....................................................  $5,387.8   $5,296.1   $5,051.5
  Assumed...................................................       1.9       (1.3)      66.0
  Ceded.....................................................    (157.4)     (33.9)     (28.5)
                                                              --------   --------   --------
Net benefits, claims and settlement expenses................  $5,232.3   $5,260.9   $5,089.0
                                                              ========   ========   ========

                                       F-11
   204
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

GUARANTY-FUND ASSESSMENTS

    Guaranty-fund assessments are accrued for anticipated assessments, which are
estimated using data available from various industry sources that monitor the
current status of open and closed insolvencies. The Company has also established
an other asset for assessments expected to be recovered through future premium
tax offsets.

SEPARATE ACCOUNTS

    The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. Generally, the separate account contract owner,
rather than the Company, bears the investment risk of these funds. The separate
account assets are legally segregated and are not subject to claims that arise
out of any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Net deposits, net investment income
and realized and unrealized capital gains and losses on the separate accounts
are not reflected in the consolidated statements of operations.

INCOME TAXES

    The Company files a U.S. consolidated income tax return that includes all of
its qualifying subsidiaries and has a policy of allocating income tax expenses
and benefits to companies in the group based upon pro rata contribution of
taxable income or operating losses. The Company is taxed at corporate rates on
taxable income based on existing tax laws. Current income taxes are charged or
credited to operations based upon amounts estimated to be payable or recoverable
as a result of taxable operations for the current year. Deferred income taxes
are provided for the tax effect of temporary differences in the financial
reporting and income tax bases of assets and liabilities and net operating
losses using enacted income tax rates and laws. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is recognized in
operations in the period in which the change is enacted.

FOREIGN EXCHANGE

    The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.

PENSION AND POSTRETIREMENT BENEFITS

    The Company accounts for its pension benefits and postretirement benefits
other than pension (medical, life insurance and long-term care) using the full
accrual method.

PROPERTY AND EQUIPMENT

    Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):

                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
Property and equipment......................................  $ 924.6   $ 887.8
Accumulated depreciation....................................   (417.6)   (380.1)
                                                              -------   -------
Property and equipment, net.................................  $ 507.0   $ 507.7
                                                              =======   =======

GOODWILL AND OTHER INTANGIBLES

    Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which have been recorded in connection with acquisitions. These assets
are amortized on a straight-line basis generally over 8 to 40 years. At December
31, 2000, the weighted-average

                                       F-12
   205
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

amortization periods for goodwill and other intangibles were 22.4 years and 38.6
years, respectively. The carrying amount of goodwill and other intangibles is
reviewed periodically for indicators of impairment in value, which in the view
of management are other than temporary, including unexpected or adverse changes
in the economic or competitive environments in which the Company operates,
profitability analyses and the fair value of the relevant subsidiary. If facts
and circumstances suggest that a subsidiary's goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces the goodwill to
an amount that results in the book value of the subsidiary approximating fair
value.

    Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Goodwill....................................................  $  559.0   $  610.9
Other intangibles...........................................     908.0      920.1
                                                              --------   --------
                                                               1,467.0    1,531.0
Accumulated amortization....................................     (91.1)     (59.5)
                                                              --------   --------
         Total goodwill and other intangibles, net..........  $1,375.9   $1,471.5
                                                              ========   ========

PREMIUMS DUE AND OTHER RECEIVABLES

    Premiums due and other receivables include life and health insurance
premiums due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.

MORTGAGE LOAN SERVICING RIGHTS

    Mortgage loan servicing rights represent the cost of purchasing or
originating the right to service mortgage loans. These costs are capitalized and
amortized to operations over the estimated remaining lives of the underlying
loans using the interest method and taking into account appropriate prepayment
assumptions. Capitalized mortgage loan servicing rights are periodically
assessed for impairment, which is recognized in the consolidated statements of
operations during the period in which impairment occurs by establishing a
corresponding valuation allowance. For purposes of performing its impairment
evaluation, the Company stratifies the servicing portfolio on the basis of
specified predominant risk characteristics, including loan type and note rate. A
valuation model is used to determine the fair value of each stratum. Cash flows
are calculated using an internal prepayment model and discounted at a spread to
London Inter-Bank Offer Rate. External valuations are obtained for comparison
purposes. Activity in the valuation allowance for mortgage loan servicing rights
is summarized as follows (in millions):

                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----   ------   ------
                                                                      
Balance at beginning of year................................  $ 2.9   $ 56.1   $  4.2
Impairments.................................................    1.1      1.7    120.0
Recoveries..................................................   (1.7)   (54.9)   (68.1)
                                                              -----   ------   ------
Balance at end of year......................................  $ 2.3   $  2.9   $ 56.1
                                                              =====   ======   ======

OTHER ASSETS

    Included in other assets are certain assets pending transfer or novation
that are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.

COMPREHENSIVE INCOME (LOSS)

    Comprehensive income (loss) includes all changes in equity during a period
except those resulting from investments by shareholders and distributions to
shareholders, which would not be applicable to a mutual holding company.

                                       F-13
   206
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

    The following table sets forth the adjustments necessary to avoid
duplication of items that are included as part of net income for a year that had
been part of other comprehensive income in prior years (in millions):

                                                                      DECEMBER 31,
                                                              ----------------------------
                                                               2000      1999       1998
                                                              ------   ---------   -------
                                                                          
Unrealized gains (losses) on available-for-sale securities
  arising during the year...................................  $238.9   $(1,013.2)  $(531.8)
Adjustment for realized gains (losses) on available-for-sale
  securities included in net income.........................   (29.9)      188.2     240.2
                                                              ------   ---------   -------
Unrealized gains (losses) on available-for-sale securities,
  as adjusted...............................................  $209.0   $  (825.0)  $(291.6)
                                                              ======   =========   =======

    The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.

RECLASSIFICATIONS

    Reclassifications have been made to the 1998 and 1999 consolidated financial
statements to conform to the 2000 presentation.

ACCOUNTING CHANGES

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities("SFAS 133"). In June 1999, Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137") was issued deferring the effective date
of SFAS 133 by one year. The new effective date for the Company to adopt SFAS
133 is January 1, 2001. In June 2000, the FASB issued Statement No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities an
amendment of FASB Statement No. 133 which amended the accounting and reporting
standards of SFAS 133 for certain derivative instruments and certain hedging
activities. SFAS 133 will require the Company to include all derivatives in the
consolidated statement of financial position at fair value. The accounting for
changes in the fair value of a derivative depends on its intended use. Changes
in derivative fair values will either be recognized in earnings as offsets to
the changes in fair value of related hedged assets, liabilities and firm
commitments or, for forecasted transactions, deferred and recorded as a
component of equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. The Company adopted
SFAS 133 effective January 1, 2001. The Company evaluated the effect
implementation would have on its reported results of operations and financial
position, based on derivatives holdings and market conditions as of December 31,
2000. That evaluation indicated that the implementation of SFAS 133 would not
have had a material impact on the results of operations and financial position
as of and for the year ended December 31, 2000.

    On January 1, 1999, the Company implemented the Statement of Position
("SOP") 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 defines internal use software and when the
costs associated with internal use should be capitalized. The implementation did
not have a material impact on the Company's consolidated financial statements.

    In December 2000, the Accounting Standards Executive Committee issued
Statement of Position 00-3, Accounting by Insurance Enterprises for
Demutualization and Formation of Mutual Insurance Holding Companies and for
Certain Long-Duration Participating Contracts. The effective date for adoption
of SOP 00-3, with retroactive application and restatement of all previously
issued financial statements, is for fiscal years beginning after December 15,
2000, however, early adoption is encouraged by the Accounting Standards
Executive Committee. The Statement provides guidance on accounting by insurance
companies for demutualization and the formation of mutual insurance holding
companies. The Statement specifies that closed block assets, liabilities,
revenues and expenses should be displayed together with all other assets,
liabilities, revenues and expenses of the insurance enterprise based on the
nature of the particular item, with appropriate disclosures relating to the
closed block. The Statement also provides guidance regarding: accounting for
predemutualization participating contracts, establishment of a policyholder
dividend obligation for earnings that relate to the closed block, but do not
inure to stockholders, if applicable, accounting for participating policies sold
outside the closed block, accounting for expenses related to a demutualization
and the formation of an MIHC, accounting for retained earnings and other
comprehensive income and accounting for a distribution from an

                                       F-14
   207
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

MIHC to its members. The Company early adopted SOP 00-3 during 2000, and
financial statements for all periods presented have been reclassified to reflect
the guidance set forth in SOP 00-3. See Note 6.

2. MERGERS, ACQUISITIONS AND DIVESTITURES

    During 2000, various acquisitions of joint ventures were made by the Company
at purchase prices aggregating $27.4 million. During 2000, the Company included
$(2) million in net investment income representing the Company's share of
current year net losses of the acquired joint ventures. These joint ventures are
part of unconsolidated entities described in Note 1.

    On December 21, 2000, the Company entered into an agreement to dispose of
the stock of Principal International Espana, S.A. de Seguros de Vida, a
subsidiary in Spain. The transaction is expected to be completed in the first
quarter of 2001, after which the Company will have no business operations in
Spain. In 2000, the consolidated financial statements included $222.7 million in
assets, $49.4 million in revenues and $(1.2) million of pretax losses related to
these operations.

    Beginning January 1, 2000, the Company ceased new sales of Medicare
supplement insurance and effective July 1, 2000, the Company entered into a
reinsurance agreement to reinsure 100% of the Medicare supplement insurance
block of business. Medicare supplement insurance premiums were $98.4 million for
the six months ended June 30, 2000 and $164.6 million for the year ended
December 31, 1999.

    On August 31, 1999, the Company acquired the outstanding stock of several
companies affiliated with Bankers Trust Australia Group ("Acquired Companies")
from Deutsche Bank AG at a purchase price of $1,445.6 million. The acquisition
was accounted for using the purchase method and results of operations of the
Acquired Companies have been included in the consolidated financial statements
from the date of acquisition. In connection with the acquisition, the Company
and Deutsche Bank AG agreed to the sale of the investment banking operations of
the Acquired Companies to Macquarie Bank Limited, with net proceeds of $63.7
million from this transaction being included in the acquired assets.

    The purchase price and $9.4 million of direct acquisition costs have been
allocated to the assets acquired and liabilities assumed based on their
respective fair market values at the acquisition date. The allocation included
identifiable intangibles represented by management rights for the funds
management business and the brand name of $897.4 million and $38.5 million of
workforce intangibles, with $408.6 million of resulting goodwill, which are
being amortized on a straight-line basis over 40, 8 and 25 years, respectively.
Refinements in the allocation were made in 2000 as accounting completion and
valuation studies were finalized.

    Completion of the sale of the investment banking operations required the
transfer or novation to Macquarie Bank Limited of the investment banking assets
and liabilities of the Acquired Companies. The bulk of these were statutorily
transferred on August 3, 1999, pursuant to the procedures laid down in the
Financial Sector (Transfers of Business) Act ("the Act") of the Commonwealth of
Australia. Certain assets and liabilities which are governed by a law other than
that of Australia, or which the Act does not address, were excluded from the
statutory transfer. For these assets and liabilities it has been necessary to
effect individual transfers or novations, in some cases with the agreement of
the relevant customers or counterparties. Pending such transfers or novations,
the Company agreed, as part of the sale of the investment banking operations,
that these assets and liabilities will remain in the name of one of the Acquired
Companies, but all economic risks and benefits associated with them will be
assumed and a related indemnification provided by Macquarie Bank Limited. In
addition, the Company may rely upon Deutsche Bank AG to ensure that the Company
does not suffer any claim or loss related to the investment banking operations
sold, including the assets and liabilities, respectively, that will remain in
the name of the Acquired Companies pending transfer or novation. These assets
and liabilities which remain in the name of one of the Acquired Companies and
aggregated $1,020.7 million and $652.7 million at December 31, 1999,
respectively, are reported at fair value and included in other assets and other
liabilities in the Company's consolidated statement of financial position, with
a net payable to Macquarie Bank Limited of $368.0 million. At December 31, 2000,
these assets and liabilities aggregated $424.1 million and $219.6 million,
respectively, with a net payable to Macquarie Bank Limited of $204.5 million.

    During 1999, various other acquisitions were made by the Company at purchase
prices aggregating $121.5 million. The acquisitions were all accounted for using
the purchase method and the results of operations of the acquired businesses
have been included in the financial statements of the subsidiaries from the
dates of acquisition. Such acquired companies had total assets at December 31,
1999 and total 1999 revenue of $126.9 million and $11.2 million, respectively.

                                       F-15
   208
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGERS, ACQUISITIONS AND DIVESTITURES -- (CONTINUED)

    Effective April 1, 1998, the Company transferred substantially all of its
managed care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, Coventry Health Care, Inc. The
Company's investment in Coventry Health Care, Inc. is accounted for using the
equity method. Net equity of the transferred business on April 1, 1998 was
$170.0 million. Consolidated financial results for 1997 included total assets at
December 31, 1997, and total revenues and pretax loss for the year then ended of
approximately $419.0 million, $883.3 million and $(26.1) million, respectively,
for the transferred business. In September 2000, the Company sold a portion of
its equity ownership position, which reduced its ownership to approximately 25%
and resulted in a realized capital gain of $13.9 million, net of tax.

    During 1998, various acquisitions were made by the Company at purchase
prices aggregating $224.5 million. The acquisitions were all accounted for using
the purchase method and the results of operations of the acquired businesses
have been included in the financial statements of the subsidiaries from the
dates of acquisition. Such acquired companies had total assets at December 31,
1998 and total 1998 revenue of $458.8 million and $58.3 million, respectively.

    During 1998, various divestitures were made by the Company at selling prices
aggregating $117.9 million and $15.3 million in net realized capital gains were
realized as a result of these divestitures. In 1997, the financial statements
included $151.6 million in assets, $205.7 million in revenues and $19.8 million
of pretax losses related to these subsidiaries.

    Effective July 1, 1998, the Company no longer participates in reinsurance
pools related to the Federal Employee Group Life Insurance and Service Group
Life Insurance programs. In 1997, the premium assumed from these arrangements
was approximately $84.9 million.

3. INVESTMENTS

    Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire fixed
maturities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred policy acquisition costs, unearned
revenue reserves and deferred income taxes.

                                       F-16
   209
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    The cost, gross unrealized gains and losses and fair value of fixed
maturities and equity securities available-for-sale as of December 31, 2000 and
1999, are as follows (in millions):

                                                                          GROSS        GROSS
                                                                        UNREALIZED   UNREALIZED
                                                              COST        GAINS        LOSSES     FAIR VALUE
                                                            ---------   ----------   ----------   ----------
                                                                                      
DECEMBER 31, 2000
Fixed maturities:
  United States Government and agencies...................  $    23.2     $  0.1       $  0.2     $    23.1
  Foreign governments.....................................      895.7       27.6          5.3         918.0
  States and political subdivisions.......................      287.4       12.5          4.2         295.7
  Corporate -- public.....................................    9,027.2      219.5        129.4       9,117.3
  Corporate -- private....................................    9,809.9      208.9        206.0       9,812.8
  Mortgage-backed and other asset-backed securities.......    6,496.1      211.2         34.3       6,673.0
                                                            ---------     ------       ------     ---------
         Total fixed maturities...........................  $26,539.5     $679.8       $379.4     $26,839.9
                                                            =========     ======       ======     =========
         Total equity securities..........................  $   805.9     $191.2       $254.2     $   742.9
                                                            =========     ======       ======     =========

DECEMBER 31, 1999
Fixed maturities:
  United States Government and agencies...................  $   163.7     $   --       $  1.7     $   162.0
  Foreign governments.....................................      820.2       18.7         15.2         823.7
  States and political subdivisions.......................      176.0        1.3          9.8         167.5
  Corporate -- public.....................................    5,425.4       74.4        140.6       5,359.2
  Corporate -- private....................................   11,476.9      106.7        363.0      11,220.6
  Mortgage-backed and other asset-backed securities.......    5,832.2       12.6        133.9       5,710.9
                                                            ---------     ------       ------     ---------
         Total fixed maturities...........................  $23,894.4     $213.7       $664.2     $23,443.9
                                                            =========     ======       ======     =========
         Total equity securities..........................  $   720.8     $176.3       $ 32.9     $   864.2
                                                            =========     ======       ======     =========

    The cost and fair value of fixed maturities available-for-sale at December
31, 2000, by expected maturity, are as follows (in millions):

                                                                COST      FAIR VALUE
                                                              ---------   ----------
                                                                    
Due in one year or less.....................................  $ 1,125.2   $ 1,113.0
Due after one year through five years.......................    9,782.8     9,783.0
Due after five years through ten years......................    5,273.6     5,352.8
Due after ten years.........................................    3,861.8     3,918.1
                                                              ---------   ---------
                                                               20,043.4    20,166.9
Mortgage-backed and other asset-backed securities...........    6,496.1     6,673.0
                                                              ---------   ---------
         Total..............................................  $26,539.5   $26,839.9
                                                              =========   =========

    The above summarized activity is based on expected maturities. Actual
maturities may differ because borrowers may have the right to call or pre-pay
obligations.

                                       F-17
   210
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    Major categories of net investment income are summarized as follows (in
millions):

                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Fixed maturities, available-for-sale........................  $1,880.7   $1,712.4   $1,587.5
Equity securities, available-for-sale.......................      67.6       46.2       31.6
Mortgage loans..............................................   1,022.9    1,111.1    1,143.0
Real estate.................................................     171.3      187.5      143.2
Policy loans................................................      55.1       50.2       50.9
Cash and cash equivalents...................................      32.3       25.9        8.8
Other.......................................................      81.1       55.3      108.1
                                                              --------   --------   --------
                                                               3,311.0    3,188.6    3,073.1
Less investment expenses....................................    (138.7)    (116.6)    (139.2)
                                                              --------   --------   --------
Net investment income.......................................  $3,172.3   $3,072.0   $2,933.9
                                                              ========   ========   ========

    The major components of net realized capital gains on investments are
summarized as follows (in millions):

                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               2000       1999       1998
                                                              -------    -------    ------
                                                                           
Fixed maturities, available-for-sale:
  Gross gains...............................................  $  29.1    $  31.2    $ 61.4
  Gross losses..............................................   (155.0)    (128.1)    (33.5)
Equity securities, available-for-sale:
  Gross gains...............................................     84.2      408.7     341.7
  Gross losses..............................................     (5.0)     (25.7)    (38.8)
Mortgage loans..............................................      8.6       (8.4)      6.3
Real estate.................................................     82.3       56.4     120.6
Other.......................................................     95.7       70.4       8.1
                                                              -------    -------    ------
Net realized capital gains..................................  $ 139.9    $ 404.5    $465.8
                                                              =======    =======    ======

    Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.7 billion, $5.5 billion and $2.8 billion in 2000, 1999
and 1998 respectively. Of the 2000, 1999 and 1998 proceeds, $2.6 billion, $3.8
billion and $2.2 billion, respectively, relates to sales of mortgage-backed
securities. The Company actively manages its mortgage-backed securities
portfolio to control prepayment risk. Gross gains of $2.0 million, $2.1 million
and $23.0 million and gross losses of $40.1 million, $60.3 million and $7.0
million in 2000, 1999 and 1998, respectively, were realized on sales of
mortgage-backed securities. At December 31, 1999, the Company had security
purchases payable totaling $21.9 million relating to the purchases of
mortgage-backed securities at forward dates.

    The net unrealized gains and losses on investments in fixed maturities and
equity securities available-for-sale is reported as a separate component of
equity, reduced by adjustments to deferred policy acquisition costs and unearned
revenue reserves that would have been required as a charge or credit to
operations had such amounts been realized and a provision for deferred income
taxes. The cumulative amount of net unrealized gains and losses on
available-for-sale securities is as follows (in millions):

                                                                DECEMBER 31,
                                                              ----------------
                                                               2000     1999
                                                              ------   -------
                                                                 
Net unrealized gains and losses on fixed maturities,
  available-for-sale........................................  $283.9   $(437.9)
Net unrealized gains and losses on equity securities,
  available-for-sale, including seed money in separate
  accounts..................................................   (55.6)    229.7
Adjustments for assumed changes in amortization patterns:
  Deferred policy acquisition costs.........................   (43.2)     79.4
  Unearned revenue reserves.................................     2.8     (12.3)
Provision for deferred income (taxes) tax benefit...........   (58.0)     62.0
                                                              ------   -------
Net unrealized gains and losses on available-for-sale
  securities................................................  $129.9   $ (79.1)
                                                              ======   =======

                                       F-18
   211
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

    The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities.

    Commercial mortgage loans and corporate private placement bonds originated
or acquired by the Company represent its primary areas of credit risk exposure.
At December 31, 2000 and 1999, the commercial mortgage portfolio is diversified
by geographic region and specific collateral property type as follows:

               GEOGRAPHIC DISTRIBUTION
                                        DECEMBER 31,
                                        -------------
                                        2000     1999
                                        ----     ----

New England...........................    5%       5%
Middle Atlantic.......................   15       14
East North Central....................    9       10
West North Central....................    4        5
South Atlantic........................   24       25
East South Central....................    4        3
West South Central....................    8        7
Mountain..............................    6        5
Pacific...............................   26       27
Valuation allowance...................   (1)      (1)

             PROPERTY TYPE DISTRIBUTION
                                        DECEMBER 31,
                                        -------------
                                        2000     1999
                                        ----     ----

Office................................   30%      31%
Retail................................   34       33
Industrial............................   31       32
Apartments............................    4        3
Hotel.................................    1        1
Mixed use/other.......................    1        1
Valuation allowance...................   (1)      (1)

    Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as a net realized capital loss.

    Mortgage loans deemed to be uncollectible are charged against the allowance
for losses and subsequent recoveries are credited to the allowance for losses.
The allowance for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance for losses is based on the Company's
past loan loss experience, 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.

    A summary of the changes in the mortgage loan allowance for losses is as
follows (in millions):

                                                                    DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                       
Balance at beginning of year................................  $117.8   $113.0   $121.4
Provision for losses........................................     5.4      9.2      7.3
Releases due to write-downs, sales and foreclosures.........   (12.8)    (4.4)   (15.7)
                                                              ------   ------   ------
Balance at end of year......................................  $110.4   $117.8   $113.0
                                                              ======   ======   ======

    The Company was servicing approximately 582,000 and 555,000 residential
mortgage loans with aggregate principal balances of approximately $55,987.4
million and $51,875.5 million at December 31, 2000 and 1999, respectively. In
connection with these mortgage servicing activities, the Company held funds in
trust for others totaling approximately $343.8 million and $334.0 million at
December 31, 2000 and 1999, respectively. In connection with its loan
administration activities, the Company advances payments of property taxes and
insurance premiums and also advances principal and interest payments to
investors in advance of collecting funds from specific mortgagors. In addition,
the Company makes certain payments of attorney fees and other costs related to
loans in foreclosure. These amounts receivable are recorded, at cost, as
advances on serviced loans. Amounts advanced are considered in management's
evaluation of the adequacy of the mortgage loan allowance for losses.

    In June 2000, the Company's mortgage banking segment created a special
purpose entity to provide an off-balance sheet source of funding for the
Company's residential mortgage loan production. The Company sells residential
mortgage loans to the special purpose entity, where they are warehoused until
sold to the final investor. A maximum of $1 billion may be warehoused by the
special purpose entity at any given time. Through December 31, 2000,

                                       F-19
   212
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENTS -- (CONTINUED)

$5,340.8 million of loans had been sold to the special purpose entity and $688.2
million was warehoused by the special purpose entity at December 31, 2000. The
Company remains the servicer of the mortgage loans and also performs secondary
marketing, accounting and various administrative functions on behalf of the
special purpose entity. The special purpose entity is owned by unaffiliated
equity certificate holders and thus, is not consolidated with the Company.

    In October 2000, the Company's mortgage banking unit also created an
unconsolidated qualifying special purpose entity ("QSPE") to provide an
off-balance sheet source of funding for up to $250 million of qualifying
delinquent mortgage loans. The Company sells qualifying delinquent loans to the
QSPE, which then pledges the loans to secure its borrowings from a Delaware
business trust. The trust funds its loan to the QSPE by selling participations
certifications to commercial paper conduit purchasers. Mortgage loans remain in
the QSPE until they are processed through claims, reinstated or paid off. The
Company is retained as the servicer on the mortgage loans and also performs
accounting and various administrative functions on behalf of the QSPE. The
Company's retained interest in the mortgage loans of $10.2 million is classified
as other assets in the consolidated statements of financial position.

    Real estate holdings and related accumulated depreciation are as follows (in
millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Investment real estate......................................  $  822.2   $1,339.6
Accumulated depreciation....................................    (117.1)    (161.0)
                                                              --------   --------
                                                                 705.1    1,178.6
Properties held for sale....................................     695.4    1,033.4
                                                              --------   --------
Real estate, net............................................  $1,400.5   $2,212.0
                                                              ========   ========

    Other investments primarily include properties owned jointly with venture
partners and operated by the partners. Joint ventures in which the Company has
an interest have mortgage loans with the Company of $612.1 million and $760.1
million at December 31, 2000 and 1999, respectively. The Company is committed to
providing additional mortgage financing for such joint ventures aggregating
$71.5 million and $76.8 million at December 31, 2000 and 1999, respectively.

4. SECURITIZATION TRANSACTIONS

COMMERCIAL MORTGAGE LOANS

    During 2000 and 1999, the Company sold commercial mortgage loans in
securitization transactions. In each of those securitizations, the Company
retained primary servicing responsibilities and other interests. The Company
receives annual servicing fees approximating 0.01 percent, which approximates
cost. The investors and the securitization trusts have no recourse to the
Company's other assets for failure of debtors to pay when due. The value of the
Company's retained interests is subject primarily to credit risk.

    In 2000, the Company recognized pretax gains of $0.7 million on the
securitization of commercial mortgage loans.

    Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from transactions completed during the year
included a cumulative default rate between five and eight percent. The assumed
range of the loss severity, as a percentage of defaulted loans, was between 13
and 25 percent. The low end of the loss severity range relates to a portfolio of
seasoned loans. The high end of the loss severity range relates to a portfolio
of newly issued loans.

    At December 31, 2000, the fair values of retained interests related to the
securitizations of commercial mortgage loans were $65.2 million. Key economic
assumptions and the sensitivity of the current fair values of residual cash
flows were tested to one and two standard deviations from the expected rates.
The changes in the fair values at December 31, 2000 as a result of these
assumptions were not significant.

RESIDENTIAL MORTGAGE LOANS

    During 2000 and 1999, the Company sold residential mortgage loans in
securitization transactions. In those securitizations, the Company retained
servicing responsibilities and subordinated interests. The Company receives
annual servicing fees approximating 0.4 percent of the outstanding balance and
rights to future cash flows arising after

                                       F-20
   213
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. SECURITIZATION TRANSACTIONS -- (CONTINUED)

the investors have received the return for which they have contracted. The
investors have no recourse to the Company's other assets for failure of debtors
to pay when due. The Company's retained interests are subordinate to the
investor's interests. Their value is subject to prepayment and interest rate
risks on the transferred assets.

    In 2000, the Company recognized pretax gains of $9.4 million on the
securitization of residential mortgage loans.

    The key economic assumptions used in determining the fair value of mortgage
servicing rights at the date of securitization resulting from securitizations
completed in 2000 were as follows:

                                                            
Weighted average life (years)...............................    6.87
Prepayment speed............................................   11.81%
Static yield to maturity discount rate......................   10.74%

    Prepayment speed is the constant prepayment rate that results in the
weighted average life disclosed above.

    At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of the mortgage servicing rights to immediate 10 and 20
percent adverse changes in those assumptions are as follows ($ in millions):

                                                            
Fair value of retained interests............................   $1,193.4
Expected weighted average life (in years)...................        6.7
Prepayment speed............................................      12.43%
Decrease in fair value of 10% adverse change................   $   45.7
Decrease in fair value of 20% adverse charge................   $   87.1
Static yield to maturity discount rate......................       9.44%
Decrease in fair value of 10% adverse change................   $   73.8
Decrease in fair value of 20% adverse change................   $  147.7

    These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in the
assumption to the change in fair value may not be linear. Also, in the above
table, the effect of a variation in a particular assumption on the fair value of
the servicing rights is calculated independently without changing any other
assumption. In reality, changes in one factor may result in change in another,
which might magnify or counteract the sensitivities. For example, changes in
prepayment speed estimates could result in changes in the discount rate.

MARGIN LENDING

    During 2000 and 1999, the Company sold loans under its margin loan
securitization program. In that securitization, the Company retained primary
servicing responsibilities and retained subordinated interests. The Company
receives servicing fees approximating 0.3 percent of the outstanding balance and
rights to future cash flows arising after investors in the trust have received a
contracted return. The Company's retained interests are subordinated to
investors' interests. Retained interests equate to 7% of the outstanding loan
balances, of which the Company may earn a return of 1.5% to 2.0% over the
Australian 30 day Bank Bill swap rate. The investors and the securitization
trusts have no recourse to the Company's other assets for failure of debtors to
pay when due. The value of the Company's retained interests is subject to market
risk and all positions are primarily hedged. No gains or losses on the
transaction have been realized to date.

    The fair values of the retained interests, $43.7 million at December 31,
2000, are based upon the Company's relative ownership percentage of the
outstanding loan balances. At December 31, 2000, the Company utilized the
present value of expected future cash flows as a valuation technique to assess
the sensitivity of the fair values of retained interests. Key economic
assumptions used in measuring the retained interests included interest margin,
credit losses, terminations and discount rates and the resulting changes to the
fair values were not significant.

    The table below summarizes cash flows received from and paid to
securitization trusts for the year ended December 31, 2000 (in millions):

                                                            
Proceeds from new securitizations...........................   $9,658.2
Proceeds from advances on margin loans previously
  securitized...............................................       16.1
Servicing fees received.....................................      239.3
Other cash flows received on retained interests.............       42.8

                                       F-21
   214
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

    The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards to hedge against interest rate risks. The Company attempts
to match the timing of when interest rates are committed on insurance products
and on new investments. However, timing differences do occur and can expose the
Company to fluctuating interest rates. Interest rate futures and mortgage-backed
securities forwards are used to minimize these risks. In these contracts, the
Company is subject to the risk that the counterparties will fail to perform and
to the risks associated with changes in the value of the underlying securities;
however, such changes in value generally are offset by opposite changes in the
value of the hedged items. Futures contracts are marked to market and settled
daily, which minimizes the counterparty risk. The notional amounts of futures
contracts represent the extent of the Company's involvement.

    The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a fixed rate
liability. The Company's current credit exposure on swaps is limited to the
value of interest rate swaps that have become favorable to the Company. The
average unexpired terms of the swaps were approximately four years at December
31, 2000 and five years at December 31, 1999. The net amount payable or
receivable from interest rate swaps is accrued as an adjustment to interest
income. The Company's interest rate swap agreements include cross-default
provisions when two or more swaps are transacted with a given counterparty.

    The Company enters into currency exchange swap agreements to convert both
principal and interest payments of certain foreign denominated fixed rate assets
and liabilities into U.S. dollar denominated instruments to eliminate the
exposure to future currency volatility on those items. At December 31, 2000, the
Company had various foreign currency exchange agreements with maturities ranging
from 2001 to 2019. At December 31, 1999, such maturities ranged from 2000 to
2018. The average unexpired term of the swaps was approximately five years at
December 31, 2000 and six years at December 31, 1999.

    The Company manages the risk on its commercial mortgage loan pipeline by
buying and selling mortgage-backed securities in the forward markets, interest
rate swaps, interest rate futures, and treasury rate guarantees. Such futures
contracts are marked to market and settled daily.

    The Company manages risk on its residential mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, over-the-counter
options on mortgage-backed securities, U.S. Treasury futures contracts and
options on Treasury futures contracts. The Company entered into mandatory
forward, option and futures contracts to reduce interest rate risk on certain
mortgage loans held for sale and other commitments. The forward contracts
provide for the delivery of securities at a specified future date at a specified
price or yield. In the event the counterparty is unable to meet its contractual
obligations, the Company may be exposed to the risk of selling mortgage loans at
prevailing market prices. The effect of these contracts was considered in the
lower of cost or market calculation of mortgage loans held for sale.

    The Company has committed to originate approximately $695.2 million and
$372.0 million of residential mortgage loans at December 31, 2000 and 1999,
respectively, subject to borrowers meeting the Company's underwriting
guidelines. These commitments call for the Company to fund such loans at a
future date with a specified rate at a specified price. Because the borrowers
are not obligated to close the loans, the Company is exposed to risks that it
may not have sufficient mortgage loans to deliver to its mandatory forward
contracts and, thus, would be obligated to purchase mortgage loans at prevailing
market rates to meet such commitments. Conversely, the Company is exposed to the
risk that more loans than expected will close, and the loans would then be sold
at current market prices.

    The Company uses interest rate floors, futures contracts and options on
futures contracts in hedging a portion of its portfolio of mortgage servicing
rights from prepayment risk associated with changes in interest rates. The
floors and contracts provide for the receipt of payments when interest rates are
below predetermined interest rate levels. The premiums paid for floors are
included in other assets in the Company's consolidated statements of financial
position.

    With regard to its international operations, the Company attempts to conduct
much of its business in the functional currency of the country of operation. At
times, the Company is unable to do so and it uses foreign currency forwards,
foreign currency swaps and interest rate swaps to hedge the resulting currency
risk.

                                       F-22
   215
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING -- (CONTINUED)

    The notional amounts and credit exposure of the Company's derivative
financial instruments by type are as follows (in millions):

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                    
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  UNITED STATES OPERATIONS
  Foreign currency swaps....................................  $ 2,745.0   $ 1,571.5
  Interest rate floors......................................    2,450.0     5,550.0
  Interest rate swaps.......................................    2,391.5     1,298.5
  Mortgage-backed forwards and options......................    1,898.3     1,546.7
  Swaptions.................................................      697.7       469.7
  Call options..............................................       30.0        30.0
  U.S. Treasury futures.....................................      183.2       287.6
  Currency forwards.........................................       39.4        13.0
  Treasury rate guarantees..................................       60.0          --
                                                              ---------   ---------
                                                               10,495.1    10,767.0
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  INTERNATIONAL OPERATIONS
  Foreign currency swaps....................................      665.0       670.0
  Interest rate swaps.......................................      665.0       665.0
  Currency forwards.........................................      380.0       380.0
                                                              ---------   ---------
                                                                1,710.0     1,715.0
                                                              ---------   ---------
         Total notional amounts at end of year..............  $12,205.1   $12,482.0
                                                              =========   =========
CREDIT EXPOSURE OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  UNITED STATES OPERATIONS
  Foreign currency swaps....................................  $    45.3   $    69.2
  Interest rate floors......................................       20.0        15.1
  Interest rate swaps.......................................       14.1        21.6
  Mortgage-backed forwards and options......................         --         6.0
  Swaptions.................................................       11.8         8.7
  Call options..............................................       12.3        19.0
  Currency forwards.........................................        5.5          --
                                                              ---------   ---------
                                                                  109.0       139.6
CREDIT EXPOSURE OF DERIVATIVE INSTRUMENTS WITH REGARD TO
  INTERNATIONAL OPERATIONS
  Foreign currency swaps....................................       28.4        14.8
  Interest rate swaps.......................................       39.1          --
  Currency forwards.........................................       26.2          --
                                                              ---------   ---------
                                                                   93.7        14.8
                                                              ---------   ---------
         Total credit exposure at end of year...............  $   202.7   $   154.4
                                                              =========   =========

                                       F-23
   216
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. CLOSED BLOCK

    Summarized financial information of the Closed Block is as follows (in
millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
ASSETS
  Fixed maturities, available-for-sale......................  $2,182.2   $1,781.7
  Mortgage loans............................................     919.4    1,035.9
  Policy loans..............................................     770.0      752.1
  Other investments.........................................       1.3        1.2
                                                              --------   --------
  Total investments.........................................   3,872.9    3,570.9

  Cash and cash equivalents.................................      22.7       23.9
  Accrued investment income.................................      72.4       62.9
  Deferred policy acquisition costs.........................     524.7      639.1
  Premiums due and other receivables........................      14.7       20.6
                                                              --------   --------
                                                              $4,507.4   $4,317.4
                                                              ========   ========
LIABILITIES
  Future policy benefits and claims.........................  $5,032.4   $4,864.3
  Other policyholder funds..................................     406.9      405.8
  Other liabilities.........................................     108.5      124.5
                                                              --------   --------
                                                              $5,547.8   $5,394.6
                                                              ========   ========

                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
REVENUES AND EXPENSES
  Premiums and other considerations.........................  $ 752.5   $ 764.4
  Net investment income.....................................    289.9     269.3
  Other income (expense)....................................     (5.0)     (2.0)
  Benefits, claims and settlement expenses..................   (601.2)   (614.5)
  Dividends to policyholders................................   (307.7)   (295.9)
  Operating expenses........................................    (77.8)   (110.6)
                                                              -------   -------
  Contribution from Closed Block (before income taxes)......  $  50.7   $  10.7
                                                              =======   =======

    As described in Note 1, the formation of the closed block required an
actuarial calculation including expectations of future earnings related to
policies in the closed block. Subsequent to formation, cumulative actual
earnings in excess of cumulative expected earnings (which are not revised in
future periods) are required to be recorded as a policyholder dividend
obligation. From date of formation through December 31, 2000, cumulative actual
earnings have been less than cumulative expected earnings, and the resulting
negative policyholder dividend obligation balance has not been recognized.

7. DEFERRED POLICY ACQUISITION COSTS

    Policy acquisition costs deferred and amortized in 2000, 1999 and 1998 are
as follows (in millions):

                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Balance at beginning of year................................  $1,430.9   $1,104.7   $1,057.5
Cost deferred during the year...............................     263.6      253.8      229.1
Amortized to expense during the year........................    (238.6)    (173.7)    (219.0)
Effect of unrealized (gains) losses.........................    (122.6)     246.1       37.1
                                                              --------   --------   --------
Balance at end of year......................................  $1,333.3   $1,430.9   $1,104.7
                                                              ========   ========   ========

                                       F-24
   217
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INSURANCE LIABILITIES

    Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):

                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                    
Liabilities for investment-type contracts:
  Guaranteed investment contracts...........................  $14,779.6   $15,935.5
  U.S. funding agreements...................................      772.1       742.9
  International funding agreements backing medium-term
    notes...................................................    2,475.3     1,139.0
  Other investment-type contracts...........................    2,537.0     3,117.1
                                                              ---------   ---------
         Total liabilities for investment-type contracts....   20,564.0    20,934.5
Liabilities for individual annuities........................    2,442.7     2,522.3
Universal life and other reserves...........................    1,293.5     1,063.0
                                                              ---------   ---------
         Total contractholder funds.........................  $24,300.2   $24,519.8
                                                              =========   =========

    The Company's guaranteed investment contracts and funding agreements contain
provisions limiting early surrenders, including penalties for early surrenders
and minimum notice requirements. Put provisions give customers the option to
terminate a contract prior to maturity, provided they give us a minimum notice
period.

    The following table presents GAAP reserves for guaranteed investment
contracts and funding agreements by withdrawal provisions (in millions):

                                                                 DECEMBER 31, 2000
                                                              -----------------------
                                                              GUARANTEED
                                                              INVESTMENT    FUNDING
                                                              CONTRACTS    AGREEMENTS
                                                              ----------   ----------
                                                                     
Less than 30 days notice....................................  $      --     $     --
30 to 89 days notice........................................      284.6        100.6
90 to 180 days notice.......................................      456.8        226.2
More than 180 days notice...................................         --        150.9
No active put provision*....................................      426.7           --
No put provision............................................   13,611.5      2,769.7
                                                              ---------     --------
         Total..............................................  $14,779.6     $3,247.4
                                                              =========     ========

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

*  Contracts under an initial lock-out period, but which will become puttable
   with 90 days notice at some time in the future.

    Funding agreements are issued to non-qualified institutional investors both
in domestic and international markets. In late 1998, the Company established a
$2.0 billion program, which was expanded to $4.0 billion in 2000, under which an
offshore special purpose entity was created to issue nonrecourse medium-term
notes. Under the program, the proceeds of each note series issuance are used to
purchase a funding agreement from the Company, with the funding agreement so
purchased then used to secure that particular series of notes. The payment terms
of any particular series of notes match the payment terms of the funding
agreement that secures that series. Claims for principal and interest under
those international funding agreements are afforded equal priority to claims of
life insurance and annuity policyholders under insolvency provisions of Iowa
Insurance Laws. During 1999, the Company began issuing international funding
agreements to the offshore special purpose vehicle under that program. The
offshore special purpose vehicle issued medium-term notes to investors in
Europe, Asia and Australia. In general, the medium-term note funding agreements
do not give the contractholder the right to terminate prior to contractually
stated maturity dates, absent the existence of certain circumstances which are
largely within the Company's control. The special purpose entity is consolidated
in the Company's financial statements. The medium-term notes issued by the
special purpose entity are reported with contractholder funds liabilities in the
Company's consolidated statement of financial position. At December 31, 2000,
the contractual maturities were 2002 -- $164.3 million; 2003  --  $476.6
million; 2004 -- $424.9 million; and thereafter -- $1,409.5 million.

    In February 2001, the Company agreed to issue up to $3.0 billion of funding
agreements under another program to support the prospective issuance by an
unaffiliated entity of medium-term notes in both domestic and international
markets. The unaffiliated entity will not be consolidated in the Company's
financial statements. The funding agreements

                                       F-25
   218
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INSURANCE LIABILITIES -- (CONTINUED)

issued to the unaffiliated entity will be reported as contractholder funds
liabilities in the Company's consolidated statement of financial position.

    Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):

                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Balance at beginning of year................................  $  721.7   $  641.4   $  770.3
Incurred:
  Current year..............................................   1,788.1    1,872.2    1,921.8
  Prior years...............................................     (17.8)      (6.2)     (13.8)
                                                              --------   --------   --------
         Total incurred.....................................   1,770.3    1,866.0    1,908.0
Reclassification for subsidiary merger (see Note 2).........        --         --      154.9
Payments:
  Current year..............................................   1,447.3    1,466.3    1,523.1
  Prior years...............................................     339.7      319.4      358.9
                                                              --------   --------   --------
         Total payments.....................................   1,787.0    1,785.7    2,036.9
Balance at end of year:
  Current year..............................................     340.8      405.9      348.7
  Prior years...............................................     364.2      315.8      292.7
                                                              --------   --------   --------
         Total balance at end of year.......................  $  705.0   $  721.7   $  641.4
                                                              ========   ========   ========

    The activity summary in the liability for unpaid accident and health claims
shows a decrease of $17.8 million, $6.2 million and $13.8 million to the
December 31, 1999, 1998 and 1997 liability for unpaid accident and health
claims, respectively, arising in prior years. Such liability adjustments, which
affected current operations during 2000, 1999 and 1998, respectively, resulted
from developed claims for prior years being different than were anticipated when
the liabilities for unpaid accident and health claims were originally estimated.
These trends have been considered in establishing the current year liability for
unpaid accident and health claims.

9. DEBT

SHORT-TERM DEBT

    Short-term debt consists primarily of commercial paper and outstanding
balances on credit facilities with various banks. At December 31, 2000, the
Company and certain subsidiaries had credit facilities with various banks in an
aggregate amount of $1.7 billion. The credit facilities may be used for general
corporate purposes and also to provide backup for the Company's commercial paper
programs.

    The components of short-term debt as of December 31, 2000 and 1999 are as
follows (in millions):

                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     1999
                                                              ------   ------
                                                                 
Commercial paper............................................  $ 29.9   $198.5
Other recourse short-term debt..............................    16.6    100.0
Non-recourse short-term debt................................   413.0    248.8
                                                              ------   ------
         Total short-term debt..............................  $459.5   $547.3
                                                              ======   ======

                                       F-26
   219
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. DEBT -- (CONTINUED)

LONG-TERM DEBT

    The components of long-term debt as of December 31, 2000 and December 31,
1999 are as follows (in millions):

                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
7.95% notes payable, due 2004...............................  $  199.3   $  198.6
8.2% notes payable, due 2009................................     464.9      460.5
7.875% surplus notes payable, due 2024......................     198.9      199.0
8% surplus notes payable, due 2044..........................      99.1       98.8
Non-recourse mortgages and notes payable....................     149.8      335.2
Other mortgages and notes payable...........................     224.5      200.8
                                                              --------   --------
         Total long-term debt...............................  $1,336.5   $1,492.9
                                                              ========   ========

    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 August 25, 1999, Principal Financial Group (Australia) Holdings Pty
Limited, a wholly-owned subsidiary of the Company, issued $665.0 million of
unsecured redeemable long-term debt ($200.0 million of 7.95% notes due August
15, 2004 and $465.0 million in 8.2% notes due August 15, 2009). Interest on the
notes is payable semiannually on February 15 and August 15 of each year,
commencing February 15, 2000. Principal Financial Group (Australia) Holdings Pty
Limited used the net proceeds from the notes to partially fund the purchase of
the outstanding stock of several companies affiliated with Bankers Trust
Australia Group (see Note 2).

    On March 10, 1994, 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. No
affiliates of the Company hold any portion of the notes. Each payment of
interest and principal on the notes, however, may be made only with the prior
approval of the Commissioner of Insurance of the State of Iowa (the
"Commissioner") and only to the extent that Principal Life has sufficient
surplus earnings to make such payments. For each of the years ended December 31,
2000, 1999 and 1998, interest of $24.0 million was approved by the Commissioner,
paid and charged to expense.

    Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at Principal Life's election on or after March 1, 2004 in whole or in
part at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.

    In addition, subject to Commissioner approval, the notes due March 1, 2044
may be redeemed at Principal Life's election on or after March 1, 2014, in whole
or in part at a redemption price of approximately 102.3% of par. The approximate
2.3% premium is scheduled to gradually diminish over the following ten years.
These notes may be redeemed on or after March 1, 2024, at a redemption price of
100% of the principal amount plus interest accrued to the date of redemption.

    The mortgages and other notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 2000 range
from $0.5 million to $102.8 million per development with interest rates
generally ranging from 6.9% to 8.6%. Outstanding principal balances as of
December 31, 1999 range from $0.6 million to $38.3 million per development with
interest rates generally ranging from 6.4% to 9.3%.

    At December 31, 2000, future annual maturities of the long-term debt are as
follows (in millions):

                                                           
2001........................................................  $  118.9
2002........................................................      94.6
2003........................................................       8.6
2004........................................................     202.2
2005........................................................       3.0
Thereafter..................................................     909.2
                                                              --------
         Total future maturities of the long-term debt......  $1,336.5
                                                              ========

                                       F-27
   220
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. DEBT -- (CONTINUED)

    Cash paid for interest for 2000, 1999 and 1998 was $116.8 million, $127.7
million and $96.9 million, respectively. These amounts include interest paid on
taxes during these years.

10. INCOME TAXES

    The Company's income tax expense (benefit) is as follows (in millions):

                                                                     YEAR ENDED
                                                                    DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                       
Current income taxes:
  Federal...................................................  $167.7   $ 74.9   $(80.6)
  State and foreign.........................................    37.3     23.2     10.2
  Net realized capital gains................................    29.6    162.8    106.7
                                                              ------   ------   ------
         Total current income taxes.........................   234.6    260.9     36.3
Deferred income taxes.......................................     5.7     62.6      5.9
                                                              ------   ------   ------
         Total income taxes.................................  $240.3   $323.5   $ 42.2
                                                              ======   ======   ======

    The Company's provision for income taxes may not have the customary
relationship of taxes to income. Differences between the prevailing corporate
income tax rate of 35% times the pre-tax income and the Company's effective tax
rate on pre-tax income are generally due to inherent differences between income
for financial reporting purposes and income for tax purposes, and the
establishment of adequate provisions for any challenges of the tax filings and
tax payments to the various taxing jurisdictions. A reconciliation between the
corporate income tax rate and the effective tax rate is as follows:

                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2000   1999   1998
                                                              ----   ----   ----
                                                                   
Statutory corporate tax rate................................   35%    35%    35%
Dividends received deduction................................   (5)    (3)    (4)
Interest exclusion from taxable income......................   (1)    --     (1)
Resolution of prior year tax issues.........................   --     --    (20)
Other.......................................................   (1)    (2)    (4)
                                                               --     --    ---
Effective tax rate..........................................   28%    30%     6%
                                                               ==     ==    ===

    Significant components of the Company's net deferred income taxes are as
follows (in millions):

                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                  
Deferred income tax assets (liabilities):
Insurance liabilities.......................................  $ 181.1   $ 241.7
Deferred policy acquisition costs...........................   (360.1)   (358.7)
Net unrealized losses (gains) on available for sale
  securities................................................    (59.1)     91.4
Mortgage loan servicing rights..............................   (206.3)   (209.7)
Other.......................................................     (6.6)     24.1
                                                              -------   -------
                                                              $(451.0)  $(211.2)
                                                              =======   =======

    At December 31, 2000 and 1999, respectively, the Company's net deferred tax
liability is comprised of international net deferred tax assets of $36.4 million
and $60.5 million which have been included in other assets and $487.4 million
and $271.7 million of U.S. net deferred tax liabilities which have been included
in deferred income taxes in the statements of financial position.

    The Internal Revenue Service ("the Service") has completed examination of
the U.S. consolidated federal income tax returns for 1996 and prior years. The
Service has also begun to examine returns for 1997 and 1998. The Company
believes that there are adequate defenses against or sufficient provisions for
any challenges.

                                       F-28
   221
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES -- (CONTINUED)

    Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.

    Cash paid for income taxes was $279.3 million in 2000, $251.5 million in
1999 and $308.8 million in 1998.

11. EMPLOYEE AND AGENT BENEFITS

    The Company has defined benefit pension plans covering substantially all of
its employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
an amount within the range of GAAP net periodic postretirement cost and the sum
of actuarial normal cost and any change in the unfunded accrued liability over a
30-year period as a percentage of compensation.

    The Company also provides certain health care, life insurance and long-term
care benefits for retired employees. Substantially all employees are first
eligible for these postretirement benefits when they reach age 57 and have
completed ten years of service with the Company. Partial benefit accrual of
these health, life and long-term care benefits is recognized from the employee's
date of hire until retirement based on attained service divided by potential
service to age 65 with a minimum of 35 years of potential service. The Company's
policy is to fund the cost of providing retiree benefits in the years that the
employees are providing service to the Company. The Company's funding policy is
to deposit the actuarial normal cost and an accrued liability over a 30-year
period as a percentage of compensation.

    The plans' combined funded status, reconciled to amounts recognized in the
consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):

                                                                                        OTHER POSTRETIREMENT
                                                           PENSION BENEFITS                   BENEFITS
                                                     -----------------------------   ---------------------------
                                                             DECEMBER 31,                   DECEMBER 31,
                                                     -----------------------------   ---------------------------
                                                       2000       1999      1998      2000      1999      1998
                                                     --------   --------   -------   -------   -------   -------
                                                                                       
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............  $ (732.5)  $ (827.3)  $(700.5)  $(227.9)  $(206.3)  $(213.7)
Service cost.......................................     (35.0)     (42.2)    (33.8)    (10.4)    (10.9)    (12.1)
Interest cost......................................     (57.5)     (55.1)    (49.3)    (19.0)    (14.1)    (15.9)
Actuarial gain (loss)..............................      (2.7)     163.4     (79.7)      3.7      (3.5)     20.5
Benefits paid......................................      30.4       28.7      36.0        --       6.9      14.9
Other..............................................        --         --        --      31.8        --        --
                                                     --------   --------   -------   -------   -------   -------
Benefit obligation at end of year..................  $ (797.3)  $ (732.5)  $(827.3)  $(221.8)  $(227.9)  $(206.3)
                                                     ========   ========   =======   =======   =======   =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.....  $1,059.8   $  992.9   $ 980.1   $ 345.5   $ 325.7   $ 300.2
Actual return on plan assets.......................      75.1       90.1      23.3      13.7       5.4      14.6
Employer contribution..............................      10.9        5.5      25.5      18.6      21.3      25.8
Benefits paid......................................     (30.4)     (28.7)    (36.0)    (18.0)     (6.9)    (14.9)
                                                     --------   --------   -------   -------   -------   -------
Fair value of plan assets at end of year...........  $1,115.4   $1,059.8   $ 992.9   $ 359.8   $ 345.5   $ 325.7
                                                     ========   ========   =======   =======   =======   =======
Funded status......................................  $  318.1   $  327.3   $ 165.6   $ 138.0   $ 117.6   $ 119.4
Unrecognized net actuarial gain....................    (194.2)    (215.5)    (38.2)    (19.4)    (46.3)    (70.3)
Unrecognized prior service cost....................       9.2       10.9      12.6     (29.8)       --        --
Unamortized transition obligation (asset)..........     (14.2)     (25.7)    (37.2)      0.3       4.7       7.8
                                                     --------   --------   -------   -------   -------   -------
Other assets -- prepaid benefit cost...............  $  118.9   $   97.0   $ 102.8   $  89.1   $  76.0   $  56.9
                                                     ========   ========   =======   =======   =======   =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate......................................      8.00%      8.00%     6.75%     8.00%     8.00%     6.75%

                                       F-29
   222
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. EMPLOYEE AND AGENT BENEFITS -- (CONTINUED)

                                                                                        OTHER POSTRETIREMENT
                                                           PENSION BENEFITS                   BENEFITS
                                                     -----------------------------   ---------------------------
                                                             DECEMBER 31,                   DECEMBER 31,
                                                     -----------------------------   ---------------------------
                                                       2000       1999      1998      2000      1999      1998
                                                     --------   --------   -------   -------   -------   -------
                                                                                       
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.......................................  $   35.0   $   42.2   $  33.8   $  10.4   $  10.9   $  12.1
Interest cost......................................      57.5       55.1      49.3      19.0      14.1      15.9
Expected return on plan assets.....................     (81.3)     (76.0)    (74.4)    (25.1)    (23.7)    (16.1)
Amortization of prior service cost.................       1.7        1.7       1.7        --        --        --
Amortization of transition (asset) obligation......     (11.5)     (11.5)    (11.5)      2.3       3.7       3.3
Recognized net actuarial loss (gain)...............     (12.5)      (0.3)     (8.3)     (1.1)     (2.3)     (1.8)
                                                     --------   --------   -------   -------   -------   -------
Net periodic benefit cost (income).................  $  (11.1)  $   11.2   $  (9.4)  $   5.5   $   2.7   $  13.4
                                                     ========   ========   =======   =======   =======   =======

    Effective January 1, 2000, the Company amended the method in determining
postretirement health benefit plan and terminated long-term care coverage for
participants retiring on and subsequent to July 1, 2000. The result of these
amendments decreased the postretirement benefit obligation by $31.8 million and
was partially offset by the remaining portion of the original transition
obligation.

    For 2000, 1999 and 1998, the expected long-term rates of return on plan
assets for pension benefits were approximately 5% in each of these years (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1% in each of the years 2000, 1999 and 1998. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.

    For 2000, 1999 and 1998, the expected long-term rates of return on plan
assets for other post-retirement benefits were approximately 5% to 5.9% in each
of these years (after estimated income taxes) for those trusts subject to income
taxes. For trusts not subject to income taxes, the expected long-term rates of
return on plan assets were approximately 9.3%, 8.0% and 8.1% for 2000, 1999 and
1998, respectively. These rates of return on plan assets vary by benefit type
and employee group.

    The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 13.9% in 2000 and declines to an
ultimate rate of 6% in 2010. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):

                                                               1-PERCENTAGE-    1-PERCENTAGE-
                                                               POINT INCREASE   POINT DECREASE
                                                               --------------   --------------
                                                                          
Effect on total of service and interest cost components.....       $ 7.4            $ (5.5)
Effect on accumulated postretirement benefit obligation.....        47.7             (38.6)

    In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,500 in 2000 and $10,000 in 1999 and 1998. The Company matches the
participant's contribution at a 50% contribution rate up to a maximum Company
contribution of 3% of the participant's compensation in 2000, and 2% of the
participant's compensation in 1999 and 1998. The Company contributed $16.0
million in 2000 and $11.0 million in both 1999 and 1998 to these defined
contribution plans.

                                       F-30
   223
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. OTHER COMMITMENTS AND CONTINGENCIES

    The Company, as a lessor, leases industrial, office, retail and other
investment real estate properties under various operating leases. Rental income
for all operating leases totaled $292.5 million in 2000, $356.8 million in 1999
and $362.4 million in 1998. At December 31, 2000, future minimum annual rental
commitments under these noncancelable operating leases are as follows (in
millions):

                                                              HELD FOR    HELD FOR    TOTAL RENTAL
                                                                SALE     INVESTMENT   COMMITMENTS
                                                              --------   ----------   ------------
                                                                             
2001........................................................   $ 85.4      $ 87.8       $  173.2
2002........................................................     80.4        80.4          160.8
2003........................................................     72.5        66.2          138.7
2004........................................................     63.9        56.0          119.9
2005........................................................     54.2        46.1          100.3
Thereafter..................................................    168.2       308.6          476.8
                                                               ------      ------       --------
         Total future minimum lease receipts................   $524.6      $645.1       $1,169.7
                                                               ======      ======       ========

    The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $66.3 million in 2000,
$78.5 million in 1999 and $60.8 million in 1998. At December 31, 2000, future
minimum annual rental commitments under these noncancelable operating leases are
as follows (in millions):

                                                           
2001........................................................  $ 49.1
2002........................................................    40.5
2003........................................................    32.3
2004........................................................    25.2
2005........................................................    16.4
Thereafter..................................................    12.1
                                                              ------
                                                               175.6
Less future sublease rental income on these noncancelable
  leases....................................................     1.1
                                                              ------
         Total future minimum lease payments................  $174.5
                                                              ======

    The Company is a plaintiff or defendant in actions arising out of its
operations. The Company is, from time to time, also involved in various
governmental and administrative proceedings. 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 the Company's
business, financial condition or results of operations. However, no assurances
can be given that such litigation would not materially and adversely affect the
Company's business, financial condition or results of operations.

    Other companies in the life insurance industry have historically been
subject to substantial litigation resulting from claims disputes and other
matters. Most recently, such companies have faced extensive claims, including
class-action lawsuits, alleging improper life insurance sales practices.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. Principal Life is currently a defendant in two class-action
lawsuits which allege improper sales practices.

    In 2000, the Company reached an agreement in principle to settle these two
class-action lawsuits alleging improper sales practices. The proposed settlement
is subject to court approval and therefore is not yet final. In agreeing to the
settlement, the Company specifically denied any wrongdoing. The Company has
accrued a loss reserve for its best estimate based on information available. As
uncertainties continue to exist in resolving this matter, it is reasonably
possible that, as the actual cost of the claims subject to alternative dispute
resolution becomes available, the final cost of settlement could exceed the
Company's estimate. However, the range of any additional cost related to the
settlement cannot presently be reasonably estimated. See Note 16.

    The Company is also subject to insurance guaranty laws in the states in
which it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. The
Company believes such assessments in excess of amounts accrued would not
materially affect its financial condition or results of operations.

                                       F-31
   224
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following discussion describes the methods and assumptions utilized by
the Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyholder liabilities other than
investment-type contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.

    The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted
market prices are not available, fair values are estimated using present value
or other valuation techniques. The fair value estimates are made at a specific
point in time, based on available market information and judgments about the
financial instrument, including estimates of timing, amount of expected future
cash flows and the credit standing of counterparties. Such estimates do not
consider the tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by comparison to
independent markets. In addition, the disclosed fair value may not be realized
in the immediate settlement of the financial instrument.

    Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other fixed maturities and equity securities are valued by discounting the
expected total cash flows. Market rates used are applicable to the yield, credit
quality and average maturity of each security.

    Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.

    The fair values for assets classified as policy loans, other investments
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.

    Mortgage servicing rights represent the present value of estimated future
net revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.

    The fair values of the Company's reserves and liabilities for
investment-type insurance contracts (insurance, annuity and other policy
contracts that do not involve significant mortality or morbidity risk and that
are only a portion of the policyholder liabilities appearing in the consolidated
statements of financial position) are estimated using discounted cash flow
analyses (based on current interest rates being offered for similar contracts
with maturities consistent with those remaining for the investment-type
contracts being valued). The fair values for the Company's insurance contracts
(insurance, annuity and other policy contracts that do involve significant
mortality or morbidity risk), other than investment-type contracts, are not
required to be disclosed. The Company does consider, however, the various
insurance and investment risks in choosing investments for both insurance and
investment-type contracts.

    Fair values for debt issues are estimated using discounted cash flow
analysis based on the Company's incremental borrowing rate for similar borrowing
arrangements.

                                       F-32
   225
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)

    The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2000 and 1999, are as follows (in millions):

                                                                2000                      1999
                                                       -----------------------   -----------------------
                                                        CARRYING                  CARRYING
                                                         AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                        --------    ----------    --------    ----------
                                                                                  
Assets (liabilities)
Fixed maturities (see Note 3)........................  $ 26,839.9   $ 26,839.9   $ 23,443.9   $ 23,443.9
Equity securities (see Note 3).......................       742.9        742.9        864.2        864.2
Mortgage loans.......................................    11,492.7     11,741.9     13,332.2     13,200.0
Policy loans.........................................       803.6        803.6        780.5        780.5
Other investments....................................       507.5        507.5        253.9        253.9
Cash and cash equivalents............................       926.6        926.6        569.5        569.5
Accrued investment income............................       530.8        530.8        472.0        472.0
Mortgage loan servicing rights.......................     1,084.4      1,193.5      1,081.0      1,288.0
Investment-type insurance contracts..................   (22,818.6)   (22,688.9)   (24,072.5)   (23,322.6)
Short-term debt......................................      (459.5)      (459.5)      (547.3)      (547.3)
Long-term debt.......................................    (1,336.5)    (1,343.1)    (1,492.9)    (1,441.4)

14. STATUTORY INSURANCE FINANCIAL INFORMATION

    Principal Life, the largest subsidiary (indirect) of Principal Mutual
Holding Company, prepares statutory financial statements in accordance with the
accounting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Currently "prescribed" statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and general administrative rules. "Permitted" statutory accounting
practices encompass all accounting practices not so prescribed. The impact of
any permitted accounting practices on statutory surplus is not material. The
accounting practices used to prepare statutory financial statements for
regulatory filings differ in certain instances from GAAP. Prescribed or
permitted statutory accounting practices are used by state insurance departments
to regulate the Company.

    The NAIC revised the Accounting Practices and Procedures Manual in a process
referred to as Codification. The revised manual will be effective January 1,
2001. The State of Iowa has adopted the provisions of the revised manual without
modification. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will result in changes to the accounting
practices that Principal Life uses to prepare its statutory-basis financial
statements.

    The Company has identified the following changes in prescribed statutory
accounting practices as those that will have the most significant impact on
Principal Life's statutory-basis financial statements:

    - Deposit-type funds related to both Principal Life's general account and
      its separate accounts will no longer be reported in the statutory
      statement of operations as revenues, but rather will be reported directly
      to an appropriate policy reserve account, a treatment of deposit-type
      funds that is similar to that under GAAP. This will have the effect of
      decreasing total statutory revenues and total statutory expenses of
      Principal Life, with no effect to statutory net income or statutory
      surplus.

    - Undistributed income from subsidiaries will no longer be reported as a
      component of statutory net investment income, but rather will be
      classified as statutory unrealized capital gains and losses. This will
      have the effect of decreasing Principal Life's total statutory revenues,
      with a related effect on statutory net income; however, it will have no
      effect on statutory surplus.

    - Deferred income tax assets and/or liabilities will be recognized. This
      will have the effect of increasing Principal Life's total statutory assets
      or statutory liabilities to the extent it has such deferred income tax
      assets or liabilities and will have a corresponding effect on Principal
      Life's statutory surplus.

    Management believes the net impact of these changes to Principal Life's
statutory-basis capital and surplus as of January 1, 2001 will not be
significant. Insurance regulators, accountants, and the insurance industry
continue work to finalize interpretations of the Codification. The ongoing
implementation work could cause changes to final interpretations that could
ultimately have an adverse effect on Principal Life's statutory surplus or
statutory net income.

                                       F-33
   226
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. STATUTORY INSURANCE FINANCIAL INFORMATION -- (CONTINUED)

    Life/Health insurance companies are subject to certain risk-based capital
("RBC") requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 2000, Principal Life meets the RBC requirements.

    Under Iowa law, Principal Life may pay stockholder 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 to pay a stockholder dividend if
such a stockholder dividend would exceed certain statutory limitations. The
current statutory limitation is the greater of 10% of Principal Life's
policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 2000
statutory results, Principal Life could pay approximately $760.9 million in
stockholder dividends in 2001 without exceeding the statutory limitation.

    In 2000, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of all stockholder dividend payments. Total stockholder
dividends paid to its parent company in 2000 were $538.8 million.

    In 1999, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of all stockholder dividend payments and received approval for
an extraordinary stockholder dividend of $250.0 million. Total stockholder
dividends paid to its parent company in 1999 were $509.0 million.

    In 1998, Principal Life notified the Insurance Commissioner of the State of
Iowa in advance of dividend payments. Total stockholder dividends paid to its
parent company in 1998 were $140.0 million.

    The following summary reconciles the assets and equity at December 31, 2000,
1999 and 1998, and net income for the years ended December 31, 2000, 1999 and
1998, in accordance with statutory reporting practices prescribed or permitted
by the Insurance Division of the Department of Commerce of the State of Iowa
(Principal Life only) with that reported in these consolidated GAAP financial
statements (in millions):

                                                               ASSETS      EQUITY    NET INCOME
                                                              ---------   --------   ----------
                                                                            
DECEMBER 31, 2000
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $75,573.4   $3,356.4    $ 912.6
Additions (deductions):
  Unrealized gain on fixed maturities available-for-sale....      375.3      375.3         --
  Other investment adjustments..............................    2,760.2      590.3     (137.7)
  Adjustments to insurance reserves and policyholder
    dividends...............................................      (73.9)    (187.0)      26.3
  Deferral of policy acquisition costs......................    1,295.5    1,295.5        8.8
  Surplus note reclassification as debt.....................         --     (298.0)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --     (138.3)     (26.6)
  Other -- net..............................................      324.5      306.0     (141.8)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   80,255.0    5,300.2      641.6
Parent holding company totals...............................    4,002.0      952.3      (21.4)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $84,257.0   $6,252.5    $ 620.2
                                                              =========   ========    =======
DECEMBER 31, 1999
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $76,017.7   $3,151.9    $ 713.7
Additions (deductions):
  Unrealized loss on fixed maturities available-for-sale....     (356.8)    (356.8)        --
  Other investment adjustments..............................    2,093.3      994.4        9.8
  Adjustments to insurance reserves and policyholder
    dividends...............................................     (124.6)    (235.5)      15.1
  Deferral of policy acquisition costs......................    1,409.3    1,409.3       68.3
  Surplus note reclassification as debt.....................         --     (297.8)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --       33.0       18.2
  Other -- net..............................................      277.1      252.5      (15.4)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   79,316.0    4,951.0      809.7
Parent holding company totals...............................    4,516.2      601.9      (67.6)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $83,832.2   $5,552.9    $ 742.1
                                                              =========   ========    =======

                                       F-34
   227
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. STATUTORY INSURANCE FINANCIAL INFORMATION -- (CONTINUED)

                                                               ASSETS      EQUITY    NET INCOME
                                                              ---------   --------   ----------
                                                                            
DECEMBER 31, 1998
As reported in accordance with statutory accounting
  practices -- unconsolidated...............................  $70,096.1   $3,031.5    $ 511.4
Additions (deductions):
  Unrealized gain on fixed maturities available-for-sale....      996.9      996.9         --
  Other investment adjustments..............................    1,620.7    1,080.9      176.8
  Adjustments to insurance reserves and policyholder
    dividends...............................................     (169.5)    (191.6)     (55.8)
  Deferral of policy acquisition costs......................    1,104.7    1,104.7         --
  Surplus note reclassification as debt.....................         --     (297.8)        --
  Provision for deferred federal income taxes and other tax
    reclassifications.......................................         --     (474.2)     164.9
  Other -- net..............................................      294.4      219.0     (102.0)
                                                              ---------   --------    -------
As reported in accordance with GAAP  --
  Principal Life only.......................................   73,943.3    5,469.4      695.3
Parent holding company totals...............................         --      197.8       (2.3)
                                                              ---------   --------    -------
As reported in the consolidated GAAP financial statements...  $73,943.3   $5,667.2    $ 693.0
                                                              =========   ========    =======

15. SEGMENT INFORMATION

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

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

    The International Asset Management and Accumulation segment provides asset
management products and services to retail clients in Australia and
institutional clients throughout the world and provides life insurance and
retirement and related financial products and services primarily to businesses,
their employees and other individuals principally in Australia, Chile, Brazil,
New Zealand, Mexico, India, Japan, Argentina, and Hong Kong.

    The Life and Health insurance segment provides individual life and
disability insurance to the owners and employees of businesses and other
individuals in the United States and provides group life and health insurance to
businesses in the United States.

    The Mortgage Banking segment originates and services residential mortgage
loan products for customers primarily in the United States.

    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 financing activities for the Company, income
on capital not allocated to other segments, intercompany eliminations, and
non-recurring or other income or expenses not allocated to the segments based on
review of the nature of such items.

    The Company evaluates segment performance on segment operating earnings,
which excludes the effect of net realized capital gains and losses, as adjusted,
and non-recurring events and transactions. Net realized capital gains, as
adjusted, are net of tax, related changes in the amortization pattern of
deferred policy acquisition costs, recognition of front-end fee revenues for
sales charges on pension products and services and net realized capital gains
credited to customers. Segment operating revenues exclude net realized capital
gains and their impact on recognition of front-end fee revenues. Segment
operating earnings is determined by adjusting GAAP net income for net realized
capital gains and losses and non-recurring items which management believes are
not indicative of overall operating trends. 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 the Company's results of operations by
highlighting earnings attributable to the normal, recurring operations of the
business. However, segment operating earnings are not a substitute for net
income determined in accordance with GAAP.

    In 2000, the Company excluded $101.0 million of non-recurring items, net of
tax, from net income for the presentation of operating earnings. The
non-recurring items included the negative effects of (a) a loss contingency

                                       F-35
   228
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

reserve established for litigation ($93.8 million) and (b) expenses related to
the development of a plan of demutualization ($7.2 million).

    In 1998, the Company excluded $104.8 million of non-recurring items, net of
tax, from net income for the presentation of operating earnings. The
non-recurring items included: (1) the positive effects of (a) Principal Life's
release of tax reserves and related accrued interest ($164.4 million) and (b)
accounting changes by the Company's international operations ($13.3 million) and
(2) the negative effects of (a) expenses related to the Company's corporate
structure change to a mutual insurance holding company and related adjustments
for changes in amortization assumptions for deferred policy acquisition costs
($27.4 million) and (b) a contribution related to permanent endowment of the
Principal Financial Group Foundation ($45.5 million).

    The accounting policies of the segments are similar to those as described in
Note 1, with the exception of capital allocation. The Company allocates capital
to its segments based upon an internal capital model that allows management to
more effectively manage the Company's capital.

    The following table summarizes selected financial information by segment as
of, or for the year ended, December 31 and reconciles segment totals to those
reported in the consolidated financial statements (in millions):

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2000
Revenues
  Operating revenues.....................   $ 3,533.9       $  630.7       $ 4,122.6     $  359.8    $   97.1     $ 8,744.1
  Net realized capital gains (losses)....       (53.8)           2.8            70.8           --       120.1         139.9
  Plus (less) recognition of front-end
    fee revenues.........................         0.9             --              --           --          --           0.9
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 3,481.0       $  633.5       $ 4,193.4     $  359.8    $  217.2     $ 8,884.9
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   356.6       $   (8.5)      $   162.3     $   50.0    $   67.7     $   628.1
  Net realized capital gains (losses), as
    adjusted.............................       (35.9)           1.4            47.3           --        80.3          93.1
  Non-recurring items....................          --             --              --           --      (101.0)       (101.0)
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   320.7       $   (7.1)      $   209.6     $   50.0    $   47.0     $   620.2
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $65,795.9       $5,525.9       $10,421.1     $1,556.3    $  957.8     $84,257.0
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 3,399.1       $  632.4       $ 4,196.9     $  359.8    $  296.7     $ 8,884.9
  Intersegment revenues..................        81.9            1.1            (3.5)          --       (79.5)           --
  Interest expense.......................          --             --              --           --        78.4          78.4
  Income tax expense (benefit)...........       102.0            6.1           104.7         27.0         0.5         240.3
  Amortization of goodwill and other
    intangibles..........................         1.0           47.9             7.7          0.8        (1.1)         56.3
1999
Revenues:
  Operating revenues.....................   $ 3,472.6       $  379.6       $ 3,985.5     $  398.3    $   61.9     $ 8,297.9
  Net realized capital gains (losses)....       (58.0)           8.7            16.0           --       437.8         404.5
  Plus (less) recognition of front-end
    fee revenues.........................        (1.0)            --              --           --          --          (1.0)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 3,413.6       $  388.3       $ 4,001.5     $  398.3    $  499.7     $ 8,701.4
                                            =========       ========       =========     ========    ========     =========

                                       F-36
   229
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
1999 (CONTINUED)
Net income:
  Operating earnings (loss)..............   $   356.6       $  (38.4)      $    90.7     $   56.8    $    9.5     $   475.2
  Net realized capital gains (losses), as
    adjusted.............................       (35.4)           7.7            10.1           --       284.5         266.9
  Non-recurring items....................          --             --              --           --          --            --
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   321.2       $  (30.7)      $   100.8     $   56.8    $  294.0     $   742.1
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $65,096.4       $5,926.8       $ 9,949.8     $1,737.7    $1,121.5     $83,832.2
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 3,338.7       $  388.3       $ 4,007.9     $  398.3    $  568.2     $ 8,701.4
  Intersegment revenues..................        74.9             --            (6.4)          --       (68.5)           --
  Interest expense.......................          --            0.7              --           --        47.1          47.8
  Income tax expense (benefit)...........       126.4           (3.2)           18.1         30.7       151.5         323.5
  Amortization of goodwill and other
    intangibles..........................         1.0           16.0             4.0          0.8        (1.6)         20.2
1998
Revenues:
  Operating revenues.....................   $ 2,933.1       $  223.1       $ 3,893.1     $  340.6    $  342.5     $ 7,732.4
  Net realized capital gains (losses)....        48.8           13.5            (1.3)                   404.8         465.8
  Plus (less) recognition of front-end
    fee revenues.........................        (1.3)            --              --           --          --          (1.3)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 2,980.6       $  236.6       $ 3,891.8     $  340.6    $  747.3     $ 8,196.9
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $   238.4       $  (35.4)      $    50.0     $   58.8    $  (44.3)    $   267.5
  Net realized capital gains (losses), as
    adjusted.............................        14.7           12.0             1.9           --       292.1         320.7
  Non-recurring items....................        23.9           13.3            60.1           --         7.5         104.8
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $   277.0       $  (10.1)      $   112.0     $   58.8    $  255.3     $   693.0
                                            =========       ========       =========     ========    ========     =========

Assets...................................   $58,701.5       $1,239.4       $ 9,116.1     $1,810.4    $3,075.9     $73,943.3
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $ 2,980.6       $  236.6       $ 3,891.8     $  340.6    $  747.3     $ 8,196.9
  Intersegment revenues..................          --             --              --           --          --            --
  Interest expense.......................          --             --              --           --        27.4          27.4
  Income tax expense (benefit)...........        78.7          (10.5)          (26.6)        31.6       (31.0)         42.2
  Amortization of goodwill and other
    intangibles..........................        18.1            6.9            18.1          4.0         5.5          52.6

                                       F-37
   230
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT INFORMATION -- (CONTINUED)

    The Company operates in the United States and in selected markets
internationally (including Australia, Chile, Brazil, New Zealand, Mexico, India,
Japan, Argentina, Spain and Hong Kong). The following table summarizes selected
financial information by geographic location as of or for the year ended
December 31 (in millions):

                                                                           LONG-LIVED               NET INCOME
                                                               REVENUES      ASSETS      ASSETS       (LOSS)
                                                               --------    ----------    ------     ----------
                                                                                        
2000
United States...............................................   $8,251.4     $  517.7    $78,731.1     $627.3
International...............................................      633.5      1,365.2      5,525.9       (7.1)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,884.9     $1,882.9    $84,257.0     $620.2
                                                               ========     ========    =========     ======
1999
United States...............................................   $8,313.1     $  505.0    $77,905.4     $772.8
International...............................................      388.3      1,474.2      5,926.8      (30.7)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,701.4     $1,979.2    $83,832.2     $742.1
                                                               ========     ========    =========     ======
1998
United States...............................................   $7,960.3     $  493.6    $72,703.9     $703.1
International...............................................      236.6        116.9      1,239.4      (10.1)
                                                               --------     --------    ---------     ------
         Total..............................................   $8,196.9     $  610.5    $73,943.3     $693.0
                                                               ========     ========    =========     ======

    Long-lived assets include property and equipment and goodwill and other
intangibles.

    The Corporate and Other segment includes an equity ownership interest in
Coventry Health Care, Inc. The ownership interest was initiated through a
transaction in 1998, described further in Note 2. In September 2000, the Company
sold a portion of its equity ownership position, which reduced its ownership to
approximately 25% and resulted in a realized capital gain of $13.9 million, net
of tax. The Corporate and Other segment's equity in earnings of Coventry Health
Care, Inc., which was included in net investment income, was $20.0 million and
$19.1 million for the years ended December 31, 2000 and 1999, respectively. The
investment in Coventry Health Care, Inc. was $122.9 million and $179.3 million
at December 31, 2000 and 1999, respectively. The Corporate and Other segment
also include consolidating and intersegment eliminations.

    The Company's operations are not materially dependent on one or a few
customers, brokers or agents, and revenues, assets and operating earnings are
attributed to geographic location based on the country of domicile sales
originate from.

16. SUBSEQUENT EVENTS

PLAN OF DEMUTUALIZATION

    On March 31, 2001, the Company's Board of Directors adopted a plan to
convert Principal Mutual Holding Company from a mutual insurance holding company
to a stock company. Adoption of the plan authorizes management to implement the
plan for demutualization of the Company. Upon demutualization, the membership
interests of Principal Life's policyholders in Principal Mutual Holding Company
will be extinguished, and eligible policyholders will receive compensation in
exchange for the extinguishment of their membership interests. Their
compensation will be in the form of common stock, cash or policy credits,
depending upon the type of policy or policyholder.

    Under Iowa insurance law, the plan also requires the approval of
policyholders and the Insurance Commissioner of the State of Iowa. During 2001,
the Company expects to file the plan with the Insurance Commissioner of the
State of Iowa and to mail the proposed plan and related materials to
policyholders eligible to vote.

LITIGATION

    In April 2001, the proposed settlement of the class-action lawsuit alleging
improper sales practices received court approval. In agreeing to the settlement,
the Company specifically denied any wrongdoing. The Company has accrued a loss
reserve for its best estimate based on information available. As uncertainties
continue to exist in resolving this matter, it is reasonably possible that, as
the actual cost of the claims subject to alternative dispute resolution becomes
available, the final cost of settlement could exceed the Company's estimate. The
range of any additional cost related to the settlement cannot be presently
estimated, however the Company believes the settlement will not have a material
impact on its business, financial condition or results of operations.
                                       F-38
   231

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

                                                                 FOR THE THREE
                                                                 MONTHS ENDED
                                                                   MARCH 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                 (IN MILLIONS)
                                                                   
REVENUES
Premiums and other considerations...........................  $1,064.2   $1,014.4
Fees and other revenues.....................................     413.0      396.4
Net investment income.......................................     839.7      789.5
Net realized capital gains (losses).........................     (80.9)      70.3
                                                              --------   --------
Total revenues..............................................   2,236.0    2,270.6

EXPENSES
Benefits, claims and settlement expenses....................   1,391.9    1,319.6
Dividends to policyholders..................................      81.0       75.4
Operating expenses..........................................     622.7      593.2
                                                              --------   --------
Total expenses..............................................   2,095.6    1,988.2
                                                              --------   --------

Income before income taxes and cumulative effect of
  accounting change.........................................     140.4      282.4

Income taxes................................................      24.4       89.3
                                                              --------   --------
Income before cumulative effect of accounting change........     116.0      193.1
Cumulative effect of accounting change, net of related
  income taxes..............................................     (10.7)        --
                                                              --------   --------
Net income..................................................  $  105.3   $  193.1
                                                              ========   ========

                            See accompanying notes.
                                       F-39
   232

                        PRINCIPAL MUTUAL HOLDING COMPANY

                 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                                  (UNAUDITED)

                                                              MARCH 31,   DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
                                                                   (IN MILLIONS)
                                                                    
ASSETS
Fixed maturities, available-for-sale........................  $29,110.8    $26,839.9
Equity securities, available-for-sale.......................     618.6         742.9
Mortgage loans..............................................  11,378.6      11,492.7
Real estate.................................................   1,186.1       1,400.5
Policy loans................................................     819.3         803.6
Other investments...........................................     889.2         811.0
                                                              ---------    ---------
         Total investments..................................  44,002.6      42,090.6

Cash and cash equivalents...................................     525.6         926.6
Accrued investment income...................................     516.7         530.8
Premiums due and other receivables..........................     335.2         357.8
Deferred policy acquisition costs...........................   1,268.9       1,333.3
Property and equipment......................................     500.9         507.0
Goodwill and other intangibles..............................   1,225.5       1,375.9
Mortgage loan servicing rights..............................   1,164.0       1,084.4
Separate account assets.....................................  31,638.8      34,916.2
Other assets................................................   1,234.2       1,134.4
                                                              ---------    ---------
         Total assets.......................................  $82,412.4    $84,257.0
                                                              =========    =========

LIABILITIES
Contractholder funds........................................  $24,919.0    $24,300.2
Future policy benefits and claims...........................  13,252.5      13,198.1
Other policyholder funds....................................     592.2         597.4
Short-term debt.............................................     550.1         459.5
Long-term debt..............................................   1,294.1       1,336.5
Income taxes currently payable..............................     149.3         108.4
Deferred income taxes.......................................     587.3         487.4
Separate account liabilities................................  31,638.8      34,916.2
Other liabilities...........................................   2,988.3       2,600.8
                                                              ---------    ---------
         Total liabilities..................................  75,971.6      78,004.5

EQUITY
Retained earnings...........................................   6,417.8       6,312.5
Accumulated other comprehensive income (loss):
  Net unrealized gains (losses) on available-for-sale
    securities..............................................     319.9         129.9
  Net foreign currency translation adjustment...............    (296.9)       (189.9)
                                                              ---------    ---------
         Total equity.......................................   6,440.8       6,252.5
                                                              ---------    ---------
         Total liabilities and equity.......................  $82,412.4    $84,257.0
                                                              =========    =========

                            See accompanying notes.
                                       F-40
   233

                        PRINCIPAL MUTUAL HOLDING COMPANY

                       CONSOLIDATED STATEMENTS OF EQUITY
                                  (UNAUDITED)

                                                                      NET UNREALIZED      NET FOREIGN
                                                                      GAINS (LOSSES)       CURRENCY
                                                         RETAINED    ON AVAILABLE-FOR-    TRANSLATION     TOTAL
                                                         EARNINGS     SALE SECURITIES     ADJUSTMENT      EQUITY
                                                         --------    -----------------    -----------    --------
                                                                                             
BALANCES AT JANUARY 1, 2000............................  $5,692.3         $ (79.1)          $ (60.3)     $5,552.9
Comprehensive income:
  Net income...........................................    193.1               --                --         193.1
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................       --             98.0                --          98.0
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................       --            (91.4)               --         (91.4)
  Adjustments for assumed changes in amortization
    pattern:
    Deferred policy acquisition costs..................       --             (9.5)               --          (9.5)
    Unearned revenue reserves..........................       --              2.6                --           2.6
  Provision for deferred income tax benefit............       --             (7.6)               --          (7.6)
  Change in net foreign currency translation
    adjustment.........................................       --               --             (37.9)        (37.9)
                                                                                                         --------
Comprehensive income...................................                                                     147.3
                                                         --------         -------           -------      --------
BALANCES AT MARCH 31, 2000.............................  $5,885.4         $ (87.0)          $ (98.2)     $5,700.2
                                                         ========         =======           =======      ========
BALANCES AT JANUARY 1, 2001............................  $6,312.5         $ 129.9           $(189.9)     $6,252.5
Comprehensive income:
  Net income...........................................    105.3               --                --         105.3
  Net change in unrealized gains and losses on fixed
    maturities, available-for-sale.....................       --            387.1                --         387.1
  Net change in unrealized gains and losses on equity
    securities, available-for-sale, including seed
    money in separate accounts.........................       --            (23.9)               --         (23.9)
  Adjustments for assumed changes in amortization
    pattern:
    Deferred policy acquisition costs..................       --            (67.1)               --         (67.1)
    Unearned revenue reserves..........................       --              5.2                --           5.2
  Provision for deferred income tax benefit............       --           (108.2)               --        (108.2)
  Change in net foreign currency translation
    adjustment.........................................       --               --             (95.9)        (95.9)
  Cumulative effect of accounting change, net of
    related income taxes...............................                      (3.1)            (11.1)        (14.2)
                                                                                                         --------
Comprehensive income...................................                                                     188.3
                                                         --------         -------           -------      --------
BALANCES AT MARCH 31, 2001.............................  $6,417.8         $ 319.9           $(296.9)     $6,440.8
                                                         ========         =======           =======      ========

                            See accompanying notes.
                                       F-41
   234

                        PRINCIPAL MUTUAL HOLDING COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

                                                              FOR THE THREE MONTHS
                                                                 ENDED MARCH 31,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
                                                                    
OPERATING ACTIVITIES:
Net income..................................................  $   105.3   $   193.1
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Cumulative effect of accounting change, net of related
    income taxes............................................       10.7          --
  Amortization of deferred policy acquisition costs.........       68.4        47.7
  Additions to deferred policy acquisition costs............      (71.4)      (75.4)
  Accrued investment income.................................       11.6        22.8
  Premiums due and other receivables........................       14.3        50.1
  Contractholder and policyowner liabilities and
    dividends...............................................      227.2       318.5
  Current and deferred income taxes.........................       36.3        53.2
  Net realized capital (gains) losses.......................       80.9       (70.3)
  Depreciation and Amortization expense.....................       31.5        29.0
  Amortization and impairment/recovery of Mortgage Servicing
    Rights..................................................       52.9        38.8
  Other.....................................................      100.6      (357.1)
                                                              ---------   ---------
Net cash provided by operating activities...................      668.3       250.4
INVESTING ACTIVITIES:
Available-for-Sale Securities:
  Purchases.................................................   (4,470.0)   (3,458.0)
  Sales.....................................................    1,809.6     2,445.1
  Maturities................................................      710.0       633.8
Mortgage loans acquired or originated.......................   (5,592.2)   (1,794.0)
Mortgage loans sold or repaid...............................    5,715.6     1,715.6
Net change in mortgage servicing rights.....................      (94.5)       (6.4)
Real Estate Acquired........................................      (99.1)      (83.7)
Real Estate sold............................................      329.4       117.3
Net change in Property and equipment........................        2.5         7.7
Net proceeds from sale of subsidiaries......................      (13.5)         --
Purchases of interests in subsidiaries, net of cash
  acquired..................................................       (4.2)       25.7
Net change in other investments.............................      (44.0)     (103.5)
                                                              ---------   ---------
Net cash used in investing activities.......................   (1,750.4)     (500.4)
FINANCING ACTIVITIES:
Issuance of debt............................................       27.8        44.6
Principal repayments of debt................................      (70.1)      (24.3)
Proceeds of short-term borrowings...........................    2,005.6       249.4
Repayment of short-term borrowings..........................   (1,914.9)      (30.5)
Investment contract deposits................................    1,844.2     1,123.9
Investment contract withdrawals.............................   (1,211.5)   (1,475.6)
                                                              ---------   ---------
Net cash provided by (used in) financing activities.........      681.1      (112.5)
                                                              ---------   ---------
Net decrease in cash and cash equivalents...................     (401.0)     (362.5)
Cash and cash equivalents at beginning of year..............      926.6       569.5
                                                              ---------   ---------
Cash and cash equivalents at end of period..................  $   525.6   $   207.0
                                                              =========   =========

                            See accompanying notes.
                                       F-42
   235

                        PRINCIPAL MUTUAL HOLDING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2001
                                  (UNAUDITED)

1. BASIS OF PRESENTATION

    The accompanying consolidated financial statements of Principal Mutual
Holding Company and its consolidated subsidiaries ("the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. 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 month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. These interim financial statements should be read in
conjunction with the Company's annual financial statements as of December 31,
2000. The accompanying consolidated statement of financial position at December
31, 2000 has been derived from the audited consolidated statement of financial
position.

2. ACCOUNTING CHANGES

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 was issued deferring the effective date of SFAS 133 by one
year. In June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities on amendment of FASB
Statement No. 133, which amended the accounting and reporting standards of SFAS
133 for certain derivative instruments and certain hedging activities.

    The Company's derivatives are generally held for purposes other than trading
and are primarily used to hedge or reduce exposure to interest rate and foreign
currency risks associated with assets held or expected to be purchased or sold,
and liabilities incurred or expected to be incurred. Additionally, derivatives
are used to change the characteristics of the Company's asset/liability mix
consistent with the Company's risk management activities.

    The Company's risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.

    The net interest effect of interest rate and currency swap transactions is
recorded as an adjustment to net investment income or interest expense, as
appropriate, over the periods covered by the agreements. The cost of other
derivative contracts is amortized over the life of the contracts and classified
with the results of the underlying hedged item. Futures contracts and
mortgage-backed forwards are used to hedge anticipated transactions. Futures
contracts are marked to market value and settled daily. However, changes in the
market value of such contracts have not qualified for inclusion in the
measurement of subsequent transactions or represent hedges of items reported at
fair value. Accordingly, such changes in market value are reported in net income
in the period of change.

    Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.

    The Company designates all derivatives into two types: hedges of fair value
exposure and hedges of cash flow exposure. Hedges of fair value exposure are
entered into in order to hedge the fair value of a recognized asset or
liability. Hedges of cash flow exposure are entered into to hedge the
variability of cash flows to be received or paid related to certain assets or
liabilities. On the date the derivative contract is entered, the Company
designates the contract as either a fair value or cash flow hedge. Changes in
fair values of derivatives designated as effective and that qualify as fair
value hedges are recognized in earnings as offsets to the changes in fair value
of the hedged assets and liabilities. Changes in fair values of derivatives
designated as effective and that qualify as cash flow hedges are deferred and
recognized as a component of accumulated other comprehensive income until the
hedged transaction occurs and are then recognized in earnings. Any ineffective
portion of hedging a derivative contract's change in fair value is recognized in
earnings.

    During the three months ended March 31, 2001, the Company recognized the
change in value related to cash flow hedges in accumulated other comprehensive
income, and reclassified a gain from accumulated other comprehensive income to
earnings, which was offset by net losses on the assets or liabilities being
hedged. These amounts were not material.

                                       F-43
   236
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACCOUNTING CHANGES -- (CONTINUED)

    At January 1, 2001, the Company's consolidated financial statements were
adjusted to record a cumulative effect of adopting SFAS 133, as follows (in
millions):

                                                                            ACCUMULATED OTHER
                                                                              COMPREHENSIVE
                                                              NET INCOME         INCOME
                                                              ----------    -----------------
                                                                      
Adjustment to fair value of derivative contracts(1).........    $(16.4)          $(15.8)
Income tax impact...........................................       5.7              1.6
                                                                ------           ------
         Total..............................................    $(10.7)          $(14.2)
                                                                ======           ======

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

(1) Amount presented is net of adjustment to hedged item.

    Derivatives not designated as hedges primarily consist of swaptions.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. Although swaptions and other derivatives
not designated as hedges are effective hedges from an economic standpoint, they
do not qualify for hedge accounting treatment under SFAS 133.

    For the three months ended March 31, 2001, the Company reported net income
of $6.1 million, net of tax, primarily related to fair value hedges and to
derivatives not designated as hedges. The impact to accumulated other
comprehensive income for the three months ended March 31, 2001, was $(10.0)
million, net of tax, primarily related to cash flow hedges.

3. SEGMENT INFORMATION

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

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

    The International Asset Management and Accumulation segment provides asset
management products and services to retail clients in Australia and
institutional clients throughout the world and provides life insurance and
retirement and related financial products and services primarily to businesses,
their employees and other individuals principally in Australia, Chile, Brazil,
New Zealand, Mexico, India, Japan, Argentina and Hong Kong.

    The Life and Health Insurance segment provides individual life and
disability insurance to the owners and employees of businesses and other
individuals in the United States and provides group life and health insurance to
businesses in the United States.

    The Mortgage Banking segment originates and services residential mortgage
loan products for customers primarily in the United States.

    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 financing activities for the Company, income
on capital not allocated to other segments, intercompany eliminations, and
non-recurring or other income or expenses not allocated to the segments based on
review of the nature of such items.

    The Company evaluates segment performance on segment operating earnings,
which excludes the effect of net realized capital gains and losses, as adjusted,
and non-recurring events and transactions. Net realized capital gains, as
adjusted, are net of tax, related changes in the amortization pattern of
deferred policy acquisition costs, recognition of front-end fee revenues for
sales charges on pension products and services and net realized capital gains
credited to customers. Segment operating revenues exclude net realized capital
gains and their impact on recognition of front-end fee revenues. Segment
operating earnings is determined by adjusting GAAP net income for net realized
capital gains and losses and non-recurring items which management believes are
not indicative of overall operating trends. 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 the Company's

                                       F-44
   237
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SEGMENT INFORMATION -- (CONTINUED)

results of operations by highlighting earnings attributable to the normal,
recurring operations of the business. However, segment operating earnings are
not a substitute for net income determined in accordance with GAAP.

    For the three months ended March 31, 2001, the Company excluded $20.5
million of non-recurring items, net of tax, from net income for the presentation
of operating earnings. The non-recurring items included the negative effects of
(a) a cumulative effect of change in accounting principle related to our
implementation of SFAS 133 ($10.7 million), (b) a loss contingency reserve
established for litigation ($5.9 million); and (c) expenses related to our
demutualization ($3.9 million).

    The accounting policies of the segments are similar to those as described in
Note 1, with the exception of capital allocation. The Company allocates capital
to its segments based upon an internal capital model that allows management to
more effectively manage the Company's capital.

    The following table summarizes selected financial information by segment as
of, or for the three months ended March 31 and reconciles segment totals to
those reported in the consolidated financial statements (in millions):

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2001
Revenues:
  Operating revenues.....................   $ 1,015.7       $  144.4       $ 1,002.4     $  119.6    $   35.0     $ 2,317.1
  Net realized capital gains (losses),
    including recognition of front-end
    fee revenues.........................       (12.1)         (37.7)           (1.3)          --       (30.0)        (81.1)
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $ 1,003.6       $  106.7       $ 1,001.1     $  119.6    $    5.0     $ 2,236.0
                                            =========       ========       =========     ========    ========     =========
Net income:
  Operating earnings (loss)..............   $    88.8       $   (5.3)      $    42.5     $   23.9    $   23.8     $   173.7
  Net realized capital gains (losses), as
    adjusted.............................        (7.4)         (20.3)           (0.6)          --       (19.6)        (47.9)
  Non-recurring items....................       (10.8)            --             0.1           --        (9.8)        (20.5)
                                            ---------       --------       ---------     --------    --------     ---------
Net income (loss)........................   $    70.6       $  (25.6)      $    42.0     $   23.9    $   (5.6)    $   105.3
                                            =========       ========       =========     ========    ========     =========
Assets...................................   $64,144.6       $4,928.1       $10,406.6     $1,915.2    $1,017.9     $82,412.4
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $   978.2       $  106.4       $ 1,001.8     $  117.8    $   31.8     $ 2,236.0
  Intersegment revenues..................        25.4            0.3            (0.7)         1.8       (26.8)           --
  Interest expense.......................         1.3             --             2.3           --        17.1          20.7
  Income tax expense (benefit)...........        16.4          (18.8)           21.2         12.8        (7.2)         24.4
  Amortization of goodwill and other
    intangibles..........................         0.3           15.2             0.8          0.2        (0.2)         16.3
2000
Revenues:
  Operating revenues.....................   $   868.3       $  157.4       $ 1,047.4     $   97.7    $   29.0     $ 2,199.8
  Net realized capital gains (losses),
    including recognition of front-end
    fee revenues.........................       (28.3)           4.7            83.4           --        11.0          70.8
                                            ---------       --------       ---------     --------    --------     ---------
Revenues.................................   $   840.0       $  162.1       $ 1,130.8     $   97.7    $   40.0     $ 2,270.6
                                            =========       ========       =========     ========    ========     =========

                                       F-45
   238
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SEGMENT INFORMATION -- (CONTINUED)

                                                          INTERNATIONAL
                                            U.S. ASSET        ASSET
                                            MANAGEMENT     MANAGEMENT      LIFE AND
                                               AND             AND          HEALTH       MORTGAGE    CORPORATE
                                           ACCUMULATION   ACCUMULATION     INSURANCE     BANKING     AND OTHER   CONSOLIDATED
                                           ------------   -------------   -----------   ----------   ---------   ------------
                                                                                               
2000 (CONTINUED)
Net income:
  Operating earnings (loss)..............   $    88.7       $   (4.5)      $    36.6     $   18.0    $    4.5     $   143.3
  Net realized capital gains (losses), as
    adjusted.............................       (18.8)           4.7            54.8           --         9.1          49.8
  Non-recurring items....................          --             --              --           --          --            --
                                            ---------       --------       ---------     --------    --------     ---------
Net income...............................   $    69.9       $    0.2       $    91.4     $   18.0    $   13.6     $   193.1
                                            =========       ========       =========     ========    ========     =========
Assets...................................   $66,312.3       $5,550.8       $10,080.9     $1,793.9    $1,064.9     $84,802.8
                                            =========       ========       =========     ========    ========     =========
Other segment data:
  Revenues from external customers.......   $   821.7       $  161.7       $ 1,132.4     $   97.7    $   57.1     $ 2,270.6
  Intersegment revenues..................        18.3            0.4            (1.6)          --       (17.1)           --
  Interest expense.......................         1.8             --             0.3           --        21.7          23.8
  Income tax expense.....................        21.3            3.4            43.4          9.7        11.5          89.3
  Amortization of goodwill and other
    intangibles..........................         0.3           10.6             1.0          0.2        (0.3)         11.8

    The Company operates in the United States and in selected markets
internationally (including Australia, Chile, Brazil, New Zealand, Mexico, India,
Japan, Argentina and Hong Kong). The following table summarizes selected
financial information by geographic location as of or for the three months ended
March 31 (in millions):

                                                                         LONG-LIVED                 NET INCOME
                                                             REVENUES      ASSETS       ASSETS        (LOSS)
                                                             --------    ----------    ---------    ----------
                                                                                        
2001
United States..............................................  $2,129.3     $  520.1     $77,484.3      $130.9
International..............................................    106.7       1,206.3       4,928.1       (25.6)
                                                             --------     --------     ---------      ------
Total......................................................  $2,236.0     $1,726.4     $82,412.4      $105.3
                                                             ========     ========     =========      ======
2000
United States..............................................  $2,108.5     $  500.2     $79,252.0      $192.9
International..............................................    162.1       1,365.9       5,550.8         0.2
                                                             --------     --------     ---------      ------
Total......................................................  $2,270.6     $1,866.1     $84,802.8      $193.1
                                                             ========     ========     =========      ======

    Long-lived assets include property and equipment and goodwill and other
intangibles.

    The Corporate and Other segment includes an equity ownership interest in
Coventry Health Care, Inc. The Corporate and Other segment's equity in earnings
of Coventry Health Care, Inc., which was included in net investment income, was
$4.9 million and $6.0 million for the three months ended March 31, 2001 and
2000, respectively. The investment in Coventry Health Care, Inc. was $128.9
million and $122.9 million at March 31, 2001 and December 31, 2000,
respectively. The Corporate and Other segment also includes consolidating and
intersegment eliminations.

    The Company's operations are not materially dependent on one or a few
customers, brokers or agents, and revenues, assets and operating earnings are
attributable to geographic location based on the country of domicile sales
originate from.

4. PLAN OF DEMUTUALIZATION

    On March 31, 2001, the Company's Board of Directors adopted a plan to
convert Principal Mutual Holding Company from a mutual insurance holding company
to a stock company. Adoption of the plan authorizes management to implement the
plan for demutualization of the Company. Upon demutualization, the membership
interests of Principal Life's policyholders in Principal Mutual Holding Company
will be extinguished, and eligible policyholders will receive

                                       F-46
   239
                        PRINCIPAL MUTUAL HOLDING COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PLAN OF DEMUTUALIZATION -- (CONTINUED)

compensation in exchange for the extinguishment of their membership interests.
Their compensation will be in the form of common stock, cash or policy credits,
depending upon the type of policy or policyholder.

    Under Iowa insurance law, the plan also requires the approval of
policyholders and the Insurance Commissioner of the State of Iowa. During 2001,
the Company expects to file the plan with the Insurance Commissioner of the
State of Iowa and to mail the proposed plan and related materials to
policyholders eligible to vote.

5. COMMITMENTS AND CONTINGENCIES

    The Company is a plaintiff or defendant in actions arising out of its
operations. The Company is, from time to time, also involved in various
governmental and administrative proceedings. 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 the Company's
business, financial condition or results of operations. However, no assurances
can be given that such litigation would not materially and adversely affect the
Company's business, financial condition or results of operations.

    Other companies in the life insurance industry have historically been
subject to substantial litigation resulting from claims disputes and other
matters. Most recently, such companies have faced extensive claims, including
class-action lawsuits, alleging improper life insurance sales practices.
Negotiated settlements of such class-action lawsuits have had a material adverse
effect on the business, financial condition and results of operations of certain
of these companies. Principal Life is currently a defendant in two class-action
lawsuits which allege improper sales practices.

    In 2000, the Company reached an agreement in principal to settle these two
class-action lawsuits alleging improper sales practices. The proposed settlement
is subject to court approval and therefore is not yet final. In agreeing to the
settlement, the Company specifically denied any wrongdoing. The Company has
accrued a loss reserve for its best estimate based on information available. As
uncertainties continue to exist in resolving alternative dispute resolution
becomes available, the final cost of settlement could exceed the Company's
estimate. However, the range of any additional cost related to the settlement
cannot presently be reasonably estimated. See Note 6.

    The Company is also subject to insurance guaranty laws in the states in
which it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. The
Company believes such assessments in excess of amounts accrued would not
materially affect its financial condition or results of operations.

6. SUBSEQUENT EVENT

    In April 2001, the proposed settlement of the class action lawsuit alleging
improper sales practices received court approval. In agreeing to the settlement,
the Company specifically denied any wrongdoing. The Company has accrued a loss
reserve for its best estimate based on information available. As uncertainties
continue to exist in resolving this matter, it is reasonably possible that, as
the actual cost of the claims subject to alternative dispute resolution becomes
available, the final cost of settlement could exceed the Company's estimate. The
range of any additional cost related to the settlement cannot be presently
estimated, however the Company believes the settlement will not have a material
impact on its business, financial condition or results of operations.

                                       F-47
   240

                         OPINION OF DANIEL J. MCCARTHY

                        [Milliman & Robertson, Inc. logo]

                                                                  March 31, 2001

                     The Board of Directors
                     Principal Mutual Holding Company
                     711 High Street
                     Des Moines, IA 50392-0650

                     Re: Plan of Conversion of Principal Mutual Holding Company

                                   STATEMENT OF ACTUARIAL OPINION

                     SUBJECT OF THIS OPINION

                         This opinion letter relates to the actuarial aspects of
                     the proposed Reorganization of Principal Mutual Holding
                     Company ("Principal") pursuant to its Plan of Conversion
                     (the "Plan") as presented to Principal's Board of Directors
                     for its consideration and adoption on March 31, 2001. The
                     specific opinion set forth herein relates to the proposed
                     allocation of consideration among Eligible Policyholders as
                     described in the Plan.

                         Capitalized terms have the same meaning in this opinion
                     as they have in the Plan.

                     QUALIFICATIONS AND USAGE

                         I, Daniel J. McCarthy, am associated with the firm of
                     Milliman & Robertson, Inc., ("M&R") and am a Member of the
                     American Academy of Actuaries, qualified under the
                     Academy's Qualification Standards to render the opinions
                     set forth herein. I and other M&R staff acting under my
                     direction have advised Principal during the course of its
                     development of the Plan and the Actuarial Contribution
                     Memorandum, an Exhibit thereto. The Plan is based on
                     authority in Sections 521A.14(5)(b) and 508B.2 of Title
                     XIII of the Code of Iowa (2001). The opinions set forth
                     herein are not legal opinions concerning the Plan but
                     rather reflect the application of actuarial concepts and
                     standards of practice to the provisions thereof.

                         I am aware that this opinion letter will be furnished
                     to the Commissioner of Insurance of the State of Iowa for
                     her use in determining the fairness of the Plan, and to
                     Principal's Members as part of the Policyholder Information
                     Booklet that will be delivered to them, and I consent to
                     the use of this letter for those purposes.

                     RELIANCE

                         In forming the opinions set forth in this memorandum, I
                     have received from Principal extensive information
                     concerning the past and present practices and financial
                     results of Principal Life Insurance Company ("Principal
                     Life"), formerly known as Principal Mutual Life Insurance
                     Company and Bankers Life Company. This information includes
                     actuarial studies and projected asset cash flows developed
                     by Principal Life staff. I, and other M&R staff acting
                     under my direction, met with Principal personnel and
                     defined the information
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HOUSTON, INDIANAPOLIS, IRVINE, KANSAS CITY, LOS ANGELES, MILWAUKEE, MINNEAPOLIS,
NEW YORK, OMAHA, PHILADELPHIA, PHOENIX, PORTLAND, MF., PORTLAND, OR, ST. LOUIS,
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                                       A-1
   241
Board of Directors
March 31, 2001
Page  2

we required; in all cases, we were provided with the information we requested to
the extent that it was available or could be developed from Principal Life's
records. We have made no independent verification of this information, although
we have reviewed it where practicable for general reasonableness and internal
consistency. I have relied on this information, which was provided under the
general direction of Ellen Lamale, Principal Life's Senior Vice President &
Chief Actuary. My opinions depend on the substantial accuracy of this
information.

PROCESS

    In all cases, I and other M&R staff acting under my direction either derived
the results on which my opinions rest or reviewed derivations carried out by
Principal Life employees.

OPINION

    Under the Plan, consideration (shares of Common Stock of Principal Financial
Group Inc., or their equivalent value in cash or policy credits) is to be
distributed to each Eligible Policyholder in exchange for the Eligible
Policyholder's Membership Interest. In my opinion, the principles, assumptions,
and methodologies used to allocate consideration among Principal's Eligible
Policyholders, as set forth in Article VII of the Plan (including the Actuarial
Contribution Memorandum, an Exhibit thereto) are reasonable and appropriate and
result in an allocation of consideration that is fair and equitable to the
Eligible Policyholders.

DISCUSSION

    General description of the method of allocation.  Under the Plan, each
Eligible Policyholder will be allocated a fixed component of consideration;
i.e., a value, expressed in terms of shares of Common Stock, that is independent
of the Eligible Policyholder's Actuarial Contribution. In addition, each
Eligible Policyholder will be allocated a variable component of consideration if
the Actuarial Contribution of any of the Policies owned by the Eligible
Policyholder is positive. As defined in the Plan, Actuarial Contribution means,
with respect to a particular Policy, the contribution that such Policy is
estimated to have made to Principal Life's surplus and asset valuation reserve,
plus the contribution that such Policy is expected to make in the future,
calculated in each case according to the principles, assumptions and
methodologies set forth in Article VII of the Plan and the Actuarial
Contribution Memorandum.

    For each Eligible Policyholder who receives a variable component of
consideration, the amount of such consideration is equal to:

        (a) the sum of the positive Actuarial Contributions of all Policies
    owned by the Eligible Policyholder, multiplied by

        (b) the ratio of the Aggregate Variable Component to the sum of the
    positive Actuarial Contributions of all Policies,

subject to rounding rules described in the Plan.

    Appropriateness of the "actuarial contribution" method.  Most of the
consideration allocated to Eligible Policyholders is allocated via the Aggregate
Variable Component, using the "actuarial contribution" method described above.
The previously cited Sections of the Code of Iowa do not provide any specific
guidance as to the method of allocation; it is therefore appropriate to consider
applicable professional literature when considering the appropriateness of an
allocation method. The actuarial contribution method is recognized in the
actuarial literature as an appropriate allocation method. In particular,
Actuarial Standard of Practice 37, "Allocation of Policyholder Consideration in
Mutual Life Insurance Company Demutualizations" ("ASOP 37"), which is the most
authoritative professional guidance available to actuaries on this subject,
states in part, "The variable component of consideration should be allocated on
the basis of the actuarial contribution." ASOP 37 defines "actuarial
contribution," in relevant part, to be "The contributions that a particular
policy ... has made to the company's statutory surplus and asset valuation
reserve, plus the present value of contributions that the same policy ... is
expected to make in the future." This is consistent with the definition in the
Plan. I therefore find that the use of "actuarial contribution" as the principal
basis underlying the allocation of consideration is appropriate. I further find
that, in the Plan, the actuarial contribution method has been implemented in a
reasonable manner, through the use of methods and assumptions that are
reasonable and appropriate, consistent with Principal's past and present
business practices and relevant actuarial literature and, in particular,
consistent with methods and assumptions prescribed or permitted by ASOP 37.

                           MILLIMAN & ROBERTSON, INC.

                                       A-2
   242
Board of Directors
March 31, 2001
Page  3

    Discounting of expected future contributions to surplus.  In determining the
portion of a policy's Actuarial Contribution that arises from its expected
future contribution to surplus, ASOP 37 provides that such contributions may be
discounted to present value using either the expected after-tax rate of
investment return or ".. a risk-adjusted rate appropriate for the line of
business or type of policy involved." Principal has chosen the latter course,
and has selected risk-adjusted rates of return generally consistent with
Principal Life's pricing objectives or, in the instance of policies in the
Closed Block, consistent with the funding of the Closed Block. I find that this
use of risk-adjusted rates of return is appropriate, and that the rates of
return selected are reasonable.

    The effect of the Closed Block.  As is set forth in Article II of the Plan,
Principal Life formed and began operating a Closed Block coincident with the
reorganization of Principal Mutual Life Insurance Company to a mutual holding
company structure effective July 1, 1998. After the conversion of the MIHC,
Principal Life will continue to operate the Closed Block in accordance with its
terms as originally established. Principal has -- in calculating the Actuarial
Contribution of each Closed Block policy -- estimated the contribution that each
such policy is expected to make to Principal Life's surplus and asset valuation
reserve from the date of the Closed Block's establishment forward by using
assumptions that are consistent with those used in the funding of the Closed
Block, with further adjustments to reflect the effect of future operating
expenses that were not funded for in the Closed Block. I find that this is an
appropriate manner in which to determine the expected future contributions to
Principal Life's surplus and asset valuation reserve arising from Closed Block
policies.

    Appropriateness of the fixed component.  Consideration is also allocated to
Eligible Policyholders via the fixed component, through which each Eligible
Policyholder is allocated a fixed number of shares of Common Stock without
regard to the Actuarial Contribution of Policies owned by that Eligible
Policyholder. This element of the allocation assures that each Eligible
Policyholder will receive some distribution, and is consistent with overall
concepts of equity. Under the Plan, the percentage of the total consideration
that is allocated in this manner is small relative to that allocated in
proportion to positive actuarial contributions, which is appropriate. I find
that including a minimum allocation to each Eligible Policyholder using the
fixed component is reasonable and appropriate, and that the size of the fixed
component to be distributed to each Eligible Policyholder as set forth in the
Plan, and the overall portion of consideration allocated among Eligible
Policyholders via the fixed component -- approximately one-fourth of the
total -- are reasonable. In making this finding, I have taken into account the
guidance provided in ASOP 37. In particular, I have taken into account the
treatment of the fixed component -- both as to the size of the fixed component
received by each Eligible Policyholder and as to the overall portion of
consideration allocated via the fixed component -- in prior demutualizations of
mutual life insurance companies.

    Appropriateness of the definition of "Eligible Policyholder."  In
considering the fairness of the allocation, I have taken into account the
definition of "Eligible Policyholder" set forth in the Plan. Principal's
definition is influenced in part by Iowa law, in part by the company's manner of
operation (including the sale of certain classes of business through Company
Trusts), in part by the provisions of Principal's By-laws, and in part by
precedent from prior demutualizations. Taking into account these influences, I
find the definition of Eligible Policyholder to be reasonable and appropriate.

                                         Yours sincerely,

                                         /s/ Daniel J. McCarthy
                                         Daniel J. McCarthy

                           MILLIMAN & ROBERTSON, INC.
                                       A-3
   243

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

  No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

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

                               TABLE OF CONTENTS

                                                 Page
                                                 ----
                                              
Prospectus Summary.............................    1
Risk Factors...................................   12
Statistical Information Sources................   20
The Demutualization............................   21
Use Of Proceeds................................   30
Stockholder Dividend Policy....................   31
Capitalization.................................   32
Selected Historical Financial Information......   33
Unaudited Pro Forma Condensed Consolidated
  Financial Information........................   40
Unaudited Pro Forma Supplementary Information..   44
Management's Discussion And Analysis Of
  Financial Condition And Results Of
  Operations...................................   46
Business.......................................   86
Investments....................................  135
Management.....................................  158
Regulation.....................................  172
Ownership Of Common Stock......................  179
Description Of Capital Stock And Change Of
  Control Related Provisions...................  180
Common Stock Eligible For Future Sale..........  184
Underwriting...................................  185
Validity Of Common Stock.......................  187
Experts........................................  187
Additional Information.........................  187
Glossary.......................................  G-1
Consolidated Financial Statements..............  F-1
Opinion Of Daniel J. McCarthy..................  A-1

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

  Through and including             , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------

                                             Shares

                              PRINCIPAL FINANCIAL
                                  GROUP, INC.

                                  Common Stock
                    ----------------------------------------

                                     (LOGO)

                    ----------------------------------------
                              GOLDMAN, SACHS & CO.

                      Representatives of the Underwriters

- ------------------------------------------------------------
- ------------------------------------------------------------
   244

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

    The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered hereby,
all of which expenses, except for the SEC registration fee, the New York Stock
Exchange listing fee and the NASD filing fee, are estimates:

DESCRIPTION                                                      AMOUNT
- -----------                                                      ------
                                                           
SEC registration fee........................................  $734,161.86
New York Stock Exchange listing fee and expenses............       *
NASD filing fee.............................................       *
Blue Sky fees and expenses (including legal fees)...........       *
Printing and engraving expenses.............................       *
Legal fees and expenses (other than Blue Sky)...............       *
Accounting fees and expenses................................       *
Transfer Agent and Registrar's fees.........................       *
Miscellaneous...............................................       *
                                                              ------------
         TOTAL..............................................  $    *
                                                              ============

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

* To be furnished by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

    Our directors and officers may be indemnified against liabilities, fines,
penalties and claims imposed upon or asserted against them as provided in the
Delaware General Corporation Law and our certificate of incorporation and
by-laws. Such indemnification covers all costs and expenses incurred by a
director or officer in his or her capacity as such. The board of directors, by a
majority vote of a quorum of disinterested directors or, under certain
circumstances, independent counsel appointed by the board of directors, must
determine that the director or officer seeking indemnification was not guilty of
willful misconduct or a knowing violation of the criminal law. In addition, the
Delaware General Corporation Law and our certificate of incorporation may, under
certain circumstances, eliminate the liability of directors and officers in a
stockholder or derivative proceeding.

    If the person involved is not a director or officer of Principal Financial
Group, Inc., the board of directors may cause Principal Financial Group, Inc. to
indemnify, to the same extent allowed for our directors and officers, such
person who was or is a party to a proceeding by reason of the fact that he or
she is or was our employee or agent, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise.

    We have policies in force and effect that insure our directors and officers
against losses which they or any of them will become legally obligated to pay by
reason of any actual or alleged error or misstatement or misleading statement or
act or omission or neglect or breach of duty by such directors and officers in
the discharge of their duties, individually or collectively, or as a result of
any matter claimed against them solely by reason of their being directors or
officers. Such coverage is limited by the specific terms and provisions of the
insurance policies.

    Pursuant to the underwriting agreements, in the forms filed as exhibits to
this Registration Statement, the underwriters agree to indemnify directors and
officers of Principal Financial Group, Inc. and persons controlling Principal
Financial Group, Inc., within the meaning of the Securities Act of 1933, as
amended, or the Act, against certain liabilities that might arise out of or are
based upon certain information furnished to us by any such underwriter.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

    Upon the effective date of the demutualization, Principal Financial Group,
Inc. will distribute approximately 260.5 million shares of common stock to
eligible policyholders of Principal Life in connection with the demutualization.
Exemption from registration under the Act for such distribution will be claimed
under Section 3(a)(10) of the Act based on the approval by the Insurance
Commissioner of the State of Iowa of the plan of conversion.

                                       II-1
   245

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

    (a) Exhibits. See Exhibit Index following the signature pages to this
        Registration Statement.

    (b) Financial Statement Schedules.

                                                              PAGE
                                                              ----
                                                           
Independent Auditors' Report................................  II-3
Schedule I Summary of Investments Other Than Investments in
  Related Parties as of December 31, 2000...................  II-4
Schedule III Supplementary Insurance Information for the
  years ended December 31, 2000, 1999 and 1998..............  II-5
Schedule IV Reinsurance for the years ended December 31,
  2000, 1999 and 1998.......................................  II-7

    All other schedules, other than those listed above, are omitted because the
information is not required or because the information is included in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements.

                                       II-2
   246

                  REPORT OF INDEPENDENT AUDITORS ON SCHEDULES

The Board of Directors
Principal Mutual Holding Company

    We have audited the consolidated financial statements of Principal Mutual
Holding Company (the Company) as of December 31, 2000 and 1999, and for each of
the three years in the period ended December 31, 2000, and have issued our
report thereon dated February 2, 2001 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed in
Item 16(b) of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.

    In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

                                        /s/ Ernst & Young LLP

Des Moines, Iowa
February 2, 2001

                                       II-3
   247

                      SCHEDULE I -- SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES
                            AS OF DECEMBER 31, 2000

                                                                                       AMOUNT AT WHICH
                                                                                         SHOWN IN THE
                                                                                         STATEMENT OF
TYPE OF INVESTMENT                                              COST        VALUE     FINANCIAL POSITION
- ------------------                                            ---------   ---------   ------------------
                                                                           ($ IN MILLIONS)
                                                                             
Fixed maturities, available-for-sale:
  U.S. Treasury securities and obligations of U.S.
    government corporations and agencies....................  $    23.2   $    23.1       $    23.1
  States, municipalities and political subdivisions.........      287.4       295.7           295.7
  Foreign governments.......................................      895.7       918.0           918.0
  Public utilities..........................................    2,440.2     2,494.2         2,494.2
  Convertibles and bonds with warrants attached.............       40.0        33.7            33.7
  Redeemable preferred......................................       21.4        21.2            21.2
  All other corporate bonds.................................   16,335.5    16,381.0        16,381.0
Mortgage-backed and other asset-backed securities...........    6,496.1     6,673.0         6,673.0
                                                              ---------   ---------       ---------
         Total fixed maturities, available-for-sale.........   26,539.5    26,839.9        26,839.9
Equity securities, available-for-sale
  Common stocks:
  Public utilities..........................................        5.3         6.0             6.0
  Banks, trust and insurance companies......................       58.8        58.4            58.4
  Industrial, miscellaneous and all other...................      655.0       596.1           596.1
Non-redeemable preferred stock..............................       86.8        82.4            82.4
                                                              ---------   ---------       ---------
         Total equity securities, available-for-sale........      805.9       742.9           742.9

Mortgage loans..............................................   11,603.1        xxxx        11,492.7
Real estate, net:
  Real estate acquired in satisfaction of debt..............      133.1        xxxx           109.6
  Other real estate.........................................    1,308.2        xxxx         1,290.9
Policy loans................................................      803.6        xxxx           803.6
Other investments...........................................      790.8        xxxx           811.0
                                                              ---------   ---------       ---------
         Total investments..................................  $41,984.2        xxxx       $42,090.6
                                                              =========   =========       =========

                                       II-4
   248

              SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
  AS OF DECEMBER 31, 2000, 1999 AND 1998 AND FOR EACH OF THE YEARS THEN ENDED

                                                               DEFERRED                     CONTRACTHOLDER
                                                                POLICY      FUTURE POLICY     AND OTHER
                                                              ACQUISITION   BENEFITS AND     POLICYHOLDER
SEGMENT                                                          COSTS         CLAIMS           FUNDS
- -------                                                       -----------   -------------   --------------
                                                                            ($ IN MILLIONS)
                                                                                   
2000:
U.S. Asset Management and Accumulation......................   $  368.9       $ 6,065.4       $23,046.2
International Asset Management and Accumulation.............       37.8           971.9            52.4
Life and Health Insurance...................................      926.6         6,156.6         1,799.0
Mortgage Banking............................................         --              --              --
Corporate and Other.........................................         --             4.2              --
                                                               --------       ---------       ---------
         Total..............................................   $1,333.3       $13,198.1       $24,897.6
                                                               ========       =========       =========
1999:
U.S. Asset Management and Accumulation......................   $  426.2       $ 5,675.2       $23,515.6
International Asset Management and Accumulation.............       21.6           834.7            57.8
Life and Health Insurance...................................      983.1         5,976.0         1,623.3
Mortgage Banking............................................         --              --              --
Corporate and Other.........................................         --             5.3              --
                                                               --------       ---------       ---------
         Total..............................................   $1,430.9       $12,491.2       $25,196.7
                                                               ========       =========       =========
1998:
U.S. Asset Management and Accumulation......................   $  248.7       $ 5,472.4       $22,295.0
International Asset Management and Accumulation.............        9.7           745.6              --
Life and Health Insurance...................................      846.3         5,646.3         1,616.0
Mortgage Banking............................................         --              --              --
Corporate and Other.........................................         --             6.2             0.2
                                                               --------       ---------       ---------
         Total..............................................   $1,104.7       $11,870.5       $23,911.2
                                                               ========       =========       =========

                                       II-5
   249

         SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
  AS OF DECEMBER 31, 2000, 1999 AND 1998 AND FOR EACH OF THE YEARS THEN ENDED

                                                                                            AMORTIZATION
                                                                               BENEFITS,    OF DEFERRED
                                                  PREMIUMS AND       NET       CLAIMS AND      POLICY        OTHER
                                                     OTHER        INVESTMENT   SETTLEMENT   ACQUISITION    OPERATING
SEGMENT                                          CONSIDERATIONS     INCOME      EXPENSES       COSTS       EXPENSES
- -------                                          --------------   ----------   ----------   ------------   ---------
                                                                           ($ IN MILLIONS)
                                                                                            
2000:
U.S. Asset Management and Accumulation.........     $  525.4       $2,303.9     $2,310.6       $123.6      $  619.6
International Asset Management and
  Accumulation.................................        220.5          105.0        262.2          2.0         370.3
Life and Health Insurance......................      3,250.5          642.1      2,659.4        113.0         798.6
Mortgage Banking...............................           --          (15.7)          --           --         282.7
Corporate and Other............................           --          137.0          0.1           --         169.6
                                                    --------       --------     --------       ------      --------
         Total.................................     $3,996.4       $3,172.3     $5,232.3       $238.6      $2,240.8
                                                    ========       ========     ========       ======      ========
1999:
U.S. Asset Management and Accumulation.........     $  566.7       $2,289.7     $2,335.3       $ 60.2      $  561.5
International Asset Management and
  Accumulation.................................        179.9           94.1        210.1          1.7         210.4
Life and Health Insurance......................      3,190.6          614.7      2,714.9        111.8         760.3
Mortgage Banking...............................           --            3.3           --           --         310.8
Corporate and Other............................          0.4           70.2          0.6           --          53.6
                                                    --------       --------     --------       ------      --------
         Total.................................     $3,937.6       $3,072.0     $5,260.9       $173.7      $1,896.6
                                                    ========       ========     ========       ======      ========
1998:
U.S. Asset Management and Accumulation.........     $  281.7       $2,200.6     $2,047.1       $ 65.7      $  513.4
International Asset Management and
  Accumulation.................................        147.1           47.9        165.2          0.1          91.9
Life and Health Insurance......................      3,126.6          619.8      2,605.3        153.2         747.9
Mortgage Banking...............................           --           12.5           --           --         250.2
Corporate and Other............................        263.0           53.1        271.4           --         251.6
                                                    --------       --------     --------       ------      --------
         Total.................................     $3,818.4       $2,933.9     $5,089.0       $219.0      $1,855.0
                                                    ========       ========     ========       ======      ========

                                       II-6
   250

                           SCHEDULE IV -- REINSURANCE
  AS OF DECEMBER 31, 2000, 1999 AND 1998 AND FOR EACH OF THE YEARS THEN ENDED

                                                                                                     PERCENTAGE
                                                              CEDED TO      ASSUMED                  OF AMOUNT
                                                  GROSS         OTHER      FROM OTHER      NET       ASSUMED TO
                                                  AMOUNT      COMPANIES    COMPANIES      AMOUNT        NET
                                                ----------   -----------   ----------   ----------   ----------
                                                                        ($ IN MILLIONS)
                                                                                      
2000:
Life insurance in force.......................  $165,912.8    $21,935.3     $1,173.9    $145,151.4      0.8%
                                                ==========    =========     ========    ==========
Premiums:
  Life insurance..............................  $  1,815.7    $    48.7     $   24.6    $  1,791.6      1.4%
  Accident and health insurance...............     2,326.4        121.6           --       2,204.8       --%
                                                ----------    ---------     --------    ----------
         Total................................  $  4,142.1    $   170.3     $   24.6    $  3,996.4      0.6%
                                                ==========    =========     ========    ==========
1999:
Life insurance in force.......................  $167,173.0    $17,529.2     $  243.8    $149,887.6      0.2%
                                                ==========    =========     ========    ==========

Premiums:
  Life insurance..............................  $  1,829.9    $    38.5     $    3.8    $  1,795.2      0.2%
  Accident and health insurance...............     2,160.1         18.0          0.3       2,142.4       --%
                                                ----------    ---------     --------    ----------
         Total................................  $  3,990.0    $    56.5     $    4.1    $  3,937.6      0.1%
                                                ==========    =========     ========    ==========
1998:
Life insurance in force.......................  $161,144.2    $ 9,663.4     $   92.8    $151,573.6      0.1%
                                                ==========    =========     ========    ==========
Premiums:
  Life insurance..............................  $  1,545.3    $    37.3     $   58.8    $  1,566.8      3.8%
  Accident and health insurance...............     2,254.6          6.4          3.4       2,251.6      0.2%
                                                ----------    ---------     --------    ----------
         Total................................  $  3,799.9    $    43.7     $   62.2    $  3,818.4      1.6%
                                                ==========    =========     ========    ==========

                                       II-7
   251

ITEM 17. UNDERTAKINGS.

    The undersigned registrant hereby undertakes:

        (a) to provide to the underwriters at the closing specified in the
    underwriting agreements, certificates in such denominations and registered
    in such names as required by the underwriters to permit prompt delivery to
    each purchaser;

        (b) insofar as indemnification for liabilities arising under the
    Securities Act of 1933, as amended (the "Act"), may be permitted to
    directors, officers and controlling persons of the registrant pursuant to
    the foregoing provisions, or otherwise, the registrant has been advised that
    in the opinion of the Securities and Exchange Commission such
    indemnification is against public policy as expressed in the Act and is,
    therefore, unenforceable. In the event that a claim for indemnification
    against such liabilities (other than the payment by the registrant of
    expenses incurred or paid by a director, officer or controlling person of
    the registrant in the successful defense of any action, suit or proceeding)
    is asserted by such director, officer or controlling person in connection
    with the securities being registered, the registrant will, unless in the
    opinion of its counsel the matter has been settled by controlling precedent,
    submit to a court of appropriate jurisdiction the question whether such
    indemnification by it is against public policy as expressed in the Act and
    will be governed by the final adjudication of such issue;

        (c) for purposes of determining any liability under the Act, the
    information omitted from the form of prospectus filed as part of this
    registration statement in reliance upon Rule 430A and contained in a form of
    prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
    497(h) under the Act shall be deemed to be part of this Registration
    Statement as of the time it was declared effective; and

        (d) for the purpose of determining any liability under the Act, each
    post-effective amendment that contains a form of prospectus shall be deemed
    to be a new registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall be deemed to
    be the initial bona fide offering thereof.

                                       II-8
   252

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Des Moines, Iowa on
June 8, 2001.

                                        PRINCIPAL FINANCIAL GROUP, INC.

                                        By:     /s/ J. Barry Griswell
                                         ---------------------------------------
                                            Name: J. Barry Griswell
                                            Title: President and Chief Executive
                                            Officer and Director

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David J. Drury, J. Barry Griswell and Michael H.
Gersie, and each of them, his or her true and lawful attorney-in-fact and agent,
with full power or substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and to sign any and all registration statements relating to the same offering of
securities as this Registration Statement that are filed pursuant to Rule 462(b)
of the Securities Act of 1933, as amended, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

    Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

                      SIGNATURE                                            TITLE                           DATE
                      ---------                                            -----                           ----
                                                                                                
                 /s/ David J. Drury                    Chairman of the Board, Chairman and Director      June 8, 2001
- -----------------------------------------------------
                   David J. Drury

                /s/ J. Barry Griswell                  President and Chief Executive Officer and         June 8, 2001
- -----------------------------------------------------    Director
                  J. Barry Griswell

                /s/ Michael H. Gersie                  Executive Vice President and Chief Financial      June 8, 2001
- -----------------------------------------------------    Officer (principal financial officer and
                  Michael H. Gersie                      principal accounting officer)

                /s/ Betsy J. Bernard                   Director                                          June 8, 2001
- -----------------------------------------------------
                  Betsy J. Bernard

              /s/ Jocelyn Carter-Miller                Director                                          June 8, 2001
- -----------------------------------------------------
                Jocelyn Carter-Miller

                  /s/ Daniel Gelatt                    Director                                          June 8, 2001
- -----------------------------------------------------
                    Daniel Gelatt

                /s/ Sandra L. Helton                   Director                                          June 8, 2001
- -----------------------------------------------------
                  Sandra L. Helton

               /s/ Charles S. Johnson                  Director                                          June 8, 2001
- -----------------------------------------------------
                 Charles S. Johnson

                                       II-9
   253

                      SIGNATURE                                            TITLE                           DATE
                      ---------                                            -----                           ----

                 /s/ William T. Kerr                   Director                                          June 8, 2001
- -----------------------------------------------------
                   William T. Kerr

                     /s/ Lee Liu                       Director                                          June 8, 2001
- -----------------------------------------------------
                       Lee Liu

              /s/ Victor H. Loewenstein                Director                                          June 8, 2001
- -----------------------------------------------------
                Victor H. Loewenstein

                /s/ Ronald D. Pearson                  Director                                          June 8, 2001
- -----------------------------------------------------
                  Ronald D. Pearson

                /s/ Federico F. Pena                   Director                                          June 8, 2001
- -----------------------------------------------------
                  Federico F. Pena

                /s/ Donald M. Stewart                  Director                                          June 8, 2001
- -----------------------------------------------------
                  Donald M. Stewart

              /s/ Elizabeth E. Tallett                 Director                                          June 8, 2001
- -----------------------------------------------------
                Elizabeth E. Tallett

                                      II-10
   254

                                 EXHIBIT INDEX

        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------

           1.1           Form of Underwriting Agreement**

           2.1           Plan of Conversion*

           2.2           Share Sale Deed, dated as of June 17, 1999, among BT
                         Investments (Australia) LLC, BT Foreign Investment
                         Corporation, BT New Zealand Limited, BT International
                         (Delaware), Inc., BT Nominees (H.K.) Limited, Deutsche Bank
                         AG, Bankers Trust Corporation, Principal Financial Group
                         (Australia) Pty Limited and Principal Financial Services,
                         Inc.*

           2.3           Deed to Amend the Share Sale Deed, dated as of August 31,
                         1999, among BT Investments (Australia) LLC, BT Foreign
                         Investment Corporation, BT New Zealand Limited, BT
                         International (Delaware), Inc., BT Nominees (H.K.) Limited,
                         Deutsche Bank AG, Bankers Trust Corporation, Principal
                         Financial Group (Australia) Pty Limited and Principal
                         Financial Services, Inc.*

           2.4           Second Amendment to the Share Sale Deed, dated as of March
                         14, 2001, among BT Investments (Australia) LLC, BT Foreign
                         Investment Corporation, Deutsche New Zealand Limited
                         (formerly called BT New Zealand Limited), BT International
                         (Delaware), Inc., DB Nominees (H.K.) Limited (formerly
                         called BT Nominees (H.K.) Limited), Deutsche Bank AG,
                         Bankers Trust Corporation, Principal Financial Group
                         (Australia) Pty Limited and Principal Financial Services,
                         Inc.*

           3.1           Form of Amended and Restated Certificate of Incorporation of
                         Principal Financial Group, Inc. (included in Exhibit 2.1)*

           3.2           Form of By-Laws of Principal Financial Group, Inc. (included
                         in Exhibit 2.1)*

           4.1           Form of Certificate for the Common Stock of Principal
                         Financial Group, Inc., par value $0.01 per share**

           4.2           Form of Stockholder Rights Agreement*

           5.1           Opinion of Debevoise & Plimpton**

          10.1           Principal Financial Group, Inc. Stock Incentive Plan*

          10.2           Principal Financial Group Long-Term Performance Plan*

          10.3           Principal Financial Group Incentive Pay Plan (PrinPay),
                         amended and restated effective January 1, 2001*

          10.4           Principal Financial Group, Inc. Directors Stock Plan*

          10.5           Principal Select Savings Excess Plan*

          10.6           Supplemental Executive Retirement Plan for Employees*

          10.7           Employment Agreement, dated as of May 19, 2000, among
                         Principal Mutual Holding Company, Principal Financial Group,
                         Inc., Principal Financial Services, Inc., Principal Life
                         Insurance Company and J. Barry Griswell*

          10.8           Change-of-Control Supplement and Amendment to Employment
                         Agreement, dated as of October 19, 2000, among Principal
                         Mutual Holding Company, Principal Financial Group, Inc.,
                         Principal Financial Services, Inc., Principal Life Insurance
                         Company and J. Barry Griswell*

          10.9           Form of Principal Mutual Holding Company and Principal Life
                         Insurance Company Change of Control Employment Agreement
                         (Tier One Executives) among Principal Mutual Holding
                         Company, Principal Financial Group, Inc., Principal
                         Financial Services, Inc., Principal Life Insurance Company
                         and       ("Executive")*

          10.10          Fiscal Agency Agreement, dated as of August 25, 1999, among
                         Principal Financial Group (Australia) Holdings Pty Limited,
                         Principal Financial Services, Inc. and U.S. Bank Trust
                         National Association*

          21.1           Subsidiaries of Principal Financial Group, Inc.*

          23.1           Consent of Ernst & Young LLP*

          23.2           Consent of Debevoise & Plimpton (included in Exhibit 5.1)**

          23.3           Consent of Milliman & Robertson, Inc.*

          24.1           Powers of Attorney (included in the signature page of this
                         Registration Statement)*

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

*  Filed herewith.

** To be filed by amendment.
   1

                                                                     EXHIBIT 2.1

                               PLAN OF CONVERSION

                                       OF

                        PRINCIPAL MUTUAL HOLDING COMPANY

                   Under Sections 521A.14(5)(b) and 508B.2 of
                      Title XIII of the Code of Iowa (2001)

                          As adopted on March 31, 2001
   2

                                TABLE OF CONTENTS

PREAMBLE...................................................................... 1

ARTICLE I      DEFINITIONS.....................................................3

ARTICLE II     THE CONVERSION.................................................13

ARTICLE III    APPROVAL BY THE COMMISSIONER...................................14

        3.1    Application....................................................14
        3.2    Commissioner's Public Hearing; Commissioner's Order............14
        3.3    Notice of Public Hearing.......................................15

ARTICLE IV     APPROVAL BY POLICYHOLDERS......................................15

        4.1    Policyholder Vote..............................................15
        4.2    Notice of Members' Meeting.....................................16

ARTICLE V      THE RESTRUCTURING..............................................17

        5.1    Effect of Restructuring on the MIHC............................17
        5.2    Effectiveness of Plan..........................................17
        5.3    Tax Considerations.............................................23
        5.4    Other Opinions.................................................25

ARTICLE VI     POLICIES.......................................................26

        6.1    Policies.......................................................26
        6.2    Determination of Ownership.....................................27
        6.3    In Force.......................................................29

ARTICLE VII    ALLOCATION OF POLICYHOLDER CONSIDERATION.......................30

        7.1    Allocation of Allocable Shares.................................30
        7.2    Allocation of Aggregate Variable Component.....................31
        7.3    Distribution of Consideration..................................32
        7.4    ERISA Plans....................................................38

ARTICLE VIII   ADDITIONAL PROVISIONS..........................................38

        8.1    Restriction on Acquisition of Securities by Officers and
               Directors......................................................38
        8.2    Compensation of Directors, Officers, Agents and Employees......40
        8.3    Adjustment of Share Numbers....................................40

   3

        8.4    No Preemptive Rights...........................................41
        8.5    Notices........................................................41
        8.6    Amendment or Withdrawal of Plan................................41
        8.7    Corrections....................................................41
        8.8    Costs and Expenses.............................................42
        8.9    Separate Account Voting Procedures.............................42
        8.10   Governing Law..................................................43

Exhibits to the Plan:

EXHIBIT A  -   Form of Agreement and Plan of Merger

EXHIBIT B  -   Form of Amended and Restated Certificate of Incorporation of the
               Holding Company

EXHIBIT C  -   Form of By-Laws of the Holding Company

EXHIBIT D  -   Form of Articles of Incorporation of the Intermediate Holding
               Company

EXHIBIT E  -   Form of By-Laws of the Intermediate Holding Company

EXHIBIT F  -   Actuarial Contribution Memorandum

   4

                               PLAN OF CONVERSION
                                       OF
                        PRINCIPAL MUTUAL HOLDING COMPANY

                   Under Sections 521A.14(5)(b) and 508B.2 of
                      Title XIII of the Code of Iowa (2001)

                                    PREAMBLE

     This Plan has been adopted by the Board of Directors (the "Board") of
Principal Mutual Holding Company, a mutual insurance holding company organized
pursuant to Section 521A.14(1) of Title XIII and Chapter 491 of Title XII of the
Code of Iowa (the "MIHC"), at a meeting duly called and held on March 31, 2001
(the "Adoption Date"). The Plan provides for the conversion of the MIHC from a
mutual insurance holding company into a stock company in accordance with the
requirements of Section 521A.14(5)(b) and Chapter 508B of Title XIII of the Code
of Iowa (2001) (the "Conversion"). It also provides for the merger of the
converted MIHC with and into a newly-formed Iowa corporation (the "Intermediate
Holding Company"), which is a wholly-owned subsidiary of a newly-formed Delaware
corporation (the "Holding Company"), the merger of Principal Financial Group,
Inc. with and into the Intermediate Holding Company, and the merger of Principal
Financial Services, Inc. with and into the Intermediate Holding Company, (the
"Mergers"). The Conversion and the Mergers are hereafter collectively referred
to as the "Restructuring."

     The MIHC structure, adopted in 1998, has served the organization well and
helped it accomplish many things in a short period of time. The environment in
which the organization operates, however, has changed in a number of important
ways since then. The passage of the Gramm-Leach-Bliley Act in 1999 which permits
mergers that combine commercial banks, insurers and securities firms under one
holding company may increase competition by substantially increasing the number,
size and financial strength of the organization's competitors. Further, for a
variety of reasons, other life insurance companies of the size of Principal Life
Insurance Company ("Principal Life") have not adopted the mutual insurance
holding company structure which leads to uncertainty about the receptivity and
valuation of stock offered to the public by a company with this structure. While
the organization is financially strong, these changes since the creation of the
MIHC have led the Board and management to conclude that achievement of the
organization's strategy will be enhanced through demutualization. The
flexibility to raise additional capital and diversify into global financial
services is enhanced in a demutualization. A demutualization will yield benefits
to the policyholders of Principal Life by increasing the organization's
financial resources and its ability to invest in new technology, products and
markets and improved customer service.

   5

     The Conversion will provide Eligible Policyholders with an opportunity to
receive shares of Common Stock, cash or Policy Credits in exchange for their
otherwise illiquid Membership Interests, which will be extinguished in the
Conversion. Thus, Eligible Policyholders will realize economic value from their
Membership Interests that is not currently available to them so long as the MIHC
remains a mutual company.

     THE CONVERSION WILL NOT, IN ANY WAY, CHANGE PREMIUMS OR REDUCE POLICY
BENEFITS, VALUES, GUARANTEES OR OTHER POLICY OBLIGATIONS OF PRINCIPAL LIFE TO
ITS POLICYHOLDERS. ALSO, PRINCIPAL LIFE WILL CONTINUE TO PAY POLICY DIVIDENDS AS
DECLARED (ALTHOUGH, AS ALWAYS, POLICY DIVIDENDS ARE NOT GUARANTEED AND MAY VARY
FROM YEAR TO YEAR DUE TO EXPERIENCE).

     The Board has received opinions from its financial, actuarial and legal
advisors and has relied on those opinions in adopting the Plan.

     The Board has unanimously determined that the Plan is fair and equitable to
the Members, both as to their Membership Interests and as to their contractual
interests as policyholders of Principal Life.

                                    ARTICLE I

                                   DEFINITIONS

     As used in the Plan the following terms have the following meanings:

     "Account Value Policy Credit" means a Policy Credit, in the form of an
increase in the value of the applicable group annuity contract, issued to a
Qualified Plan Customer or a Non-Rule 180 Qualified Plan Customer. Such increase
in value shall be allocated to participants' accounts, where appropriate, based
on account balances for which records are kept by Principal Life unless the
Qualified Plan Customer or Non-Rule 180 Qualified Plan Customer directs
otherwise.

     "Actuarial Calculation Date" means the date as of which the Actuarial
Contribution for the Policies will be calculated and is the same date as the
Record Date.

     "Actuarial Contribution" means, with respect to a particular Policy, the
contribution that such Policy has made to Principal Life's statutory surplus and
asset valuation reserve, plus the contribution that such Policy is expected to
make in the future, as calculated according to the principles, assumptions and
methodologies set forth in this Plan and the Actuarial Contribution Memorandum.

                                        2
   6

     "Actuarial Contribution Memorandum" has the meaning specified in Section
7.1(b).

     "Adoption Date" has the meaning specified in the first paragraph of the
preamble hereto.

     "Agents Savings Plan" means The Principal Select Savings Plan for
Individual Field.

     "Aggregate Fixed Component" has the meaning specified in Section 7.1(b).

     "Aggregate Variable Component" has the meaning specified in Section 7.1(b).

     "Agreement and Plan of Merger" has the meaning specified in Section 5.1.

     "Allocable Shares" means, subject to Section 8.3, 350 million shares of
Common Stock, to be allocated as described in Article VII.

     "Application" has the meaning specified in Section 3.1.

     "Board" has the meaning specified in the first paragraph of the preamble
hereto.

     "Chapter 508B" means Chapter 508B of Title XIII of the Code of Iowa (2001).

     "Closed Block" has the meaning specified in Article II.

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

     "Commissioner" means the Commissioner of Insurance of the State of Iowa, or
such other governmental officer, body or authority as becomes the primary
regulator of the MIHC under applicable Iowa law.

     "Common Stock" means the shares of common stock of the Holding Company.

     "Company Records" means the records of the MIHC or Principal Life, as
applicable.

     "Company Trust" means any trust established by Principal Life for its own
administrative convenience in its capacity as an insurer.

     "Conversion" has the meaning specified in the first paragraph of the
preamble hereto.

                                        3
   7

     "Director" means a member of the Board of Directors of the MIHC, Principal
Financial Group, Inc., Principal Financial Services, Inc., the Holding Company,
the Intermediate Holding Company or Principal Life.

     "Directors Stock Plan" means the Principal Financial Group, Inc. Directors
Stock Plan.

     "Dividend Capacity" means the full extent of Principal Life's statutory
capacity to pay a non-extraordinary dividend in 2001.

     "Dividend Shortfall" means the amount, if any, of Principal Life's Dividend
Capacity that Principal Life has been prohibited by the Commissioner from paying
to Principal Financial Services, Inc. in 2001 prior to the Effective Date.

     "Effective Date" has the meaning specified in Section 5.2(a).

     "Elective Cash Requirements" means the amount needed by Principal Life to
fund the aggregate amount of all elections and deemed elections for cash and
Account Value Policy Credits (pursuant to paragraphs (a), (d) and (e) of Section
7.3) that are attributable to Eligible Policyholders who are allocated more than
100 shares of Common Stock.

     "Eligible Policyholder" means a Person (or, collectively, the Persons) who,
on the Record Date, is the Owner of one or more Policies and who, as reflected
in the Company Records, has a continuous membership interest in the MIHC through
ownership of one or more Policies from the Record Date until and on the
Effective Date. Members of the MIHC who were issued Policies on or before April
8, 1980 and transferred ownership rights of such Policies on or before April 8,
1980 are Eligible Policyholders so long as such Policies remain In Force until
and on the Effective Date. The MIHC may deem a Person to be an Eligible
Policyholder in order to correct any immaterial administrative errors or
oversights.

     "Employees Savings Plan" means the Principal Select Savings Plan for
Employees.

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

     "Evidence of Insurance Coverage" means subscription agreements (other than
a Subscription to Trust and Enrollment Form for Accident and Sickness Insurance
under the Principal Retiree Group Medical Trust) except in the case of Group
Universal Life-1 and Long Term Care-1 Policies issued to a Company Trust, in
which cases "Evidence of Insurance Coverage" means certificates of insurance.

                                        4
   8

     "Excess Plan" means the Principal Select Savings Excess Plan and the Non-
Qualified Defined Contribution Plan for Designated Participants.

     "Executive Officer" means any "executive officer" (within the meaning of
Rule 3b-7 under the Securities Exchange Act of 1934, as amended) of the Holding
Company, from time to time, whether such person is an officer of the Holding
Company or one of its subsidiaries, and any officer of the MIHC or Principal
Life with the title of Second Vice President or a more senior title, or any
officer of a subsidiary or affiliate of Principal Life with a title equivalent
to a Second Vice President or more senior title with Principal Life. For a
period of six months after the Effective Date, the individuals identified as
executive officers in the Holding Company's registration statement under the
Securities Act of 1933, as amended, relating to the IPO shall be considered
Executive Officers regardless of any change in title or duties, provided that
such individuals are in the employ of the Holding Company or any of its
subsidiaries.

     "Federal Income Tax Law" means the Code, Treasury Regulations issued
thereunder, administrative interpretations thereof and judicial interpretations
with respect thereto.

     "Funding Agreement" means an agreement which authorizes Principal Life to
accept and accumulate funds for the purpose of making one or more payments at
future dates and which does not contain or provide for any mortality or
morbidity contingencies.

     "Holding Company" has the meaning specified in the first paragraph of the
preamble hereto.

     "Holding Stock Plan" has the meaning specified in Section 8.1(a).

     "In Force" has the meaning specified in Section 6.3.

     "Intermediate Holding Company" has the meaning specified in the first
paragraph of the preamble hereto.

     "IPO" means the initial public offering by the Holding Company of shares of
Common Stock.

     "IPO Stock Price" means the price per share to the public at which Common
Stock is sold in the IPO.

     "LTI Plan" means the Principal Financial Group Long-Term Performance Plan.

     "Mandatory Cash Requirements" means the amount needed by Principal Life to
fund (1) the mandatory Policy Credits and cash payments for Eligible
Policyholders described in paragraphs (b) and (c) of Section 7.3; (2) the
elections and deemed elections

                                        5
   9

for cash and Account Value Policy Credits (pursuant to paragraphs (a), (d) and
(e) of Section 7.3) that are attributable to Eligible Policyholders who are
allocated 100 or fewer shares of Common Stock; and (3) an amount equal to the
fees and expenses of the Restructuring paid by Principal Life.

     "Member" means a Person who is (or, collectively, the Persons who are) on a
specified date, the Owner of one or more Policies which is (are) then In Force.
A Person who was issued a Policy on or before April 8, 1980 and transferred
ownership rights of that Policy on or before April 8, 1980 is also a Member so
long as such Policy remains In Force.

     "Members' Meeting" has the meaning specified in Section 4.1.

     "Membership Interest" means all the rights and interests arising under the
Articles of Incorporation or By-Laws of the MIHC or otherwise by law arising
through ownership or issuance of a Policy or Policies of Principal Life
including, but not limited to, any right to vote and any rights which may exist
with regard to the net worth of the MIHC, including any such rights in
liquidation or reorganization of the MIHC, but shall not include any other right
or interest expressly conferred by a Policy.

     "Mergers" has the meaning specified in the first paragraph of the preamble
hereto.

     "MIHC" has the meaning specified in the first paragraph of the preamble
hereto.

     "Net Cash Proceeds" means proceeds of the IPO received by the Holding
Company plus proceeds of any Other Capital Raising Transaction received by the
Holding Company, net of all underwriting commissions, offering expenses and
other transaction expenses of the Holding Company, without taking into account
any proceeds received pursuant to any Underwriters' Over-Allotment Option.

     "Nonroutine Matter" means a matter up for shareholder vote if:

          (i) the matter concerns the election or removal of Directors of the
Holding Company and a proxy contest is appropriately initiated by a contesting
shareholder whereby the contesting shareholder seeks to (1) nominate one or more
candidates or a slate of candidates for election as Directors of the Holding
Company in opposition to a nominee of the Holding Company's Board of Directors,
(2) oppose one or more nominees of the Holding Company's Board of Directors for
election of Directors, (3) remove one or more Directors of the Holding Company
for cause, or (4) nominate one or more candidates for election as Directors of
the Holding Company to fill the vacancy or vacancies resulting from the removal
of one or more Directors by the Holding Company's shareholders;

                                        6
   10

          (ii) the matter concerns (1) the merger or consolidation of the
Holding Company into or with any other person, the sale, lease or exchange of
all or substantially all of the property or assets of the Holding Company, or
the recapitalization or dissolution of the Holding Company, in each case which
requires a vote of the Holding Company's shareholders under applicable Delaware
law, or (2) any other corporate transaction that would result in an exchange or
conversion of the shares of Common Stock in the separate account formed pursuant
to Section 7.3(d) for cash, securities or other property;

          (iii) the matter concerns any proposal requiring the Board of
Directors of the Holding Company to amend or redeem the rights under the Holding
Company's shareholder rights plan, other than a proposal with respect to which
the Holding Company has received the advice of nationally-recognized legal
counsel to the effect that the proposal is not a proper subject for shareholder
action under Delaware law; or

          (iv) the matter concerns any of the following subjects, if such
matter is brought to a vote of shareholders prior to the first anniversary of
the Effective Date: (1)(a) the issuance of Common Stock after the Effective Date
at a price materially less than the then prevailing market price of the Common
Stock, other than through an underwritten offering or to officers, employees,
Directors or insurance agents of the Holding Company or any subsidiary of the
Holding Company pursuant to an employee benefit plan, and (b) a vote of the
Holding Company's shareholders with respect to the issuance is conducted or is
required to be conducted under applicable Delaware law; (2) any matter that
requires approval by a vote of more than a majority of the outstanding stock of
the Holding Company entitled to vote thereon under Delaware law or the
Certificate of Incorporation or the By-Laws of the Holding Company; or (3) an
amendment of the Certificate of Incorporation or By-Laws of the Holding Company
submitted for approval to the Holding Company's shareholders.

     "Non-Rule 180 Qualified Plan Customer" means an Owner of a group annuity
contract issued by Principal Life, which contract is designed to fund benefits
under a retirement plan which is qualified under Section 401(a) or Section
403(a) of the Code and which covers employees described in Section 401(c) of the
Code but which does not meet the requirements of Rule 180 promulgated under the
Securities Act of 1933, as amended.

     "Other Capital Raising Transactions" means one or more of the following:
(1) a private placement of Common Stock, (2) a private placement or public
offering of convertible preferred stock, (3) a private placement or public
offering of debt or (4) other sources of capital, or a combination thereof, on
or prior to the Effective Date.

     "Owner" means with respect to any Policy, the Person or Persons specified
or determined pursuant to Section 6.2.

                                        7
   11

     "Person" means an individual, corporation, limited liability company, joint
venture, partnership, association, trust, trustee, unincorporated entity or any
other form of entity, organization, or government or any department or agency
thereof. A Person who is the Owner of Policies in more than one legal capacity
(e.g., trustee under separate trusts) shall be deemed to be a separate Person in
each capacity.

     "Plan" means this Plan of Conversion (including all Exhibits hereto) as it
may be amended or modified from time to time in accordance with Section 8.6 or
Section 8.7.

     "Policy" has the meaning specified in Section 6.1.

     "Policy Credit" means consideration to be paid in the form of an increase
in cash value, account value, dividend accumulations, face amount, extended term
period or benefit payment, as appropriate, depending on the Policy. If the
Policy is owned by a Qualified Plan Customer, the Policy Credit will take the
form of a Separate Account Policy Credit or an Account Value Policy Credit. If
the Policy is owned by a Non-Rule 180 Qualified Plan Customer, the Policy Credit
will take the form of an Account Value Policy Credit.

     "Principal Life" has the meaning specified in the second paragraph of the
preamble hereto.

     "Public Hearing" has the meaning specified in Section 3.2.

     "Qualified Plan Customer" means an Owner of a group annuity contract issued
by Principal Life, which contract is designed to fund benefits under a
retirement plan which is qualified under Section 401(a) or Section 403(a) of the
Code (including a plan covering employees described in Section 401(c) of the
Code, provided such plan meets the requirements of Rule 180 promulgated under
the Securities Act of 1933, as amended) or which is a governmental plan
described in Section 414(d) of the Code, excluding (i) group annuity contracts
that fund only guaranteed deferred annuities or annuities in the course of
payments and (ii) group annuity contracts for which Principal Life does not
perform retirement plan record keeping services and whose group annuity
contracts do not provide for investments in Principal Life's pooled unregistered
separate accounts.

     "Record Date" means the date that is one year prior to the Adoption Date.

     "Restructuring" has the meaning specified in the first paragraph of the
preamble hereto.

     "Routine Matter" means any matter up for shareholder vote that does not
fall within the definition of a Nonroutine Matter.

                                        8
   12

     "Savings Plans" means the Employees Savings Plan, the Agents Savings Plan
and the Excess Plan.

     "Separate Account Policy Credit" means a Policy Credit issued to a
Qualified Plan Customer in the form of an addition to such Qualified Plan
Customer's group annuity contract of an interest in a separate account
maintained by Principal Life. This separate account will receive, for the
benefit of such Qualified Plan Customer's qualified plan, a number of shares of
Common Stock equal to the number of shares allocable to such contract pursuant
to Section 7.1. The separate account interests issued as Separate Account Policy
Credits to a Qualified Plan Customer shall be allocated to plan participants'
accounts, where appropriate, based on account balances for which records are
kept by Principal Life unless the Qualified Plan Customer directs otherwise.

     "State" means any state, territory or insular possession of the United
States of America and the District of Columbia.

     "Stock Incentive Plan" means the Principal Financial Group, Inc. Stock
Incentive Plan.

     "Stock Purchase Plan" means the Principal Financial Group, Inc. Employee
Stock Purchase Plan.

     "Total Debt/Capitalization Ratio" means (1) long-term debt plus current
maturities, commercial paper and other short-term borrowings divided by (2)
long-term debt plus current maturities, commercial paper, and other short term
borrowings plus shareholders' equity (including preferred stock) plus minority
interest.

     "Underwriters' Over-Allotment Option" means, as applicable, the option
granted by the Holding Company to the underwriters to purchase additional shares
of Common Stock under certain conditions or any over-allotment option granted by
the Holding Company to the underwriters in any Other Capital Raising
Transactions to purchase additional securities in those offerings under any
applicable conditions.

     "Voting Policyholder" has the meaning specified in Section 4.1.

                                   ARTICLE II

                                 THE CONVERSION

     Under the Plan, the MIHC converts to a stock company and all Membership
Interests are extinguished. Eligible Policyholders will receive as consideration
under the Plan shares of Common Stock, cash or Policy Credits.

                                        9
   13

     While the Membership Interests are extinguished in the Conversion, the
Conversion will not, in any way, change premiums or reduce policy benefits,
values, guarantees or other policy obligations of Principal Life to its
policyholders.

     Upon Principal Life's reorganization to the mutual insurance holding
company structure effective July 1, 1998, for policyholder dividend purposes
only, Principal Life formed and began operating a closed block of participating
policies for the benefit of the participating policies and contracts included
therein (the "Closed Block"). The Closed Block is described in Article V of the
Plan of Reorganization of Principal Mutual Life Insurance Company, dated as of
September 15, 1997, as amended. Assets of Principal Life were allocated to the
Closed Block in an amount that produces cash flows which, together with
anticipated revenue from the Closed Block policies and contracts, are expected
to be sufficient to support the Closed Block policies and contracts including,
but not limited to, provisions for payment of claims and certain expenses and
taxes, and to provide for continuation of policy and contract dividends in
aggregate in accordance with the 1997 dividend scales if the experience
underlying such scales continues, and to allow for appropriate adjustments in
such scales if such experience changes. After the Effective Date, Principal Life
will continue to operate the Closed Block in accordance with its terms.

                                   ARTICLE III

                          APPROVAL BY THE COMMISSIONER

     3.1 APPLICATION. The MIHC shall file with the Commissioner an application
(the "Application") to convert pursuant to Chapter 508B to a stock company in a
transaction whereby Membership Interests in the MIHC will be extinguished and
Eligible Policyholders will receive the consideration provided in the Plan as a
result of its effectiveness. The Application shall include the following:

     (a) the Plan;

     (b) the form of notice of the Public Hearing;

     (c) the form of notice of the Members' Meeting;

     (d) the form of ballot to be solicited from Voting Policyholders;

     (e) the information required by Section 508B.6 of the Code of Iowa (2001);
         and

     (f) any other information or documentation required by the Commissioner.

                                       10
   14

     3.2 COMMISSIONER'S PUBLIC HEARING; COMMISSIONER'S ORDER. The Plan is
subject to the approval of the Commissioner. The Commissioner will hold a
hearing on the compliance of the Plan with all provisions of law, the fairness
and equity of the terms of the Plan and on whether the Intermediate Holding
Company and Principal Life will have the amount of capital and surplus necessary
for their future solvency (the "Public Hearing"). The MIHC, its Members and
other interested persons shall have the right to appear at the Public Hearing.
The Public Hearing will occur after the Members' Meeting.

     3.3 NOTICE OF PUBLIC HEARING.

     (a) Written notice by the MIHC of such Public Hearing, in a form
satisfactory to the Commissioner, shall be mailed by priority mail or delivered
by the MIHC at the MIHC's expense at least 30 days prior to the Public Hearing
to each Voting Policyholder, and other interested persons as determined by the
Commissioner. Such notice of Public Hearing shall be accompanied or preceded by
information relevant to the Public Hearing, including the time, date, place and
purpose of the Public Hearing, all of which shall be in a form satisfactory to
the Commissioner.

     (b) The MIHC shall give notice of such Public Hearing by publication once
in each of The Des Moines Register, USA Today (National Edition) and The New
York Times (National Edition) and by posting on the MIHC's website. Such
newspaper publications and the MIHC website posting shall be made at least 30
days prior to the Public Hearing and shall be in a form satisfactory to the
Commissioner.

                                   ARTICLE IV

                            APPROVAL BY POLICYHOLDERS

     4.1 POLICYHOLDER VOTE.

     (a) The MIHC shall hold a special meeting of Members (the "Members'
Meeting"). At the Members' Meeting, any Person who is (or, collectively, Persons
who are) a Member on the Adoption Date (the "Voting Policyholders") shall be
entitled to vote on the proposal to approve the Restructuring by ballot or in
person at the Members' Meeting.

     (b) The Restructuring is subject to the approval of not less than
two-thirds of the votes of the Voting Policyholders cast thereon by ballot or in
person at the Members' Meeting.

     (c) Based on Company Records, each Voting Policyholder shall be entitled to
one vote pursuant to Chapter 508B and the Articles of Incorporation of the MIHC,

                                       11
   15

regardless of the number of Policies or amount of insurance and benefits held by
or issued to such Voting Policyholder. Two or more persons who are the Owners of
a single Policy and who are one Member shall be deemed one Voting Policyholder
for purposes of voting and collectively shall be entitled to one vote.

     4.2 NOTICE OF MEMBERS' MEETING.

     (a) The MIHC shall mail notice by priority mail of the Members' Meeting to
all Voting Policyholders as provided herein. Such notice of Members' Meeting may
be mailed together with the notice of Public Hearing pursuant to Section 3.3.
The notice shall set forth the reasons for the ballot vote and the time, date
and place of the Members' Meeting, and shall enclose a ballot for each Voting
Policyholder. Such notice and ballot shall be mailed to the address of each
Voting Policyholder as it appears on Company Records, except in instances where
mailing of notice is not feasible as determined by the Commissioner. Such
mailing shall be made at least 30 days prior to the Members' Meeting and shall
be in a form satisfactory to the Commissioner. Such notice period for the
Members' Meeting may run concurrently with the notice period for the Public
Hearing provided for in Section 3.3.

     (b) Such notice of the Members' Meeting shall be accompanied or preceded by
information relevant to the Members' Meeting, including a copy or summary of the
Plan and other explanatory information, all of which shall be in a form
satisfactory to the Commissioner.

     (c) The MIHC shall give notice of such Members' Meeting by publication once
in each of The Des Moines Register, USA Today (National Edition) and The New
York Times (National Edition) and by posting on the MIHC's website. Such
newspaper publications and the MIHC website posting shall be made at least 30
days prior to the Members' Meeting and shall be in a form satisfactory to the
Commissioner.

                                    ARTICLE V

                                THE RESTRUCTURING

     5.1 EFFECT OF RESTRUCTURING ON THE MIHC. On the Effective Date, the MIHC
shall be converted from a mutual insurance holding company into a stock company
in accordance with Section 521A.14(5)(b) of the Code of Iowa (2001) and Chapter
508B and the Mergers shall occur in accordance with the agreement and plan of
merger (the "Agreement and Plan of Merger"), the form of which is attached
hereto as Exhibit A. As a result of the Conversion and the Mergers, Principal
Life will become a wholly-owned subsidiary of the Intermediate Holding Company,
and the Intermediate Holding Company will continue as a wholly-owned subsidiary
of the Holding Company on the

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Effective Date. The Intermediate Holding Company, as the surviving company in
the Mergers, will succeed to all of the assets, liabilities, rights, title and
interests of the MIHC and the other entities in the Mergers that are not the
surviving company. The forms of the Amended and Restated Certificate of
Incorporation and By-Laws of the Holding Company and the forms of the Articles
of Incorporation and By-Laws of the Intermediate Holding Company as shall be in
effect on the Effective Date are set forth as Exhibits B, C, D and E,
respectively.

     5.2 EFFECTIVENESS OF PLAN.

     (a) The effective date of the Plan (the "Effective Date") shall be the date
on which the closing of the IPO occurs, which shall be a date occurring after
the approval of the Plan by the Voting Policyholders and the Commissioner,
provided that in no event shall the Effective Date be more than 12 months after
the date on which the Commissioner approved or conditionally approved the Plan,
unless such period is extended by the Commissioner. The Plan shall be deemed to
have become effective at 12:01 a.m., Central Time, on the Effective Date.

     (b) Upon the effectiveness of the Plan:

          (i) The MIHC shall become a stock company by operation of Section
521A.14(5)(b) of the Code of Iowa (2001) and Chapter 508B.

          (ii) All Membership Interests shall be extinguished and Eligible
Policyholders shall be entitled to receive in exchange therefor shares of Common
Stock, cash or Policy Credits in accordance with Article VII and subject to
Section 8.3.

          (iii) The Mergers shall be effective.

          (iv) The Holding Company shall sell shares of Common Stock in the IPO
for cash and, if applicable, shall engage or shall have engaged in one or more
Other Capital Raising Transactions.

          (v) The Net Cash Proceeds must, at a minimum, be sufficient to fund
the Mandatory Cash Requirements in full, and the Net Cash Proceeds shall be used
first for that purpose. Provided that Principal Life has not been prohibited by
the Commissioner, prior to the Effective Date, from paying dividends to
Principal Financial Services, Inc. in 2001 equal to its Dividend Capacity, any
Net Cash Proceeds that remain after the Mandatory Cash Requirements have been
funded in full shall be used next to fund the Elective Cash Requirements in
accordance with Section 7.3(k). If the Net Cash Proceeds are sufficient to fund
both the Mandatory Cash Requirements and the Elective Cash Requirements in full,
the Holding Company may retain up to $250 million of any Net Cash Proceeds that
remain. Any remaining Net Cash Proceeds in excess of this $250 million limit
must be contributed to Principal Life. Notwithstanding the foregoing, if,

                                       13
   17

prior to the Effective Date, Principal Life has been prohibited by the
Commissioner from paying dividends to Principal Financial Services, Inc. in 2001
equal to its Dividend Capacity, then the amount the Holding Company is required
to contribute to fund the Elective Cash Requirements shall be reduced by the
lesser of: (A) the Dividend Shortfall; or (B) the extent, if any, that the
aggregate of cash and cash equivalents held by the MIHC, the Holding Company,
Principal Financial Services, Inc. and Principal Financial Group, Inc. on the
business day immediately preceding the Effective Date is less than $250 million.

The proceeds of any Underwriters' Over-Allotment Option shall be used first to
fund (in accordance with Section 7.3(k)) that portion, if any, of the Elective
Cash Requirements that is not funded in full by the Net Cash Proceeds to the
extent required by the immediately preceding paragraph. The Holding Company may
retain any amounts received from any Underwriters' Over-Allotment Option
proceeds that are not needed to fund the Elective Cash Requirements.

The Holding Company shall contribute to the Intermediate Holding Company, and
the Intermediate Holding Company shall in turn contribute to Principal Life, any
Net Cash Proceeds and proceeds of any Underwriters' Over-Allotment Option that
are needed to fund the Mandatory Cash Requirements or the Elective Cash
Requirements. All proceeds ultimately to be contributed to Principal Life
pursuant to this Section 5.2(b)(v) must be contributed not later than one
business day after such proceeds are received by the Holding Company.

          (vi) Principal Life shall receive from the Holding Company, solely for
allocation to the separate account described in the definition of "Separate
Account Policy Credit," and for no other purposes, a number of shares of Common
Stock that is adequate to provide the Separate Account Policy Credits.

     (c) As soon as reasonably practicable following the Effective Date, but in
any event no more than 60 days (or 75 days if the Net Cash Proceeds are not
sufficient to fund the Elective Cash Requirements in full) following the
Effective Date, unless the Commissioner approves a later date, (i) the Holding
Company shall issue to the Eligible Policyholders entitled to receive Common
Stock pursuant to Section 7.3 a number of shares of Common Stock determined in
accordance with Article VII registered in the respective names of such Eligible
Policyholders, and (ii) Principal Life shall pay cash or credit Policy Credits
to Eligible Policyholders pursuant to Section 7.3, subject in each case to
Section 8.3.

     (d) The Holding Company shall arrange for the listing of the Common Stock
on a national securities exchange and shall use its reasonable efforts to
maintain such listing for so long as the Holding Company is a publicly-traded
company. Except as

                                       14
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provided in Section 7.3(j), neither the MIHC nor the Holding Company shall have
any obligation to provide a procedure for the sale of shares of Common Stock.

     (e) In addition to the IPO, the Holding Company may also raise capital
through one or more Other Capital Raising Transactions, as determined by the
Board of Directors of the Holding Company.

The capital to be raised by the IPO or any Other Capital Raising Transaction
shall be in such amounts as the Board of Directors of the Holding Company shall
determine, provided that the proceeds raised in all such Other Capital Raising
Transactions, together with any amounts received from any Underwriters'
Over-Allotment Option with respect to any such Other Capital Raising
Transactions, shall not in the aggregate exceed one- third of the total proceeds
raised in any such Other Capital Raising Transactions, including any amounts
received from any Underwriters' Over-Allotment Option with respect to any such
Other Capital Raising Transactions, and the IPO.

The aggregate amount of any debt issued in such Other Capital Raising
Transactions, together with any amounts received from any Underwriters'
Over-Allotment Option with respect to any such Other Capital Raising
Transactions, if applicable, shall not cause the Holding Company's Total
Debt/Capitalization Ratio to exceed 25% on the date any such debt is issued.

The form, structure and terms of the IPO are subject to prior review and
approval by the Commissioner.

The form, structure and terms of any Other Capital Raising Transaction are
subject to prior review and approval by the Commissioner, as set forth in
Section 5.2(g).

     (f) The MIHC and the Holding Company shall use their best efforts to ensure
that the managing underwriters for the IPO and any Other Capital Raising
Transaction conduct the offering process in a manner that is generally
consistent with customary practices for similar offerings. The MIHC and the
Holding Company shall allow the Commissioner and the Commissioner's financial
advisors reasonable access to permit them to observe the offering process.
Special pricing committees of the boards of directors of the MIHC and the
Holding Company shall determine the price of Common Stock offered in the IPO and
any securities offered in any Other Capital Raising Transaction. These board
committees shall consist entirely of Directors who are not officers or employees
of the MIHC, the Holding Company, or any affiliate and no employees, officers or
directors of or legal counsel to any of the underwriters for the IPO or any
Other Capital Raising Transaction shall serve on such committees. Neither the
MIHC nor the Holding Company will enter into an underwriting agreement for the
IPO or any Other Capital Raising Transaction if it is notified that the
Commissioner has not received confirmation from its financial advisors to the
effect that the MIHC, the Holding

                                       15
   19

Company and the underwriters for the offerings have complied in all material
respects with the requirements of this Section 5.2(f). The underwriting
agreements and any amendments thereto shall contain terms and provisions that
are acceptable to the Commissioner. The MIHC shall provide the Commissioner with
a letter, dated the date of the signing of the underwriting agreements,
representing that as of that date it has complied with the foregoing
requirements in this Section 5.2(f) and that it will continue to do so. On the
Effective Date, the MIHC will provide the Commissioner with a letter confirming
these representations as of that date.

     (g) Written notice of the type and approximate amount of Other Capital
Raising Transactions, if any, in which the Holding Company proposes to engage
will be provided to the Commissioner.

If the Holding Company proposes to engage in an Other Capital Raising
Transaction that is classified under subsections (1), (2) or (3) of the Other
Capital Raising Transactions definition in Article I, the Holding Company will
make reasonable efforts to provide such notice 25 days prior (but in no event
shall notice be given less than 15 days prior) to the earlier of the
distribution of any preliminary prospectus or preliminary offering memorandum,
or commencement of the roadshow, relating to any such Other Capital Raising
Transaction.

If the Holding Company proposes to engage in an Other Capital Raising
Transaction that is classified under subsection (4) of the Other Capital Raising
Transactions definition in Article I, the Holding Company will provide such
notice no fewer than 25 days prior to the earlier of the distribution of any
preliminary prospectus or preliminary offering memorandum, or commencement of
the roadshow, relating to any such Other Capital Raising Transaction.

The Holding Company will provide written notice to the Commissioner at least 10
business days prior to the earlier of the distribution of any preliminary
prospectus or preliminary offering memorandum, or commencement of the roadshow,
relating to any Other Capital Raising Transaction, of the approximate amount and
the expected range of the offering price, interest or dividend rate, conversion
or redemption price and other relevant terms of such Other Capital Raising
Transaction.

During any notice period provided for in this Section 5.2(g), the Holding
Company will promptly provide to the Commissioner any additional information
required by the Commissioner regarding any proposed Other Capital Raising
Transaction. The Commissioner may, in her sole discretion, toll the running of
the applicable notice period until such time as all such information is
received.

The Holding Company shall not proceed with the distribution of any preliminary
prospectus or preliminary offering memorandum, or commencement of the roadshow,

                                       16
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relating to any Other Capital Raising Transaction without the express written
approval of the Commissioner.

     5.3 TAX CONSIDERATIONS. The Plan shall not become effective and the
Restructuring shall not occur, unless, on or prior to the Effective Date:

     (a) The MIHC shall have obtained rulings from the Internal Revenue Service
or, at the option of the MIHC, received the opinion of Debevoise & Plimpton or
other nationally recognized independent tax counsel, addressed to the Board and
in form and substance satisfactory to the Board, substantially to the effect
that:

          (i) Policies issued by Principal Life prior to the Effective Date will
not be deemed newly issued, issued in exchange for existing Policies or newly
purchased for any material federal income tax purpose as a result of the
reorganization of the MIHC pursuant to the Plan;

          (ii) With respect to any Policy issued by Principal Life prior to the
Effective Date that is part of a tax-qualified retirement funding arrangement
described in Section 403(b) or Section 408 or Section 408A of the Code, the
consummation of the Plan, including the crediting of consideration in the form
of Policy Credits to such Policy pursuant to Section 7.3, will not result in any
transaction that:

               (A) constitutes a distribution to the employee or beneficiary of
          the arrangement under Section 72 or Section 403(b)(11) of the Code, or
          a designated distribution, defined in Section 3405(e)(1) of the Code,
          that is subject to withholding under Section 3405(b) of the Code,

               (B) disqualifies an individual retirement annuity policy under
          Section 408(e) of the Code or gives rise to a prohibited transaction
          under Section 4975 of the Code between the individual retirement
          annuity and the individual for whose benefit it is established, or his
          or her beneficiary,

               (C) requires the imposition of a penalty for a premature
          distribution under Section 72(t) of the Code or a penalty for excess
          contributions to certain qualified retirement plans under Section 4973
          or Section 4979 of the Code, or

               (D) otherwise adversely affects the tax-favored status accorded
          such Policies under the Code or results in penalties or any other
          material adverse federal income tax consequences to the holders of
          such Policies under the Code;

          (iii) With respect to any Policy issued by Principal Life prior to the
Effective Date that is part of a tax-qualified pension or profit-sharing plan
described in

                                       17
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Section 401(a) or Section 403(a) of the Code and that will be credited with
consideration in the form of Policy Credits pursuant to Section 7.3, the
consummation of the Plan, including the crediting of such Policy Credits, will
not result in any transaction that disqualifies such plan under Section 401(a)
or Section 403(a) of the Code, whichever is applicable, gives rise to a
prohibited transaction under Section 4975 of the Code, or otherwise adversely
affects the tax-favored status accorded such Policies under the Code or results
in penalties or any other material adverse federal income tax consequences to
the holders of such Policies under the Code.

          (iv) Eligible Policyholders receiving solely Common Stock pursuant to
Section 7.3 and Qualified Plan Customers whose Policies are credited with
Separate Account Policy Credits should not recognize gain or loss for federal
income tax purposes as a result of the consummation of the Plan.

     (b) The MIHC shall have received an opinion of nationally recognized
independent tax counsel, addressed to the Board and in form and substance
satisfactory to the Board, substantially to the effect that the summary of the
principal income tax consequences to Eligible Policyholders of their receipt of
consideration pursuant to Section 7.3 set forth in the information provided to
Voting Policyholders pursuant to Section 4.2(b), to the extent it describes
matters of law or legal conclusions, is, subject to the limitations and
assumptions set forth therein, an accurate summary of the material federal
income tax consequences to Eligible Policyholders of the consummation of the
Plan under the Federal Income Tax Law in effect on the date of the commencement
of the mailing of such information to Voting Policyholders and remains accurate
under the Federal Income Tax Law in effect as of the Effective Date, except for
any developments between the date of the commencement of mailing and the
Effective Date (i) the principal federal income tax consequences of which to
Eligible Policyholders are, under the ruling or in the opinion of such counsel,
accurately described in all material respects in the information provided to
Voting Policyholders or (ii) that the MIHC has determined are not materially
adverse to the interests of Eligible Policyholders.

     5.4 OTHER OPINIONS. The Plan shall not become effective and the
Restructuring shall not occur, unless, on or prior to the Effective Date:

     (a) The MIHC shall have received an opinion of Goldman, Sachs & Co., or
another nationally-recognized financial advisor, as to the fairness from a
financial point of view to Eligible Policyholders, taken as a group, of the
exchange of the aggregate Membership Interests for Common Stock, cash or Policy
Credits in accordance with this Plan.

     (b) The MIHC shall have received an opinion of Daniel J. McCarthy, F.S.A.,
a consulting actuary associated with Milliman & Robertson, Inc., that the
principles, assumptions, and methodologies used to allocate consideration among
the Eligible

                                       18
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Policyholders are reasonable and appropriate and result in an allocation of
consideration that is fair and equitable to the Eligible Policyholders.

                                   ARTICLE VI

                                    POLICIES

     6.1 POLICIES.

     (a) For the purposes of this Plan, the term "Policy" means:

          (i) each original life, health or accident insurance policy or annuity
contract (including each annuity contract issued to an employer funding the
termination of a pension plan) that has been issued or assumed by Principal
Life, provided that any supplementary contract issued to effect the
annuitization of an individual deferred annuity shall be treated with such
annuity as one Policy;

          (ii) each Evidence of Insurance Coverage issued by Principal Life
under a group insurance policy or group annuity contract issued to a Company
Trust; and

          (iii) each certificate of insurance issued by Principal Life to
Persons who have exercised a portability or continuation option under any of
Principal Life's group universal life insurance Policies or group long term care
insurance Policies.

     (b) The following policies and contracts shall be deemed not to be Policies
for purposes of this Plan:

          (i) except as provided in Section 6.1(a)(i), any supplementary
contract or settlement option contract;

         (ii) except as provided in Section 6.1(a)(ii) and (iii), any
certificate or other evidence of insurance or coverage issued to an insured or
an annuitant, as applicable, under a group insurance policy or group annuity
contract;

          (iii) any reinsurance assumed by Principal Life as a reinsurer on an
indemnity basis (but assumption certificates may constitute Policies if they
otherwise fall within the definition of Policies as provided in Section
6.1(a)(i));

          (iv) all administrative services agreements, Funding Agreements and
synthetic guaranteed investment contracts; and

                                       19
   23

          (v) any policy issued by Principal Life and ceded to another insurance
company via assumption reinsurance.

     6.2 DETERMINATION OF OWNERSHIP. The Owner of any Policy as of any date
specified in the Plan shall be determined by the MIHC on the basis of Company
Records as of such date in accordance with the following provisions:

     (a) The Owner of a Policy shall be the holder of the Policy as shown on
Company Records, as described with greater specificity in Sections 6.2(b), (c),
(d) and (i).

     (b) If an individual Policy contains ownership provisions and the Owner is
named therein, then the Owner is the Person named as such in the Policy, as
shown on Company Records.

     (c) If an individual Policy does not contain ownership provisions, or
contains such provisions but an Owner is not named therein, the principal Person
upon whose life or health the Policy is issued, as shown on Company Records,
shall be the Owner.

     (d) The Owner of a Policy that is a group insurance policy or a group
annuity contract shall be the Person or Persons specified in the master policy
or contract as the policyholder or contractholder, unless no policyholder or
contractholder is so specified, in which case the Owner shall be the Person or
Persons to whom or in whose name the master policy or contract shall have been
issued, as shown on Company Records, provided that each holder, as shown on
Company Records, of Evidence of Insurance Coverage issued by Principal Life
under a group insurance policy or group annuity contract issued to a Company
Trust shall be deemed to be an Owner of a Policy, and such holder, and not the
trustee of any such Company Trust, nor any other Person with an interest in such
policy or contract, shall be deemed a Voting Policyholder, an Eligible
Policyholder or an Owner, as applicable.

     (e) Notwithstanding Sections 6.2(a), (b), (c) and (d), the Owner of a
Policy that has been assigned to another Person by an assignment of ownership
thereof absolute on its face and filed with Principal Life, in accordance with
the provisions of such Policy and Principal Life's rules with respect to the
absolute assignment of such Policy in effect at the time of such assignment
(which rules, for purposes of this Plan, shall be approved by the Commissioner),
shall be the Owner of such Policy as shown on Company Records. Unless an
assignment satisfies the requirements specified for such an assignment in this
Section 6.2(e), the determination of the Owner of a Policy shall be made without
giving effect to such assignment.

     (f) Notwithstanding Sections 6.2(a), (b), (c) and (d), with respect to a
Policy that funds an employee benefit plan and that has been assigned by an
assignment absolute

                                       20
   24

on its face, subsequent to the Record Date and before the Effective Date as
provided above, to a trust for such plan that is qualified under Section 401(a),
Section 403(a) or Section 501(c)(9) of the Code, such trust shall be deemed, for
purposes of this Plan, to have been the Owner on the Record Date and as of the
Effective Date for purposes of the definition of Eligible Policyholder set forth
in Article I hereof.

     (g) Except as otherwise set forth in this Article VI, the identity of the
Owner of a Policy shall be determined without giving effect to any interest of
any other Person in such Policy.

     (h) In no event may there be more than one Owner of a Policy, although more
than one Person may constitute a single Owner. If a Person owns a Policy with
one or more other Persons, they will constitute a single Owner with respect to
the Policy.

     (i) In any situation not expressly covered by the foregoing provisions of
this Section 6.2, the policyholder or contractholder, as reflected on Company
Records, and as determined in good faith by the MIHC, shall, subject to a
contrary decision by the Commissioner pursuant to Section 6.2(k), conclusively
be presumed to be the Owner of such Policy for purposes of this Section 6.2 and,
except for administrative errors, the MIHC shall not be required to examine or
consider any other facts or circumstances.

     (j) The mailing address of an Owner as of any date for purposes of the Plan
shall be the Owner's last known address as shown on Company Records as of such
date.

     (k) Any dispute as to the identity of the Owner of a Policy or the right to
vote or receive consideration shall be resolved in accordance with the
provisions of this Section 6.2 and such other procedures as may be acceptable to
the Commissioner.

     6.3 IN FORCE.

     (a) A Policy shall be deemed to be in force ("In Force") as of any date if,
as shown on Company Records (A)(i) such Policy has been issued and is in effect
or (ii) such Policy has not been issued but (x) has an effective date on or
before such date and (y) Principal Life's administrative office has received
with respect to such Policy on or before such date either (xx) an application
complete on its face or (yy) payment of full initial premium (or such lesser
amount required by Principal Life's normal administrative procedures) and
sufficient information to effect a contract of insurance according to Principal
Life's normal administrative procedures for coverage to be effective, provided
that any Policy referred to in this clause (ii) is issued as applied for, and
(B) such Policy has not matured by death or otherwise or been surrendered or
otherwise terminated; provided that a Policy shall be deemed to be In Force
after lapse for nonpayment of premiums until expiration of any applicable grace
period (or other similar period however designated in such Policy) or any
extension of such grace period in accordance with

                                       21
   25

Principal Life's normal administrative procedures, during which time the Policy
is in full force for its basic benefits.

     (b) In the case of any reinstated Policy, the determination of such
Policy's variable component, if any, pursuant to Article VII shall be made based
on the original issue date of such Policy and without regard to any lapse and
reinstatement.

     (c) A Policy shall not be deemed to have matured by reason of death as of
any date unless verbal or written notice of such death has been received in
Principal Life's administrative office on or prior to such date, as shown on
Company Records. The date of the surrender or termination of a Policy shall be
as shown on Company Records.

                                   ARTICLE VII

                    ALLOCATION OF POLICYHOLDER CONSIDERATION

     7.1 ALLOCATION OF ALLOCABLE SHARES.

     (a) The consideration to be given to Eligible Policyholders in exchange for
their Membership Interests shall be shares of Common Stock, cash or Policy
Credits, as provided in this Article VII. Solely for purposes of calculating the
amount of such consideration, each Eligible Policyholder will be allocated (but
not necessarily issued) shares of Common Stock in accordance with this Article
VII.

     (b) Each Eligible Policyholder shall be allocated out of the Allocable
Shares a number of shares of Common Stock equal to the sum of:

          (i) a fixed component of consideration equal to 100 shares of Common
Stock (subject to proportional adjustment as provided in Section 8.3) regardless
of how many Policies, if any, such Eligible Policyholder owns or was issued, and

          (ii) a variable component of consideration consisting of a number of
shares of Common Stock reflecting the portion, if any, of the Aggregate Variable
Component allocated with respect to each Policy of which such Eligible
Policyholder was the Owner on the Record Date, so long as such Eligible
Policyholder remained a Member continuously until and on the Effective Date as
reflected in Company Records. A Person who is an Eligible Policyholder by virtue
of being a Member of the MIHC who was issued a Policy on or before April 8, 1980
and transferred ownership rights of such Policy on or before April 8, 1980 will
not receive a variable component of consideration with respect to such Policy.

                                       22
   26

The Allocable Shares shall be allocated first to provide for the number of
shares required for the aggregate fixed component of consideration allocable in
respect of all Eligible Policyholders (the "Aggregate Fixed Component"), and the
remainder of the Allocable Shares shall constitute the aggregate variable
component of consideration (the "Aggregate Variable Component"). The Aggregate
Variable Component shall be allocated in accordance with the principles set
forth in Section 7.2 and the calculation of actuarial contribution described in
the Actuarial Contribution Memorandum (the "Actuarial Contribution Memorandum")
attached as Exhibit F.

     7.2 ALLOCATION OF AGGREGATE VARIABLE COMPONENT. The Aggregate Variable
Component shall be allocated to Eligible Policyholders with respect to Policies
of which they are Owners on the Actuarial Calculation Date as follows:

     (a) Such allocation shall be made by multiplying each Eligible
Policyholder's Actuarial Contribution by the ratio of the Aggregate Variable
Component to the sum of all the Actuarial Contributions of all Policies. Each
Eligible Policyholder's variable component shall be computed by summing the
aforementioned calculation of said policyholder's Policies and rounding such
result to the nearest integral number of shares (with one-half shares being
rounded upward). Because of such rounding, the aggregate of Eligible
Policyholders' variable components will not necessarily be equal to the
Aggregate Variable Component. In the event the aggregate of Eligible
Policyholders' variable components is different from the Aggregate Variable
Component, the rounding of the Eligible Policyholders' variable components will
be redone using a different criterion as to the point at or above which partial
shares are rounded upward. This point will be chosen such that the aggregate of
Eligible Policyholders' variable components is as large as possible while
remaining not greater than the Aggregate Variable Component.

     (b) The MIHC shall make reasonable determinations of the dollar amount of
Actuarial Contribution, which shall be zero or a positive number according to
the principles and methodologies set forth in the Actuarial Contribution
Memorandum.

     (c) Each such Actuarial Contribution shall be determined on the basis of
Company Records as of the Actuarial Calculation Date without regard to any
changes in the status of, or premiums in excess of those required on such
Policies that occur subsequent to the Actuarial Calculation Date.

     7.3 DISTRIBUTION OF CONSIDERATION.

     (a) Any Eligible Policyholder other than one of those described in
paragraphs (b)-(e) of this Section 7.3 shall be issued a number of shares of
Common Stock equal to the number of shares allocated to such Eligible
Policyholder, unless, subject to the limitations set forth in Section 7.3(k),
such Eligible Policyholder has affirmatively elected, on a form provided to such
Eligible Policyholder that has been properly

                                       23
   27

completed and received by the MIHC on or prior to the date of the Members'
Meeting referred to in Section 4.1, to receive cash.

     (b) To the extent shares of Common Stock are allocable with respect to a
Policy of a type described below, the Eligible Policyholder who is the Owner of
such Policy shall not be issued shares of Common Stock and shall instead be
credited Policy Credits (in an amount determined pursuant to Section 7.3(h))
based on the number of shares of Common Stock allocated to such Eligible
Policyholder as provided in this Article VII:

          (i) a Policy that is an individual retirement annuity contract within
the meaning of Section 408(b) or 408A of the Code or an annuity contract under
Section 403(b) of the Code;

          (ii) a Policy that is an individual annuity contract that has been
issued pursuant to a plan qualified under Section 401(a) or Section 403(a) of
the Code directly to the plan participant;

          (iii) a Policy that is an individual life insurance policy that has
been issued pursuant to a plan qualified under Section 401(a) or Section 403(a)
of the Code directly to the plan participant.

     (c) To the extent shares of Common Stock are allocable with respect to a
Policy owned by an Eligible Policyholder of a type described below, such
Eligible Policyholder shall not be issued shares of Common Stock and shall
instead be paid cash (in an amount determined pursuant to Section 7.3(h)) based
on the number of shares of Common Stock allocated to such Eligible Policyholder
as provided in this Article VII:

          (i) an Eligible Policyholder whose address for mailing purposes as
shown on Company Records is an address at which mail is undeliverable or deemed
to be undeliverable in accordance with guidelines approved by the Commissioner,
unless the Policy is one of the types described in clauses (i) through (iii) of
Section 7.3(b);

          (ii) an Eligible Policyholder with respect to whom the MIHC determines
in good faith to the satisfaction of the Commissioner that it is not reasonably
feasible or appropriate to provide consideration in the form that such Eligible
Policyholder would otherwise receive, unless the Policy is one of the types
described in clauses (i) through (iii) of Section 7.3(b);

          (iii) an Eligible Policyholder whose address for mailing purposes as
shown on Company Records is located outside the States of the United States of
America, unless the Policy is one of the types described in clauses (i) through
(iii) of Section 7.3(b).

                                       24
   28

     (d) To the extent shares of Common Stock are allocable with respect to a
Policy owned by a Qualified Plan Customer, subject to the limitations set forth
in Sections 7.3(k), (l) and (m), such Qualified Plan Customer shall not be
issued shares of Common Stock and shall instead be issued Separate Account
Policy Credits unless such Qualified Plan Customer has affirmatively elected, on
a form provided to such Qualified Plan Customer that has been properly completed
and received by the MIHC on or prior to the date of the Members' Meeting, to
receive Common Stock, cash or Account Value Policy Credits.

     (e) To the extent shares of Common Stock are allocable with respect to a
Policy owned by a Non-Rule 180 Qualified Plan Customer, subject to the
limitations set forth in Section 7.3(k), such Non-Rule 180 Qualified Plan
Customer shall not be issued shares of Common Stock and shall instead be issued
Account Value Policy Credits unless such Non-Rule 180 Qualified Plan Customer
has affirmatively elected, on a form that has been properly completed and
received by the MIHC on or prior to the date of the Members' Meeting, to receive
Common Stock or cash.

     (f) In the event that an Eligible Policyholder who is the Owner of more
than one Policy is entitled to receive consideration under this Article VII both
in the form of Policy Credits and in the form of cash or shares of Common Stock,
the fixed component of consideration payable to such Eligible Policyholder shall
be payable only with respect to those Policies for which cash or shares of
Common Stock are paid. In the event that an Eligible Policyholder has been
allocated consideration with respect to two or more Policies, all of which would
be credited Policy Credits pursuant to this Section 7.3, then the fixed
component of consideration shall be credited to the Policy with the earliest
Policy effective date.

     (g) In the event that more than one Person constitutes a single Owner of a
Policy, consideration allocated pursuant to this Article VII shall be
distributed jointly to such Persons.

     (h) If consideration is to be paid or credited to an Eligible Policyholder
in cash or Policy Credits (other than Separate Account Policy Credits), as the
case may be, pursuant to the Plan, the amount of such consideration shall be
equal to the number of shares of Common Stock allocable to such Eligible
Policyholder as provided in this Article VII multiplied by the IPO Stock Price.
If consideration is to be credited to an Eligible Policyholder in Separate
Account Policy Credits, such consideration shall initially consist of an
interest in the number of shares of Common Stock allocable to such Eligible
Policyholder as provided in this Article VII. Principal Life shall use
reasonable efforts to make payment of such consideration as soon as reasonably
practicable after the Effective Date, but in any event no more than 60 days (or
75 days if the Net Cash Proceeds are not sufficient to fund the Elective Cash
Requirements in full) following the

                                       25
   29

Effective Date, unless the Commissioner approves a later date, net of any
applicable withholding tax, by check, or by the crediting of a Policy Credit, as
the case may be.

     (i) As soon as reasonably practicable following the Effective Date, but in
any event no more than 60 days (or 75 days if the Net Cash Proceeds are not
sufficient to fund the Elective Cash Requirements in full) following the
Effective Date, unless the Commissioner approves a later date, the Holding
Company shall issue to each Eligible Policyholder, in book-entry form as
uncertificated shares, the shares of Common Stock allocated to such Eligible
Policyholder for which such Eligible Policyholder will not receive consideration
from Principal Life in the form of cash or Policy Credits, and mail to each such
Eligible Policyholder an appropriate notice that a designated number of shares
of Common Stock have been registered in the name of such Eligible Policyholder.
Upon request of the registered holder of such shares issued in book-entry form
as uncertificated shares, the Holding Company shall promptly mail a stock
certificate representing such shares to the registered holder.

     (j) Subject to any applicable requirements of federal or state securities
law, the Holding Company shall, in the unlikely event there are Eligible
Policyholders who receive under the Plan 99 or fewer shares of Common Stock,
establish a commission-free sales program which shall begin no sooner than the
first business day after the six-month anniversary of the Effective Date and no
later than the first business day after the twelve- month anniversary of the
Effective Date and shall continue in either case for three months or for such
longer period of time as the Board of Directors of the Holding Company may
determine to be appropriate and in the best interest of the Holding Company and
Eligible Policyholders. Pursuant to such program, each Eligible Policyholder who
receives under the Plan 99 or fewer shares of Common Stock shall be entitled to
sell at prevailing market prices all, but not less than all, the shares of
Common Stock received hereunder by such Eligible Policyholder, without paying
brokerage commissions, mailing charges, registration fees or other
administrative or similar expenses. Each Eligible Policyholder entitled to
participate in the commission-free sales program shall be entitled to purchase
that number of shares of Common Stock that is equal to the number necessary in
order to round up such Eligible Policyholder's holdings to 100 shares, without
paying brokerage commissions, mailing charges, registration fees or other
administrative or similar expenses. The Holding Company shall establish
administrative procedures for the delivery of requests to sell or purchase
shares of Common Stock through such program. The Holding Company may, in its
discretion, institute one or more commission-free sales programs in the future,
but is not required to do so. The commission-free sale and purchase arrangements
described herein shall be subject to such limitations as are agreed upon between
the MIHC, the Holding Company and the Securities and Exchange Commission.

     (k) If the Net Cash Proceeds and the proceeds of any Underwriters' Over-
Allotment Option are not sufficient, after the Mandatory Cash Requirements are
satisfied,

                                       26
   30

to fund the Elective Cash Requirements in full, such amount as is available
shall be distributed by Principal Life to Eligible Policyholders, in accordance
with the number of shares of Common Stock allocated, beginning with the Eligible
Policyholders allocated 101 shares of Common Stock and continuing to the highest
level of share allocation possible at which cash or Account Value Policy Credit
elections and deemed elections can be satisfied using such amount of available
funds. Eligible Policyholders described in Section 7.3(a) whose cash elections
cannot be satisfied shall instead receive Common Stock. Qualified Plan Customers
whose cash or Account Value Policy Credit elections cannot be satisfied shall
instead receive Separate Account Policy Credits. Non-Rule 180 Qualified Plan
Customers whose cash elections or Account Value Policy Credit deemed elections
cannot be satisfied shall instead receive Common Stock.

     (l) Notwithstanding any other provisions, the amount of Separate Account
Policy Credits shall be limited so that no less than 50% of the total
consideration distributed pursuant to this Section 7.3 shall be in the form of
Common Stock to ensure that the Restructuring qualifies as a tax-free
reorganization under the Code. Such limitation shall be accomplished by
calculating the total amount of Separate Account Policy Credits that may,
consistent with such 50% requirement, be credited after all other payments of
consideration other than in the form of Common Stock (giving effect to Section
7.3(k)) and crediting the amount available in accordance with the number of
shares of Common Stock allocated, beginning with such Qualified Plan Customers
allocated no more than the fixed component of consideration and continuing to
the highest level of share allocation possible at which all deemed elections for
Separate Account Policy Credits can be satisfied using the available amount.
Eligible Policyholders whose deemed elections for Separate Account Policy
Credits cannot be satisfied shall instead receive Common Stock.

     (m) The availability of Separate Account Policy Credits to any particular
Qualified Plan Customer shall be subject to the terms of the applicable Policy
and any applicable state insurance regulatory approvals. If any particular
Qualified Plan Customer is deemed to elect Separate Account Policy Credits and
such Separate Account Policy Credits are not available for any of the reasons
specified in the preceding sentence, such Qualified Plan Customer shall instead
receive Common Stock.

     7.4 ERISA PLANS. The MIHC and Principal Life have applied to the Department
of Labor for an exemption from Section 406(a) of ERISA and Section 4975 of the
Code with respect to the receipt of consideration pursuant to the Plan by
employee benefit plans subject to the provisions of such sections.
Notwithstanding any other provision of the Plan, if such exemption is not
received prior to the Effective Date, the MIHC shall, subject to the
Commissioner's approval, either pay such consideration to such Eligible
Policyholders or delay payment of such consideration to such Eligible
Policyholders and may place such consideration in an escrow or similar
arrangement subject to terms and conditions approved by the Commissioner. Any
such escrow or arrangement shall

                                       27
   31

provide for payment to Eligible Policyholders of such consideration plus
interest earned thereon not later than the third anniversary of the Effective
Date and all costs and expenses of such escrow or arrangement shall be borne by
the MIHC or its subsidiaries.

                                  ARTICLE VIII

                              ADDITIONAL PROVISIONS

     8.1 RESTRICTION ON ACQUISITION OF SECURITIES BY OFFICERS AND DIRECTORS.

     (a) Subject to the limitations set forth in this Section 8.1, nothing in
this Plan shall be deemed to prohibit the officers, Directors, employees, agents
and employee benefit plans of the Holding Company or its subsidiaries from
purchasing for cash, at the same price as offered to the public in any public
offering, Common Stock or from acquiring Common Stock as consideration pursuant
to Article VII or pursuant to a transaction otherwise permitted by this Plan.
Subject to the limitations set forth in this Section 8.1, nothing shall be
deemed to prohibit the Holding Company, Principal Life or any direct or indirect
subsidiary of the Holding Company from establishing stock option plans, stock
incentive plans, stock purchase plans and share ownership plans related to the
Common Stock (each, a "Holding Stock Plan") that are customary for publicly
traded companies.

     (b) During the eighteen-month period immediately following the Effective
Date, without the prior approval of the Commissioner, neither the Holding
Company, Principal Life nor any of their affiliates shall (i) adopt any Holding
Stock Plan other than the Stock Incentive Plan, the LTI Plan, the Stock Purchase
Plan, the Directors Stock Plan, the Agents Savings Plan, the Employees Savings
Plan, and the Excess Plan, (ii) amend any Holding Stock Plan (or, in the case of
the LTI Plan and the Savings Plans, the portions thereof that relate to Common
Stock), or (iii) amend any guideline related to the operation of any such
Holding Stock Plan attached to the Holding Stock Plan. The immediately preceding
sentence shall not preclude any amendment to each or any of the Savings Plans to
make Common Stock an investment option or a deemed investment option thereunder.
During the five year period immediately following the Effective Date, unless the
shareholders of the Holding Company approve an increase in such number by a
shareholder vote, the maximum number of shares of Common Stock that may be made
issuable under all Holding Stock Plans other than the Employees Savings Plan,
the Agents Savings Plan and the Stock Purchase Plan is 6% of the number of
shares outstanding immediately following the Effective Date.

     (c) Until six months after the Effective Date, the Holding Company shall
not make any awards under the Stock Incentive Plan, the Stock Purchase Plan or
the

                                       28
   32

Directors Stock Plan, or distribute any Common Stock under the LTI Plan, to any
Executive Officer or Director, and no Executive Officer or Director (or any
parent, spouse of a parent, child, spouse of a child, spouse, brother or sister,
including any step and adoptive relationships, of such Executive Officer or
Director) shall purchase any Common Stock. The Holding Company shall not make
any awards under the Stock Incentive Plan or the Stock Purchase Plan, or
distribute any Common Stock under the LTI Plan, to any person who is not an
Executive Officer or Director until at least 30 days following the Effective
Date.

     (d) Without limiting the generality of the foregoing, except to the extent
exercisability or distribution is accelerated (i) due to the approved retirement
of any person other than an Executive Officer or Director, (ii) due to the death
or disability of any person (including an Executive Officer or Director) or
(iii) with the approval of the Commissioner, no awards to any person under the
Stock Incentive Plan or the Directors Stock Plan shall become exercisable or
distributable earlier than the eighteen month anniversary of the Effective Date.
For purposes of the preceding sentence, any determination regarding a
recipient's disability or approved retirement shall be made in accordance with
the applicable Holding Stock Plan. No Common Stock shall be issuable to any
participant under the Excess Plan earlier than the eighteen month anniversary of
the Effective Date.

     (e) Nothing in this Section 8.1 shall prevent the Holding Company from (i)
issuing Common Stock in connection with the Employees Savings Plan or the Agents
Savings Plan, (ii) matching contributions by participants to either such plan or
(iii) crediting the account of any participant (including any Executive Officer)
under any of the Savings Plans by reference to the value of the Common Stock.
Further, except as provided in Section 8.1(b), 8.1(c) or 8.1(d), nothing in this
Section 8.1 shall prevent the Holding Company from issuing Common Stock pursuant
to any Holding Stock Plan.

     8.2 COMPENSATION OF DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES. No Director,
officer, insurance agent or employee of the MIHC or its subsidiaries shall
receive any fee, commission or other valuable consideration whatsoever, other
than their usual salary and compensation, for in any manner aiding, promoting or
assisting in connection with the transactions contemplated by the Plan or the
Mergers, except as provided for herein or as approved by the Commissioner.

     8.3 ADJUSTMENT OF SHARE NUMBERS. In order to effect a filing range (in the
registration statement under the Securities Act of 1933, as amended, relating to
the IPO) for the IPO Stock Price which the MIHC and the managing underwriters of
the IPO deem appropriate, the MIHC may adjust, by vote of the Board or a duly
authorized committee thereof at any time before the Effective Date and with the
prior approval of the Commissioner, the number of shares of Common Stock set
forth in the definition of Allocable Shares. Upon such an adjustment, the number
of shares set forth in

                                       29
   33

Section 7.1(b)(i) as the fixed component of consideration shall be adjusted
proportionately. The number of shares resulting from any such adjustment shall
be rounded up to the next higher integral number; provided, that no such
adjustment will be made unless it would result, without any such rounding, in
the number of Allocable Shares to be allocated in respect of each Policy as the
fixed component of consideration pursuant to Section 7.1(b)(i) being an integral
number.

     8.4 NO PREEMPTIVE RIGHTS. No member of the MIHC or other Person shall have
any preemptive right to acquire shares of Common Stock in connection with this
Plan.

     8.5 NOTICES. If the MIHC complies substantially and in good faith with the
requirements of Section 521A.14(5)(b) of the Code of Iowa (2001) and Chapter
508B or the terms of the Plan with respect to the giving of any required notice
to Voting Policyholders, its failure in any case to give such notice to any
Person or Persons entitled thereto shall not impair the validity of the actions
and proceedings taken under Section 521A.14(5)(b) of the Code of Iowa (2001) and
Chapter 508B or the Plan or entitle such Person to any injunctive or other
equitable relief with respect thereto.

     8.6 AMENDMENT OR WITHDRAWAL OF PLAN. At any time prior to the Effective
Date, the Board may withdraw or, with the Commissioner's approval, amend, the
Plan. The Plan may be amended by the Board of Directors of the Holding Company
after the Effective Date with the approval of the Commissioner. However, nothing
herein shall be construed to prevent the amendment of the Articles of
Incorporation or By-Laws of the MIHC or the Certificate of Incorporation or
By-Laws of the Holding Company at any time in accordance with their terms and
with applicable law.

     8.7 CORRECTIONS. The MIHC may, until the Effective Date, by an instrument
executed by its Chairman, Chief Executive Officer or any Executive Vice
President, attested by its Secretary under the MIHC's corporate seal and
submitted to the Commissioner, make such modifications as are appropriate to
correct errors, clarify existing items or make additions to correct manifest
omissions in the Plan (including the Exhibits). The MIHC may in the same manner
also make such modifications as may be required by the Commissioner after the
Public Hearing as a condition of approval of the Plan. Subject to the terms of
the Plan, the Holding Company may issue additional shares of Common Stock and
take any other action it deems appropriate to remedy errors or miscalculations
made in connection with the Plan.

     8.8 COSTS AND EXPENSES. All reasonable costs related to the Plan and the
Mergers, including without limitation, (1) those costs attributable to the use
of outside advisors by the MIHC, Principal Life, the Iowa Division of Insurance
or the New York Department of Insurance and (2) any costs related to any
deferral of the Effective Date pursuant to Section 5.2, shall be borne by the
MIHC, the Holding Company or Principal Life.

                                       30
   34

     8.9 SEPARATE ACCOUNT VOTING PROCEDURES.

     (a) Shares of Common Stock held in the separate account formed pursuant to
Section 7.3(d) shall be voted in accordance with the terms of Principal Life's
agreement with the independent fiduciary for such separate account, as amended
from time to time, and in accordance with the terms of the plan of operation for
such separate account, as amended from time to time with the prior approval of
the Commissioner. These agreements shall initially provide as follows:

          (i) Principal Life or its agent shall seek specific instruction from
Qualified Plan Customers as to how each Qualified Plan Customer wishes to votes
shares of Common Stock representing such Qualified Plan Customer's interest in
the separate account formed pursuant to Section 7.3(d). Principal Life or its
agent will vote shares of Common Stock in such separate account in accordance
with the instructions provided by each Qualified Plan Customer.

          (ii) In all shareholder votes on Routine Matters, shares of Common
Stock held in the separate account formed pursuant to Section 7.3(d)
representing the interest of Qualified Plan Customers who have not provided
voting instructions to Principal Life or its agent, shall be voted in the same
ratio as those shares of Common Stock held in such separate account for which
instructions were given to Principal Life or its agent by Qualified Plan
Customers as described in Section 8.9(a)(i).

          (iii) In the unlikely event of a shareholder vote on a Nonroutine
Matter, shares of Common Stock held in the separate account formed pursuant to
Section 7.3(d) representing interests of Qualified Plan Customers who have not
provided voting instructions to Principal Life or its agent, shall be voted in
accordance with the instructions of an independent fiduciary for such separate
account. The independent fiduciary shall instruct that such shares be voted in a
way that, in the independent fiduciary's judgment, would be in the best interest
of the participants and beneficiaries of the benefits plans of Qualified Plan
Customers in whose interest such shares are held. The independent fiduciary
shall carry out its fiduciary duties solely in the interest of the participants
and beneficiaries of the plans that have invested (directly or indirectly) in
the separate account formed pursuant to Section 7.3(d), in accordance with
Section 404 and other provisions of Part 4 of Title I of ERISA, and pursuant to
an investment policy that seeks to maximize the long-term investment returns of
the separate account formed pursuant to Section 7.3(d).

     8.10 GOVERNING LAW. The terms of the Plan shall be governed by and
construed in accordance with the laws of the State of Iowa.

                                       31
   35

     IN WITNESS WHEREOF, Principal Mutual Holding Company, by authority of its
Board of Directors, has caused this Plan to be duly executed this 31st day of
March, 2001.

                                PRINCIPAL MUTUAL HOLDING
                                COMPANY

                                By: /s/ J. BARRY GRISWELL
                                   ----------------------------------------
                                     J. Barry Griswell
                                     President and Chief Executive Officer

Attest:

/s/ JOYCE N. HOFFMAN
- -----------------------------------------
Joyce N. Hoffman
Senior Vice President and Corporate Secretary

                                       32
   36

                                             EXHIBIT A to the Plan of Conversion

                          AGREEMENT AND PLAN OF MERGER

        AGREEMENT AND PLAN OF MERGER dated _________, 2001 (the "Agreement")
between Principal Mutual Holding Company, an Iowa mutual insurance holding
company (to be converted into a stock company pursuant to Section 521A.14(5)(b)
and Chapter 508B of Title XIII the Code of Iowa (2001)) (the "MIHC"), and
Principal Iowa Newco, Inc., an Iowa stock corporation and indirect wholly-owned
subsidiary of the MIHC (the "Intermediate Holding Company").

     WHEREAS, the Board of Directors of the MIHC deems it advisable and in the
best interest of the MIHC and its members that the MIHC convert into a stock
company and merge with and into the Intermediate Holding Company, an Iowa stock
corporation and wholly-owned subsidiary of Principal Financial Group, Inc., a
Delaware corporation and wholly-owned subsidiary of the MIHC (the "Holding
Company"), with the Intermediate Holding Company as the surviving corporation;

     WHEREAS, the MIHC has caused the Holding Company and the Intermediate
Holding Company to be organized as newly-formed direct and indirect subsidiaries
of the MIHC for the purpose of merging the MIHC, Principal Financial Group,
Inc., an Iowa stock corporation and wholly-owned subsidiary of the MIHC
("Group"), and Principal Financial Services, Inc., an Iowa stock corporation and
wholly-owned subsidiary of Group ("Services"), with and into the Intermediate
Holding Company, with the Intermediate Holding Company as the surviving
corporation;

     WHEREAS, pursuant to the Plan of Conversion dated March 31, 2001 (the
"Plan"), Eligible Policyholders, as defined in the Plan, are receiving stock of
the Holding Company, cash or policy credits in exchange for their membership
interests in the MIHC which are being extinguished under the Plan;

     WHEREAS, the Board of Directors of the Intermediate Holding Company deems
it advisable and in the best interest of the Intermediate Holding Company and
its stockholder that Group merge with and into the Intermediate Holding Company,
with the Intermediate Holding Company as the surviving corporation;

     WHEREAS, the Board of Directors of the Intermediate Holding Company deems
it advisable and in the best interest of the Intermediate Holding Company and
its stockholder that Services merge with and into the Intermediate Holding
Company, with the Intermediate Holding Company as the surviving corporation, and
that the Intermediate Holding Company change its name to "Principal Financial
Services, Inc.";

   37

                                             EXHIBIT A to the Plan of Conversion

     WHEREAS, the Board of Directors of the MIHC has approved and has
recommended that the Voting Policyholders, as defined in the Plan, approve the
Plan, pursuant to which the MIHC shall convert into a stock company and the
MIHC, Group and Services shall merge with and into the Intermediate Holding
Company upon the terms and subject to the conditions set forth herein (the
"Mergers");

     WHEREAS, the Board of Directors of the Intermediate Holding Company has
approved the mergers of Group and Services with and into the Intermediate
Holding Company, with the Intermediate Holding Company as the surviving
corporation, each upon the terms and subject to the conditions set forth herein;
and

     WHEREAS, for U.S. Federal income tax purposes, it is intended that this
Agreement be a "plan of reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended.

     NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree
as follows:

                                    ARTICLE I

                                     MERGERS

     Section 1.1 The Mergers. Upon the terms and subject to the conditions of
this Agreement, and in accordance with Section 521A.14(5)(b) and Chapter 508B of
Title XIII of the Code of Iowa (2001) and the applicable provisions of the Iowa
Business Corporation Act (the "IBCA"), the MIHC shall convert into a stock
company and shall be merged with and into the Intermediate Holding Company, with
the Intermediate Holding Company as the surviving corporation. Following the
merger of the converted MIHC with and into the Intermediate Holding Company,
Group shall be merged with and into the Intermediate Holding Company, with the
Intermediate Holding Company as the surviving corporation, upon the terms and
subject to the conditions of this Agreement, and in accordance with Section
490.1104 of the IBCA and the Code of Iowa (2001). Following the merger of Group
with and into the Intermediate Holding Company, Services shall be merged with
and into the Intermediate Holding Company, with the Intermediate Holding Company
as the surviving corporation, and the Intermediate Holding Company shall change
its name to "Principal Financial Services, Inc.," upon the terms and subject to
the conditions of this Agreement, and in accordance with Section 490.1104 of the
IBCA and the Code of Iowa (2001). The Mergers shall become effective at the
Effective Time (as defined in Section 1.2 below). Following the Mergers, the
separate corporate existences of the MIHC, Group and Services shall cease and
the

                                        2
   38

                                             EXHIBIT A to the Plan of Conversion

Intermediate Holding Company shall continue under the name "Principal Financial
Services, Inc." as the surviving corporation (the "Surviving Corporation") and
shall succeed to all of the assets, liabilities, rights, title and interests of
each of the MIHC, Group and Services.

     Section 1.2 Effective Time of the Mergers. The Mergers shall become
effective at the date and time set forth in properly executed articles of merger
(the "Effective Time"), which articles of merger shall be duly filed with the
Secretary of State of the State of Iowa by the Surviving Corporation.

                                   ARTICLE II

                              SURVIVING CORPORATION

     Section 2.1 Articles of Incorporation. The Articles of Incorporation of the
Surviving Corporation shall be as set forth in the form of Articles of
Incorporation attached as Exhibit D to the Plan until thereafter changed or
amended as provided therein or by applicable law.

     Section 2.2 By-Laws. The By-Laws of the Surviving Corporation shall be as
set forth in the form of By-Laws attached as Exhibit E to the Plan until
thereafter changed or amended as provided therein or by applicable law.

     Section 2.3 Directors and Officers. The directors and officers of the
Intermediate Holding Company immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation. The directors and
officers of the Surviving Corporation shall hold office until their respective
successors shall have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Articles of
Incorporation and By-Laws of the Surviving Corporation.

                                   ARTICLE III

                       COMMON STOCK OF GROUP AND SERVICES

     Section 3.1 Common stock of Group and Services. At the Effective Time, by
virtue of the Mergers, each share of common stock of Group and each share of
common stock of Services issued and outstanding immediately prior to the
Effective Time shall be cancelled and retired, and shall cease to exist, without
any conversion thereof.

                                        3
   39

                                             EXHIBIT A to the Plan of Conversion

                                   ARTICLE IV

                              CONDITIONS TO MERGERS

     Section 4.1 Conditions to the Mergers. The obligations of the MIHC and the
Intermediate Holding Company to consummate the Mergers are subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions:

          (a) Voting Policyholder approval. The Plan and the transactions
          contemplated thereby, including this Agreement, shall have been
          approved and adopted by the requisite vote of the Voting Policyholders
          in accordance with the Plan or applicable laws;

          (b) Effectiveness of the Plan. All conditions precedent to the
          effectiveness of the Plan, including the approval of the Insurance
          Commissioner of the State of Iowa, shall have been satisfied and the
          Plan shall have become effective or will become effective on the same
          date as the Effective Time;

          (c) No injunctions. The consummation of the Mergers shall not be
          precluded by any bona fide order, decree or injunction of any federal
          or state court of the United States, and there shall not have been any
          action taken or any law enacted, promulgated or deemed applicable to
          the Mergers by any governmental entity that makes consummation of the
          Mergers illegal;

          (d) Filings. All filings with, and all actions by or in respect of,
          any governmental body, agency, official or authority required to
          permit the consummation of the Mergers shall have been completed.

                                    ARTICLE V

                              ADDITIONAL PROVISIONS

     Section 5.1 Amendment. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.

     Section 5.2 Costs and Expenses. All costs related to the Mergers shall be
borne by the MIHC or the Holding Company.

                                        4
   40

                                             EXHIBIT A to the Plan of Conversion

     Section 5.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa without giving effect
to the conflicts of law principles thereof.

     Section 5.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of which
shall together constitute one and the same agreement.

                                        5
   41
                                             EXHIBIT B to the Plan of Conversion

                              AMENDED AND RESTATED

                          CERTIFICATE OF INCORPORATION

                                       OF

                         PRINCIPAL FINANCIAL GROUP, INC.

                                    ARTICLE I

                               NAME OF CORPORATION

     The name of the corporation is Principal Financial Group, Inc. (the
"Corporation").

                                   ARTICLE II

                                REGISTERED OFFICE

     The Corporation's registered office in the State of Delaware is at 1209 N.
Orange Street, City of Wilmington, County of Newcastle, Delaware 19801. The name
of its registered agent at such address is The Corporation Trust Company.

                                   ARTICLE III

                                     PURPOSE

     The nature of the business of the Corporation and its purpose is to engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.

                                   ARTICLE IV

                                      STOCK

     Section 1. Authorized Stock. The aggregate number of shares of stock that
the Corporation shall have authority to issue is ___________ shares of common
stock, par value $____ per share (the "Common Stock"), and __________ shares of
preferred stock, par value $____ per share (the "Preferred Stock"). The number
of authorized shares of the Common Stock and the Preferred Stock or any other
class of stock may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the combined voting power of the outstanding shares of stock of the
Corporation entitled to vote thereon, and, irrespective of Section 242(b)(2) of
the Delaware General Corporation Law, no vote of the holders of any of the
Common Stock, the Preferred Stock or any other class of stock, voting separately
as a class, shall be required therefor.

   42

                                             EXHIBIT B to the Plan of Conversion

     Section 2. Preferred Stock.

     (a) The Preferred Stock may be issued at any time and from time to time in
one or more series. The Board of Directors is hereby authorized to provide for
the issuance of shares of Preferred Stock in series and, by filing a certificate
of designation pursuant to the applicable provisions of the General Corporation
Law of the State of Delaware (hereinafter referred to as a "Preferred Stock
Certificate of Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences and rights of shares of each such series and the qualifications,
limitations and restrictions thereof.

     (b) The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:

          (i)    the designation of the series, which may be by distinguishing
                 number, letter or title;

          (ii)   the number of shares of the series, which number the Board of
                 Directors may thereafter (except where otherwise provided in
                 the applicable Preferred Stock Certificate of Designation)
                 increase or decrease (but not below the number of shares
                 thereof then outstanding);

          (iii)  whether dividends, if any, shall be cumulative or noncumulative
                 and the dividend rate of the series;

          (iv)   whether dividends, if any, shall be payable in cash, in kind or
                 otherwise;

          (v)    the dates on which dividends, if any, shall be payable;

          (vi)   the redemption rights and price or prices, if any, for shares
                 of the series;

          (vii)  the terms and amount of any sinking fund provided for the
                 purchase or redemption of shares of the series;

          (viii) the amounts payable on shares of the series in the event of any
                 voluntary or involuntary liquidation, dissolution or winding up
                 of the affairs of the Corporation;

          (ix)   whether the shares of the series shall be convertible or
                 exchangeable into shares of any other class or series, or any
                 other security, of the Corporation or any other corporation,
                 and, if so, the specification of such other class or series or
                 such other security, the conversion or exchange price or prices
                 or rate or rates, any adjustments thereof, the date or dates as
                 of which such shares shall

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                                             EXHIBIT B to the Plan of Conversion

                be convertible or exchangeable and all other terms and
                conditions upon which such conversion or exchange may be made;

          (x)   restrictions on the issuance of shares of the same series or of
                any other class or series; and

          (xi)  whether or not the holders of the shares of such series shall
                have voting rights, in addition to the voting rights provided by
                law, and if so, the terms of such voting rights, which may
                provide, among other things and subject to the other provisions
                of this Amended and Restated Certificate of Incorporation, that
                each share of such series shall carry one vote or more or less
                than one vote per share, that the holders of such series shall
                be entitled to vote on certain matters as a separate class
                (which for such purpose may be comprised solely of such series
                or of such series and one or more other series or classes of
                stock of the Corporation) and that all the shares of such series
                entitled to vote on a particular matter shall be deemed to be
                voted on such matter in the manner that a specified portion of
                the voting power of the shares of such series or separate class
                are voted on such matter.

     (c) The Common Stock shall be subject to the express terms of the Preferred
Stock and any series thereof.

     (d) Subject to the rights of the holders of any series of Preferred Stock,
the number of authorized shares of any series of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by resolution of the Board of Directors and approved by the
affirmative vote of the holders of a majority of the voting power of all
outstanding shares of Common Stock of the Corporation and all other outstanding
shares of stock of the Corporation entitled to vote on such matter irrespective
of the provisions of Section 242(b)(2) of the General Corporation Law of the
State of Delaware or any corresponding provision hereafter enacted, with such
outstanding shares of Common Stock and other stock considered for this purpose a
single class.

     (e) Except as otherwise required by law, holders of Common Stock, as such,
shall not be entitled to vote on any amendment to this Amended and Restated
Certificate of Incorporation or to a Preferred Stock Certificate of Designation
that alters or changes the powers, preferences, rights or other terms of one or
more outstanding series of Preferred Stock if the holders of such affected
series are entitled, either separately or together with the holders of one or
more other series of Preferred Stock, to vote thereon as a separate class
pursuant to this Amended and Restated Certificate of Incorporation or a
Preferred Stock Certificate of Designation or pursuant to the General
Corporation Law of the State of Delaware as currently in effect or as the same
may hereafter be amended.

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                                             EXHIBIT B to the Plan of Conversion

     Section 3. Voting in Election of Directors. Except as may be required by
law or as provided in this Amended and Restated Certificate of Incorporation or
in a Preferred Stock Certificate of Designation, holders of Common Stock shall
have the exclusive right to vote for the election of Directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to vote on any
matter or receive notice of any meeting of stockholders.

     Section 4. Owner. The Corporation shall be entitled to treat the person in
whose name any share of its stock is registered as the owner thereof for all
purposes and shall not be bound to recognize any equitable or other claim to, or
interest in, such share on the part of any other person, whether or not the
Corporation shall have notice thereof, except as expressly provided by
applicable law.

     Section 5. Shareholder Rights Plans. The Board of Directors is hereby
authorized to create and issue, whether or not in connection with the issuance
and sale of any of the Corporation's stock or other securities or property,
rights entitling the holders thereof to purchase from the Corporation shares of
stock or other securities of the Corporation or any other corporation. The times
at which and the terms upon which such rights are to be issued will be
determined by the Board of Directors and set forth in the contracts or
instruments that evidence such rights. The authority of the Board of Directors
with respect to such rights shall include, but not be limited to, determination
of the following:

          (a)   the initial purchase price per share or other unit of the stock
                or other securities or property to be purchased upon exercise of
                such rights;

          (b)   provisions relating to the times at which and the circumstances
                under which such rights may be exercised or sold or otherwise
                transferred, either together with or separately from, any other
                stock or other securities of the Corporation;

          (c)   provisions which adjust the number or exercise price of such
                rights, or amount or nature of the stock or other securities or
                property receivable upon exercise of such rights, in the event
                of a combination, split or recapitalization of any stock of the
                Corporation, a change in ownership of the Corporation's stock or
                other securities or a reorganization, merger, consolidation,
                sale of assets or other occurrence relating to the Corporation
                or any stock of the Corporation, and provisions restricting the
                ability of the Corporation to enter into any such transaction
                absent an assumption by the other party or parties thereto of
                the obligations of the Corporation under such rights;

          (d)   provisions which deny the holder of a specified percentage of
                the outstanding stock or other securities of the Corporation the
                right to

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                                             EXHIBIT B to the Plan of Conversion

                exercise such rights and/or cause the rights held by such holder
                to become void;

          (e)   provisions which permit the Corporation to redeem such rights;
                and

          (f)   the appointment of a rights agent with respect to such rights.

                                    ARTICLE V

                               BOARD OF DIRECTORS;
                          MANAGEMENT OF THE CORPORATION

     Section 1. Classified Board. The Directors of the Corporation, subject to
the rights of the holders of shares of any class or series of Preferred Stock,
shall be classified with respect to the time for which they severally hold
office, into three classes, as nearly equal in number as possible, as shall be
provided in the By-laws of the Corporation, one class ("Class I") whose initial
term expires at the 2002 annual meeting of stockholders, another class ("Class
II") whose initial term expires at the 2003 annual meeting of stockholders, and
another class ("Class III") whose initial term expires at the 2004 annual
meeting of stockholders, with each class to hold office until its successors are
elected and qualified. At each annual meeting of stockholders of the
Corporation, the date of which will be fixed pursuant to the By-Laws of the
Corporation, and subject to the rights of the holders of shares of any class or
series of Preferred Stock, the successors of the class of Directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election.

     Section 2. Director Discretion. In determining what he or she reasonably
believes to be in the best interests of the Corporation in the performance of
his or her duties as a director, a Director may consider, to the extent
permitted by law, both in the consideration of tender and exchange offers,
mergers, consolidations and sales of all or substantially all of the
Corporation's assets and otherwise, such factors as the Board of Directors
determines to be relevant, including without limitation:

     (a)  the interests of the policyholders of the Corporation's subsidiaries;

     (b)  the long-term and short-term interests of the Corporation and its
          stockholders, including the possibility that the interests may be best
          served by the continued independence of the Corporation;

     (c)  whether the proposed transaction might violate state or federal laws;

     (d)  if applicable, not only the consideration being offered in a proposed
          transaction, in relation to the then current market price for the
          outstanding capital stock of the Corporation over a period of years,
          the estimated price that might be achieved in a negotiated sale of the
          Corporation as a whole or in part through orderly liquidation, the
          premiums over market price for

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                                             EXHIBIT B to the Plan of Conversion

          the securities of other Corporations in similar transactions, current
          political, economic and other factors bearing on securities prices and
          the Corporation's financial condition and future prospects; and

     (e)  the interests of the Corporation's employees, suppliers, creditors and
          customers, the economy of the state, region and nation, and community
          and societal considerations.

In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and to engage in such legal proceedings as the Board
of Directors may determine.

     Section 3. Management of Business. The following provisions are inserted
for the management of the business and for the conduct of the affairs of the
Corporation and for the purpose of creating, defining, limiting and regulating
the powers of the Corporation and its Directors and stockholders:

     (a)  Subject to the rights of any holders of any series of Preferred Stock,
          if any, to elect additional Directors under specified circumstances,
          the holders of a majority of the combined voting power of the then
          outstanding stock of the Corporation entitled to vote generally in the
          election of Directors may remove any Director or the entire Board of
          Directors, but only for cause.

     (b)  Vacancies in the Board of Directors resulting from death, resignation,
          retirement, disqualification, removal from office or other cause and
          newly created Directorships resulting from any increase in the
          authorized number of Directors shall be filled in the manner provided
          in the By-Laws of the Corporation.

     (c)  Advance notice of nominations for the election of Directors shall be
          given in the manner and to the extent provided in the By-Laws of the
          Corporation.

     (d)  The election of Directors may be conducted in any manner approved by
          the Board of Directors at the time when the election is held and need
          not be by written ballot.

     (e)  All corporate powers and authority of the Corporation (except as at
          the time otherwise provided by law, by this Amended and Restated
          Certificate of Incorporation or by the By-Laws) shall be vested in and
          exercised by the Board of Directors.

     (f)  The Board of Directors shall have the power without the assent or vote
          of the stockholders to adopt, amend, alter or repeal the By-Laws of
          the Corporation, except to the extent that the By-Laws or this Amended
          and Restated Certificate of Incorporation otherwise provide. In
          addition to any requirements of law and any other provision of this
          Amended and Restated Certificate of Incorporation, the stockholders of
          the Corporation

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                                             EXHIBIT B to the Plan of Conversion

          may adopt, amend, alter or repeal any provision of the By-Laws upon
          the affirmative vote of the holders of three-fourths (3/4) or more of
          the combined voting power of the then outstanding stock of the
          Corporation entitled to vote generally in the election of Directors.

                                   ARTICLE VI

                             LIABILITY OF DIRECTORS

     Section 1. General. No Director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a Director, except to the extent that such exemption from
liability or limitation thereof is not permitted under the Delaware General
Corporation Law as currently in effect or as the same may hereafter be amended.

     Section 2. Repeal or Modification. Any repeal or modification of this
Article VI by the stockholders of the Corporation shall not adversely affect any
right or protection of a Director, officer or the Corporation existing at the
time of such repeal or modification. If the General Corporation Law of the State
of Delaware is amended after the filing of this Amended and Restated Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended.

                                   ARTICLE VII

                    NO STOCKHOLDER ACTIONS BY WRITTEN CONSENT

     Effective as of the time the Common Stock shall be registered pursuant to
the provisions of the Securities Exchange Act of 1934, as amended, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of the stockholders of the
Corporation, and the ability of the stockholders to consent in writing to the
taking of any action is specifically denied.

                                  ARTICLE VIII

                    PROHIBITION ON ACQUISITION OF SECURITIES

     Pursuant to Section 13 of Chapter 508B of Title XIII of the Code of Iowa
(2001), a person shall not directly or indirectly acquire or offer to acquire
the beneficial ownership of more than five percent of any class of voting
security of the Corporation for a period of five years following the effective
date of the conversion of Principal Mutual Holding Company from a mutual
insurance holding company into a stock company pursuant to the Plan of
Conversion adopted March 31, 2001, without the prior approval of the Insurance
Commissioner of the State of Iowa and the Board of Directors of the reorganized
company. For the purposes of this Article IX, the term "beneficial ownership"
has the meaning set forth in Section 13 of Chapter 508B of Title XIII of the

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                                             EXHIBIT B to the Plan of Conversion

Code of Iowa (2001) and the term "reorganized company" has the meaning set forth
in Section 1 of Chapter 508B of Title XIII of the Code of Iowa (2001).

                                   ARTICLE IX

                                    AMENDMENT

     The Corporation reserves the right to amend or repeal any provision
contained in this Amended and Restated Certificate of Incorporation in the
manner now or hereafter prescribed by the laws of the State of Delaware, and all
rights herein conferred upon stockholders or Directors (in the present form of
this Amended and Restated Certificate of Incorporation or as hereinafter
amended) are granted subject to this reservation; provided, however, that any
amendment or repeal of Article VI of this Amended and Restated Certificate of
Incorporation shall not adversely affect any right or protection existing
hereunder immediately prior to such amendment or repeal; and, provided, further,
that Articles V, VI, VII, VIII or IX of this Amended and Restated Certificate of
Incorporation shall not be amended, altered or repealed without the affirmative
vote of the holders of at least three-fourths (3/4) of the combined voting power
of the then outstanding stock of the Corporation entitled to vote generally in
the election of Directors.

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                                            EXHIBIT C to the Plan of Conversion

                                     BY-LAWS

                                       OF

                        PRINCIPAL FINANCIAL GROUP, INC.
                        -------------------------------

                        As Adopted on         ,   2001
                                      -------- --

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                                            EXHIBIT C to the Plan of Conversion

                         PRINCIPAL FINANCIAL GROUP, INC.
                                     BY-LAWS
                         -------------------------------

                                TABLE OF CONTENTS

SECTION                                                                   PAGE

ARTICLE I       STOCKHOLDERS
Section 1.01.   Annual Meetings.............................................5
Section 1.02.   Special Meetings............................................5
Section 1.03.   Notice of Meetings; Waiver..................................5
Section 1.04.   Quorum......................................................3
Section 1.05.   Voting......................................................3
Section 1.06.   Voting by Ballot............................................3
Section 1.07.   Adjournment.................................................3
Section 1.08.   Proxies.....................................................3
Section 1.09.   Organization; Procedure.....................................4
Section 1.10.   Notice of Stockholder Business and Nominations..............4
Section 1.11.   Inspectors of Elections.....................................7
Section 1.12.   Opening and Closing of Polls................................8
Section 1.13.   No Stockholder Action by Written Consent....................8

ARTICLE II      BOARD OF DIRECTORS
Section 2.01.   General Powers..............................................8
Section 2.02.   Number of Directors.........................................8
Section 2.03.   Classified Board of Directors; Election of Directors........8
Section 2.04.   The Chairman of the Board...................................9
Section 2.05.   Annual and Regular Meetings.................................9
Section 2.06.   Special Meetings; Notice....................................9
Section 2.07.   Quorum; Voting.............................................10
Section 2.08.   Adjournment................................................10
Section 2.09.   Action Without a Meeting...................................10
Section 2.10.   Regulations; Manner of Acting..............................10
Section 2.11.   Action by Telephonic Communications........................11
Section 2.12.   Resignations...............................................11
Section 2.13.   Removal of Directors.......................................11
Section 2.14.   Vacancies and Newly Created Directorships..................11
Section 2.15.   Compensation...............................................11
Section 2.16.   Reliance on Accounts and Reports, etc......................12

ARTICLE III     EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 3.01.   Executive Committee........................................12

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                                            EXHIBIT C to the Plan of Conversion

Section 3.02.   Powers of Executive Committee..............................12
Section 3.03.   Other Committees...........................................12
Section 3.04.   Powers.....................................................13
Section 3.05.   Proceedings................................................13
Section 3.06.   Quorum and Manner of Acting................................13
Section 3.07.   Action by Telephonic Communications........................13
Section 3.08.   Absent or Disqualified Members.............................14
Section 3.09.   Resignations...............................................14
Section 3.10.   Removal....................................................14
Section 3.11.   Vacancies..................................................14

ARTICLE IV      OFFICERS
Section 4.01.   Chief Executive Officer....................................14
Section 4.02.   Secretary of the Corporation...............................14
Section 4.03.   Other Officers Elected by Board of Directors...............15
Section 4.04.   Other Officers.............................................15
Section 4.05.   Salaries...................................................15
Section 4.06.   Removal and Resignation; Vacancies.........................15
Section 4.07.   Authority and Duties of Officers...........................15

ARTICLE V       CAPITAL STOCK
Section 5.01.   Certificates of Stock, Uncertificated Shares...............15
Section 5.02.   Signatures; Facsimile......................................16
Section 5.03.   Lost, Stolen or Destroyed Certificates.....................16
Section 5.04.   Transfer of Stock..........................................16
Section 5.05.   Record Date................................................16
Section 5.06.   Registered Stockholders....................................17
Section 5.07.   Transfer Agent and Registrar...............................17

ARTICLE VI      INDEMNIFICATION
Section 6.01.   Nature of Indemnity........................................17
Section 6.02.   Successful Defense.........................................18
Section 6.03.   Determination that Indemnification is Proper...............18
Section 6.04.   Advance Payment of Expenses................................19
Section 6.05.   Procedure for Indemnification of Directors and Officers....19
Section 6.06.   Survival; Preservation of Other Rights.....................20
Section 6.07.   Insurance..................................................20
Section 6.08.   Severability...............................................20

ARTICLE VII     OFFICES
Section 7.01.   Initial Registered Office..................................21
Section 7.02.   Other Offices..............................................21

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                                            EXHIBIT C to the Plan of Conversion

ARTICLE VIII    GENERAL PROVISIONS
Section 8.01.   Dividends..................................................21
Section 8.02.   Reserves...................................................22
Section 8.03.   Execution of Instruments...................................22
Section 8.04.   Corporate Indebtedness.....................................22
Section 8.05.   Disposition of Funds.......................................22
Section 8.06.   Sale, Transfer, etc. of Securities.........................22
Section 8.07.   Voting as Stockholder......................................23
Section 8.08.   Fiscal Year................................................23
Section 8.09.   Seal.......................................................23
Section 8.10.   Books and Records; Inspection..............................23

ARTICLE IX      AMENDMENT OF BY-LAWS
Section 9.01.   Amendment..................................................23

ARTICLE X       CONSTRUCTION
Section 10.01.  Construction................................................24

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                                            EXHIBIT C to the Plan of Conversion

                         PRINCIPAL FINANCIAL GROUP, INC.

                                     BY-LAWS

                         As adopted on          , 2001
                                      ------ --

                                    ARTICLE I

                                  STOCKHOLDERS

     Section 1.01. Annual Meetings. The annual meeting of the stockholders of
the Corporation for the election of Directors and for the transaction of such
other business as properly may come before such meeting shall be held at such
place, either within or without the State of Delaware, or, within the sole
discretion of the Board of Directors, by remote electronic communication
technologies and at such date and at such time, as may be fixed from time to
time by resolution of the Board of Directors and set forth in the notice or
waiver of notice of the meeting.

     Section 1.02. Special Meetings. Special meetings of the stockholders may be
called at any time by the Chairman of the Board, Chief Executive Officer (or, in
the event of his or her absence or disability, by the President or any Executive
Vice President), or by the Board of Directors. A special meeting shall be called
by the Chairman of the Board, Chief Executive Officer (or, in the event of his
or her absence or disability, by the President or any Executive Vice President),
or by the Secretary of the Corporation pursuant to a resolution approved by a
majority of the entire Board of Directors. Such special meetings of the
stockholders shall be held at such places, within or without the State of
Delaware, or, within the sole discretion of the Board of Directors, by remote
electronic communication technologies, as shall be specified in the respective
notices or waivers of notice thereof. Any power of the stockholders of the
Corporation to call a special meeting is specifically denied.

     Section 1.03. Notice of Meetings; Waiver.

     (a) The Secretary of the Corporation or any Assistant Secretary shall cause
written notice of the place, if any, date and hour of each meeting of the
stockholders, and, in the case of a special meeting, the purpose or purposes for
which such meeting is called, and the means of remote communications, if any, by
which stockholders and proxyholders may be deemed to be present in person and
vote at such meeting, to be given personally by mail or by electronic
transmission, not fewer than ten (10) nor more than sixty (60) days prior to the
meeting, to each stockholder of record entitled to vote at

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                                            EXHIBIT C to the Plan of Conversion

     (b) such meeting. If such notice is mailed, it shall be deemed to have been
given personally to a stockholder when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the record of stockholders of the Corporation, or, if a stockholder shall
have filed with the Secretary of the Corporation a written request that notices
to such stockholder be mailed to some other address, then directed to such
stockholder at such other address. Such further notice shall be given as may be
required by law.

     (c) A written waiver of any notice of any annual or special meeting signed
by the person entitled thereto, or a waiver by electronic transmission by the
person entitled to notice, shall be deemed equivalent to notice. Neither the
business to be transacted at, nor the purpose of, any annual or special meeting
of the stockholders need be specified in a written waiver of notice. Attendance
of a stockholder at a meeting of stockholders shall constitute a waiver of
notice of such meeting, except when the stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.

     (d) For notice given by electronic transmission to a stockholder to be
effective, such stockholder must consent to the Corporation's giving notice by
that particular form of electronic transmission. A stockholder may revoke
consent to receive notice by electronic transmission by written notice to the
Corporation. A stockholder's consent to notice by electronic transmission is
automatically revoked if the Corporation is unable to deliver two consecutive
electronic transmission notices and such inability becomes known to the
Secretary of the Corporation, any Assistant Secretary, the transfer agent or
other person responsible for giving notice.

     (e) Notices are deemed given (i) if by facsimile, when faxed to a number
where the stockholder has consented to receive notice; (ii) if by electronic
mail, when mailed electronically to an electronic mail address at which the
stockholder has consented to receive such notice; (iii) if by posting on an
electronic network (such as a website or chatroom) together with a separate
notice to the stockholder of such specific posting, upon the later to occur of
(A) such posting or (B) the giving of the separate notice of such posting; or
(iv) if by any other form of electronic communication, when directed to the
stockholder in the manner consented to by the stockholder.

     (f) If a stockholder meeting is to be held via electronic communications
and stockholders will take action at such meeting, the notice of such meeting
must: (i) specify the means of remote communications, if any, by which
stockholders and proxy holders may be deemed to be present and vote at such
meeting; and (ii) provide the information required to access the stockholder
list. A waiver of notice may be given by electronic transmission.

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                                            EXHIBIT C to the Plan of Conversion

     Section 1.04. Quorum. Except as otherwise required by law or by the
Certificate of Incorporation, the presence in person or by proxy of the holders
of record of one-third of the shares entitled to vote at a meeting of
stockholders shall constitute a quorum for the transaction of business at such
meeting.

     Section 1.05. Voting. If, pursuant to Section 5.05 of these By-Laws, a
record date has been fixed, every holder of record of shares entitled to vote at
a meeting of stockholders shall be entitled to one (1) vote for each share
outstanding in his or her name on the books of the Corporation at the close of
business on such record date. If no record date has been fixed, then every
holder of record of shares entitled to vote at a meeting of stockholders shall
be entitled to one (1) vote for each share of stock standing in his or her name
on the books of the Corporation at the close of business on the day next
preceding the day on which notice of the meeting is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. Except as otherwise required by law, the Certificate of
Incorporation or these By-Laws, the vote of a majority of the shares represented
in person or by proxy at any meeting at which a quorum is present shall be
sufficient for the transaction of any business at such meeting.

     Section 1.06. Voting by Ballot. No vote of the stockholders on an election
of Directors need be taken by written ballot or by electronic transmission
unless otherwise required by law. Any vote not required to be taken by ballot or
by electronic transmission may be conducted in any manner approved by the Board
of Directors prior to the meeting at which such vote is taken.

     Section 1.07. Adjournment. If a quorum is not present at any meeting of the
stockholders, the stockholders present in person or by proxy shall have the
power to adjourn any such meeting from time to time until a quorum is present.
Notice of any adjourned meeting of the stockholders of the Corporation need not
be given if the place, if any, date and hour thereof are announced at the
meeting at which the adjournment is taken, provided, however, that if the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date for the adjourned meeting is fixed pursuant to Section 5.05 of these
By-Laws, a notice of the adjourned meeting, conforming to the requirements of
Section 1.03 hereof, shall be given to each stockholder of record entitled to
vote at such meeting. At any adjourned meeting at which a quorum is present, any
business may be transacted that might have been transacted on the original date
of the meeting.

     Section 1.08. Proxies. Any stockholder entitled to vote at any meeting of
the stockholders may authorize another person or persons to vote at any such
meeting and express such consent or dissent for him or her by proxy. A
stockholder may authorize a valid proxy by executing a written instrument signed
by such stockholder, or by causing his or her signature to be affixed to such
writing by any reasonable means including, but not limited to, by facsimile
signature, or by transmitting or authorizing the transmission

                                        3

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                                            EXHIBIT C to the Plan of Conversion

of a telegram, cablegram or other means of electronic transmission to the person
designated as the holder of the proxy, a proxy solicitation firm or a like
authorized agent. No such proxy shall be voted or acted upon after the
expiration of three years from the date of such proxy, unless such proxy
provides for a longer period. Every proxy shall be revocable at the pleasure of
the stockholder executing it, except in those cases where applicable law
provides that a proxy shall be irrevocable. A stockholder may revoke any proxy
which is not irrevocable by attending the meeting and voting in person or by
filing with the Secretary of the Corporation either an instrument in writing
revoking the proxy or another duly executed proxy bearing a later date. Proxies
by telegram, cablegram or other electronic transmission must either set forth or
be submitted with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of a
writing or transmission created pursuant to this section may be substituted or
used in lieu of the original writing or transmission for any and all purposes
for which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.

     Section 1.09. Organization; Procedure. At every meeting of stockholders the
presiding officer shall be the Chairman of the Board or, in the event of his or
her absence or disability, a presiding officer chosen by the Board of Directors.
The Secretary of the Corporation, or in the event of his or her absence or
disability, an Assistant Secretary, if any, or if there be no Assistant
Secretary, in the absence of the Secretary of the Corporation, an appointee of
the presiding officer, shall act as Secretary of the meeting. The order of
business and all other matters of procedure at every meeting of stockholders may
be determined by such presiding officer.

     Section 1.10. Notice of Stockholder Business and Nominations.

     (a) Annual Meetings of Stockholders.

          (i) Nominations of persons for election to the Board of Directors of
     the Corporation and the proposal of business to be considered by the
     stockholders may be made at an annual meeting of stockholders (A) by or at
     the direction of the Board of Directors or the Chairman of the Board, or
     (B) by any stockholder of the Corporation who is entitled to vote at the
     meeting, who complies with the notice procedures set forth in clauses (ii)
     and (iii) of this paragraph and who was a stockholder of record at the time
     such notice is delivered to the Secretary of the Corporation.

          (ii) For nominations or other business to be properly brought before
     an annual meeting by a stockholder, pursuant to clause (B) of paragraph
     (a)(i) of this Section 1.10, the stockholder must have given timely notice
     thereof in writing or

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     by electronic transmission to the Secretary of the Corporation. To be
     timely, a stockholder's notice shall be delivered to the Secretary of the
     Corporation at the principal executive offices of the Corporation not fewer
     than ninety (90) days nor more than one hundred twenty (120) days prior to
     the first anniversary of the preceding year's annual meeting and in any
     event at least forty-five (45) days prior to the first anniversary of the
     date on which the registrant first mailed its proxy materials for the prior
     year's annual meeting of shareholders; provided, that if the date of the
     annual meeting is advanced by more than thirty (30) days or delayed by more
     than seventy (70) days from such anniversary date, notice by the
     stockholder to be timely must be so delivered not earlier than one hundred
     twenty (120) days prior to such annual meeting and not later than the close
     of business on the later of the ninetieth day prior to such annual meeting
     or the tenth day following the day on which public announcement of the date
     of such meeting is first made. In no event shall the adjournment of an
     annual meeting commence a new time period for the giving of a stockholder's
     notice as described above. Such stockholder's notice shall set forth (A) as
     to each person whom the stockholder proposes to nominate for election or
     reelection as a Director all information relating to such person that is
     required to be disclosed in solicitations of proxies for election of
     Directors, or is otherwise required, in each case pursuant to Regulation
     14A under the Securities Exchange Act of 1934, as amended (the "Exchange
     Act"), and Rule 14a-11 thereunder, or any successor provisions, including
     such person's written consent to being named in the proxy statement as a
     nominee and to serving as a Director if elected; (B) as to any other
     business that the stockholder proposes to bring before the meeting, a brief
     description of the business desired to be brought before the meeting, the
     reasons for conducting such business at the meeting and any material
     interest in such business of such stockholder and of any beneficial owner
     on whose behalf the proposal is made; and (C) as to the stockholder giving
     the notice and any beneficial owner on whose behalf the nomination or
     proposal is made (1) the name and address of such stockholder, as they
     appear on the Corporation's books, and of such beneficial owner and (2) the
     class and number of shares of the Corporation which are owned beneficially
     and of record by such stockholder and such beneficial owner.

          (iii) Notwithstanding anything in the second sentence of paragraph
     (a)(ii) of this Section 1.10 to the contrary, in the event that the number
     of Directors to be elected to the Board of Directors of the Corporation is
     increased and there is no public announcement naming all of the nominees
     for Director or specifying the size of the increased Board of Directors
     made by the Corporation at least one hundred (100) days prior to the first
     anniversary of the preceding year's annual meeting, a stockholder's notice
     under this paragraph shall also be considered timely, but only with respect
     to nominees for any new positions created by such increase, if it shall be
     delivered to the Secretary of the Corporation at the principal executive
     offices of the Corporation not later than the close of business on the

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     tenth day following the day on which such public announcement is first made
     by the Corporation.

     (b) Special Meetings of Stockholders. Only such business as shall have been
brought before the special meeting of the stockholders pursuant to the
Corporation's notice of meeting pursuant to Section 1.03 of these By-Laws shall
be conducted at such meeting. Nominations of persons for election to the Board
of Directors may be made at a special meeting of stockholders at which Directors
are to be elected pursuant to the Corporation's notice of meeting (1) by or at
the direction of the Board of Directors or (2) by any stockholder of the
Corporation who is entitled to vote at the meeting, who complies with the notice
procedures set forth in this Section 1.10 and who is a stockholder of record at
the time such notice is delivered to the Secretary of the Corporation.
Nominations by stockholders of persons for election to the Board of Directors
may be made at such special meeting of stockholders if the stockholder's notice
as required by paragraph (a)(ii) of this Section 1.10 shall be delivered to the
Secretary of the Corporation at the principal executive offices of the
Corporation not earlier than the one hundred and twentieth (120(th)) day prior
to such special meeting and not later than the close of business on the later of
the ninetieth (90(th)) day prior to such special meeting or the tenth (10(th))
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.

     (c) General.

          (i) Only persons who are nominated in accordance with the procedures
     set forth in this Section 1.10 shall be eligible to serve as Directors and
     only such business shall be conducted at a meeting of stockholders as shall
     have been brought before the meeting in accordance with the procedures set
     forth in this Section 1.10. Except as otherwise provided by law, the
     Certificate of Incorporation or these By-Laws, the Chairman of the meeting
     shall have the power and duty to determine whether a nomination or any
     business proposed to be brought before the meeting was made in accordance
     with the procedures set forth in this Section 1.10 and, if any proposed
     nomination or business is not in compliance with this Section 1.10, to
     declare that such defective proposal or nomination shall be disregarded.

          (ii) For purposes of this Section 1.10, "public announcement" shall
     mean disclosure in a press release reported by the Dow Jones News Service,
     Associated Press or comparable national news service or in a document
     publicly filed by the Corporation with the Securities and Exchange
     Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act.

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          (iii) Notwithstanding the foregoing provisions of this Section 1.10, a
     stockholder shall also comply with all applicable requirements of the
     Exchange Act and the rules and regulations thereunder with respect to the
     matters set forth in this Section 1.10. Nothing in this Section 1.10 shall
     be deemed to affect any rights (A) of stockholders to request inclusion of
     proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under
     the Exchange Act, or (B) of the holders of any series of Preferred Stock,
     if any, to elect Directors if so provided under any applicable Preferred
     Stock Certificate of Designation (as defined in the Certificate of
     Incorporation).

     Section 1.11. Inspectors of Elections. Preceding any meeting of the
stockholders, the Board of Directors shall appoint one (1) or more persons to
act as Inspectors of Elections, and may designate one (1) or more alternate
inspectors. In the event no inspector or alternate is able to act, the person
presiding at the meeting shall appoint one (1) or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of the duties of an
inspector, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector shall:

     (a) ascertain the number of shares outstanding and the voting power of
each;

     (b) determine the shares represented at a meeting and the validity of
proxies and ballots;

     (c) specify the information relied upon to determine the validity of
electronic transmissions in accordance with Section 1.08 hereof;

     (d) count all votes and ballots;

     (e) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors; and

     (f) certify his or her determination of the number of shares represented at
the meeting, and his or her count of all votes and ballots;

     (g) appoint or retain other persons or entities to assist in the
performance of the duties of inspector; and

     (h) when determining the shares represented and the validity of proxies and
ballots, be limited to an examination of the proxies, any envelopes submitted
with those proxies, any information provided in accordance with Section 1.08 of
these By-Laws, ballots and the regular books and records of the Corporation. The
inspector may consider other reliable information for the limited purpose of
reconciling proxies and ballots submitted by or on behalf of banks, brokers or
their nominees or a similar person which

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represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspector considers other reliable information as outlined in this section, the
inspector, at the time of his or her certification pursuant to paragraph (f) of
this section, shall specify the precise information considered, the person or
persons from whom the information was obtained, when this information was
obtained, the means by which the information was obtained, and the basis for the
inspector's belief that such information is accurate and reliable.

     Section 1.12. Opening and Closing of Polls. The date and time for the
opening and the closing of the polls for each matter to be voted upon at a
stockholder meeting shall be announced at the meeting. The inspector shall be
prohibited from accepting any ballots, proxies or votes or any revocations
thereof or changes thereto after the closing of the polls, unless the Court of
Chancery upon application by a stockholder shall determine otherwise.

     Section 1.13. No Stockholder Action by Written Consent. Effective as of the
time the Common Stock shall be registered pursuant to the provisions of the
Exchange Act, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of the stockholders of the Corporation, and the ability of the stockholders to
consent in writing to the taking of any action is specifically denied.

                                   ARTICLE II

                               BOARD OF DIRECTORS

     Section 2.01. General Powers. Except as may otherwise be provided by law,
the Certificate of Incorporation or these By-Laws, the property, affairs and
business of the Corporation shall be managed by or under the direction of the
Board of Directors and the Board of Directors may exercise all the powers of the
Corporation.

     Section 2.02. Number of Directors. Subject to the rights of the holders of
any class or series of Preferred Stock, if any, the number of Directors shall be
fixed from time to time exclusively pursuant to a resolution adopted by a
majority of the entire Board of Directors; provided, however, that the Board of
Directors shall at no time consist of fewer than three (3) Directors.

     Section 2.03. Classified Board of Directors; Election of Directors. The
Directors of the Corporation, subject to the rights of the holders of shares of
any class or series of Preferred Stock, shall be classified with respect to the
time for which they severally hold office, into three (3) classes, as nearly
equal in number as possible, one class ("Class I") whose initial term expires at
the 2002 annual meeting of stockholders, another class

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                                            EXHIBIT C to the Plan of Conversion

("Class II") whose initial term expires at the 2003 annual meeting of
stockholders, and another class ("Class III") whose initial term expires at the
2004 annual meeting of stockholders, with each class to hold office until its
successors are elected and qualified. Except as otherwise provided in Sections
2.12 and 2.13 of these By-Laws, at each annual meeting of stockholders of the
Corporation, and subject to the rights of the holders of shares of any class or
series of Preferred Stock, the successors of the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election.

     Section 2.04. The Chairman of the Board. The Directors shall elect from
among the members of the Board a "Chairman of the Board". The Chairman of the
Board shall be an deemed an officer of the Corporation and shall have such
duties and powers as set forth in these By-Laws or as shall otherwise be
conferred upon the Chairman of the Board from time to time by the Board of
Directors. The Chairman of the Board shall, if present, preside over all
meetings of the Stockholders and of the Board of Directors. The Board of
Directors shall by resolution establish a procedure to provide for an acting
Chairman of the Board in the event the current Chairman of the Board is unable
to serve or act in that capacity.

     Section 2.05. Annual and Regular Meetings. The annual meeting of the Board
of Directors for the purpose of electing officers and for the transaction of
such other business as may come before the meeting shall be held as soon as
reasonably practicable following adjournment of the annual meeting of the
stockholders at the place of such annual meeting of the stockholders. Notice of
such annual meeting of the Board of Directors need not be given. The Board of
Directors from time to time may by resolution provide for the holding of regular
meetings and fix the place (which may be within or without the State of
Delaware) and the date and hour of such meetings. Notice of regular meetings
need not be given, provided, however, that if the Board of Directors shall fix
or change the time or place of any regular meeting, notice of such action shall
be mailed promptly, or sent by telephone, including a voice messaging system or
other system or technology designed to record and communicate messages,
telegraph, facsimile, electronic mail or other electronic means, to each
Director who shall not have been present at the meeting at which such action was
taken, addressed to him or her at his or her usual place of business, or shall
be delivered to him or her personally. Notice of such action need not be given
to any Director who attends the first regular meeting after such action is taken
without protesting the lack of notice to him or her, prior to or at the
commencement of such meeting, or to any Director who submits a signed waiver of
notice, whether before or after such meeting.

     Section 2.06. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, Chief
Executive Officer (or, in the event of his or her absence or disability, by the
President or any

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Executive Vice President), or by the Board of Directors, at such place (within
or without the State of Delaware), date and hour as may be specified in the
respective notices or waivers of notice of such meetings. Special meetings of
the Board of Directors also may be held whenever called pursuant to a resolution
approved by a majority of the entire Board of Directors. Special meetings of the
Board of Directors may be called on twenty- four (24) hours' notice, if notice
is given to each Director personally or by telephone, including a voice
messaging system, or other system or technology designed to record and
communicate messages, telegraph, facsimile, electronic mail or other electronic
means, or on five (5) days' notice, if notice is mailed to each Director,
addressed to him or her at his or her usual place of business or to such other
address as any Director may request by notice to the Secretary. Notice of any
special meeting need not be given to any Director who attends such meeting
without protesting the lack of notice to him or her, prior to or at the
commencement of such meeting, or to any Director who submits a signed waiver of
notice, whether before or after such meeting, and any business may be transacted
thereat.

     Section 2.07. Quorum; Voting. At all meetings of the Board of Directors,
the presence of at least a majority of the total authorized number of Directors
shall constitute a quorum for the transaction of business. Except as otherwise
required by law, the vote of at least a majority of the Directors present at any
meeting at which a quorum is present shall be the act of the Board of Directors.

     Section 2.08. Adjournment. A majority of the Directors present, whether or
not a quorum is present, may adjourn any meeting of the Board of Directors to
another time or place. No notice need be given of any adjourned meeting unless
the time and place of the adjourned meeting are not announced at the time of
adjournment, in which case notice conforming to the requirements of Section 2.05
of these By-Laws shall be given to each Director.

     Section 2.09. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a meeting
if all members of the Board of Directors consent thereto in writing or by
electronic transmission, and such writing, writings or electronic transmission
or transmissions are filed with the minutes of proceedings of the Board of
Directors. Such filing shall be in paper form if the minutes are maintained in
paper form and shall be in electronic form if the minutes are maintained in
electronic form.

     Section 2.10. Regulations; Manner of Acting. To the extent consistent with
applicable law, the Certificate of Incorporation and these By-Laws, the Board of
Directors may adopt by resolution such rules and regulations for the conduct of
meetings of the Board of Directors and for the management of the property,
affairs and business of the Corporation as the Board of Directors may deem
appropriate. The Directors shall act

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                                            EXHIBIT C to the Plan of Conversion

only as a Board of Directors and the individual Directors shall have no power in
their individual capacities unless expressly authorized by the Board of
Directors.

     Section 2.11. Action by Telephonic Communications. Members of the Board of
Directors may participate in a meeting of the Board of Directors by means of
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this provision shall constitute presence in person at such
meeting.

     Section 2.12. Resignations. Any Director may resign at any time by
submitting an electronic transmission or by delivering a written notice of
resignation, signed by such Director, to the Chairman of the Board or the
Secretary. Unless otherwise specified therein, such resignation shall take
effect upon delivery.

     Section 2.13. Removal of Directors. Subject to the rights of the holders of
any class or series of Preferred Stock, if any, to elect additional Directors
under specified circumstances, any Director may be removed at any time, but only
for cause, upon the affirmative vote of the holders of a majority of the
combined voting power of the then outstanding stock of the Corporation entitled
to vote generally in the election of Directors. Any vacancy in the Board of
Directors caused by any such removal may be filled at such meeting by the
stockholders entitled to vote for the election of the Director so removed. If
such stockholders do not fill such vacancy at such meeting, such vacancy may be
filled in the manner provided in Section 2.14 of these By-Laws.

     Section 2.14. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any class or series of Preferred Stock, if any, to
elect additional Directors under specified circumstances, and except as provided
in Section 2.13, if any vacancies shall occur in the Board of Directors, by
reason of death, resignation, removal or otherwise, or if the authorized number
of Directors shall be increased, the Directors then in office shall continue to
act, and such vacancies and newly created directorships may be filled by a
majority of the Directors then in office, although less than a quorum. Any
director filling a vacancy shall be of the same class as that of the Director
whose death, resignation, removal or other event caused the vacancy, and any
Director filling a newly created directorship shall be of the class specified by
the Board of Directors at the time the newly created directorships were created.
A Director elected to fill a vacancy or a newly created directorship shall hold
office until his or her successor has been elected and qualified or until his or
her earlier death, resignation or removal.

     Section 2.15. Compensation. The amount, if any, which each Director shall
be entitled to receive as compensation for such Director's services as such
shall be fixed from time to time by resolution of the Board of Directors.

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     Section 2.16. Reliance on Accounts and Reports, etc. A Director, or a
member of any committee designated by the Board of Directors shall, in the
performance of such Director's or member's duties, be fully protected in relying
in good faith upon the records of the Corporation and upon information,
opinions, reports or statements presented to the Corporation by any of the
Corporation's officers or employees, or committees designated by the Board of
Directors, or by any other person as to the matters the Director or the member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation.

                                   ARTICLE III

                    EXECUTIVE COMMITTEE AND OTHER COMMITTEES

     Section 3.01. Executive Committee. The Board of Directors shall appoint an
Executive Committee consisting of five (5) Directors. Members of the Executive
Committee shall be appointed by and serve at the pleasure of the Board of
Directors. The Chairman of the Board shall be a member of the Executive
Committee and shall, if present, preside at each meeting of the Executive
Committee. The Chief Executive Officer, if different than the Chairman of the
Board, shall be a member of the Executive Committee and in the event of an
absence or vacancy in the office of the Chairman of the Board, shall preside at
meetings of the Executive Committee. If the Chairman of the Board is also the
Chief Executive Officer, any other member of the Executive Committee, as
determined by the members of the Executive Committee present, shall preside at a
meeting of the Executive Committee in the absence of the Chairman of the Board.
The Secretary shall act as secretary of the Executive Committee and shall keep a
record of all proceedings of the Executive Committee. A majority of the members
of the Executive Committee shall constitute a quorum.

     Section 3.02. Powers of Executive Committee. The Executive Committee shall
have and, to the extent permitted by law, may exercise all of the powers of the
Board of Directors in the management and affairs of the corporation except when
the Board of Directors is in session.

     Section 3.03. Other Committees. The Board of Directors, by resolution
adopted by the affirmative vote of a majority of Directors then in office, may
establish one (1) or more other committees of the Board of Directors, each
committee to consist of such number of Directors as from time to time may be
fixed by the Board of Directors. Any such committee shall serve at the pleasure
of the Board of Directors. Each such committee shall have the powers and duties
delegated to it by the Board of Directors, subject to the limitations set forth
in applicable Delaware law. The Board of Directors

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                                            EXHIBIT C to the Plan of Conversion

may elect one or more of its members as alternate members of any such committee
who may take the place of any absent member or members at any meeting of such
committee, upon request of the Chairman of the Board or the Chairman of such
committee.

     Section 3.04. Powers. Each committee, except as otherwise provided in this
section, shall have and may exercise such powers of the Board of Directors as
may be provided by resolution or resolutions of the Board of Directors. Neither
the Executive Committee nor any other committee shall have the power or
authority:

          (a) to approve or adopt, or recommend to the stockholders, any action
     or matter expressly required by the General Corporation Law to be submitted
     to the stockholders for approval; or

          (b) to adopt, amend or repeal the By-Laws of the Corporation.

     Section 3.05. Proceedings. Each such committee may fix its own rules of
procedure and may meet at such place (within or without the State of Delaware),
at such time and upon such notice, if any, as it shall determine from time to
time. Each such committee shall keep minutes of its proceedings and shall report
such proceedings to the Board of Directors at the meeting of the Board of
Directors next following any such proceedings.

     Section 3.06. Quorum and Manner of Acting. Except as may be otherwise
provided in the resolution creating such committee, at all meetings of any
committee, the presence of members (or alternate members) constituting a
majority of the total authorized membership of such committee shall constitute a
quorum for the transaction of business. The act of the majority of the members
present at any meeting at which a quorum is present shall be the act of such
committee. Any action required or permitted to be taken at any meeting of any
such committee may be taken without a meeting, if all members of such committee
shall consent to such action in writing or by electronic transmission and such
writing, writings or electronic transmission or transmissions are filed with the
minutes of the proceedings of the committee. Such filing shall be in paper form
if the minutes are in paper form and shall be in electronic form if the minutes
are maintained in electronic form. The members of any such committee shall act
only as a committee, and the individual members of such committee shall have no
power in their individual capacities unless expressly authorized by the Board of
Directors.

     Section 3.07. Action by Telephonic Communications. Unless otherwise
provided by the Board of Directors, members of any committee may participate in
a meeting of such committee by means of conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
provision shall constitute presence in person at such meeting.

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                                            EXHIBIT C to the Plan of Conversion

     Section 3.08. Absent or Disqualified Members. In the absence or
disqualification of a member of any committee, if no alternate member is present
to act in his or her stead, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he, she or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.

     Section 3.09. Resignations. Any member (and any alternate member) of any
committee may resign at any time by delivering a written notice of resignation,
signed by such member, to the Board of Directors or the Chairman of the Board.
Unless otherwise specified therein, such resignation shall take effect upon
delivery.

     Section 3.10. Removal. Any member (and any alternate member) of any
committee may be removed at any time, either for or without cause, by resolution
adopted by a majority of the whole Board of Directors.

     Section 3.11. Vacancies. If any vacancy shall occur in any committee, by
reason of disqualification, death, resignation, removal or otherwise, the
remaining members (and any alternate members) shall continue to act, and any
such vacancy may be filled by the Board of Directors.

                                   ARTICLE IV

                                    OFFICERS

     Section 4.01. Chief Executive Officer. The Board of Directors shall elect a
Chief Executive Officer to serve at the pleasure of the Board of Directors who
shall (a) supervise the carrying out of policies adopted or approved by the
Board of directors, (b) exercise a general supervision and superintendence over
all the business and affairs of the corporation, and (c) possess such other
powers and perform such other duties as may be assigned to him or her by these
By-Laws, as may from time to time be assigned by the Board of Directors and as
may be incident to the office of Chief Executive Officer.

     Section 4.02. Secretary of the Corporation. The Board of Directors shall
appoint a Secretary of the Corporation to serve at the pleasure of the Board of
Directors. The Secretary of the Corporation shall (a) keep minutes of all
meetings of the stockholders and of the Board of Directors, (b) authenticate
records of the corporation and (c) in general, have such powers and perform such
other duties as may be assigned to him or her by these By-Laws, as may from time
to time be assigned to him or her by the Board of directors or the Chief
Executive Officer and as may be incident to the office of Secretary of the
Corporation.

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                                            EXHIBIT C to the Plan of Conversion

     Section 4.03. Other Officers Elected by Board of Directors. At any meeting
of the Board of Directors, the Board of Directors may elect a President, Vice
Presidents, a Chief Financial Officer, a Treasurer, Assistant Treasurers,
Assistant Secretaries, or such other officers of the corporation as the Board of
Directors may deem necessary, to serve at the pleasure of the Board of
Directors. Other officers elected by the Board of Directors shall have such
powers and perform such duties as may be assigned to such officers by or
pursuant to authorization of the Board of Directors or by the Chief Executive
Officer.

     Section 4.04. Other Officers. The Board of Directors may authorize the
corporation to elect or appoint other officers, each of whom shall serve at the
pleasure of the corporation. Officers elected or appointed by the corporation
shall have such powers and perform such duties as may be assigned to them by the
corporation.

     Section 4.05. Salaries. The salaries of all officers and agents of the
Corporation shall be fixed by or pursuant to authorization of the Board of
Directors.

     Section 4.06. Removal and Resignation; Vacancies. Any officer may be
removed for or without cause at any time by the Board of Directors. Any officer
may resign at any time by delivering a written notice of resignation, signed by
such officer, to the Board of Directors or the Chief Executive Officer. Unless
otherwise specified therein, such resignation shall take effect upon delivery.
Any vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise, shall be filled by or pursuant to authorization of the
Board of Directors.

     Section 4.07. Authority and Duties of Officers. The officers of the
Corporation shall have such authority and shall exercise such powers and perform
such duties as may be specified in these By-Laws, except that in any event each
officer shall exercise such powers and perform such duties as may be required by
law.

                                    ARTICLE V

                                  CAPITAL STOCK

     Section 5.01. Certificates of Stock, Uncertificated Shares. The shares of
the Corporation shall be represented by certificates, provided that the Board of
Directors may provide by resolution or resolutions that some or all of any or
all classes or series of the stock of the Corporation shall be uncertificated
shares. Any such resolution shall not apply to shares represented by a
certificate until each such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock in the Corporation represented by certificates and upon
request every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of, the Corporation, by the Chairman of
the Board, the Chief Executive

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                                            EXHIBIT C to the Plan of Conversion

Officer or the President, and by the Chief Financial Officer, the Treasurer or
an Assistant Treasurer, or the Secretary of the Corporation or an Assistant
Secretary, representing the number of shares registered in certificate form.
Such certificate shall be in such form as the Board of Directors may determine,
to the extent consistent with applicable law, the Certificate of Incorporation
and these By-Laws.

     Section 5.02. Signatures; Facsimile. All signatures on the certificate
referred to in Section 5.01 of these By-Laws may be in facsimile, engraved or
printed form, to the extent permitted by law. In case any officer, transfer
agent or registrar who has signed, or whose facsimile, engraved or printed
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.

     Section 5.03. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct that a new certificate be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon delivery to the Corporation of an affidavit of the
owner or owners of such certificate, setting forth such allegation. The
Corporation may require the owner of such lost, stolen or destroyed certificate,
or his or her legal representative, to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate.

     Section 5.04. Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares, duly endorsed or
accompanied by appropriate evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Within a reasonable time after the transfer of uncertificated stock, the
Corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to the laws of the General Corporation Law of the State of Delaware.
Subject to the provisions of the Certificate of Incorporation and these By-Laws,
the Board of Directors may prescribe such additional rules and regulations as it
may deem appropriate relating to the issue, transfer and registration of shares
of the Corporation.

     Section 5.05. Record Date. In order to determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date on which the resolution fixing the record date
is adopted by the Board of Directors, and which shall not be more than sixty
(60) nor fewer than ten (10) days before the date of such meeting. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting,

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                                            EXHIBIT C to the Plan of Conversion

provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

     In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
of the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty (60) days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.

     Section 5.06. Registered Stockholders. Prior to due surrender of a
certificate for registration of transfer, the Corporation may treat the
registered owner as the person exclusively entitled to receive dividends and
other distributions, to vote, to receive notice and otherwise to exercise all
the rights and powers of the owner of the shares represented by such
certificate, and the Corporation shall not be bound to recognize any equitable
or legal claim to or interest in such shares on the part of any other person,
whether or not the Corporation shall have notice of such claim or interests.
Whenever any transfer of shares shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer if, when the
certificates are presented to the Corporation for transfer or uncertificated
shares are requested to be transferred, both the transferor and transferee
request the Corporation to do so.

     Section 5.07. Transfer Agent and Registrar. The Board of Directors may
appoint one (1) or more transfer agents and one (1) or more registrars, and may
require all certificates representing shares to bear the signature of any such
transfer agents or registrars.

                                   ARTICLE VI

                                 INDEMNIFICATION

     Section 6.01. Nature of Indemnity. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (a "Proceeding"),
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was or has agreed to become a director or officer of the
Corporation, or is or was serving or has agreed to serve at the request of the
Corporation as a director or officer, of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to

                                       17

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                                            EXHIBIT C to the Plan of Conversion

have been taken or omitted in such capacity, and may indemnify any person who
was or is a party or is threatened to be made a party to such a Proceeding by
reason of the fact that he or she is or was or has agreed to become an employee
or agent of the Corporation, or is or was serving or has agreed to serve at the
request of the Corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her or on his or her behalf in
connection with such Proceeding and any appeal therefrom, if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Corporation, and, with respect to any criminal
Proceeding, had no reasonable cause to believe his or her conduct was unlawful;
except that in the case of a Proceeding by or in the right of the Corporation to
procure a judgment in its favor (1) such indemnification shall be limited to
expenses (including attorneys' fees) actually and reasonably incurred by such
person in the defense or settlement of such Proceeding, and (2) no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such Proceeding was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Notwithstanding the foregoing, but subject to Section 6.05 of these
By-Laws, the Corporation shall not be obligated to indemnify a director or
officer of the Corporation in respect of a Proceeding (or part thereof)
instituted by such director or officer, unless such Proceeding (or part thereof)
has been authorized by the Board of Directors.

     The termination of any Proceeding by judgment, order settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal Proceeding, had
reasonable cause to believe that his or her conduct was unlawful.

     Section 6.02. Successful Defense. To the extent that a present or former
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any Proceeding referred to in Section 6.01 hereof or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.

     Section 6.03. Determination that Indemnification is Proper. Any
indemnification of a present or former director or officer of the Corporation
under Section 6.01 hereof (unless ordered by a court) shall be made by the
Corporation unless a determination is made that indemnification of the present
or former director or officer is not proper in the

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                                            EXHIBIT C to the Plan of Conversion

circumstances because he or she has not met the applicable standard of conduct
set forth in Section 6.01 hereof. Any indemnification of a present or former
employee or agent of the Corporation under Section 6.01 hereof (unless ordered
by a court) may be made by the Corporation upon a determination that
indemnification of the present or former employee or agent is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in Section 6.01 hereof. Any such determination shall be made, with respect
to a person who is a director or officer at the time of such determination, (1)
by a majority vote of the Directors who are not parties to such Proceeding, even
though less than a quorum, or (2) by a committee of such Directors designated by
majority vote of such Directors, even though less than a quorum, or (3) if there
are no such Directors, or if such Directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.

     Section 6.04. Advance Payment of Expenses. Expenses (including attorneys'
fees) incurred by a director or officer in defending any civil, criminal,
administrative or investigative Proceeding shall be paid by the Corporation in
advance of the final disposition of such Proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the Corporation deems appropriate. The Board of Directors may authorize the
Corporation's counsel to represent such director, officer, employee or agent in
any Proceeding, whether or not the Corporation is a party to such Proceeding.

     Section 6.05. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the Corporation under Sections 6.01
and 6.02, or advance of costs, charges and expenses to a director or officer
under Section 6.04 of these By-Laws, shall be made promptly, and in any event
within thirty (30) days, upon the written request of the director or officer. If
a determination by the Corporation that the director or officer is entitled to
indemnification pursuant to this Article VI is required, and the Corporation
fails to respond within thirty (30) days to a written request for indemnity, the
Corporation shall be deemed to have approved such request. If the Corporation
denies a written request for indemnity or advancement of expenses, in whole or
in part, or if payment in full pursuant to such request is not made within
thirty (30) days, the right to indemnification or advances as granted by this
Article VI shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such Proceeding shall also be indemnified by the Corporation. It
shall be a defense to any such Proceeding (other than an action brought to
enforce a claim for the advance of costs, charges and expenses under Section
6.04 of these By-Laws where the required undertaking, if any, has been received
by the Corporation) that the claimant has not met the standard of conduct set
forth in

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                                            EXHIBIT C to the Plan of Conversion

Section 6.01 of these By-Laws, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, its independent legal counsel, and its stockholders) to have made
a determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in Section 6.01 of these By-Laws, nor
the fact that there has been an actual determination by the Corporation
(including its Board of Directors, its independent legal counsel, and its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.

     Section 6.06. Survival; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any Proceeding
previously or thereafter brought or threatened based in whole or in part upon
any such state of facts. Such a "contract right" may not be modified
retroactively without the consent of such director, officer, employee or agent.

     The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.

     Section 6.07. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
or on such person's behalf in any such capacity, or arising out of such person's
status as such, whether or not the Corporation would have the power to indemnify
him or her against such liability under the provisions of this Article VI.

     Section 6.08. Severability. If this Article VI or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees),

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                                            EXHIBIT C to the Plan of Conversion

judgments, fines and amounts paid in settlement with respect to a Proceeding,
whether civil, criminal, administrative or investigative, including a Proceeding
by or in the right of the Corporation, to the fullest extent permitted by any
applicable portion of this Article VI that shall not have been invalidated and
to the fullest extent permitted by applicable law.

                                   ARTICLE VII

                                     OFFICES

     Section 7.01. Initial Registered Office. The initial registered office of
the Corporation in the State of Delaware shall be located at Corporation Trust
Center, 1209 N. Orange Street in the City of Wilmington, County of New Castle.

     Section 7.02. Other Offices. The Corporation may maintain offices or places
of business at such other locations within or without the State of Delaware as
the Board of Directors may from time to time determine or as the business of the
Corporation may require.

                                  ARTICLE VIII

                               GENERAL PROVISIONS

     Section 8.01. Dividends. Subject to any applicable provisions of law and
the Certificate of Incorporation, dividends upon the shares of the Corporation
may be declared by the Board of Directors at any regular or special meeting of
the Board of Directors and any such dividend may be paid in cash, property, or
shares of the Corporation's capital stock.

     A member of the Board of Directors, or a member of any committee designated
by the Board of Directors shall be fully protected in relying in good faith upon
the records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of its officers or employees, or
committees of the Board of Directors, or by any other person as to matters the
Director reasonably believes are within such other person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Corporation, as to the value and amount of the assets, liabilities and/or
net profits of the Corporation, or any other facts pertinent to the existence
and amount of surplus or other funds from which dividends might properly be
declared and paid.

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                                            EXHIBIT C to the Plan of Conversion

     Section 8.02. Reserves. There may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, thinks proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation or for such other purpose as the
Board of Directors shall think conducive to the interest of the Corporation, and
the Board of Directors may similarly modify or abolish any such reserve.

     Section 8.03. Execution of Instruments. The Board of Directors may
authorize, or provide for the authorization of, officers, employees or agents to
enter into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation. Any such authorization must be in writing or by
electronic transmission and may be general or limited to specific contracts or
instruments.

     Section 8.04. Corporate Indebtedness. No loan shall be contracted on behalf
of the Corporation, and no evidence of indebtedness shall be issued in its name,
unless authorized by the Board of Directors. Such authorization may be general
or confined to specific instances. Loans so authorized may be effected at any
time for the Corporation from any bank, trust company or other institution, or
from any firm, corporation or individual. All bonds, debentures, notes and other
obligations or evidences of indebtedness of the Corporation issued for such
loans shall be made, executed and delivered as the Board of Directors shall
authorize. When so authorized by the Board of Directors, any part of or all the
properties, including contract rights, assets, business or good will of the
Corporation, whether then owned or thereafter acquired, may be mortgaged,
pledged, hypothecated or conveyed or assigned in trust as security for the
payment of such bonds, debentures, notes and other obligations or evidences of
indebtedness of the Corporation, and of the interest thereon, by instruments
executed and delivered in the name of the Corporation.

     Section 8.05. Disposition of Funds. The funds of the Corporation shall be
paid out, transferred or otherwise disposed of only in such manner and under
such controls as may be authorized by resolution of the Board of Directors or as
may be authorized by such officers of the Corporation as the Board of Directors
designates.

     Section 8.06. Sale, Transfer, etc. of Securities. To the extent authorized
by the Board of Directors or by the Chief Executive Officer, the President, any
Vice President, the Secretary of the Corporation, the Chief Financial Officer or
the Treasurer or any other officers designated by the Board of Directors or the
Chief Executive Officer may sell, transfer, endorse, and assign any shares of
stock, bonds or other securities owned by or held in the name of the
Corporation, and may make, execute and deliver in the name of the Corporation,
under its corporate seal, any instruments that may be appropriate to effect any
such sale, transfer, endorsement or assignment.

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   75
                                            EXHIBIT C to the Plan of Conversion

     Section 8.07. Voting as Stockholder. Unless otherwise determined by
resolution of the Board of Directors, the Chief Executive Officer, the
President, any Executive Vice President or any Senior Vice President shall have
full power and authority on behalf of the Corporation to attend any meeting of
stockholders of any corporation in which the Corporation may hold stock, and to
act, vote (or execute proxies to vote) and exercise in person or by proxy all
other rights, powers and privileges incident to the ownership of such stock.
Such officers acting on behalf of the Corporation shall have full power and
authority to execute any instrument expressing consent to or dissent from any
action of any such corporation without a meeting. The Board of Directors may by
resolution from time to time confer such power and authority upon any other
person or persons.

     Section 8.08. Fiscal Year. The fiscal year of the Corporation shall
commence on the first day of January of each year (except for the Corporation's
first fiscal year which shall commence on the date of incorporation) and shall
terminate in each case on December 31.

     Section 8.09. Seal. The seal of the Corporation shall be in such form as
the Board of Directors may from time to time determine and shall contain the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Delaware". The form of such seal shall be subject to alteration by
the Board of Directors. The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or reproduced, or may be used in any other
lawful manner.

     Section 8.10. Books and Records; Inspection. Except to the extent otherwise
required by law, the books and records of the Corporation shall be kept at such
place or places within or without the State of Delaware as may be determined
from time to time by the Board of Directors.

                                   ARTICLE IX

                              AMENDMENT OF BY-LAWS

     Section 9.01. Amendment. These By-Laws may be amended, altered or repealed:

          (a) by resolution adopted by a majority of the Board of Directors at
     any special or regular meeting of the Board of Directors if, in the case of
     such special meeting only, notice of such amendment, alteration or repeal
     is contained in the notice or waiver of notice of such meeting; or

          (b) at any regular or special meeting of the stockholders upon the
     affirmative vote of the holders of three-fourths (3/4) or more of the
     combined voting power of the outstanding shares of the Corporation entitled
     to vote

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                                            EXHIBIT C to the Plan of Conversion

generally in the election of Directors if, in the case of such special meeting
only, notice of such amendment, alteration or repeal is contained in the notice
or waiver of notice of such meeting.

                                    ARTICLE X

                                  CONSTRUCTION

     Section 10.01. Construction. In the event of any conflict between the
provisions of these By-Laws as in effect from time to time and the provisions of
the Certificate of Incorporation of the Corporation as in effect from time to
time, the provisions of such Certificate of Incorporation shall be controlling.

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                                             EXHIBIT D to the Plan of Conversion

                            ARTICLES OF INCORPORATION

                                       OF

                           PRINCIPAL IOWA NEWCO, INC.

TO THE SECRETARY OF STATE
OF THE STATE OF IOWA:

     Pursuant to Section 202 of Chapter 490 of Title XII of the Iowa Code (2001)
("Chapter 490"), the undersigned, acting as incorporator, adopts the following
Articles of Incorporation:

                                    ARTICLE I

     The name of the corporation is Principal Iowa Newco, Inc.

                                   ARTICLE II

     The corporation shall have perpetual existence.

                                   ARTICLE III

     The purpose for which the corporation is organized is the transaction of
any and all lawful business for which corporations may be organized under
Chapter 490.

                                   ARTICLE IV

     Section 1. The aggregate number of shares of stock which the corporation is
authorized to issue is ________ shares of common stock, par value $________ per
share (the "Common Stock"), and ________ shares of preferred stock, par value
$________ per share (the "Preferred Stock"), issuable in one or more series.

     Section 2. The Board of Directors of the corporation is hereby expressly
authorized, at any time and from time to time, to divide the shares of Preferred
Stock into one or more series, to issue from time to time in whole or in part
the shares of Preferred Stock or the shares of any series thereof, and in the
resolution or resolutions providing for the issue of shares of Preferred Stock
or of a particular series to fix and determine the voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof that may be desired, to the fullest extent now or
hereafter permitted by Section 602 of Chapter 490, as amended from time to time,
and the other provisions of these Articles of Incorporation.

   78
                                             EXHIBIT D to the Plan of Conversion

     Section 3. The Common Stock shall be subject to the express terms of the
Preferred Stock and any series thereof.

     Section 4. Except as otherwise provided by law or by the resolution or
resolutions of the Board of Directors of the corporation providing for the issue
of any series of Preferred Stock, the holders of the Common Stock shall have the
exclusive right to vote for the election of directors and for all other purposes
and holders of Preferred Stock shall not be entitled to vote on any matter or
receive notice of any meeting of stockholders. At each annual or special meeting
of shareholders, each holder of Common Stock shall be entitled to one vote in
person or by proxy for each share of Common Stock standing in such holder's name
on the stock transfer records of the corporation.

     Section 5. No shareholder of the corporation shall be entitled to exercise
any right of cumulative voting.

     Section 6. No shareholder of the corporation shall have any preemptive or
preferential right, nor be entitled as such as a matter of right to subscribe
for or purchase any part of any new or additional issue of stock of the
corporation of any class or series, whether issued for money or for
consideration other than money, or of any issue of securities convertible into
stock of the corporation.

     Section 7. The corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the corporation
shall have notice thereof, except as expressly provided by applicable law.

                                    ARTICLE V

     The street address of the initial registered office of the corporation is
711 High Street, Des Moines, Iowa 50392 and the name of its initial registered
agent at such address is Karen E. Shaff.

                                   ARTICLE VI

     The name and address of the incorporator is Joyce N. Hoffman, c/o Principal
Financial Group, 711 High Street, Des Moines, Iowa 50392-0300.

                                   ARTICLE VII

     The private property of the shareholders, directors and other officers and
managers of the corporation shall in no case be liable for corporate debts, but
shall be exempt therefrom.

   79
                                             EXHIBIT D to the Plan of Conversion

                                  ARTICLE VIII

     The following provisions are inserted for the management of the business
and for the conduct of the affairs of the corporation and for the purpose of
creating, defining, limiting and regulating the powers of the corporation and
its directors and shareholders:

     (a)  Subject to the rights of the holders of any class or series of
          Preferred Stock, if any, the number of directors shall be fixed from
          time to time exclusively pursuant to a resolution adopted by a
          majority of the entire Board of Directors; provided however, that the
          Board of Directors shall at no time consist of fewer than three (3)
          directors.

     (b)  The Board of Directors, subject to the rights of any holders of shares
          of any class or series of Preferred Stock, shall be divided into three
          classes, designated Classes I, II and III, which shall be as nearly
          equal numerically as possible. Directors of Class I shall be elected
          to hold office for a term expiring at the annual meeting of
          shareholders to be held in 2002, directors of Class II shall be
          elected to hold office for a term expiring at the annual meeting of
          shareholders to be held in 2003 and directors of Class III shall be
          elected to hold office for a term expiring at the annual meeting of
          shareholders to be held in 2004. At each succeeding annual meeting of
          shareholders following such initial classification and election, the
          respective successors of each class shall be elected for three year
          terms. The term of office of each director shall begin at the annual
          meeting at which such director is elected or at the time elected by
          the Board of Directors. Each director shall serve until a successor is
          duly elected and qualified and shall be eligible for re-election.

     (c)  The Board of Directors shall be elected in the manner specified in
          these Articles of Incorporation and the By-Laws of the corporation.
          Advance notice of nominations for the election of directors and of
          business to be brought by shareholders before any meeting of
          shareholders of the corporation shall be given in the manner and to
          the extent provided in the By-Laws of the corporation.

     (d)  Subject to the rights of any holders of shares of any class or series
          of Preferred Stock to elect additional directors under specified
          circumstances, any director may be removed, but only for cause, at a
          meeting of shareholders called for that purpose in the manner
          prescribed by law, upon the affirmative vote of holders of a majority
          of the combined voting power of the then outstanding stock of the
          corporation entitled to vote generally in the election of directors.

     (e)  Each director (whenever elected) shall hold office until his or her
          death, resignation or removal, except that the term of office of each
          director shall

   80
                                             EXHIBIT D to the Plan of Conversion

          not extend beyond the annual meeting next following the date such
          director attains age 70, or such younger age as may be established for
          all directors by the Board of Directors, except that the terms of
          directors of the corporation who were directors of Principal Mutual
          Life Insurance Company prior to the annual meeting of Principal Mutual
          Life Insurance Company in 1984 may extend to the annual meeting of
          shareholders of the corporation next following the date such director
          attains age 72 and except that for officer-directors, other than one
          who is or has been Chief Executive Officer of the corporation, the
          term as director shall not extend beyond the annual meeting of
          shareholders of the corporation next following the date such director
          retires as an active officer of the corporation.

     (f)  Vacancies in the Board of Directors resulting from death, resignation,
          retirement, disqualification, removal from office or other cause and
          newly created directorships resulting from any increase in the
          authorized number of directors shall be filled in the manner provided
          in the By-Laws of the corporation.

     (g)  The corporate powers of the corporation (except as at the time
          otherwise provided by law, these Articles of Incorporation or the
          By-Laws of the corporation) shall be exercised by the Board of
          Directors, and by such officers, and agents as the Board of Directors
          may authorize, elect or appoint.

     (h)  The Board of Directors shall have the power without the assent or vote
          of the shareholders of the corporation to adopt such By-Laws and rules
          and regulations for the transaction of the business of the corporation
          not inconsistent with these Articles of Incorporation or the laws of
          the State of Iowa, and to amend, alter or repeal such By-Laws, rules
          and regulations.

     (i)  A director, in determining what is in the best interests of the
          corporation when considering a proposal of acquisition, merger or
          consolidation of the corporation or a similar proposal, may consider
          any or all of the following community interest factors, in addition to
          consideration of the effects of any action on shareholders: (1) the
          interests of the policyholders of the Corporation's subsidiaries; (2)
          the effects of action on the corporation's employees, suppliers,
          creditors and customers; (3) the effects of the action on the
          communities in which the corporation and its subsidiaries operate; and
          (4) the long-term as well as short-term interests of the corporation
          and its shareholders including the possibility that these interests
          may be best served by the continued independence of the corporation.

     If on the basis of the community interest factors described above, the
Board of Directors of the corporation determines that a proposal to acquire or
merge the

   81
                                             EXHIBIT D to the Plan of Conversion

corporation is not in the best interests of the corporation, it may reject the
proposal. If the Board of Directors of the corporation determines to reject any
such proposal, the Board of Directors of the corporation has no obligation to
facilitate, to remove any barriers to or to refrain from impeding the proposal.
Consideration of any or all of the community interest factors is not a violation
of the business judgment rule or of any duty of the director to the
shareholders, or a group of shareholders, even if the director reasonably
determines that a community interest factor or factors outweigh the financial or
other benefits to the corporation or a shareholder or group of shareholders.

                                   ARTICLE IX

     The corporation shall indemnify directors, officers, employees and agents
of the corporation as provided in Sections 850 through 858 of Chapter 490,
subject to such limitations as may be established by the Board of Directors. Any
repeal or modification of this Article IX or of Sections 850 through 858 of
Chapter 490 shall not adversely affect any right of indemnification of a
director, officer, employee or agent of the corporation existing at any time
prior to such repeal or modification.

                                    ARTICLE X

     A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for a breach of the director's duty
of loyalty to the corporation or its shareholders; (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (c) for a transaction from which the director derives an improper personal
benefit; or (d) under Section 833 of Chapter 490, as amended from time to time.
If Chapter 490 is hereafter amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the corporation, in addition to the limitation on personal liability provided
herein, shall be eliminated or limited to the extent of such amendment,
automatically and without any further action, to the maximum extent permitted by
law. Any repeal or modification of this Article X by the shareholders of the
corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability or any other right or protection of a
director of the corporation with respect to any state of facts existing at or
prior to the time of such repeal or modification.

                                   ARTICLE XI

     The corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation in the manner now or
hereafter prescribed by the laws of the State of Iowa, and all rights herein
conferred upon shareholders or directors (in the present form of these Articles
of Incorporation or as hereinafter amended) are granted subject to this
reservation.

   82

                                             Exhibit E to the Plan of Conversion

                                     BY-LAWS

                                       OF

                           PRINCIPAL IOWA NEWCO, INC.

                          As Adopted on _____ __, 2001
   83

                                             EXHIBIT E to the Plan of Conversion

                                Table of Contents

                                                                            Page
                                                                            ----

ARTICLE I      PRINCIPAL OFFICE................................................1

ARTICLE II     REGISTERED OFFICE AND AGENT.....................................1

ARTICLE III    MEETINGS OF SHAREHOLDERS........................................1

        Section 3.01.      Annual Meeting......................................1
        Section 3.02.      Special Meetings....................................1
        Section 3.03.      Notices and Reports to Shareholders.................2
        Section 3.04.      Notice of Shareholder Business and Nominations......2
        Section 3.05.      Waiver of Notice....................................5
        Section 3.06.      Record Date.........................................5
        Section 3.07.      Shareholders' List..................................5
        Section 3.08.      Quorum..............................................6
        Section 3.09.      Organization........................................6
        Section 3.10.      Voting of Shares....................................6
        Section 3.11.      Voting by Proxy or Representative...................7
        Section 3.12.      Conduct of Business.................................7
        Section 3.13.      Action Without Meeting..............................7

ARTICLE IV     BOARD OF DIRECTORS..............................................8

        Section 4.01.      Qualifications and General Powers...................8
        Section 4.02.      Number and Term of Office...........................8
        Section 4.03.      Quorum and Manner of Acting.........................8
        Section 4.04.      Regular Meetings....................................8
        Section 4.05.      Special Meetings....................................9
        Section 4.06.      Resignation.........................................9
        Section 4.07.      Vacancies...........................................9
        Section 4.08.      Removal.............................................9
        Section 4.09.      Compensation of Directors..........................10
        Section 4.10.      Action Without Meeting.............................10
        Section 4.11.      Dividends..........................................10
        Section 4.12.      Officers of the Board of Directors.................10

ARTICLE V      THE EXECUTIVE COMMITTEE AND OTHER
               COMMITTEES.....................................................10

        Section 5.01.      Executive Committee................................10
        Section 5.02.      Powers of Executive Committee......................11
        Section 5.03.      Other Committees...................................11

                                               i
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                                             EXHIBIT E to the Plan of Conversion

                                Table of Contents
                                   (continued)

                                                                            Page
                                                                            ----

ARTICLE VI     OFFICERS.......................................................11

        Section 6.01.      Chief Executive Officer............................11
        Section 6.02.      Secretary of the Corporation.......................11
        Section 6.03.      Other Officers Elected by Board of Directors.......11
        Section 6.04.      Other Officers.....................................12
        Section 6.05.      Resignation and Removal............................12
        Section 6.06.      Compensation of Officers...........................12

ARTICLE VII    SHARES, THEIR ISSUANCE AND TRANSFER............................12

        Section 7.01.      Consideration for Shares...........................12
        Section 7.02.      Certificates for Shares............................12
        Section 7.03.      Execution of Certificates..........................12
        Section 7.04.      Share Record.......................................12
        Section 7.05.      Cancellation.......................................13
        Section 7.06.      Transfers of Stock.................................13
        Section 7.07.      Regulations........................................13
        Section 7.08.      Lost, Destroyed or Mutilated Certificates..........13

ARTICLE VIII    MISCELLANEOUS PROVISIONS......................................13

        Section 8.01.      Facsimile Signatures...............................13
        Section 8.02.      Execution of Instruments...........................13
        Section 8.03.      Disposition of Funds...............................14
        Section 8.04.      Fiscal Year........................................14
        Section 8.05.      Corporate Seal.....................................14
        Section 8.06.      Books and Records..................................14
        Section 8.07.      Voting of Stocks Owned by the Corporation..........14

ARTICLE IX     INDEMNITY......................................................14

ARTICLE X      AMENDMENTS.....................................................15

                                       ii
   85

                                             EXHIBIT E to the Plan of Conversion

                                     BY-LAWS

                                       OF

                           PRINCIPAL IOWA NEWCO, INC.

                                    ARTICLE I

                                PRINCIPAL OFFICE

     The location of the principal office of the corporation in the State of
Iowa will be identified in the corporation's annual report filed with the
Secretary of State of the State of Iowa. The corporation may have such other
offices either within or without the State of Iowa as the business of the
corporation may from time to time require.

                                   ARTICLE II

                           REGISTERED OFFICE AND AGENT

     The initial registered agent and office of the corporation are set forth in
the Articles of Incorporation. The registered agent or registered office, or
both, may be changed by resolution of the Board of Directors.

                                   ARTICLE III

                            MEETINGS OF SHAREHOLDERS

     Section 3.01. Annual Meeting. The annual meeting of the shareholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting, shall be held at such place, either within or
without the State of Iowa, and at such date and at such time, as may be fixed
from time to time by resolution of the Board of Directors and set forth in the
notice or waiver of notice of the meeting.

     Section 3.02. Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by law (which for purposes
of these By-Laws shall mean as required from time to time by the Iowa Business
Corporation Act or the Articles of Incorporation of the corporation), may be
called by the Chairman of the Board, Chief Executive Officer (or in the event of
his or her absence or disability, by the President or any Executive Vice
President), or pursuant to a resolution approved by a majority of the entire
Board of Directors, and shall be called by the Board of Directors upon the
written demand, signed, dated and delivered to the Secretary of the corporation,
of the holders of at least 10% of all the votes entitled to be cast on any issue
proposed to be considered at the meeting. Such written demand shall state the
purpose or purposes for which such meeting is to be called. The time, date and
place of any special meeting

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                                             EXHIBIT E to the Plan of Conversion

shall be determined by the Board of Directors, or, at its direction, by the
Chief Executive Officer.

     Section 3.03. Notices and Reports to Shareholders.

     (a) Notice of the place, date and time of all meetings of shareholders and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called, shall be communicated not fewer than 10 days nor more than 60 days
before the date of the meeting to each shareholder entitled to vote at such
meeting. The Board of Directors, as provided in Section 3.6 of these By-Laws,
may establish a record date for the determination of shareholders entitled to
notice. Notice of adjourned meetings need only be given if required by law or
Section 3.8 of these By-Laws.

     (b) If notice of proposed corporate action is required by law to be given
to shareholders not entitled to vote and the action is to be taken by consent of
the voting shareholders, the corporation shall give all shareholders written
notice of the proposed action at least 10 days before the action is taken. The
notice must contain or be accompanied by the same material that would have been
required by law to be sent to shareholders not entitled to vote in a notice of
meeting at which the proposed action would have been submitted to the
shareholders for action.

     (c) In the event corporate action is taken without a meeting in accordance
with Section 3.13 of these By-Laws by less than unanimous written consent,
prompt notice of the taking of such corporate action shall be given to those
shareholders who have not consented in writing to the taking of such corporate
action.

     Section 3.04. Notice of Shareholder Business and Nominations.

     (a) Annual Meetings of Shareholders.

               (i) Nominations of persons for election to the Board of Directors
     and the proposal of business to be considered by the shareholders may be
     made at an annual meeting of shareholders of the corporation (1) by or at
     the direction of the Board of Directors or the Chairman of the Board or (2)
     by any shareholder of the corporation who is entitled to vote at the
     meeting, who complies with the notice procedures set forth in clauses (ii)
     and (iii) of this paragraph (a) of Section 3.4 and who was a shareholder of
     record at the time such notice was delivered to the Secretary of the
     corporation.

               (ii) For nominations or other business to be properly brought
     before an annual meeting by a shareholder pursuant to clause (2) of
     paragraph (a)(i) of this Section 3.4, the shareholder must have given
     timely notice thereof in writing to the Secretary of the corporation. To be
     timely, a shareholder's notice shall be delivered to the Secretary of the
     corporation at the principal executive offices of the corporation not less
     than 90 days nor more than 120 days prior to the first

                                        2
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                                             EXHIBIT E to the Plan of Conversion

     anniversary of the preceding year's annual meeting; provided, however, that
     if the date of the annual meeting is advanced by more than 20 days or
     delayed by more than 70 days from such anniversary date, notice by the
     shareholder to be timely must be so delivered not earlier than 120 days
     prior to such annual meeting and not later than the close of business on
     the later of the 90th day prior to such annual meeting or the 10th day
     following the day on which public announcement of the date of such meeting
     is first made. In no event shall the adjournment of an annual meeting
     commence a new time period for the giving of a shareholder's notice as
     described above. Such shareholder's notice shall set forth (1) as to each
     person whom the shareholder proposes to nominate for election or reelection
     as a director all information relating to such person that is required to
     be disclosed in solicitations of proxies for election of directors or is
     otherwise required pursuant to Regulation 14A under the Securities Exchange
     Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder,
     including such person's written consent to being named in the proxy
     statement as a nominee and to serving as a director if elected; (2) as to
     any other business that the shareholder proposes to bring before the
     meeting, a brief description of the business desired to be brought before
     the meeting, the reasons for conducting such business at the meeting and
     any material interest in such business of such shareholder and of any
     beneficial owner on whose behalf the proposal is made; and (3) as to the
     shareholder giving the notice and any beneficial owner on whose behalf the
     nomination or proposal is made (A) the name and address of such
     shareholder, as they appear on the corporation's books, and of such
     beneficial owner and (B) the class and number of shares of the corporation
     which are owned beneficially and of record by such shareholder and such
     beneficial owner.

          (iii) Notwithstanding anything in the second sentence of paragraph
     (a)(ii) of this Section 3.4 to the contrary, in the event that the number
     of directors to be elected to the Board of Directors is increased and there
     is no public announcement naming all of the nominees for director or
     specifying the size of the increased Board of Directors made by the
     corporation at least l00 days prior to the first anniversary of the
     preceding year's annual meeting, a shareholder's notice under this Section
     3.4 shall also be considered timely, but only with respect to nominees for
     any new positions created by such increase, if it shall be delivered to the
     Secretary of the corporation at the principal executive offices of the
     corporation not later than the close of business on the 10th day following
     the day on which such public announcement is first made by the corporation.

     (b) Special Meetings of Shareholders. Only such business as shall have been
brought before the special meeting of the shareholders pursuant to the
corporation's notice of meeting pursuant to Section 3.3 of these By-Laws shall
be conducted at such meeting. Nominations of persons for election to the Board
of Directors may be made at a special meeting of shareholders at which directors
are to be elected pursuant to the corporation's notice of meeting (i) by or at
the direction of the Board of Directors or (ii)

                                        3
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                                             EXHIBIT E to the Plan of Conversion

by any shareholder of the corporation who is entitled to vote at the meeting,
who complies with the notice procedures set forth in this paragraph (b) of
Section 3.4 and who is a shareholder of record at the time such notice is
delivered to the Secretary of the corporation. Nominations by shareholders of
persons for election to the Board of Directors may be made at such special
meeting of shareholders if the shareholder's notice as required by paragraph
(a)(ii) of this Section 3.4 shall be delivered to the Secretary of the
corporation at the principal executive offices of the corporation not earlier
than the 120th day prior to such special meeting and not later than the close of
business on the later of the 90th day prior to such special meeting or the 10th
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the adjournment of a special meeting
commence a new time period for the giving of a shareholder's notice as described
above.

     (c) General.

          (i) Only persons who are nominated in accordance with the procedures
     set forth in this Section 3.4 shall be eligible to serve as directors and
     only such business shall be conducted at a meeting of shareholders as shall
     have been brought before the annual or special meeting in accordance with
     the procedures set forth in this Section 3.4. Except as otherwise provided
     by law, the Articles of Incorporation of the corporation or these By-Laws,
     the chairman of the annual or special meeting shall have the power and duty
     to determine whether a nomination or any business proposed to be brought
     before the meeting was made in accordance with the procedures set forth in
     this Section 3.4 and, if any proposed nomination or business is not in
     compliance with this Section 3.4, to declare that such defective proposal
     or nomination shall be disregarded.

          (ii) For purposes of this Section 3.4, "public announcement" shall
     mean disclosure in a press release reported by the Dow Jones News Service,
     Associated Press or comparable national news service or in a document
     publicly filed by the corporation with the Securities and Exchange
     Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

          (iii) Notwithstanding the foregoing provisions of this Section 3.4, a
     shareholder shall also comply with all applicable requirements of the
     Exchange Act and the rules and regulations thereunder with respect to the
     matters set forth in this Section 3.4. Nothing in this Section 3.4 shall be
     deemed to affect any rights of (1) shareholders to request inclusion of
     proposals in the corporation's proxy statement pursuant to Rule 14a-8 under
     the Exchange Act or (2) the holders of any series of Preferred Stock to
     elect directors if so provided under any applicable certificates of
     designation relating to the series of Preferred Stock.

                                        4
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                                             EXHIBIT E to the Plan of Conversion

     Section 3.05. Waiver of Notice.

     (a) Any shareholder may waive any notice required by law or these By-Laws
if such waiver is in writing and signed by the shareholder entitled to such
notice, whether before or after the date and time stated in such notice. Such a
waiver shall be equivalent to notice to such shareholder in due time as required
by law or these By-Laws. Any such waiver shall be delivered to the corporation
for inclusion in the minutes or filing with the corporate records of the
corporation.

     (b) A shareholder's attendance at a meeting, in person or by proxy, waives
(i) objection to lack of notice or defective notice of such meeting, unless the
shareholder at the beginning of the meeting or promptly upon the shareholder's
arrival objects to holding the meeting or transacting business at the meeting
and (ii) objection to consideration of a particular matter at the meeting that
is not within the purpose or purposes described in the meeting notice, unless
the shareholder objects to considering the matter when it is presented.

     Section 3.06. Record Date. The Board of Directors may fix, in advance, a
date as the record date for any determination of shareholders for any purpose,
such date in every case to be not more than 70 days prior to the date on which
the particular action or meeting requiring such determination of shareholders is
to be taken or held. If no record date is so fixed for the determination of
shareholders, the close of business on the day before the date on which the
first notice of a shareholders' meeting is communicated to shareholders or the
date on which the Board of Directors authorizes a share dividend or a
distribution (other than one involving a repurchase or reacquisition of shares),
as the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section 3.6, such
determination shall apply to any adjournment thereof, unless the Board of
Directors selects a new record date or unless a new record date is required by
law.

     Section 3.07. Shareholders' List. After fixing a record date for a meeting,
the corporation shall prepare an alphabetical list of the names of all
shareholders who are entitled to notice of a shareholders' meeting. The list
must be arranged by voting group and within each voting group by class or series
of shares, and show the address of and number of shares held by each
shareholder. The shareholders' list must be available for inspection by any
shareholder beginning two business days after notice of the meeting is given for
which the list was prepared and continuing through the meeting at the
corporation's principal office or at a place in the city where the meeting will
be held which such place shall be identified in the notice of the meeting. A
shareholder, or a shareholder's agent or attorney, is entitled on written demand
to inspect and, subject to the requirements of law, to copy the list, during
regular business hours and at the person's expense, during the period the list
is available for inspection. The corporation shall make the shareholders' list
available at the meeting, and any shareholder, or a shareholder's

                                        5
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                                             EXHIBIT E to the Plan of Conversion

agent or attorney, is entitled to inspect the list at any time during the
meeting or any adjournment thereof.

     Section 3.08. Quorum.

     (a) At any meeting of the shareholders, a majority of the votes entitled to
be cast on the matter by a voting group constitutes a quorum of that voting
group for action on that matter, unless the representation of a different number
is required by law, and in that case, the representation of the number so
required shall constitute a quorum. If at the time for which a meeting of
shareholders has been called less than a quorum is present, the chairman of the
meeting or a majority of the shareholders present or represented by proxy and
entitled to vote thereat may adjourn the meeting to another place, date or time.

     (b) When a meeting is adjourned to another place, date or time, notice need
not be given of the adjourned meeting if the place, date and time thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the date of any adjourned meeting is more than 120 days after the date
for which the meeting was originally noticed, or if a new record date is fixed
for the adjourned meeting, notice of the place, date and time of the adjourned
meeting shall be given in conformity with these By-Laws. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.

     (c) Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment thereof unless a new record date is or must be set for that
adjourned meeting.

     Section 3.09. Organization.

     (a) The Chairman of the Board, or in the absence of the Chairman of the
Board, the acting Chairman of the Board, or in his or her absence, such person
as shall be designated by the holders of a majority of the votes present at the
meeting shall call meetings of the shareholders to order and shall act as
presiding officer of such meetings.

     (b) The Secretary of the corporation shall act as secretary at all meetings
of the shareholders, but in the absence of the Secretary at any meeting of the
shareholders, the presiding officer may appoint any person to act as secretary
of the meeting.

     Section 3.10. Voting of Shares.

     (a) Every shareholder entitled to vote may vote in person or by proxy.
Except as provided in subsection (c) of this Section 3.10 or unless otherwise
provided by law, each outstanding share, regardless of class, shall be entitled
to one vote on each matter submitted to a vote at a meeting of shareholders.
Unless otherwise provided by law, directors in each class shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present. Shareholders

                                        6
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                                             EXHIBIT E to the Plan of Conversion

do not have the right to cumulate their votes for directors unless the Articles
of Incorporation of the corporation so provide.

     (b) The shareholders having the right to vote shares at any meeting shall
be only those of record on the stock books of the corporation on the record date
fixed by law or pursuant to the provisions of Section 3.6 of these By-Laws.

     (c) Absent special circumstances, the shares of the corporation held,
directly or indirectly, by another corporation are not entitled to vote if a
majority of the shares entitled to vote for the election of directors of such
other corporation is held by the corporation. The foregoing does not limit the
power of the corporation to vote any shares held by the corporation in a
fiduciary capacity.

     (d) If a quorum exists, action on a matter other than the election of
directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless a
greater number is required by law.

     Section 3.11. Voting by Proxy or Representative.

     (a) At all meetings of the shareholders, a shareholder entitled to vote may
vote in person or by proxy appointed in writing, which appointment shall be
effective when received by the secretary of the meeting or other officer, agent
or inspector authorized to tabulate votes. An appointment of a proxy is valid
for 11 months from the date of its execution, unless a longer period is
expressly provided in the appointment form.

     (b) Shares held by an administrator, executor, guardian, conservator,
receiver, trustee, pledgee or another corporation may be voted as provided by
law.

     Section 3.12. Conduct of Business. The person acting as the presiding
officer of any meeting of shareholders shall determine the order of business and
procedure at the meeting, including such regulation of the manner of voting and
the conduct of business as seem to him or her to be in order.

     Section 3.13. Action Without Meeting. Except as otherwise set forth in this
Section 3.13 and subject to Section 3.3(c) of these By-Laws, any action required
or permitted by law to be taken at a meeting of the shareholders of the
corporation may be taken without a meeting or vote, and without notice, if one
or more consents in writing setting forth the action taken shall be signed and
dated by the holders of outstanding shares having not less than 90% of the votes
entitled to be cast at a meeting at which all shares entitled to vote on the
action were present and voted, and are delivered to the corporation for
inclusion in the minutes or filing with the corporate records of the
corporation; provided, however, that a director shall not be removed by written
consents unless written consents are obtained from the holders of all of the
outstanding shares of the corporation that are entitled to vote on the removal
of the director. Written consents from a sufficient number of shareholders must
be obtained within 60 days from the date

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                                             EXHIBIT E to the Plan of Conversion

of the earliest dated consent for such consents to be effective to take
corporate action. If not otherwise fixed by law or in accordance with these
By-Laws, the record date for determining shareholders entitled to take action
without a meeting is the date the first shareholder signs such a written
consent.

                                   ARTICLE IV

                               BOARD OF DIRECTORS

     Section 4.01. Qualifications and General Powers. No director is required to
be an officer, employee or shareholder of the corporation or a resident of the
State of Iowa. The business and affairs of the corporation shall be managed
under the direction of the Board of Directors. The Board of Directors may
authorize any officer or officers or agent or agents to enter into any contract
or to execute and deliver any instrument in the name and on behalf of the
corporation, and such authority may be general or confined to specific
instances.

     Section 4.02. Number and Term of Office. The Board of Directors shall
consist of not less than three directors, the exact number to be determined from
time to time by a majority of the entire Board of Directors. The Board of
Directors shall be divided into three classes, designated Classes I, II and III,
which shall be as nearly equal numerically as possible. Directors of Class I
shall be elected to hold office for a term expiring at the annual meeting of
shareholders to be held in 2002, directors of Class II shall be elected to hold
office for a term expiring at the annual meeting of shareholders to be held in
2003 and directors of Class III shall be elected to hold office for a term
expiring at the annual meeting of shareholders to be held in 2004. At each
succeeding annual meeting of shareholders following such initial classification
and election, the respective successors of each class shall be elected for three
year terms. The term of office of each director shall begin at the annual
meeting at which such director is elected or at the time elected by the Board of
Directors. Each director shall serve until a successor is duly elected and
qualified and shall be eligible for re-election.

     Section 4.03. Quorum and Manner of Acting. A quorum of the Board of
Directors consists of a majority of the number of directors prescribed in
accordance with Section 4.2 of these By-Laws. If at any meeting of the Board of
Directors less than a quorum is present, a majority of the directors present may
adjourn the meeting from time to time until a quorum shall be present. Notice of
any adjourned meeting need not be given. At all meetings of directors where a
quorum is present, the act of the majority of the directors present at the
meeting shall be the act of the Board of Directors.

     Section 4.04. Regular Meetings. Regular meetings of the Board of Directors
shall be held without notice once in each calendar quarter on such date and at
such hour and place, within or without the State of Iowa, as may be fixed by the
Board of Directors, except that the meeting in the second quarter shall be held
on the date and at the place of the annual meeting of the shareholders of the
corporation. Notice of regular meetings

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                                             EXHIBIT E to the Plan of Conversion

need not be given, provided, however, that if the Board of Directors shall fix
or change the time or place of any regular meeting, notice of such action shall
be mailed promptly, or sent by telephone, including a voice messaging system or
other system or technology designed to record and communicate messages,
telegraph, facsimile, electronic mail or other electronic means, to each
director who shall not have been present at the meeting at which such action was
taken, addressed to him or her at his or her usual place of business, or shall
be delivered to him or her personally. Notice of such action need not be given
to any director who attends the first regular meeting after such action is taken
without protesting the lack of notice to him or her, prior to or at the
commencement of such meeting, or to any director who submits a signed waiver of
notice, whether before or after such meeting.

     Section 4.05. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, Chief Executive
Officer (or, in the event of his or her disability, by the President or any
Executive Vice President), or pursuant to a resolution approved by a majority of
the entire Board of Directors, at such place (within or without the State of
Iowa), date and hour as may be specified in the respective notices or waivers of
notice of such meetings. Special meetings of the Board of Directors may be
called on twenty-four (24) hours notice, if notice is given to each director
personally or by telephone, including a voice messaging system, or other system
of technology designed to record and communicate messages, telegraph, facsimile,
electronic mail or other electronic means, or on five (5) days' notice, if
notice is mailed to each director, addressed to him or her at his or her usual
place of business or to such other address as any director may request by notice
to the Secretary of the corporation. Notice of any special meeting need not be
given to any director who attends such meeting without protesting the lack of
notice to him or her, prior to or at the commencement of such meeting, or to any
director who submits a signed waiver of notice, whether before or after such
meeting, and any business may be transacted thereat.

     Section 4.06. Resignation. Any director of the corporation may resign at
any time by delivering written notice to the Chairman of the Board or the
secretary of the corporation. A resignation is effective when the notice is
delivered unless the notice specifies a later effective date.

     Section 4.07. Vacancies. Any vacancy or vacancies on the Board of Directors
may be filled by the shareholders, by the Board of Directors at any meeting of
the Board of Directors or, if the directors remaining in office constitute fewer
than a quorum of the Board of Directors, by the affirmative vote of a majority
of directors remaining in office. No decrease in the number of directors shall
shorten the term of any incumbent director.

     Section 4.08. Removal. Any director may be removed, but only for cause, at
a meeting of shareholders called for that purpose in the manner prescribed by
law, upon the affirmative vote of holders of a majority of the combined voting
power of the then outstanding stock of the corporation entitled to vote
generally in the election of directors.

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                                             EXHIBIT E to the Plan of Conversion

     Section 4.09. Compensation of Directors. The amount, if any, which each
director shall be entitled to receive as compensation for such director's
services as such shall be fixed from time to time by resolution of the Board of
Directors.

     Section 4.10. Action Without Meeting. Any action required or permitted by
law to be taken at any meeting of the Board of Directors may be taken without a
meeting if the action is taken by all of the directors then in office and if one
or more consents in writing describing the action so taken shall be signed by
each director then in office and included in the minutes or filed with the
corporate records reflecting the action taken. Action taken under this section
is effective when the last director signs the consent, unless the consent
specifies a different effective date.

     Section 4.11. Dividends. Subject to applicable law and any applicable
provisions of the Articles of Incorporation of the corporation, the Board of
Directors may authorize and the corporation may make distributions to its
shareholders in cash or property.

     Section 4.12. Officers of the Board of Directors.

     (a) The Board of Directors shall elect from its number a Chairman of the
Board to serve at the pleasure of the Board of Directors. The Chairman of the
Board shall, if present, preside at each meeting of the Board of Directors and
shall have such powers and shall perform such duties as may be assigned to him
or her by these By-Laws or by or pursuant to authorization of the Board of
Directors.

     (b) The Board of Directors shall by resolution establish a procedure to
provide for an acting Chairman of the Board in the event the current Chairman of
the Board is unable to serve or act in that capacity.

                                    ARTICLE V

                  THE EXECUTIVE COMMITTEE AND OTHER COMMITTEES

     Section 5.01. Executive Committee. The Board of Directors shall appoint an
Executive Committee composed of five directors. Members of the Executive
Committee shall be appointed by and serve at the pleasure of the Board of
Directors. The Chairman of the Board shall be a member of the Executive
Committee and shall, if present, preside at each meeting of the Executive
Committee. The Chief Executive Officer, if different than the Chairman of the
Board, shall be a member of the Executive Committee and in the absence or
vacancy in the office of the Chairman of the Board, shall preside at meetings of
the Executive Committee. If the Chairman of the Board is also the Chief
Executive Officer, any other member of the Executive Committee, as determined by
the members of the Executive Committee present, shall preside at a meeting of
the Executive Committee in the absence of the Chairman of the Board. The
Secretary of the corporation shall act as secretary of the Executive Committee
and shall keep a record of

                                       10
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                                             EXHIBIT E to the Plan of Conversion

all proceedings of the Executive Committee. A majority of the members of the
Executive Committee shall constitute a quorum.

     Section 5.02. Powers of Executive Committee. The Executive Committee shall
have and, to the extent permitted by law, may exercise all of the powers of the
Board of Directors in the management and affairs of the corporation except when
the Board of Directors is in session.

     Section 5.03. Other Committees. The Board of Directors, by resolution
adopted by the affirmative vote of a majority of directors then in office, may
establish one (1) or more other committees of the Board of Directors, each
committee to consist of such number of directors as from time to time may be
fixed by the Board of Directors. Any such committee shall serve at the pleasure
of the Board of Directors. Each such committee shall have the powers and duties
delegated to it by the Board of Directors, subject to the limitations set forth
in applicable Iowa law. The Board of Directors may elect one or more of its
members as alternate members of any such committee who may take the place of any
absent member or members at any meeting of such committee, upon request of the
Chairman of the Board or the Chairman of such committee.

                                   ARTICLE VI

                                    OFFICERS

     Section 6.01. Chief Executive Officer. The Board of Directors shall elect a
Chief Executive Officer to serve at the pleasure of the Board of Directors who
shall (a) supervise the carrying out of policies adopted or approved by the
Board of Directors, (b) exercise a general supervision and superintendence over
all the business and affairs of the corporation, and (c) possess such other
powers and perform such other duties as may be assigned to him or her by these
By-Laws, as may from time to time be assigned by the Board of Directors and as
may be incident to the office of Chief Executive Officer.

     Section 6.02. Secretary of the Corporation. The Board of Directors shall
appoint a Secretary of the corporation to serve at the pleasure of the Board of
Directors. The Secretary shall (a) keep minutes of all meetings of the
shareholders and of the Board of Directors, (b) authenticate records of the
corporation and (c) in general, have such powers and perform such other duties
as may be assigned to him or her by these By-Laws, as may from time to time be
assigned to him or her by the Board of Directors or the Chief Executive Officer
and as may be incident to the office of Secretary.

     Section 6.03. Other Officers Elected by Board of Directors. At any meeting
of the Board of Directors, the Board of Directors may elect such other officers
of the corporation as the Board of Directors may deem necessary, to serve at the
pleasure of the Board of Directors. Other officers elected by the Board of
Directors shall have such powers and perform such duties as may be assigned to
them by or pursuant to authorization of the Board of Directors or by the Chief
Executive Officer.

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                                             EXHIBIT E to the Plan of Conversion

     Section 6.04. Other Officers. The Board of Directors may authorize the
corporation to elect or appoint other officers, each of whom shall serve at the
pleasure of the corporation. Officers elected or appointed by the corporation
shall have such powers and perform such duties as may be assigned to them by the
corporation.

     Section 6.05. Resignation and Removal. An officer may resign at any time by
delivering notice to the Secretary of the corporation. A resignation is
effective when the notice is delivered unless the notice specifies a later
effective date. Any officer may be removed, for or without cause, by the Board
of Directors at any time.

     Section 6.06. Compensation of Officers. The salaries and other compensation
of all officers of the corporation shall be fixed by or pursuant to
authorization of the Board of Directors.

                                   ARTICLE VII

                     SHARES, THEIR ISSUANCE AND TRANSFER

     Section 7.01. Consideration for Shares. The Board of Directors may
authorize shares to be issued for consideration consisting of any tangible or
intangible property or benefit to the corporation, including cash, promissory
notes, services performed, contracts for services to be performed, or other
securities of the corporation. Before the corporation issues shares, the Board
of Directors must determine that the consideration received or to be received
for shares to be issued is adequate.

     Section 7.02. Certificates for Shares. Every shareholder of the corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number and class of shares of
the corporation owned by such shareholder.

     Section 7.03. Execution of Certificates. The certificates for shares of
stock shall be numbered in the order in which they shall be issued and shall be
signed by the Chief Executive Officer or President and the Secretary of the
corporation or an Assistant Secretary of the corporation. The signatures of the
Chief Executive Officer or President and the Secretary or Assistant Secretary or
other persons signing for the corporation upon a certificate may be facsimiles
if the certificate is countersigned by a transfer agent, or registered by a
registrar, other than the corporation itself or an employee of the corporation.
In case any officer or other authorized person who has signed or whose facsimile
signature has been placed upon such certificate for the corporation shall have
ceased to be such officer or employee or agent before such certificate is
issued, it may be issued by the corporation with the same effect as if he or she
were such officer or employee or agent at the date of the issuance of such
certificate.

     Section 7.04. Share Record. A record shall be kept by the Secretary of the
corporation, or by any other officer, employee or agent designated by the Board
of

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                                             EXHIBIT E to the Plan of Conversion

Directors, of the name and address of each shareholder of the corporation, the
number and class of shares held by such shareholder, the number of the
certificates representing such shares and the respective dates of issuance of
such certificates and, in case of cancellation of any such certificate, the
respective date of cancellation.

     Section 7.05. Cancellation. Every certificate surrendered to the
corporation for exchange or transfer shall be cancelled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled, except in cases provided
in Section 7.8 of these By-Laws.

     Section 7.06. Transfers of Stock. Transfers of shares of the capital stock
of the corporation shall be made only on the books of the corporation by the
record holder thereof, or by his or her attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary of the corporation, and
on surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name shares
of stock stand on the books of the corporation shall be deemed the owner thereof
for all purposes as regards the corporation; provided, however, that whenever
any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the corporation, shall be so
expressed in the entry of transfer.

     Section 7.07. Regulations. The Board of Directors may make such other rules
and regulations as it may deem expedient, not inconsistent with law, concerning
the issue, transfer and registration of certificates for shares of the capital
stock of the corporation.

     Section 7.08. Lost, Destroyed or Mutilated Certificates. In the event of
the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.

                                  ARTICLE VIII

                            MISCELLANEOUS PROVISIONS

     Section 8.01. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof. If
any officer whose facsimile signature has been placed upon any form of
instrument shall have ceased to be such officer before an instrument in such
form is issued, such instrument may be issued with the same effect as if he or
she had been such officer at the time of its issue.

     Section 8.02. Execution of Instruments. The Board of Directors may
authorize, or provide for the authorization of, officers, employees and agents
to enter into any

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                                             EXHIBIT E to the Plan of Conversion

contract or execute and deliver any instrument in the name and of behalf of the
corporation. Any such authorization must be in writing or be by electronic
transmission and may be general or limited to specific contracts or instruments.

     Section 8.03. Disposition of Funds. The funds of the corporation shall be
paid out, transferred or otherwise disposed of only in such manner and under
such controls as may be authorized by resolution of the Board of Directors or as
may be authorized by such officers of the corporation as the Board of Directors
designates.

     Section 8.04. Fiscal Year. The fiscal year of the corporation shall be from
the first day of January through the last day of December.

     Section 8.05. Corporate Seal. The corporation may adopt an official seal.

     Section 8.06. Books and Records. The books and records of the corporation
shall be kept (except that the shareholder list must also be kept at the places
described in Section 3.7 of these By-Laws) at the principal office of the
corporation.

     Section 8.07. Voting of Stocks Owned by the Corporation. In the absence of
a resolution of the Board of Directors to the contrary, the Chief Executive
Officer and the President, and each of them, are authorized and empowered on
behalf of the corporation to attend and vote, or to grant discretionary proxies
to be used, at any meeting of shareholders of any corporation in which this
corporation holds or owns shares of stock, and in that connection, on behalf of
this corporation, to execute a waiver of notice of any such meeting or a written
consent to action without a meeting. The Board of Directors shall have authority
to designate any officer or person as a proxy or attorney-in-fact to vote shares
of stock in any other corporation in which the corporation may own or hold
shares of stock.

                                   ARTICLE IX

                                    INDEMNITY

     The Board of Directors shall indemnify, or authorize the officers of the
corporation to indemnify, directly and through insurance coverage, each person
now or hereafter a director, officer, employee or other representative of the
corporation, and that person's heirs and legal representatives, against all
damages, awards, costs and expenses, including counsel fees, reasonably incurred
or imposed in connection with or resulting from any action, suit or proceeding,
or the settlement thereof prior to final adjudication, to which such person is
or may be made a party by reason of being or having been a director, officer,
employee or other representative of the corporation or by reason of service at
the request of the corporation in any capacity with another entity or
organization. Such rights or indemnification shall be in addition to any rights
to which any director, officer, employee or other representative of the
corporation, former, present

                                       14
   99

                                             EXHIBIT E to the Plan of Conversion

or future, may otherwise be entitled as a matter of law and subject to such
limitations permitted by law as may be established by the Board of Directors.

                                    ARTICLE X

                                   AMENDMENTS

     These By-Laws may be amended, altered or repealed by the Board of Directors
at any regular or special meeting of the Board of Directors, provided written
notice expressing in substance the proposed change shall have been given to each
director at least two days prior to the date of such regular or special meeting.
Notice of any proposed amendment, alteration or repeal may be waived by any
director by filing a written waiver of notice with the Secretary of the
corporation before, on or after the meeting date. The shareholders of the
corporation may also amend, alter or repeal these By-Laws as provided in the
Articles of Incorporation of the corporation.

                                       15
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                                             EXHIBIT F to the Plan of Conversion

                          PRIVILEGED AND CONFIDENTIAL

                       ACTUARIAL CONTRIBUTION MEMORANDUM

   101
Actuarial Contribution Memorandum                                 March 31, 2001

                                TABLE OF CONTENTS

SECTION                                                                                    PAGE
- -------                                                                                    ----
                                                                                         
I.     OVERVIEW..........................................................................    1

II.    BASIC PRINCIPLES AND METHODOLOGY..................................................    2
    A. INTRODUCTION......................................................................    2
    B. BASIC METHODS.....................................................................    2
    C. TREATMENT OF SUBSIDIARIES.........................................................    3
    D. ASSUMPTIONS AND PRACTICES THAT APPLY ACROSS LINES OF BUSINESS.....................    3
       1.  Historical Rates of Investment Return and Accumulation Rates..................    4
       2.  Prospective Rates of Investment Return and Discount Rates.....................    5
       3.  Historical Expense Factors....................................................    5
       4.  Prospective Expense Factors...................................................    6
       5.  Historical Federal Income Tax Factors.........................................    6
       6.  Prospective Federal Income Tax Factors........................................    6
    E. CALCULATION RULES THAT APPLY ACROSS LINES OF BUSINESS.............................    7
       1.  Number of Prospective Years Recognized in the AC Calculation..................    7
       2.  Policies Whose Contribution to Surplus Is Taken Into Account..................    7
       3.  Reinsurance...................................................................    7

III.   INDIVIDUAL LIFE INSURANCE - POLICIES IN THE CLOSED BLOCK..........................    9
    A. OVERVIEW AND METHODOLOGY..........................................................    9
    B. ADJUSTABLE LIFE...................................................................   10
    C. TRADITIONAL LIFE..................................................................   10

IV.    INDIVIDUAL LIFE INSURANCE - POLICIES NOT IN THE CLOSED BLOCK......................   12
    A. OVERVIEW AND METHODOLOGY..........................................................   12
    B. ADJUSTABLE LIFE...................................................................   12
    C. SURVIVORSHIP WHOLE LIFE...........................................................   13
    D. UNIVERSAL LIFE, EXCLUDING SURVIVORSHIP UNIVERSAL LIFE.............................   14
    E. SURVIVORSHIP UNIVERSAL LIFE.......................................................   14
    F. 97 TERM POLICIES..................................................................   15
    G. BOLI UNIVERSAL LIFE...............................................................   16
    H. SELECT UNIVERSAL LIFE.............................................................   17

V.     INDIVIDUAL HEALTH POLICIES........................................................   18
    A. OVERVIEW AND METHODOLOGY..........................................................   18
    B. INDIVIDUAL DISABILITY INCOME......................................................   19
    C. INDIVIDUAL MEDICAL................................................................   20
    D. LONG TERM CARE....................................................................   21

VI.    INDIVIDUAL ANNUITIES..............................................................   22
    A. OVERVIEW AND METHODOLOGY..........................................................   22
    B. HISTORICAL CALCULATIONS...........................................................   22
    C. PROSPECTIVE CALCULATIONS..........................................................   24

VII.   GROUP ANNUITIES...................................................................   25
    A. OVERVIEW AND METHODOLOGY..........................................................   25
    B. GUARANTEED AND EXPERIENCE-RATED GROUP ANNUITIES AND LIFE OTHER THAN GROUP TERM....   25
    C. GROUP TERM LIFE...................................................................   28

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Actuarial Contribution Memorandum                                March 31, 2001

Section                                                                                    Page
- -------                                                                                    ----
                                                                                        
VIII.  GROUP LIFE AND HEALTH INSURANCE.................................................     29
    A. OVERVIEW AND METHODOLOGY........................................................     29
    B. LARGE GROUP.....................................................................     30
    C. SMALL GROUP.....................................................................     32
    D. GROUP UNIVERSAL LIFE (GUL)......................................................     33

   103

Actuarial Contribution Memorandum          -1-                    March 31, 2001

I.    OVERVIEW

This memorandum describes the methodology for calculating the Actuarial
Contribution ("AC") of each Policy owned by an Eligible Policyholder pursuant to
Article VII of the Plan of Conversion ("Plan"). There is a separate section
describing the methodology and assumptions for each of the following lines of
business:

     1)   Individual Life Insurance - Policies in the Closed Block
     2)   Individual Life Insurance - Policies Not in the Closed Block
     3)   Individual Annuities
     4)   Individual Health Insurance
     5)   Group Annuities
     6)   Group Life and Health Insurance

The general methodology is described in more detail in the next section. Aspects
specific to a particular line of business are included in the section for that
line of business.

The information required for all of these calculations comes from a variety of
proprietary files and reports including policy records maintained in electronic
media, internal analyses and memoranda and also from public documents such as
statutory annual statements filed with insurance regulators ("Annual
Statements"). These data sources are referenced where appropriate.

Policy level data and aggregate data were used where available and credible. To
the extent that data were not available or were not credible in certain
instances, reasonable approximations were made to estimate missing data.

The term "Company" as used herein refers to Principal Life Insurance Company
(formerly known as Principal Mutual Life Insurance Company and Bankers Life
Company).

The term "Corporate Account" as used herein refers to an accounting
classification that the Company established in 1985 to account for certain
activities that were undertaken for the benefit of the Company as a whole and
which were not associated with any one line of business.

Capitalized terms used in this Exhibit have the meanings ascribed to them in the
Plan or in this Exhibit.

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Actuarial Contribution Memorandum          -2-                    March 31, 2001

II.  BASIC PRINCIPLES AND METHODOLOGY

A.  INTRODUCTION

The Actuarial Contribution (AC) of each Policy is used in the calculation of its
Variable Component of consideration as described in Section 7.2 of Article VII
of the Plan.

The AC of a Policy is the accumulated contribution that policy is estimated to
have made in the past to the Company's surplus, as defined below, ("historical
AC") plus the present value of the contribution that the same policy is expected
to make in the future ("prospective AC"), with such values determined as of
March 31, 2000, which is the Actuarial Calculation Date, or "AC Date." The
historical AC period is assumed to end at the AC Date, and the prospective AC
period is assumed to begin at the AC Date, except as noted for Policies in the
Closed Block.

"Surplus", as used herein, refers to statutory surplus, as shown in the
Company's Annual Statements, plus the Asset Valuation Reserve (AVR) or the
Mandatory Securities Valuation Reserve (MSVR), its predecessor. Contributions to
and withdrawals from the Interest Maintenance Reserve (IMR) have been
disregarded in calculating annual contributions to surplus except in the
instance of experience-rated Group Annuity Policies.

Conceptually, each Policy's contribution to surplus in each year equals the
excess of premiums, investment income, and capital gains less losses over
benefits, policy dividends, commissions, expenses, and taxes.

B.  BASIC METHODS

The Company used either a modeling approach or a case-by-case approach, as
appropriate, for purposes of determining the ACs for Policies. For some
Policies, a case-by-case approach was used to develop all or a portion of the
historical AC and a modeling approach was used to develop the prospective AC.

Under the modeling approach, a model of representative plans, issue years, and,
in some situations, issue ages, gender, risk classes and other factors was
created to develop historical and/or prospective contributions to surplus. Each
of the plan/issue year/issue age/etc. combinations is called a model "cell." For
each model cell, year-by-year historical contributions to surplus were
determined and accumulated with interest to the AC Date to arrive at the
historical AC. Similarly, future expected annual contributions to surplus were
determined and discounted to that same date to arrive at the prospective AC. The
sum of the historical and prospective ACs equals the AC for that model cell. The
ACs for the model cells were then used to determine the ACs for the Policies.

Under the case-by-case approach, the year-by-year history of each Policy in a
line of business was taken into account, so that specific
contribution-to-surplus calculations were made for each Policy. As under the
modeling approach, year-by-year historical contributions to surplus were
determined and accumulated with interest to the AC Date to arrive at the
historical AC, and prospective annual contributions to surplus were determined
and discounted to the AC Date to

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Actuarial Contribution Memorandum          -3-                    March 31, 2001

arrive at the prospective AC. The sum of the historical and prospective ACs at
the AC Date equals the AC for that Policy.

Under either the modeling approach or the case-by-case approach, if the AC of a
Policy was negative, it was set to zero.

For purposes of the AC calculations, lines of business were established by first
following the Annual Statement lines of business, and then creating subdivisions
as needed to deal with product groupings that differ from each other
significantly in terms of product characteristics. In defining product groupings
for purposes of AC calculations, the Company's past practices in managing the
business were followed to the greatest extent practicable.

C.  TREATMENT OF SUBSIDIARIES

Generally, the financial results of subsidiaries were not reflected in the
development of ACs, except as follows.

Principal National Life Insurance Company ("Principal National") was a
subsidiary whose financial results were reported in the Corporate Account, and
it sold certain types of products (individual life insurance and individual
annuities) that were also sold by the Company. The Policies in Principal
National were assumed by the Company through a reinsurance transaction, and the
ACs for these Policies (as well as for the comparable Policies sold by the
Company) were developed by combining the results, for corresponding lines of
business, of Principal National and the Company.

The second exception relates to an investment in a company called "Up and Up"
which was held by Principal Healthcare (PHC), a subsidiary that was held by
Group Life and Health and reported in the Annual Statement with the operations
of Group Health Insurance. When PHC was sold, this investment was retained by
the Company within the Group Life and Health line, and its results continued to
be reported under Group Health Insurance (in the Annual Statement). The results
of this investment are reflected in developing investment earnings rates for
assets that support products that are reported under Group Health Insurance.

The treatment of the Company's asset management subsidiaries in the calculation
of ACs follows the general rule stated above with regard to the calculation of
investment rates of return. However, the Company paid asset management fees to
these subsidiaries. Had the activities been carried on in the Company itself,
the cost of investment management (as reflected, for example, in the
profitability of Group Annuities products) would have been incurred and taken
into account directly. In order to achieve the same result when investment
management activities were carried out in a subsidiary, the effect on product
profitability was reflected by charging to the products the investment
management charge less the proportion of such charge that resulted in profit to
the subsidiary.

D.  ASSUMPTIONS AND PRACTICES THAT APPLY ACROSS LINES OF BUSINESS

The following assumptions and practices apply to all lines of business unless
noted otherwise here or in the section for that line of business.

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Actuarial Contribution Memorandum          -4-                    March 31, 2001

In general, the historical experience factors for taxes, investment returns
(investment income and capital gains less losses), and expenses were developed
based on the results as allocated in the Annual Statement. The data sources
included Annual Statement data and certain other sources developed for internal
reporting. The data from such other sources were adjusted as needed to be
consistent with to the Annual Statement amounts. However, expenses that were
allocated to the Corporate Account (with one exception), along with associated
taxes and investment income, were not allocated to the other lines of business,
since these expenses generally related to MIHC functions, philanthropic
expenses, and other corporate initiatives. The exception was the reversal of
expense credits in the Corporate Account from 1993 through 1998 related to the
prefunding of post-retirement benefits, thereby reducing expenses in the lines
of business. These expense credits were allocated to product groupings for the
calculation of ACs, based on the Company's financial management practices.

The prospective investment income, expense, and tax assumptions reflected recent
experience.

1.  Historical Rates of Investment Return and Accumulation Rates

The interest rates used in the historical AC calculations were derived from the
assets and investment income and capital gains less losses allocated to each
line of business in the Annual Statement. The rates were developed consistent
with the Company's management practices with regard to investment income
allocation during the historical period, and are net of defaults and investment
expenses. IMR amortization was not included in the investment income rate
calculation since all net capital gains were reflected in the capital gains
rates in the year that they were incurred.

Prior to 1959 the Company determined a uniform rate of investment income on the
assets of all lines of business. In 1959 the Company began to allocate portions
of assets purchased in an investment year, and the income on those assets, to
lines of business, based on the line's cash flow in that year. Beginning in
1959, for lines of business with policy loans, the cash flows from policy loans
were included in the determination of cash flows available for investment by
those lines. Investment income from policy loans was allocated directly to the
lines of business that originated the loans.

In 1982 the Company established a separate segment of assets of its general
account for the Group Annuities line of business and began to allocate assets to
this product segment based on the characteristics of the associated liabilities.
Product segments were established for other major lines of business over the
next several years, with complete segmentation of the general account by major
lines of business completed on July 1, 1985. (Additional product segments were
added in subsequent years as needed when new businesses were introduced.) When
needed, an investment year allocation methodology continued to be used to
allocate investment income to product groupings within a product segment.

The AC calculations reflected the returns on separate account assets that back
the policyholder liabilities of variable life insurance and annuity policies.
These returns are passed through to policyholders and did not impact ACs
directly. However, they do impact Policy account values, and, therefore, they
impacted ACs to the extent that the contractual policy charges were a function
of Policy account values.

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Actuarial Contribution Memorandum          -5-                    March 31, 2001

The rates used to accumulate the historical contributions to surplus to the AC
Date were set equal to the after-tax historical investment income rates for each
product grouping, adjusted to remove the effect of policy loans, and excluding
separate account performance.

2.  Prospective Rates of Investment Return and Discount Rates

Assumed investment income rates for prospective ACs reflected the
characteristics of the assets that were held in each product segment as of the
end of the historical contribution period (June 30, 1998 for Policies in the
Closed Block and March 31, 2000 for Policies not in the Closed Block),
prevailing new money rates on or about those dates, and reinvestment strategies
relating to the asset mix for each product segment. Projected investment cash
flows were reduced to reflect provisions for defaults and investment expenses,
such provisions reflecting Company experience. As the assets that were held as
of the end of the historical contribution period were projected to mature or be
repaid, they were assumed to be replaced with assets that earn the new money
rates, as described above.

No future capital gains or losses were assumed in developing prospective
investment income assumptions.

The return for equities backing separate account liabilities was based upon
historical returns for equities.

Prospective contributions to surplus were discounted to the AC Date at
risk-adjusted rates of return appropriate for the lines of business involved.
Two rates were used - one for Policies in the Closed Block, and (except as noted
below), another for all other Policies. (ACs for two small classes of Policies -
Adjustable Life Policies and Survivorship Whole Life Policies issued after the
Closed Block was formed - were discounted at the rate used for Closed Block
Policies.)

The two risk-adjusted rates of return were selected so as to be generally
proportionate to the rates of return on equity (ROE) that the Company has
established as targets for its lines of business, as validated in comparison to
actual ROE rates that have been achieved in the past.

3.  Historical Expense Factors

Historical expense assumptions were developed by starting with line of business
information on general insurance expenses (excluding commissions), miscellaneous
taxes, licenses, and fees expenses, and additional payments for benefit plan
expenses as reported in the Company's Annual Statements. For years in which a
Corporate Account was maintained, the expenses in the Corporate Account (subject
to the exception described above relating to the funding of post- retirement
benefits) were ignored in the development of expense assumptions since they had
not been reflected in the financial management practices of the lines of
business.

Once the adjusted Annual Statement expenses were developed for each line of
business, they were allocated to various product groupings within each line of
business based on historical practices and available information. Expense
assumptions were developed from these allocated expenses for use in developing
historical ACs.

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Actuarial Contribution Memorandum          -6-                    March 31, 2001

4.  Prospective Expense Factors

Expense assumptions used in calculating prospective ACs were based on recent
experience. For the individual lines of business, expense assumptions reflected
recent experience and trends. For the Group Annuities line of business, expense
assumptions reflected recent experience and trends, as well as a recent
reengineering initiative. In general, for the Group Life and Health Insurance
line of business, there was no specific projection of expenses, since the method
used (described in Section VIII of this memorandum) did not require projection
of individual sources of profit.

5.  Historical Federal Income Tax Factors

The applicable US tax law is complex and has changed over time. The derivation
of tax factors followed both the dynamics of the law in each time period and
also the Company's approach for allocating taxes. Tax factors were developed to
allocate the taxes that were reported for each line of business in the Annual
Statements to the Policies in the lines of business.

Broadly, there were four major tax eras used in the historical period. Factors
were developed that were consistent with applicable laws in each of those
periods, to be applied to corresponding bases for the historical AC calculation.

For 1957 and prior years, Company-wide tax factors were developed as a function
of investment income.

For 1958 through 1981, taxes were allocated based upon assets, investment
income, interest paid credits, reserves, and premiums, depending upon line of
business, and applied to corresponding bases.

For 1982 through 1983 (Stop-Gap Period), taxes were allocated based upon
operating gains with only a partial deduction of dividends on non-tax qualified
policies.

For 1984 and later years, taxes were allocated based upon on operating gains and
an equity tax in those years in which an equity tax applied to the Company.
During this period, the basis used to calculate deductible reserves and dividend
liabilities differed from that used to report statutory earnings. For 1990 and
later years, there was also a DAC proxy tax which was reflected in the ACs.
Finally, the resulting total tax for the years 1982 through 1999 was adjusted to
be consistent with the total tax reported in the Annual Statement for those
years.

6.  Prospective Federal Income Tax Factors

For the prospective AC calculations, the current corporate tax rate was applied
to taxable income for the line of business (which reflected the differences
between statutory and tax basis liabilities). No equity tax was applied since
the equity tax does not apply to stock companies.

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Actuarial Contribution Memorandum          -7-                    March 31, 2001

E.  CALCULATION RULES THAT APPLY ACROSS LINES OF BUSINESS

1.  Number of Prospective Years Recognized in the AC Calculation

For individual Policies, the prospective AC calculation covered the period from
the AC Date through the end of the mortality or morbidity table or maturity or
expiry of the Policy. For the Group Life and Health Insurance and the Group
Annuities lines of business, the prospective AC calculations generally covered
30 years from the AC Date. However, in certain cases, different periods were
used, based on the nature of a particular product; for example, the prospective
AC for products that involve payment of annuities covered the period from the AC
Date to the end of the mortality table.

2.  Policies Whose Contribution to Surplus Is Taken Into Account

As a general rule, in calculating ACs, contribution to surplus was determined
only for Policies that were in force as of the AC Date. However, in some cases,
such Policies were considered to be continuations of policies that they
replaced. In such cases, the contribution to surplus of the prior policy was
considered to be part of the experience of the current Policy in determining the
current Policy's AC. The financial management of each line of business was
examined to determine when a current Policy should be deemed to be a
continuation of a prior policy for purposes of determining ACs. Based on this
examination, the AC calculations reflected the following:

a.  Individual Life Insurance, Annuities, and Health Insurance. With respect to
    individual life, health and annuity business, the Company followed the
    general rule stated above, with three exceptions, all relating to recent
    exchange programs within the Individual Annuities line of business. In
    addition, the AC for each supplementary contract that resulted from the
    annuitization of a deferred annuity reflected the experience under that
    deferred annuity as well as the experience under the supplementary contract.

b.  Group Annuities and Group Life and Health Insurance. There were a number of
    situations in which policies were replaced by new Policies but the
    relationships with the Eligible Policyholders were not interrupted,
    particularly with respect to the financial management of the policies. One
    example of such a situation was modernization of policies. In these
    situations, all or a portion of experience under the replaced policies was
    incorporated into the development of the AC for the Policy that was in force
    on the AC Date. Other situations arose involving mergers or divestitures of
    companies, in which policies may have been combined or split up in order to
    accommodate the policyholders' new corporate structures. In these
    situations, the development of the ACs generally followed the financial
    management practice of the Company.

3.  Reinsurance

The Company has entered into various reinsurance agreements with reinsurers,
some of which were affiliated with the Company and some of which were
nonaffiliated. The treatment of these reinsurance agreements in the AC
calculations was consistent with the Company's practice in managing these
businesses, as described below.

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Actuarial Contribution Memorandum          -8-                    March 31, 2001

The Company has ceded amounts of mortality and morbidity risks in excess of its
retention limits to a number of nonaffiliated reinsurers. These reinsurance
programs were designed to cover a wide range of policies. The Company's
management practice has been to spread the net cost of this reinsurance - within
a line of business - over all of the plans of insurance within the line that
participated in the reinsurance program. This practice was reflected in the
calculation of the ACs.

The Company has ceded proportional amounts of mortality and morbidity risks to
nonaffiliated reinsurers for certain plans of insurance. In some instances, all
risks under a group of policies were ceded pursuant to an indemnity reinsurance
agreement. Each of these reinsurance programs was designed to apply to a
specific product grouping. When the purpose of the reinsurance was to reduce the
amount or volatility of the risk that was reinsured, the net cost was reflected
directly in the calculation of the ACs for only those Policies in the reinsured
grouping - that is, the net cost was not spread across other Policies outside
the grouping.

In other situations, the treatment of the effect of the reinsurance in the AC
calculation was spread across a broader grouping of Policies, consistent with
the Company's historical financial management practices with regard to such
reinsurance.

For certain blocks of business, the Company entered into reinsurance agreements
with affiliates. However, where such reinsurance with affiliates existed, the
Company managed policies in these blocks of business as if the reinsurance were
not in effect and the ACs were calculated consistent with this management
practice.

   111

Actuarial Contribution Memorandum          -9-                    March 31, 2001

III.  INDIVIDUAL LIFE INSURANCE - POLICIES IN THE CLOSED BLOCK

A.  OVERVIEW AND METHODOLOGY

As described in Article II of the Plan, the Company formed and began operating a
Closed Block of participating policies effective with its reorganization to a
mutual insurance holding company structure on July 1, 1998.

The individual life line of business in the Closed Block consists of certain
Adjustable Life policies and Traditional Life policies, including whole life,
endowment, and certain term policies. All Policies in the Closed Block are
eligible to receive dividends and are expected to receive dividends in the
future.

For each Closed Block Policy in force as of the AC Date, the AC was calculated
as the sum of:

     (1)  the annual historical contributions to surplus through June 30, 1998,
          accumulated with interest to the AC Date, plus
     (2)  the value as of the AC Date of expected future annual contributions to
          surplus from July 1, 1998 forward. Expected contributions to surplus
          associated with period July 1, 1998 through the AC Date were
          accumulated with interest to the AC Date at the rate of return assumed
          for funding the Closed Block. Expected contributions to surplus
          associated with periods after the AC Date were discounted to the AC
          Date using a risk-adjusted rate of return, as described in Section
          II.D.2 of this memorandum.

     If the sum was negative, it was set to zero.

ACs were determined using a combination of the case-by-case approach and a
modeling approach. Where models were used for prospective AC calculations, they
were consistent with the Closed Block model, but for some plans, additional
cells were used in order to attain more meaningful results. Under the modeling
approach, ACs for Policies were determined by interpolation among the cells, as
described below.

The assumptions regarding experience subsequent to June 30, 1998 were equivalent
to those used in the Closed Block funding calculation. For prospective
assumptions not applicable to the Closed Block funding, such as expenses and
commissions, actual Company experience was analyzed and used as appropriate.
Similarly, actual Company experience was analyzed and used as appropriate for
all historical assumptions.

The gains or losses from disability benefit and accidental death benefit riders
were allocated to all individual life insurance policies (both in and out of the
Closed Block) and used as an offset to expenses (a decrease in the case of
gains, and an increase in the case of losses). These allocations were consistent
with the Company's financial management practices.

   112

Actuarial Contribution Memorandum          -10-                   March 31, 2001

B.  ADJUSTABLE LIFE

For Adjustable Life Policies in the Closed Block, historical ACs were calculated
on a case-by- case basis, and prospective ACs were calculated on a model cell
basis, consistent with the Closed Block model.

For the calculation of historical ACs, actual historical policy data were used
for each Policy. Each Policy's annual contribution to surplus was the premium
for the year plus investment income, capital gains less losses, and other
miscellaneous gains, less benefits, commissions, expenses, policy dividends, and
federal income taxes. No adjustment was made for full policy surrenders in the
historical AC calculation. Annual historical contributions to surplus for each
Policy were accumulated as described above in Section III.A. to arrive at its
historical AC.

Historical assumptions for expenses and mortality (through June 30, 1998) were
based on Company experience studies. Investment income through June 30, 1998 was
determined for each Policy based on its cash flows and the prevailing rates,
consistent with the Company's financial management practices. The assumptions
regarding experience subsequent to June 30, 1998 were equivalent to those used
in the Closed Block funding calculation.

The prospective ACs for Adjustable Life Closed Block Policies were determined
using a model with cells based on insurance period and/or premium paying period,
gender, risk class, issue years, and issue ages of the insureds. The prospective
contribution to surplus for each year was the premium for the year plus
investment income and other miscellaneous gains, less benefits, commissions,
expenses, policy dividends, and federal income taxes. These future annual
contributions to surplus were valued as of the AC Date as described above in
Section III.A. to arrive at the prospective ACs for the model cells, and were
then expressed as a function of face amount (per $1000 in force). Generally,
prospective AC factors were determined for all Policies by interpolating between
issue ages among the AC factors for the model cells.

Prospective assumptions regarding experience subsequent to June 30, 1998 were
equivalent to those used in the Closed Block funding calculation. For
prospective assumptions not applicable to the Closed Block funding, such as
expenses and commissions, actual Company experience was analyzed and used as
appropriate.

The AC for a Policy was determined by combining its historical AC (determined on
a case-by- case basis) with its prospective AC (determined on a modeling basis),
as described in Section III.A. If the sum was negative, it was set to zero.

C.  TRADITIONAL LIFE

In general, for Traditional Life, the historical ACs were calculated using a
model through December 31, 1983, and then on a case-by-case basis through June
30, 1998. (For Survivorship Whole Life, both historical and prospective ACs were
determined on a model cell basis using combinations of representative plans,
issue ages, issue years, gender and risk classes.) The change to a case-by-case
basis in 1984 was for greater consistency with the Company's financial
management practices. The prospective ACs were calculated using substantially
the Closed

   113

Actuarial Contribution Memorandum          -11-                   March 31, 2001

Block model. The model that was used to determine the historical ACs through
December 31, 1983 was based on the Closed Block model as well, but contained
fewer cells.

The annual historical contribution to surplus for each year prior to June 30,
1998 was the premium for the year, plus investment income, capital gains less
losses, and other miscellaneous gains, less benefits, commissions, expenses,
policy dividends, and federal income taxes. Coinsurance gains (losses) on the
1992 Term products were added for those products. There was no adjustment for
policy surrenders in the historical calculation. The annual historical
contributions for model cells were accumulated to December 31, 1983 and
expressed generally as a function of face amount to arrive at AC factors as of
that date. AC factors were determined for all Policies as of that date by
interpolating between issue ages and issue years among the AC factors for the
model cells. The resulting AC as of December 31, 1983 for each Policy was
carried into the case-by-case portion of the historical AC calculation,
beginning January 1, 1984.

Historical assumptions for expenses and mortality (through June 30, 1998) were
based on Company experience studies. Investment income was determined based on
cash flow for the model cell prior to 1984 and on policy cash flow and
prevailing rates from 1984 through June 30, 1998, consistent with the Company's
financial management practices. The assumptions regarding experience subsequent
to June 30, 1998 were equivalent to those used in the Closed Block funding
calculation.

The prospective contribution to surplus for each year following June 30, 1998
was the premium for the year plus investment income and other miscellaneous
gains, less benefits, commissions, expenses, policy dividends, and federal
income taxes. Coinsurance gains (losses) on the 1992 Term products were added
for those products. These annual contributions to surplus were valued as of the
AC Date as described in Section III.A. The prospective AC factors for the model
cells were generally expressed as function of face amount (per $1000 in force).
Generally, prospective AC factors were determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section III.A. If the sum was negative, it was
set to zero.

   114

Actuarial Contribution Memorandum          -12-                   March 31, 2001

IV.  INDIVIDUAL LIFE INSURANCE - POLICIES NOT IN THE CLOSED BLOCK

A.  OVERVIEW AND METHODOLOGY

The Policies in the individual life line of business that are not in the Closed
Block encompass these plans of insurance: Adjustable Life (AL 4 Policies
generally issued July 1, 1998 through March 31, 2000), Survivorship Whole Life
(generally issued July 1, 1998 through March 31, 2000), Universal Life, 97 Term,
BOLI Universal Life, and Select Universal Life. Adjustable Life Policies and
Survivorship Whole Life Policies are eligible to receive dividends and are
expected to receive dividends in the future. The other Policies have not
received dividends and are not expected to receive dividends in the future.

The historical ACs were calculated on a case-by-case basis for Universal Life
(except for Survivorship plans that insured more than one life at issue). They
were calculated on a model cell basis for Survivorship Whole Life, 97 Term,
Survivorship Universal Life, Adjustable Life, and BOLI Universal Life. The
prospective ACs were calculated on a model cell basis for all product groupings.

For each Policy in force as of the AC Date, the AC was calculated as the sum of:

     (1)  the annual historical contributions to surplus through the AC Date,
          accumulated with interest to the AC Date, plus
     (2)  the present value of expected future annual contributions to surplus
          discounted to the AC Date using a risk-adjusted rate of return, as
          described in Section II.D.2 of this memorandum.

     If the sum was negative, it was set to zero.

Except where noted, the past financial results of the Company were analyzed to
determine experience factors for use in determining the historical AC.
Assumptions about future experience were based on analyses of the Company's
recent past experience, adjusted when appropriate to reflect changes in its way
of conducting business.

The gains or losses from disability benefit and accidental death benefit riders
were allocated to all individual life insurance policies (both in and out of the
Closed Block) and used as an offset to expenses (a decrease in the case of
gains, and an increase in the case of losses). These allocations were consistent
with the Company's financial management practices.

B.  ADJUSTABLE LIFE

The historical ACs for Adjustable Life Policies were determined using a model
with cells based on issue age, gender, risk class, and period of issue (i.e.,
before or after April 1, 1999). The contribution to surplus for each year was
premium for the year plus investment income, capital gains less losses, and
other miscellaneous gains, less benefits, commissions, expenses, policy
dividends, and federal income taxes. No policy surrenders were assumed in the
historical period.

   115

Actuarial Contribution Memorandum          -13-                   March 31, 2001

The annual historical contributions to surplus for the model cells were
accumulated to the AC Date as described above in Section IV.A. to arrive at the
historical AC for the cell. The historical AC factor for each model cell was
determined by expressing its historical AC as a function of face amount (per
$1,000 in force). Historical AC factors were then determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

The mortality, persistency, expense, investment earnings, and dividend
assumptions used for the historical and prospective ACs are those that the
Company used in pricing this product (except that lapse rates for the historical
AC period were set to zero) since these Policies are very recent issues with
little or no credible experience.

The prospective AC for Adjustable Life Policies was determined using the same
model as was used for the calculation of historical ACs. The prospective
contribution for each year was the premium for the year plus investment income
and other miscellaneous gains, less benefits, commissions, expenses, policy
dividends, and federal income taxes. These annual contributions to surplus were
discounted to the AC Date as described in Section IV.A. to arrive at the
prospective AC for the cell. The prospective AC factor for each model cell was
determined by expressing its prospective AC as a function of face amount (per
$1000 in force). Prospective AC factors were then determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section IV.A. If the sum was negative, it was
set to zero.

C.  SURVIVORSHIP WHOLE LIFE

The historical ACs for Survivorship Whole Life Policies were determined using a
model with cells based on issue age, issue year, gender, and risk class. The
contribution to surplus for each year was premium for the year plus investment
income, capital gains less losses, and other miscellaneous gains, less benefits,
commissions, expenses, policy dividends, and federal income taxes. No policy
lapses were assumed in the historical period.

The annual historical contributions to surplus for the model cells were
accumulated to the AC Date as described above in Section IV.A. to arrive at the
historical AC for the cell. The historical AC for each model cell was allocated
to the Policies in that model cell based upon face amount (per $1000 in force).

These policies are similar to Survivorship Whole Life Policies that are in the
Closed Block. As a result, the assumptions used in the development of the
historical and prospective ACs were consistent with those used to determine the
ACs for the Survivorship Whole Life policies that are in the Closed Block,
except for investment income and dividends, which were adjusted to reflect the
earnings of the assets that support the policies that are not in the Closed
Block.

The prospective AC for Survivorship Whole Life Policies was determined using the
same model as was used for the calculation of historical ACs. The prospective
contribution for each year was the premium for the year plus investment income
and other miscellaneous gains, less benefits, commissions, expenses, policy
dividends, and federal income taxes. These annual contributions

   116

Actuarial Contribution Memorandum          -14-                   March 31, 2001

to surplus were discounted to the AC Date as described in Section IV.A. to
arrive at the prospective AC for the cell. The prospective AC for each model
cell was allocated to the Policies in that model cell based upon face amount
(per $1000 in force).

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section IV.A. If the sum was negative, it was
set to zero.

D. UNIVERSAL LIFE, EXCLUDING SURVIVORSHIP UNIVERSAL LIFE

The historical AC calculation was done on a case-by-case basis, using actual
historical data for each Policy.

The historical annual contributions to surplus were based upon an earnings by
source method. The sources were interest, mortality, expense, and miscellaneous
gains, all adjusted for federal income taxes. No adjustment was made for policy
surrenders in the calculation of historical ACs. The annual historical
contributions to surplus were accumulated to the AC Date as described above in
Section IV.A. to arrive at the historical AC for the Policy.

Historical assumptions for expenses and mortality were based on Company
experience studies. Historical investment income was based on the general method
described in Section II.D.1.

The prospective ACs were determined using a model with cells based on funding
level (i.e., ratio of account value to face amount), issue years, issue ages,
gender, risk classes and death benefit options (for certain variable universal
life policies) for the Policies.

The prospective contribution to surplus for each year was the premium for the
year plus investment income and other miscellaneous gains, less benefits,
commissions, expenses, and federal income taxes. These annual contributions to
surplus were discounted to the AC Date as described in Section IV.A. The
prospective AC factor for each model cell was determined by expressing its
prospective AC as a function of face amount (per $1000 in force). Prospective AC
factors were then determined for all Policies by interpolating between issue
ages and funding levels among the AC factors for the model cells.

Prospective assumptions for expenses, mortality, policy lapse and premium
persistency were based on Company studies. Prospective credited rates were based
on assumed prospective earned rates less pricing spreads for general account
business, and on assumed prospective separate account performance less
contractual charges for separate account business.

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section IV.A. If the sum was negative, it was
set to zero.

E.  SURVIVORSHIP UNIVERSAL LIFE

The historical ACs for Survivorship Universal Life Policies were determined
using a model with cells based on plan, issue age, gender, and risk class. The
historical contribution to surplus for each year was the premium for the year
plus investment income, capital gains less losses, and other miscellaneous
gains, less benefits, commissions, expenses, and federal income taxes. No full
policy surrenders were assumed in the historical period.

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Actuarial Contribution Memorandum          -15-                   March 31, 2001

The annual historical contributions to surplus for the model cells were
accumulated to the AC Date as described above in Section IV.A. to arrive at the
historical AC for the cell. The historical AC factor for each model cell was
determined by expressing its historical AC as a function of face amount (per
$1000 in force). Historical AC factors were then determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

The mortality, persistency, premium level, expense, investment earnings, and
interest crediting assumptions used for the historical and prospective ACs are
those that the Company used in pricing these products (except that lapse rates
for the historical AC period were set to zero) since these Policies are very
recent issues with little or no credible experience.

The prospective ACs for Survivorship Universal Life Policies were determined
using the same model as was used for the calculation of historical ACs. The
prospective contribution to surplus for each year was the premium for the year
plus investment income and other miscellaneous gains, less benefits,
commissions, expenses, and federal income taxes. These annual contributions to
surplus were discounted to the AC Date as described in Section IV.A. to arrive
at the prospective AC for the cell. The prospective AC factor for each model
cell was determined by expressing its prospective AC as a function of face
amount (per $1000 in force). Prospective AC factors were then determined for all
Policies by interpolating between issue ages among the AC factors for the model
cells.

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section IV.A. If the sum was negative, it was
set to zero.

F.  97 TERM POLICIES

The historical and prospective AC factors were determined using a model with
cells based on issue year, issue age, gender, risk class, and term plan. The
historical contribution to surplus for each year was the premium for the year
plus investment income, capital gains less losses, and other miscellaneous
gains, less benefits, commissions, expenses, and federal income taxes.
Reinsurance gains and losses were reflected in these items. No policy lapses
were assumed in the historical period.

The annual historical contributions to surplus for the model cells were
accumulated to the AC Date as described above in Section IV.A. to arrive at the
historical AC for the cell. The historical AC factor for each model cell was
determined by expressing its historical AC as a function of face amount (per
$1000 in force). Historical AC factors were then determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

Historical assumptions for expenses and mortality were based on Company
experience studies. Historical investment income was based on the general method
described in Section II.D.1.

The prospective contribution to surplus for each year was the premium for the
year plus investment income and other miscellaneous gains, less benefits,
commissions, expenses, and federal income taxes. Reinsurance gains and losses
were reflected in these items. These annual contributions to surplus were
discounted to the AC Date as described in Section IV.A. to arrive at the
prospective AC for the cell. The prospective AC factor for each model cell was

   118

Actuarial Contribution Memorandum          -16-                   March 31, 2001

determined by expressing its prospective AC as a function of face amount (per
$1000 in force). Prospective AC factors were then determined for all Policies by
interpolating between issue ages among the AC factors for the model cells.

Prospective assumptions for expenses and mortality were based on Company
studies. The policy lapse assumptions reflected those that the Company used in
pricing.

The AC for a Policy was determined by combining its historical AC with its
prospective AC, as described in Section IV.A. If the sum was negative, it was
set to zero.

G. BOLI UNIVERSAL LIFE

BOLI Universal Life is managed by the Company at the "case" level, where a case
consists of one or more Eligible Policyholders, each of which owns multiple
Policies. The ACs were determined at the case level and allocated to Eligible
Policyholders on a basis consistent with the historical financial management
practices of the case.

The historical ACs for BOLI Universal Life Policies were determined using a
model with cells based on plan (reflecting variations by case), issue age, and,
in some cases, risk class. The contribution to surplus for each year was the
premium for the year plus investment income, capital gains less losses, and
other miscellaneous gains less benefits, commissions, expenses, and federal
income taxes. No policy surrenders were assumed in the historical period.

The annual historical contributions to surplus for the model cells were
accumulated to the AC Date as described above in Section IV.A. to arrive at the
historical AC for the cell.

Historical assumptions for expenses and mortality were based on Company
experience studies. Historical investment income was based on the general method
described in Section II.D.1.

The prospective ACs for BOLI Universal Life Policies were determined using the
same model that was used to determine the historical ACs. The prospective
contribution to surplus for each year was the premium for the year plus
investment income and other miscellaneous gains, less benefits, commissions,
expenses, and federal income taxes. These annual contributions to surplus were
discounted to the AC Date as described in Section IV.A. to arrive at the
prospective AC for the cell.

Prospective assumptions for expenses were based on pricing assumptions and
Company studies. Assumptions for mortality reflected Company studies as well as
an analysis prepared by a third party. Prospective investment return less
interest credited reflected case-specific assumptions that were used in pricing.
Prospective lapse rate assumptions reflected contractual provisions as well as
the implications under current tax law of transferring money to other carriers.

The AC for Policies in a cell was determined by combining the historical AC for
the cell with the prospective AC for the cell. If the sum was negative, it was
set to zero. The AC for each case was equal to the sum of the ACs of the
Policies that were in its cells. The AC determined at the case level was
allocated to Eligible Policyholders within each case on a basis consistent with
the historical financial management practices of the case.

   119

Actuarial Contribution Memorandum          -17-                   March 31, 2001

H. SELECT UNIVERSAL LIFE

Based on an analysis of experience for this business, the AC was determined to
be zero for all Select UL policies.

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Actuarial Contribution Memorandum          -18-                   March 31, 2001

V.   INDIVIDUAL HEALTH POLICIES

A.  OVERVIEW AND METHODOLOGY

The individual health line of business consists of three product groupings:
individual disability income (IDI), individual medical and long term care (LTC)
Policies. The LTC business includes both group and individual Policies. The
group LTC Policies (which are reported in the Group Health line of business in
the Annual Statement) are managed internally with the individual LTC Policies
because the coverages are voluntary and have been marketed to individuals,
although issued through multiple employer trusts.

The Company ceded 100% of the individual medical policies to Washington National
in 1983 through an indemnity reinsurance agreement. Pioneer Financial
administers this block for Washington National. The Company transferred assets
to Washington National that were less than the statutory reserves held at the
end of 1982. No ceding commissions were paid after the transfer of assets.

At the end of 1996, the Company ceded 100% of all LTC Policies through an
indemnity reinsurance agreement with MedAmerica, which also services the LTC
business. The Company received ceding commissions at that time, but there have
been no additional ceding commissions paid to the Company.

The Company continues to maintain the risk on the IDI business, but cedes to
reinsurers the portion of any risk that is in excess of its retention limits.

The historical contribution to surplus for each year for was the premium for the
year plus investment income, capital gains less losses, and other miscellaneous
gains, less benefits, commissions, expenses, federal income taxes and increases
in reserves and dividend liability. No policy lapses were assumed in the
historical period.

For the individual medical and LTC Policies, the prospective AC was set to zero,
since these businesses are 100% reinsured, and the Company will not receive any
future ceding commissions, thus providing no source of prospective contribution
to surplus. For the IDI Policies, the prospective contribution to surplus for
each year was premium for the year plus investment income, capital gains less
losses, and other miscellaneous gains, less benefits, commissions, expenses,
federal income taxes and increases in reserves and dividend liability. Assumed
policy lapses were reflected in the prospective period.

The historical ACs for each of the Individual Health product groupings, and the
prospective ACs for the IDI product groupings were functions of annualized
premium, varying by plan grouping (using a representative plan for each such
grouping) and issue year. Some groupings consisted of a single plan, and others
consisted of several plans.

For each Policy in force as of the AC Date, the AC was calculated as the sum of:

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Actuarial Contribution Memorandum          -19-                   March 31, 2001

     (1)  the annual historical contributions to surplus through the AC Date,
          accumulated to the AC Date, plus
     (2)  the present value of the expected future annual contributions to
          surplus from the AC Date forward, discounted to the AC Date.

     If the sum was negative, it was set to zero.

The following sections describe the specific methodologies used to determine the
ACs for each of the three product groupings.

B.  Individual Disability Income

The IDI business consists of disability income, business overhead and buy-out
policies. Most of the business is non-cancelable. The Company began selling IDI
policies in the early 1950s.

The ACs for the IDI business were developed using a modeling approach.
Development of both historical and prospective ACs was based on representative
plans, issue years, gender, issue ages, elimination periods, and benefit
periods. Every in-force Policy was represented by one model cell. Because actual
experience was available only at the plan level, historical and prospective AC
factors, which are a function of annualized premium, vary only by the
representative plan and issue year.

1.  Historical AC Calculations

For each model cell, year-by-year historical contributions to surplus as
described in Section V.A. were determined and accumulated to the AC Date. The
historical AC factor for each Policy within a plan grouping was calculated by
dividing the accumulated historical contributions to surplus for all cells with
the same representative plan and issue year by the total annualized premium for
all cells with the same representative plan and issue year.

Morbidity and commissions were modeled based on pricing assumptions. Expenses
were modeled based on management operating expense targets. Modeled policy
dividends reflected the amounts paid to representative plans. These assumptions
were adjusted to reflect actual variations by calendar year in aggregate
financial results as reflected in the Annual Statement and in data submitted to
the State of New York under its Regulation 62. No lapses were assumed during the
historical period. Net investment income, capital gains and federal income taxes
were modeled consistent with the description in Section II.D.

2.  Prospective AC Calculations

For each model cell, the year-by-year future contributions to surplus were
determined as described in Section V.A. and discounted to the AC Date. The
prospective AC factor for each Policy within a plan grouping was calculated by
dividing the present value of future contributions to surplus for all cells with
the same representative plan and issue year by the total annualized premium for
all cells with the same representative plan and issue year.

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Actuarial Contribution Memorandum          -20-                   March 31, 2001

Prospective assumptions for morbidity and commissions were based on pricing
assumptions, as was done for historical ACs. Prospective expenses reflected 1999
expense levels. Prospective persistency was based on pricing assumptions. These
assumptions were adjusted to reflect average experience in aggregate financial
results for calendar years 1995 through 1999 as reflected in the Annual
Statement and in data submitted to the State of New York under its Regulation
62. Prospective policy dividends were set to zero since no future policy
dividends are expected to be paid. Net investment income, capital gains and
federal income taxes were modeled consistent with the description in Section
II.D.

The total AC factor for each Policy was the sum of the historical AC factor and
the prospective AC factor. The total AC for a Policy was determined by applying
its total AC factor to its annualized premium. If the total AC was negative, it
was set to zero.

C.  INDIVIDUAL MEDICAL

The individual medical business consists of individual hospital, surgical, major
medical and accident expense policies. Principal began selling individual
medical policies in the early 1950s. The business has been 100% reinsured
through indemnity reinsurance with Washington National since 1983. The Company
recognized a gain on this reinsurance agreement.

1.  Historical AC Calculations

For the purpose of calculating historical ACs, Policies were assigned to
groupings of similar plans. The annual historical contributions to surplus for
each grouping were determined as described in Section V.A, and an average annual
contribution to surplus as percent of written premium was determined for each
grouping representing the overall contribution to surplus for the plan grouping
prior to January 1, 1983.

The historical AC factor (as percent of annualized premium) for each in-force
Policy was determined by accumulating the average annual historical
contributions to surplus as a percentage of written premium for the specific
plan grouping from the issue year through 1982. The contributions to surplus
were then accumulated to the AC Date. The historical AC factor for each in-force
Policy was increased to reflect the allocation of the after-tax statutory gains
resulting from the reinsurance agreement, with such allocation in proportion to
the Policy's accumulated contributions to surplus at the AC Date.

Net investment income, capital gains and federal income taxes were modeled
consistent with the description in the Section II.D.

2.  Prospective AC Calculations

The prospective ACs for all Individual Medical Policies were zero, as described
above in Section V.A. of this memorandum.

The total AC factor for each Policy was the historical AC factor. The AC for
each Policy was determined by applying its AC factor to its annualized premium.
If the total AC was negative, it was set to zero.

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Actuarial Contribution Memorandum          -21-                   March 31, 2001

D. LONG TERM CARE

The LTC business consists of group and individual LTC policies. Principal began
selling LTC policies in 1989. At the end of 1996, Principal reinsured 100% of
the risk on its LTC business through indemnity reinsurance through MedAmerica.
The only new LTC business that Principal currently issues is a group LTC policy
sold only to Principal employees. This business is also 100% reinsured.

1.  Historical AC Calculations

For the purpose of calculating historical ACs, policies were assigned to
groupings of similar plans. The annual historical contributions to surplus for
each grouping were determined as described in Section V.A, and an average annual
contribution to surplus as percent of written premium was determined for each
grouping, representing the overall contribution to surplus for the plan grouping
prior to January 1, 1997.

The historical AC factor (as percent of annualized premium) for each in-force
Policy was determined by accumulating the annual historical contributions to
surplus as percentages of written premium for its plan grouping from the issue
year through 1996. The contributions to surplus were then accumulated to the AC
Date. The historical AC factor for each in force Policy was increased to reflect
the allocation of the after-tax statutory gains resulting from the reinsurance
agreement, with such allocation in proportion to the Policy's accumulated
contributions to surplus at the AC Date.

Net investment income, capital gains and federal income taxes were modeled
consistent with the description in Section II.D.

2.  Prospective AC Calculations

The prospective ACs for all LTC Policies were zero, as described in Section V.A.

The total AC factors were negative for all plan groupings and thus were set to
zero, so that the AC for each LTC Policy was zero.

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Actuarial Contribution Memorandum          -22-                   March 31, 2001

VI.   INDIVIDUAL ANNUITIES

A.  OVERVIEW AND METHODOLOGY

The Individual Annuities line of business consists of three product segments:
Traditional Individual Annuity, Alternative Individual Annuity, and Individual
Variable Annuity.

The Traditional Individual Annuity product segment includes several annuity
products that have been offered over various periods in the past but are no
longer offered for sale. It includes single premium, fixed premium and flexible
premium products. These products are general account- only products. This
product segment also includes annuities in payout status which originated from
deferred annuities.

The Alternative Individual Annuity product segment includes products that are
currently offered for sale. This product segment includes both single premium
and flexible premium deferred annuity products, which are general account-only.

The Individual Variable Annuity product segment includes products that are
currently offered for sale. It includes both single premium and flexible premium
deferred products, which offer both general account and separate account
options.

Historical AC calculations were done on a case-by-case basis, and prospective AC
calculations were done on a modeling basis, with each Policy assigned to a model
cell.

For each Policy in force as of the AC Date, the AC was calculated as the sum of:

(1)  the annual historical contributions to surplus through the AC Date,
     accumulated to the AC Date, plus
(2)  the present value of expected future annual contributions to surplus from
     the AC Date forward, discounted to the AC Date.

     If the sum was negative, it was set to zero.

B.   HISTORICAL CALCULATIONS

Historical ACs were determined on a case-by-case basis, using an earnings by
source method. The annual contribution to surplus was calculated for each year
the Policy was in force by applying factors determined for each source of gain
to the appropriate base obtained from historical records.

When an AC calculation included the experience of a prior policy (that is, the
prior policy had been exchanged for the current Policy), such experience was
reflected on an estimated basis by examining the experience of Policies with
similar plan, issue year, issue month, and duration characteristics at the time
of exchange.

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Actuarial Contribution Memorandum          -23-                   March 31, 2001

The historical contribution to surplus in each calendar year was the sum of the
following sources of earnings (adjusted for federal income taxes). The annual
sources of gain were accumulated to the AC Date to arrive at the historical AC
for a Policy. An adjustment was made to the historical AC to reflect the fact
that the account values used in the calculations were not equal to statutory
reserves. This adjustment was made for each Policy.

1.  Investment Gain

Generally, the investment gain for the general account business for each year
was equal to the net investment income plus capital gains less losses minus
interest credited to the account value. The net investment income and capital
gains less losses were determined at the product segment level for each year and
used for all Policies in the product segment, based on Annual Statement
information and internal Company reports. Interest credited for each year was
also determined at the product segment level, using detailed information from
the historical files. This investment gain was expressed as a percentage of the
total account value for the product segment. The investment gain factors for
each year were applied to corresponding average account values for each Policy
in the product segment to determine its investment gain.

Alternatively, if a product provided for a fixed interest spread such as a fixed
basis point charge (as with separate account products), the investment gain for
a Policy was calculated as the fixed spread times the policy's average account
value for the year. These fixed basis point charges include Mortality and
Expense charges ("M&E charges"), administration fees, and fund management fee
reimbursements.

2.  Expense Gain

The expense gain was the excess of expense loads over the corresponding expenses
incurred, including commissions and taxes other than federal income taxes.

Factors for expenses and taxes incurred (excluding federal income taxes) were
derived at the product segment level for each calendar year, using Annual
Statement information and internal Company reports. Commissions were based on
historical commissions schedules. Factors were per policy, percent of premium
and percent of fund value. These factors were applied to the corresponding bases
for each Policy, based on the detailed historical information that was
available, to derive expenses incurred.

To determine the historical expense gain for each Policy, the actual loads
(available from the historical files) were deducted from the expenses incurred.

3.  Gain from Partial Withdrawals

The gain from withdrawals included any surrender charge from partial
withdrawals, which was available from the detailed historical information. No
gain from full withdrawals (surrenders) was included in the historical AC.

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Actuarial Contribution Memorandum          -24-                   March 31, 2001

C.  PROSPECTIVE CALCULATIONS

For prospective ACs, AC factors were developed on a modeling basis, using
representative plan/issue year model cells. The prospective contribution to
surplus for each year was the premium for the year plus investment income,
capital gains less losses, and other miscellaneous gains, less benefits,
commissions, expenses, and federal income taxes. These future annual
contributions to surplus were discounted to the AC Date as described above in
Section VI.A. to arrive at the prospective ACs for the model cells, and were
then expressed as a function of account value at the AC Date. The prospective AC
for a Policy was determined by applying the prospective AC factor for its model
cell to its account value at the AC Date.

Assumptions for prospective investment income and expenses were based on Company
expectations and recent Company experience studies. Assumptions for prospective
terminations (deaths, full and partial withdrawals, and annuitizations) were
based on recent Company experience where available, and were supplemented with
pricing assumptions as necessary.

1.  Investment Income and Credited Rates.

Projected earned rates were developed by product segment for general account
business based on the general approach discussed in Section II.D. Projected
credited rates for Traditional Individual Annuities were based on recent
credited rates. Projected credited rates for Alternate Individual Annuities and
the general account of Individual Variable Annuities were based on earned rates
for the product segment less projected interest spreads for each future calendar
year, which were based on recent historical experience and Company expectations.
For separate account business, the investment spread was the sum of contractual
M&E charges, administration fees, and net investment management fees.

2.  Premiums

Future premium payments on deferred annuities were based on recent payment
patterns or pricing assumptions. Separate assumptions were used for each product
segment.

3.  Terminations

Assumptions for prospective terminations (full and partial surrenders,
annuitizations and deaths) were based on recent experience studies, and
supplemented by pricing assumptions.

4.  Expenses

Prospective expenses (other than commissions) were based on 1999 factors.
Prospective commissions were consistent with the commission scales used for the
historical calculation. Generally, commissions as a percent of premiums were
based on rates in effect on the issue date of the Policy. Enhanced commissions,
as a percent of account value, were recently introduced by the Company for some
products. These enhancements were assumed to continue.

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Actuarial Contribution Memorandum          -25-                   March 31, 2001

VII.  GROUP ANNUITIES

A.  OVERVIEW AND METHODOLOGY

The Group Annuities line of business consists of two product segments: Policies
whose general account business is not experience-rated ("guaranteed" business)
and Policies whose general account business is experience-rated
("experience-rated" business). Some products within each type may have a
separate account component in addition to the general account component. There
are also separate account-only products.

The guaranteed business consists primarily of products sold in the 401(k) market
(with general account and separate account options, as well as payout options),
guaranteed interest contracts, a single premium product, and investment only
contracts with guaranteed crediting rates (general account only).

The experience-rated business consists primarily of unallocated contracts used
for funding defined benefit plans (with both general and separate account
options), as well as some group life insurance products (permanent and term
products), which provide group life insurance and defined benefit funding for
retirement benefits.

Both historical and prospective AC calculations for the guaranteed and
experience-rated group annuity business were determined on a case-by-case basis
using an earnings by source approach. The historical and prospective ACs for the
group term life insurance business included in the Group Annuities line were
determined on a net profit percentage (NPP) approach.

For each Policy in force as of the AC Date, the AC was calculated as the sum of:

(1)  the annual historical contributions to surplus through the AC Date,
     accumulated to the AC Date, plus
(2)  the present value of expected future annual contributions to surplus from
     the AC Date forward, discounted to the AC Date.

     If the sum was negative, it was set to zero.

B.  GUARANTEED AND EXPERIENCE-RATED GROUP ANNUITIES AND LIFE OTHER THAN GROUP
    TERM

1.  Historical AC

Historical financial information, such as historical reserves and pricing
margins, were used in the development of historical ACs. The factors for the
sources of earnings varied between the product groupings (guaranteed and
experience-rated), and within these groupings, also varied by year, among
products, by liability type (i.e., retired vs. active lives). Sources of
earnings used for one or more products were:

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Actuarial Contribution Memorandum          -26-                   March 31, 2001

a.  Profit margin.

This is the pricing margin for contribution to surplus for a Policy in a given
year.

b.  Gain from general expense

These factors were the difference between expenses charged to a Policy and the
expenses allocated to the Policy. These factors were product-specific for both
experience-rated and guaranteed business, and incorporated the effects of the
reengineering effort described in Section II.D.4, above.

c.  Gain from investment income.

These factors were the difference between the investment income earned by the
Company (net of expenses and profit margins) and the investment income credited
to the Policy. For the guaranteed business, these factors varied by year, but
not by Policy. These factors were set to zero for experience-rated Policies
since investment gains and losses were credited directly to the Policies.

d.  Gain from investment expense.

These factors were the difference between the expenses charged to a Policy for
investment services and the investment expenses allocated to the Policy by the
Company. These factors were determined separately for the experience-rated and
guaranteed product groupings for general account business. All separate accounts
were combined to determine the separate account factor.

e.  Retro gain

These factors were the rate of gain or loss experienced by a Policy in a given
year resulting from the timing of execution of separate account trades. This
source applies only to Policies with separate accounts.

f.  Gain from reserve

These factors were the difference between expected reserves (based on valuation
assumptions) and actual reserves. These factors were determined on a combined
aggregate basis for deferred and retired lives for guaranteed general account
balances only.

g.  Capital gains.

These factors were based on the amount of capital gains less losses in a year
that were not credited to the Policy or, for experience-rated Policies, deferred
through the IMR mechanism, and were not included in the interest on surplus
factor. They were calculated separately for each general account product
grouping for each year.

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Actuarial Contribution Memorandum          -27-                   March 31, 2001

h.  Miscellaneous gains

This was the remaining amount of contribution to surplus in a year that was not
captured by the other factors described above. For 1982 through 1999, an average
gain factor for the period was applied to all policies in all years in that
period. For all other years, the miscellaneous gain factor varies by year, but
is the same for all Policies.

Items specific to either guaranteed or experience-rated group annuity business
are noted below.

- -   For guaranteed business, the historical ACs were calculated separately for
    active and retired lives funds in the general account and separately for the
    separate account. Profit margins varied by timing of deposits and by
    product. Guaranteed Interest Fund products have profit margins that are
    policy-specific.

- -   For guaranteed business, the general expense gain was product-specific and
    also varied by year. The other sources of earnings factors varied by year
    and were the same for all guaranteed business products.

- -   For experience-rated business, the gain from general expenses varied by
    product and by year (as for guaranteed business). The profit margins for
    experience-rated business varied among certain product groupings. Aside from
    investment income and reserve gain factors, the other gain factors sometimes
    varied by product as well as by year. In addition, the gains from investment
    income and from reserves were zero for experience-rated business, since all
    such gains were passed directly to the Policy.

2.  Prospective AC

Source of earnings factors were applied to the projected fund balances
(generally mean reserves) in determining prospective ACs. If the product was one
for which recurring premiums/deposits were being made, expected
premiums/deposits were included in the development of projected fund balances.
Projections of fund balances reflected product-specific lapse assumptions where
appropriate, based on recent experience.

In projecting fund balances, interest credited was reset annually to reflect
changes in portfolio earned interest for all experience-rated Policies. For
guaranteed Policies (except for those with fixed credited rates), it was graded
from an initial rate to an ultimate rate, based on expected rollover. Policy
lapse rates for all future years were set equal to the average of 1997-1999
annual effective policy withdrawal rates. The benefit withdrawal rates (for
other than retirement) were set equal to the average of the 1997-1999
experience. The retirement withdrawal rates were based on the 1999 experience,
and projected based on government statistics relating to the aging of the
employed population.

The possible prospective sources of earnings were as follows.

a.  Profit margin.

These gain factors were based upon pricing margins for funds coming from
expected future deposits, and on projected future pricing margins for existing
reserves of a contract. For

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Actuarial Contribution Memorandum          -28-                   March 31, 2001

guaranteed business products, some factors were set at policy inception, and
others graded into the new business factor over a policy-specific period. The
gain factors were composites of factors for general account and separate
account, and also for active and retired or payout annuities. For
experience-rated Policies, the charge at the AC date was held level for all
future years.

b.  Gain from general expense.

These gain factors varied by product, reflecting average historical experience,
adjusted for the removal of non-recurring expenses.

c.  Gain from investment expense

These gain factors were determined separately for general account guaranteed
business, general account experience-rated business, and separate account. The
prospective gain factors were set equal to the respective 1999 factors used in
the historical calculation.

d.  Gain from investment income

For guaranteed business, the gain is the difference between the projected
interest earned (net of expenses and profit margins) for all guaranteed business
and the investment income credited to Policies. This rate of gain varies by
year. Since experience-rated Policies participate in investment experience,
there is no corresponding gain factor for that product grouping.

e.  Gain from reserve

These factors were determined on an aggregate basis (for active and retired
lives combined) for guaranteed general account balances only.

C.  GROUP TERM LIFE

1.  Historical AC

For Group Term, the historical AC was calculated as a percentage of incurred
premiums, which is consistent with how the historical AC was calculated for the
group life business that is included with the Group Life and Health line as
described in Section VIII.

2.  Prospective AC

For Group Term, the prospective ACs were calculated as a percentage of projected
premiums, consistent with the method used for historical ACs.

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Actuarial Contribution Memorandum          -29-                   March 31, 2001

VIII. GROUP LIFE AND HEALTH INSURANCE

A.   OVERVIEW AND METHODOLOGY

The Group Life and Health line of business consists of three major product
groupings: Large Group, Small Group and Group Universal Life (GUL). Within these
product groupings the business has been managed by "product line" (defined below
in sections B., C. and D). A group within Large Group or Small Group had one or
more of the following coverages: Group Term Life, Long Term Disability (LTD),
Short Term Disability (STD), Accidental Death and Dismemberment (AD&D), Medical,
Medicare Supplement, Prescription Drug, Dental or Vision.

There were two methods for determining the AC within Group Life and Health:
earnings by source and net profit percentage (NPP). The choice of method was
related to how the business was managed and also on the data available.

Under the earnings by source method (which was used for some historical
calculations) gain or loss percentages were determined for each calendar year
for each source of earnings, based on historical experience studies. These
annual percentages were applied to the corresponding historical bases, which
were obtained from detailed historical data for each group for each applicable
policy year to derive the total earnings by source. The annual contributions to
surplus for each group were accumulated to the AC Date to determine the
historical AC for that group.

The net profit percentage method was used for some historical calculations and
all prospective calculations.

For historical calculations under the NPP method, the net profit for each
calendar year during the historical period was expressed as a percentage of
total premiums for that year (using the premium equivalent for groups with
Minimum Premium (MPP) or Defined Liability Funding (DLF) arrangements.
Historical net profit was based on information from internal financial reports
and the Company's Annual Statements, and was defined as the after-tax profit
adjusted to remove investment income and capital gains less losses associated
with the surplus.

For the years 1940 through 1969, NPPs were available separately for the Group
Life and Group Health lines of business, but not by product lines within the
statutory lines of business. From 1970 through the AC Date, NPPs were available
(or were estimated) by product line and within Large and Small Group, were also
available by "summary coverages" (i.e., Life, Health, and LTD). The annual
contributions to surplus for a group were determined by applying the NPP factors
by the corresponding premiums. These annual contributions to surplus were
accumulated to the AC Date to determine the historical AC for that group.

Prospective NPPs (as a percentage of prospective premiums) and key prospective
assumptions (such as premium, lapse, trend, and mortality) were based on recent
historical experience, financial forecasts, and pricing assumptions. This was
generally done by product line and by summary coverages. However, case-specific
experience was reflected in certain instances for Large Groups and certain GUL
groups issued outside of the GUL Trust. Prospective contributions to surplus
were determined by applying the NPPs to the corresponding prospective

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Actuarial Contribution Memorandum          -30-                   March 31, 2001

premiums. These contributions were discounted to the AC Date to determine the
prospective AC for the group.

The total AC for a Policy was generally the sum of the historical and
prospective ACs as described above. If this total AC was negative, it was set to
zero. However, there are situations in which coverages or groups were
historically managed together from a financial perspective (e.g., for policy
year reconciliations, for rate setting, etc.). In such cases, this historical
financial management practice was followed for the AC calculations. This is
referred to as "linking" the ACs. In situations involving linking, the total AC
for a Policy was the algebraic sum of the linked ACs (i.e., positives offsetting
negatives), but if the sum was negative it was set to zero.

The AC for Group Universal Life for a group was never linked to the ACs of its
other Group Life and Health coverages. The ACs for GUL were determined
separately (i.e., historical AC added to prospective AC, and set to zero if
negative), and this result was added to the total (non- negative) AC of the
other coverages.

B.   LARGE GROUP

The Large Group product line consists of employer groups and association groups
that are prospectively experience-rated, typically insuring more than 100
employee lives. These groups may be fully insured and traditionally funded, or
have an alternate funding arrangement such as MPP or DLF.

The ACs for Large Group were developed on a case-by-case basis using a
combination of methods. The earnings by source method was used for the portion
of the historical period for which assumptions were available from historical
studies and detailed historical data were available at the group level for a
majority of the eligible Large Groups (generally, for policy years beginning in
1987 and later). The NPP method was used for the balance of the historical
period, and for the prospective period.

1.  Historical ACs

The major source of case-specific data for Large Group was the Policy Year
Reconciliations (PYR). These were available for almost every large group for
each policy year beginning in 1987 and later, regardless of whether the group
was eligible for an experience premium refund. Where case-specific data were not
available, an NPP approach was used.

Generally, for policy years beginning in 1987 and later, the ACs were developed
for each group using the earnings by source method. The specific sources of
earnings were:

a.  Gain from Investment

The gain from investment for each year was the difference between investment
return (investment income plus capital gains less losses) and interest credited
in the historical PYR calculations. The investment return was determined as
described in Section II.D.1.

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Actuarial Contribution Memorandum          -31-                   March 31, 2001

b.  Gain from Expenses

The gain from expenses for each year was the difference between the expenses
charged in the historical PYR calculations and the actual expenses incurred.
This gain was determined in the aggregate for all groups based on information in
internal management reports for Large Group. The annual gain for all Large
Groups was expressed as a percentage of expenses charged to all Large Groups.
This expense gain percentage was then applied to each group's expense charge to
determine the group's expense gain.

c.  Gain from Pooling

The gain from pooling for each year was the difference between the pooling
charges and the pooled claims, both obtained from the historical PYR
calculations. These gains were determined for all groups in a pool as a
percentage of the pooling charge for each year. This pooling gain percentage was
then applied to each group's pooling charge to determine the group's pooling
gain.

d.  Gain from Conversions

The gain from conversions for each year was the difference between the
conversion charges in the historical PYR calculations and the actual cost of
conversions based on information obtained from internal management reports for
Large Group. The gain for all Large Groups was expressed as a percentage of the
conversion charges made to all Large Groups. This percentage was then applied to
each group's conversion charge to determine the group's conversion gain.

e.  Gain from Risk Charge

The gain from risk charge for each year was the difference between the risk
charges and the actual cost of deficits incurred, both obtained from the
historical PYR calculations. This gain was expressed for all Large Groups as a
percentage of the risk charge for all Large Groups for each year. This
percentage was applied the each group's risk charge to determine the group's
risk charge gain.

f.  Profit Charge

This was the explicit profit charged to each group in its historical PYR
calculations.

g.  Gain from Reserves at Termination

The gain from reserves was the difference between the reserves charged a group
in the PYR calculations and the actual reserves needed at time of termination of
the group or coverage.

These annual contributions to surplus were accumulated to the AC Date and were
adjusted for federal income taxes, as described in Section II. D.

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Actuarial Contribution Memorandum          -32-                   March 31, 2001

For other historical years, the NPP method was used, as described above. NPPs
for the four policy years prior to the use of the earnings by source method were
adjusted case-by-case to grade to the levels produced by the earnings by source
method.

Actual premium for each group was used in the NPP calculation when available.
Premium equivalents were used for MPP and DLF groups. If the premium for a group
was not available for a given year, an estimated premium was used in this
calculation. Premiums were estimated by spreading the total premium since
inception (which was obtained from the earliest available PYR for the group)
back to the effective date of the group.

2.  Prospective ACs

The NPPs for the prospective period were based upon a case-specific average of
the NPPs for recent policy years in the historical period, and an assumption
that Large Group as a whole would attain its targeted pricing margins by the
fourth year of the prospective period, although some groups would attain their
targeted pricing margins sooner, and others later, than the fourth year.

For each group, its recent historical average NPP (expressed as a percentage of
the premiums earned over the same four policy year history) was used as the
starting point for its prospective NPPs, and was used to determine the
prospective AC for the balance of calendar year 2000. (i.e., March 31 to
December 31). Based on this case-specific average NPP, the future NPPs were
projected consistent with the overall assumption for attainment of the targeted
pricing margin, reflecting differences among the groups as to type of coverages
insured. In all instances, groups were assumed to attain the targeted pricing
margin no later than the fifteenth projection year.

For each group, for each coverage, recent average monthly premiums were used as
the basis for projecting the future premiums. Trend and lapse assumptions were
applied to this premium at each group's policy anniversaries. Premium
equivalents were projected for DLF and MPP groups. The prospective premium by
coverage by year for each group was aggregated into the summary coverages. The
Prospective NPP for that year was applied to determine the AC for that group and
year. The AC amounts for each year were then discounted to the AC Date using the
prospective discount rates to determine the total prospective AC for that group.

C.   SMALL GROUP

Small Group generally consists of groups insuring 1 to 100 employee lives. As
with Large Group, these may be fully insured and traditionally funded, or have
an alternate funding arrangement.

Small Group contains the following product lines: Pooled Group, Pooled Group
Alternate Funded, Rogers Benefit Group (RBG) Employers, Old Northwest Agents
(ONA) Employers, RBG Medicare Supplement/Depositors, ONA Medicare
Supplement/Depositors, Educational Service Plan (ESP), IASB, ABI, Retiree
Medical, Single Premium and Group Term Permanent. RBG and ONA are small groups,
generally insuring from 1 to 50 employee lives, while Pooled Group generally
includes groups from 1 to 100 employee lives. The Medicare Supplement portion of
RBG and ONA consists of individuals eligible for Medicare.

   135

Actuarial Contribution Memorandum          -33-                   March 31, 2001

The Small Group product lines were managed as separate financial risk pools.
Consistent with the management of the business, net profit percentages (NPPs)
were developed separately for each summary coverage by state within each product
line. These product line, state and summary coverage-specific NPPs for each
calendar year were applied to the premium for each applicable summary coverage
within a group.

1.  Historical AC

The NPP method was used, as described above. Actual premium for each group was
used in this calculation when available. This was generally from 1991 and later
for all small groups. When actual historical premium for a small group was not
available, historical trend assumptions were applied to the known premium for
each group by coverage to estimate the unavailable premium.

2.  Prospective AC

The process was generally the same as described above for Large Group. The NPPs
by product line and summary coverages for the prospective period were typically
based on an average of the NPPs by product line and summary coverages for 1997,
1998, and 1999. This average NPP was used to determine the prospective AC for
calendar year 2000 for that summary coverage on every group in that product
line.

For each group, for each coverage, recent average monthly premiums were used as
the basis for projecting the future premiums. Trend assumptions were applied to
this premium at each group's policy anniversaries. Lapse assumptions were
applied to the projected premium each calendar year. The prospective premium by
coverage by year for each group was summarized into summary coverages. The
Prospective NPP for that product line and summary coverage was applied to
determine the AC for that group and year. The AC amounts for each year were then
discounted to the AC Date using the prospective discount rates to determine the
total prospective AC for that group.

Premiums for individuals were projected to the end of the mortality table. In
addition, for those coverages using an age-related premium structure,
prospective premiums were modeled to increase by age. Terminations due to death
were estimated, along with voluntary lapses.

D.   GROUP UNIVERSAL LIFE (GUL)

The ACs for groups with GUL coverage not issued through the GUL Trust,
certificates issued through the GUL Trust, and certificates that ported their
coverage from groups not issued through the GUL Trust were determined in the
same manner as described above for Small Groups. Premiums used in the NPP
calculations were the cost of insurance amounts defined for each group or
certificate. Three separate NPPs were developed each year: one for each of two
particular large groups (and all certificates that ported from those groups) and
one for every other group and certificates combined. The two large groups were
managed separately from the remaining GUL groups and certificates. The premiums
for these groups were based to some extent on the actual experience of the
group.

The prospective ACs for certificates issued through the GUL Trust and
certificates that ported their coverage from a group not issued through the GUL
Trust were based on premiums

   136

Actuarial Contribution Memorandum          -34-                   March 31, 2001

projected to the end of the mortality table. In addition, prospective premiums
were modeled to increase by age for the coverages of these certificates that use
an age-related premium structure. Terminations due to death were estimated for
these certificates, along with voluntary lapses.

   1
                                                                     EXHIBIT 2.2

                       [ALLEN ALLEN & HEMSLEY LETTERHEAD]

SHARE SALE DEED
- --------------------------------------------------------------------------------

BT INVESTMENTS (AUSTRALIA) LLC
BT FOREIGN INVESTMENT CORPORATION
BT NEW ZEALAND LIMITED
BT INTERNATIONAL (DELAWARE), INC.
BT NOMINEES (H.K.) LIMITED
DEUTSCHE BANK AG
BANKERS TRUST CORPORATION
PRINCIPAL FINANCIAL GROUP (AUSTRALIA) PTY LIMITED
PRINCIPAL FINANCIAL SERVICES, INC.

   2

                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

1.  DEFINITIONS AND INTERPRETATION                                         2
    1.1 Definitions                                                        2
    1.2 Interpretation                                                    12
    1.3 Payments and currency                                             13

2.  CONDITIONS PRECEDENT                                                  14
    2.1 Application of conditions precedent                               14
    2.2 Conditions precedent                                              14
    2.3 Further conditions                                                15
    2.4 Benefit of conditions                                             16
    2.5 Satisfaction of conditions                                        16
    2.6 Termination for failure to satisfy conditions precedent           17
    2.7 Failure to satisfy further conditions                             17
    2.8 Offshore IB Businesses                                            17
    2.9 Malaysian Securities Commission                                   17

3.  GROUP CONDUCT BEFORE AND AFTER COMPLETION                             18
    3.1 General                                                           18
    3.2 Fiduciary and certain Investment Banking activities               20
    3.3 Group Restructuring                                               20
    3.4 Continuation of Infrastructure Support                            20
    3.5 Transitional arrangements                                         21
    3.6 IB Linkages                                                       21
    3.7 Client Confidential Information                                   22

4.  EMPLOYEE ARRANGEMENTS                                                 22

5.  SALE AND PURCHASE                                                     24

6.  COMPLETION                                                            24
    6.1 Place for Completion                                              24
    6.2 Delivery of title documents                                       24
    6.3 Delivery of general documents                                     25

- --------------------------------------------------------------------------------
                                                                        PAGE (i)
   3

                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

    6.4  Approval of transfers                                            27
    6.5  Completion Date board meetings                                   27
    6.6  Payment of Purchase Price, re-financing and Transaction
         Documents                                                        27
    6.7  Delay in satisfying conditions in Clause 2.3                     28
    6.8  OffShore FM Businesses                                           29
    6.9  Post Completion loan balances                                    30
    6.10 Parent Support Obligations                                       30
    6.11 Custody arrangements                                             31
    6.12 Deutsche Funds Management                                        31

7.  NOTICE TO COMPLETE                                                    31
    7.1  Notice by the Purchaser                                          31
    7.2  Notice by the Vendors                                            31

8.  WARRANTIES, CLAIMS AND DISPUTES                                       32
    8.1  Warranties and indemnity by the Warrantor                        32
    8.2  Warranties by the Purchaser and Purchaser's Guarantor            32
    8.3  Effective dates                                                  32
    8.4  Disclosures                                                      32
    8.5  Construction                                                     33
    8.6  Limitation on Warrantor's and Vendors' liability                 33
    8.7  No reliance                                                      36
    8.8  Statutory actions                                                37
    8.9  Indemnity                                                        38
    8.10 Dealing with Third Party Claim or Tax Claim after Completion
         Date                                                             38
    8.11 Tax Assessment                                                   41
    8.12 Procedure for making Claim                                       42
    8.13 Expert                                                           43
    8.14 Alterations to Purchase Price or Adjusted Purchase Price         43
    8.15 Notification of Warranty breach before Completion                44

9.  ACCESS TO AND RETENTION OF RECORDS                                    44
    9.1  Access                                                           44
    9.2  Retention                                                        45

- --------------------------------------------------------------------------------
                                                                       PAGE (ii)

   4

                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
10. THE COMPLETION STATEMENT                                                  45
    10.1   Preparation of Completion Statement                                45
    10.2   Delivery of Completion Statement and Vendors' Accountants Report   45
    10.3   Access to information                                              46
    10.4   Review by Purchaser's Accountants                                  46
    10.5   Basis of preparation of Completion Statement                       46
    10.6   Report by Purchaser's Accountants                                  46
    10.7   Application of Clause 11.1                                         47
    10.8   Resolution of disputes and application of Clause 11.2              47
    10.9   Conclusiveness of report                                           48
    10.10  Adjustment of Purchase Price                                       48
    10.11  Costs                                                              48

11. POST-COMPLETION ADJUSTMENT                                                48
    11.1   If Completion Statement final                                      48
    11.2   If the Accountants have disagreed                                  49
    11.3   Interest on any adjustment amount                                  49

12. DROP DEAD DATE ADJUSTMENTS                                                49
    12.1 Failure to complete                                                  49

13. USE OF NAMES AND TRADE MARKS                                              50
    13.1   Covenant not to use by Purchaser                                   50
    13.2   Purchaser's use of BT Name                                         50
    13.3   Covenant not to use by the Warrantor                               51
    13.4   Continuing use by Warrantor or Deutsche Group                      52
    13.5   Cancellation of registration                                       52
    13.6   Acknowledgement by the Purchaser                                   52
    13.7   Assignment or disposal of BT Name                                  53
    13.8   Relinquish names                                                   53
    13.9   Distinctive Use                                                    54
    13.10  Protection of BT Name                                              54
    13.11  Breach of covenant                                                 55
    13.12  Benefit of Purchaser covenants                                     55

- --------------------------------------------------------------------------------
                                                                      PAGE (iii)

   5
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
14. YEAR 2000 ISSUE                                                         55

15. INSURANCE                                                               56

16. NOTICES                                                                 56

17. NON-DISCLOSURE                                                          57
    17.1 Confidentiality                                                    57
    17.2 Exceptions                                                         57
    17.3 Public announcements                                               58

18. THE VENDORS' GUARANTOR'S GUARANTEE                                      58
    18.1 Undertaking                                                        58
    18.2 Principal obligation                                               58
    18.3 No withholdings                                                    58
    18.4 No set off                                                         59

19. DEFAULT INTEREST                                                        59
    19.1 Rate                                                               59
    19.2 Accruals                                                           59

20. FURTHER ASSURANCES                                                      59

21. ENTIRE AGREEMENT                                                        59

22. AMENDMENT                                                               60

23. ASSIGNMENT                                                              60

24. NO WAIVER                                                               60

25. WAIVER EFFECTIVE                                                        60

26. SEVERANCE                                                               60

27. NO MERGER                                                               60

28. COUNTERPARTS                                                            61

29. STAMP DUTY AND COSTS                                                    61

30. GOVERNING LAW                                                           61

- --------------------------------------------------------------------------------
                                                                       PAGE (iv)

   6
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
31. THE PURCHASER'S GUARANTOR'S GUARANTEE                                   61
    31.1 Undertaking                                                        61
    31.2 Principal obligation                                               61
    31.3 No withholdings                                                    62
    31.4 No set off                                                         62

32. SPECIAL INDEMNITY                                                       62

SCHEDULES 1 - 14

- --------------------------------------------------------------------------------
                                                                        PAGE (v)

   7

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------
DATE       17 June 1999

PARTIES

1.   BT INVESTMENTS (AUSTRALIA) LLC c/o Corporation Trust Company, 1209 Orange
     Street, Wilmington, Delaware 19801, United States of America (BTLLC);

     BT FOREIGN INVESTMENT CORPORATION c/o Corporation Trust Company, 1209
     Orange Street, Wilmington, Delaware 19801, United States of America
     (BTFIC);

     BT NEW ZEALAND LIMITED of Level 7, Price Waterhouse Centre, 66 Wyndham
     Street, Auckland, New Zealand (BTNZ);

     BT INTERNATIONAL (DELAWARE), INC. c/o U.S. Corporation Company 1013 Centre
     Road, Wilmington, Delaware 19805, United States of America (BTID); and

     BT NOMINEES (H.K.) LIMITED of 36th Floor, Two Pacific Place, 88 Queensway,
     Hong Kong (BTNHK),

     (each a VENDOR).

2.   DEUTSCHE BANK AG (ARBN 064 165 162) of Level 28, 31 West 52nd Street, New
     York, New York 10005, United States of America (the WARRANTOR).

3.   BANKERS TRUST CORPORATION of BT Plaza, 130 Liberty Street, New York, New
     York 10005, United States of America (the VENDORS' GUARANTOR).

4.   PRINCIPAL FINANCIAL GROUP (AUSTRALIA) PTY LIMITED (ACN 087 480 313) of
     Level 17, 201 Miller Street, North Sydney 2060, Australia (the PURCHASER).

5.   PRINCIPAL FINANCIAL SERVICES, INC. of 711 High Street, Des Moines, IA
     50392-0300, United States of America (the PURCHASER'S GUARANTOR).

RECITALS

A    Each Vendor is registered as the holder of the Sale Shares specified
     against its name in Part I of Schedule 1.

B    Each Vendor wishes, or is authorised by the beneficial owner, to sell the
     Sale Shares held by it and the Purchaser wishes to purchase all of the Sale
     Shares on the terms and subject to the conditions of this Deed.

- --------------------------------------------------------------------------------
                                                                          PAGE 1
   8

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

C    The Vendors have requested the Warrantor to enter into this Deed for the
     benefit of the Purchaser and the Purchaser's Guarantor.

IT IS AGREED as follows.

1.   DEFINITIONS AND INTERPRETATION
- --------------------------------------------------------------------------------

1.1  DEFINITIONS

     The following definitions apply unless the context requires otherwise.

     ACCOUNTING PRINCIPLES means the principles, policies and procedures used in
     the preparation of the Accounts and to be used in the preparation of the
     Completion Statement, as set out in Schedule 7.

     ACCOUNTS means the special purpose aggregated pro-forma balance sheet of
     the Business prepared by the Vendors as at the Balance Date, a copy of
     which has been initialled for identification by the Purchaser's solicitor
     on behalf of the Purchaser and by the Vendors' solicitor on behalf of the
     Vendors.

     ADVISER means, in respect of a party, a legal, accounting, taxation,
     financial or other expert adviser to that party and includes:

     (a)  where appropriate, the partners, Officers and employees of the
          adviser; and

     (b)  in the case of the Vendors, the Vendors' Guarantor and the Warrantor,
          any such adviser to a member of the Vendors' Group or of the Deutsche
          Group.

     ADJUSTED PURCHASE PRICE means, in respect of any particular Sale Shares or
     Offshore FM Business, the Purchase Price of those Sale Shares or that
     Offshore FM Business, as adjusted in accordance with Clause 10.

     AUTHORISATION includes:

     (a)  any authorisation, approval, consent, license, permit, franchise,
          permission, notification, filing, registration, lodgement, agreement,
          notarisation, certificate, authority, resolution, direction,
          declaration or exemption from, by or with a Public Authority; and

     (b)  in relation to anything which will be prohibited or restricted in
          whole or part by law if a Public Authority intervenes or acts in any
          way within a specified period after lodgement, filing, registration or
          notification, the expiry of such period without such intervention or
          action.

     BT NAME means any name or mark that is or includes BT or anything
     substantially or deceptively identical with or similar to BT, but does not
     include BT Pyramid.

- --------------------------------------------------------------------------------
                                                                          PAGE 2
   9

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     BTAL means Bankers Trust Australia Limited (ACN 003 017 221).

     BTC means Bankers Trust Company of BT Plaza, 130 Liberty Street, New York,
     New York 10005, United States of America.

     BTC PYRAMID AGREEMENT means the proposed agreement between BTC and BTPS
     under which BTPS agrees to provide administration services in respect of
     the funds known (at the date of this Deed) as the PT Pyramid Funds, a draft
     of which has been initialled for identification only by the Purchaser's
     solicitors on behalf of the Purchaser and the Vendors' solicitors on behalf
     of the Vendors.

     BTCO means BTCO Australia Pty Limited (ACN 070 866 367).

     BTCO AUSTRALIA AGREEMENT means the agreement between BTCO and BTPS under
     which BTPS agrees to provide administration services to BTCO, a draft of
     which has been initialled for identification only by the Purchaser's
     solicitors on behalf of the Purchaser and the Vendors' solicitors on behalf
     of the Vendors.

     BTFMA means BT Funds Management Asia Limited.

     BTFMIL means BT Funds Management (International) Limited (ACN 061 086 306).

     BTFMS means BT Funds Management (Singapore) Limited.

     BTI means Bankers Trust International Plc.

     BTIA means BT Investments (Australia) Limited.

     BTIA SHARES means all the shares in BTIA as described in column 3 of Part I
     of Schedule 1.

     BTIB COMPANY means a company described in Part IIB of Schedule 2.

     BTIB GROUP means:

     (a)  the BTIB Companies; and

     (b)  IB Businesses, whether conducted through a BTIB Company or another
          Group Member,

     and in each case excluding any asset of any nature used in or relating to
     the FM Businesses.

     BTPS means BT Portfolio Services Limited (ACN 064 567 040).

     BALANCE DATE means 31 December 1998.

     BUSINESS means the business or businesses of the Group Members and the
     Offshore FM Businesses, as carried on at the date of this Deed.

     BUSINESS DAY means a day on which banks are open for business in Sydney and
     New York.

     BUSINESS NAME ACT means the relevant Business Names Act of the jurisdiction
     specified against the Excluded Business Name in Schedule 11.

- --------------------------------------------------------------------------------
                                                                          PAGE 3
   10

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     CLAIMS (except in Clause 32) means claims, demands, actions, proceedings,
     judgements, liabilities, losses, damages, costs and expenses (including
     reasonable legal costs and disbursements on a solicitor-client basis)
     whatever and in any way arising and, unless the context requires otherwise,
     includes a Tax Claim.

     In Clause 32, CLAIMS means losses, damages, costs and expenses (including
     reasonable legal costs and disbursements on a solicitor-client basis)
     whatever and in any way arising and includes a Tax Claim.

     CLIENT CONFIDENTIAL INFORMATION means Confidential Information as defined
     in the Confidentiality Deed dated 29 March 1999 between BTAL and Deutsche
     Bank AG (Sydney Branch).

     CLOSELY-HELD SUBSIDIARY has the meaning given in section 243M of the
     Corporations Law.

     COMPANY means a company specified in column 2 of Part I of Schedule 1.

     COMPLETION means completion of the sale and purchase of the Sale Shares
     under this Deed.

     COMPLETION DATE means the last day of the calendar month in which the
     Conditions Satisfaction Date occurs or, if either that last day is not a
     business day or the Conditions Satisfaction Date occurs on the last day of
     the calendar month, the next succeeding business day.

     COMPLETION STATEMENT means the aggregated pro-forma balance sheet of the
     Group and the Offshore FM Businesses as at the Completion Date (or if the
     Completion Date is not the last day of a calendar month, the last day of
     the immediately preceding calendar month) in the form set out in Schedule 6
     which shall clearly set out the assets and liabilities attributable to the
     FM Businesses and to the IB Businesses, based on the consistent application
     of the methodology applied in preparing the Accounts and in determining the
     assets and liabilities attributable to these two businesses as set out in
     the Accounts. The assets and liabilities of the FM Businesses as set out in
     the Completion Statement must be of a similar nature, quality and general
     composition as those in the pro forma balance sheet for the FM Businesses
     in the Accounts.

     CONDITIONS SATISFACTION DATE means the date on which the last to be
     satisfied of the conditions precedent in Clause 2.2 is satisfied.

     CONFIDENTIAL INFORMATION includes know-how, trade secrets, technical
     processes, information relating to products, finances, contractual
     arrangements with customers or suppliers and other information which by its
     nature, or by the circumstances of its disclosure to the holder of the
     information, is or could reasonably be expected to be regarded as
     confidential.

     CONTRACT shall mean any written Investment Advisory Agreement entered into
     by any Group Member and any lease, license or other agreement relating to
     the use by any Group Member of any tangible or intangible property and

- --------------------------------------------------------------------------------
                                                                          PAGE 4
   11

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     all rights and interests of any Group Member arising under or in connection
     with such agreement.

     CORPORATE SERVICES means the corporate services group of the Group as
     described in the Information Memorandum.

     DEED OF ASSIGNMENT OF TRADE MARKS means the deed so named which has been
     initialled for identification by the Purchaser's solicitor on behalf of the
     Purchaser and by the Vendors' solicitor on behalf of the Vendors.

     DEUTSCHE GROUP means Deutsche Bank AG (ARBN 064 165 162), its Related
     Bodies Corporate and all of its Officers and Advisers.

     DISCLOSURE LETTER means the letter dated 17 June 1999 and its annexures
     from BTAL to the Directors of the Purchaser and the Purchaser's Guarantor
     entitled Share Sale Deed - Disclosure Letter.

     DISCLOSURE MATERIAL means:

     (a)  the material which was, at any time during the period 9 May 1999 to 28
          May 1999, contained in the data room made available to the Purchaser
          the indices for which have been initialled for identification purposes
          only (and not to establish that the material was so contained in the
          data room) by the Purchaser's solicitor on behalf of the Purchaser and
          by the Vendors' solicitor on behalf of the Vendors; and

     (b)  the Disclosure Letter,

     but does not include the IB Disclosure Material.

     DROP DEAD DATE means 30 November 1999 or such other date agreed by the
     parties.

     EMPLOYEE DISCLOSURE means the material disclosed in relation to the
     Employees as contained in the Disclosure Material.

     EMPLOYEES means those persons who are, at any time between the date of this
     Deed and the Completion Date, employees of the Group or the Offshore FM
     Businesses.

     ENCUMBRANCE means an interest or power:

     (a)  reserved in or over any interest in any asset including, without
          limitation, any retention of title; or

     (b)  created or otherwise arising in or over any interest in any asset
          under a bill of sale, mortgage, charge, lien, pledge, trust or power,
          by way of security for the payment of debt or any other monetary
          obligation or the performance of any other obligation and whether
          existing or agreed to be granted or created.

     EXCLUDED BUSINESS NAME means each business name listed in Schedule 11.

     EXCLUDED COMPANY means a Company, the sale of the shares of which does not
     proceed by reason of Clause 2.7 and which becomes the subject of
     adjustments under Clause 12, and any of its Closely-held Subsidiaries.

- --------------------------------------------------------------------------------
                                                                          PAGE 5
   12

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     EXCLUDED NAME means any name that is or includes any of the following words
     or any word substantially or deceptively identical with or similar to those
     words:

     (a) Bankers Trust;

     (b) Alex. Brown;

     (c) Wolfensohn; and

     (d) Pyramid.

     EXCLUDED SHARES means the Sale Shares in a Relevant Company to which Clause
     6.7(d) applies.

     EXCLUSION DATE means the date upon which an Excluded Company ceases to be
     the subject of a sale obligation by reason of Clause 2.7.

     EXPERT means:

     (a)  an independent professional agreed by the Vendors and the Purchaser;
          or

     (b)  failing agreement by the Vendors and the Purchaser within 3 business
          days of the triggering of the expert referral provision, an eminent
          independent professional who shall have qualifications and expertise
          suitable to the dispute as determined and nominated by the President
          of the Institute of Chartered Accountants in Australia or his duly
          appointed delegate at the request of either the Vendors or the
          Purchaser.

     FM BUSINESSES means the funds management, portfolio services and margin
     lending businesses of the Group as described in the Information Memorandum.

     FRANKING ACCOUNT has the same meaning as in section 16OAPA of the 1936 Act,
     and where relevant includes the calculation of an exempting surplus or
     deficit at that particular time pursuant to proposed section 160AQCND.

     FRANKING YEAR (has the same meaning as in section 16OAPA of the 1936 Act.).

     GROUP means the Companies and the Subsidiaries.

     GROUP MEMBER means any member of the Group.

     GROUP RESTRUCTURING means the actions undertaken in connection with the
     restructuring of the Group as set out in Schedule 3.

     HSR ACT means the Hart Scott-Rodino Antitrust Improvements Act of 1976 of
     the United States of America, as amended, and the rules and regulations.
     promulgated under it.

     IB BUSINESS means the Business other than the FM Businesses and the
     Offshore IB Businesses.

     IB DEED means the deed so named dated the date of this Deed between the
     Warrantor, the Purchaser, the Purchaser's Guarantor and BTAL (amongst
     others) regarding the IB Businesses.

- --------------------------------------------------------------------------------
                                                                          PAGE 6
   13

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     IB DISCLOSURE MATERIAL means the material which was, at any time during the
     period from 9 May 1999 to 28 May 1999, contained in the data room made
     available to the Purchaser in the folders corresponding to the index number
     IB-1 to IB-48 inclusive and the material contained in the folders placed in
     the data room after 9 May 1999 up to and including 28 May 1999 to the
     extent that it related solely to the IB Businesses or the Offshore IB
     Businesses.

     IB INDEMNITY means the indemnity given by the Warrantor set out in Clause
     32.

     INFORMATION MEMORANDUM means the information memorandum prepared by Goldman
     Sachs Australia L.L.C. and Deutsche Bank Australia dated April 1999
     relating to the Business.

     INFRASTRUCTURE SUPPORT means all infrastructure support provided to the
     Group and the Offshore FM Businesses at the date of this Deed and includes:

     (a)  office accommodation;

     (b)  access to computer networks and communication systems, including
          internet and website facilities and online services;

     (c)  the provision of computers, primers, facsimile machines, telephones
          and other office equipment;

     (d)  photocopying and mailroom services;

     (e)  "Help Desk" and other software, hardware, network and communication
          systems support and maintenance services;

     (f)  systems and software products (not including source codes);

     (g)  banking facilities; and

     (h)  payroll and associated services for employees.

     INVESTMENT ADVISORY AGREEMENTS means all agreements and arrangements for
     the performance of investment advisory or investment management services
     with respect to securities, real estate, commodities, currencies or any
     other asset class for clients or on behalf of third parties (including
     unincorporated joint ventures).

     MALAYSIAN AGREEMENT means the agreement dated 12 June 1997 between Commerce
     International Merchant Bankers Berhad (Company No. 18417-N), BTAL and the
     Malaysian Company.

     MALAYSIAN COMPANY means Commerce BT Unit Trust Management (Berhad (Company
     No. 304078-K).

     MAS means the Monetary Authority of Singapore.

     MIA TRANSITION means Division 11 (where it second appears) of Part 11.2 of
     the Corporations Law.

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                                                                          PAGE 7
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     NET ASSETS means the amount of the aggregated net assets of the Group and
     Offshore FM Businesses as at the Completion Date as disclosed in the
     Completion Statement or a report by the Expert delivered under Clause 10.8
     (as the case may be).

     OFFICER has the meaning given in section 82A of the Corporations Law.

     OFFSHORE FM BUSINESSES means the following offshore funds management
     operations:

     (a)  the management of the BT International Investment Series of funds in
          Ireland, as performed by a subsidiary of the Vendors' Guarantor called
          BT Fund Managers (Ireland) Limited;

     (b)  the marketing and distributing of the BT International Investment
          Series of funds and the marketing of BTFMIL's institutional funds
          management capabilities, as performed in the United Kingdom by BTI;

     (c)  the services provided by BTC under the Alberta Contract (as defined in
          Clause 6.8(c)); and

     (d)  the management of US securities for the Common Fund Bond Portfolio (as
          described in Clause 6.8(d)).

     OFFSHORE IB BUSINESSES means the following offshore investment banking
     operations presently carried on using local staff and staff seconded from
     BTAL in New York, Chicago, Sao Paulo, London, Paris, Hong Kong and
     Singapore:

     (a)  THE METALS AND MINING BUSINESS, which is carried on in New York and
          London by BTC and BTI in respect of precious and base metal OTC
          transactions. BT Bank of Canada is also used as a booking vehicle. The
          precious metal book is housed and hedged in BTC while the base metal
          books are housed and hedged in BTI;

     (b)  THE SOFT COMMODITIES BUSINESS, which is carried on in New York,
          Chicago and Sao Paolo by BTC and in London by BTI in respect of sugar
          only with these trades backed into BTAL;

     (c)  THE BTAL LONDON SYCOM TERMINAL, used to deal in Sydney Futures
          Exchange traded futures contracts on behalf of clients predominantly
          in the United Kingdom;

     (d)  THE DEBT MARKETS DESKS IN LONDON AND NEW YORK, which deal in
          Australian and New Zealand dollar denominated bonds and other debt
          securities in those jurisdictions. The London desk executes
          transactions in the name of BTI and backs these trades into BTAL. The
          New York desk executes transactions in the name of BT Alex. Brown,
          Inc. and backs these trades into BTAL;

     (e)  THE DEBT MARKETS DESK IN HONG KONG, which undertakes origination and
          dealer activities as part of debt issuance programs of

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                                                                          PAGE 8

   15
                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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          Australian and New Zealand issuers in the name of BT Asia Limited; and

     (f)  THE EQUITIES DESKS IN NEW YORK, SINGAPORE, LONDON AND PARIS, which
          deal in Australian equity securities for local customers in those
          jurisdictions.

     PARENT SUPPORT OBLIGATIONS means the guarantees, indemnities and other
     support obligations listed in Schedule 14 and any other guarantees,
     indemnities and other support obligations given by any member of the
     Vendors' Group (other than the Officers and Advisers forming part of the
     Vendor's Group) to any party to better secure the performance of any
     obligations of any Group Member, but excluding any liability of the
     Vendors' Group under a Transaction Document or in respect of any of the IB
     Businesses or Offshore IB Businesses.

     PRELIMINARY NET ASSETS means the amount of aggregated net assets of the
     Group and Offshore FM Businesses as at the Balance Date as disclosed in the
     Accounts.

     PUBLIC AUTHORITY includes:

     (a)  any government in any jurisdiction, whether federal, state,
          territorial or local;

     (b)  any minister, department, office, Taxation Authority, commission,
          delegate, instrumentality, agency, board, authority or organisation of
          any government or in which any government is interested;

     (c)  any non-government regulatory authority; and

     (d)  any provider of public utility services, whether or not government
          owned or controlled.

     PURCHASE PRICE means, in respect of any particular Sale Shares or Offshore
     FM Business, the consideration for the purchase of those Sale Shares or
     that Offshore FM Business as specified in column 4 of Part I of Schedule 1
     or column 3 of Part II of Schedule 1, as the case may be.

     PURCHASER ENTITIES means the Purchaser and any Related Body Corporate or
     child entity of the Purchaser (as that expression is defined in Part 2E.2
     of the Corporations Law) from time to time (and, following the Completion
     Date, includes each Group Member).

     PURCHASER'S ACCOUNTANTS means a firm of accountants nominated by the
     Purchaser.

     PYRAMID DEVICE means the pyramid logo in all its forms as used by or
     registered as a trade mark by BTC or its Related Bodies Corporate on or
     before the date of this Deed.

     REAL PROPERTY means the leasehold and freehold property listed in Schedule
     12.

     RECORDS means the original version, or a certified copy, of all books of
     account, accounts, records and data owned by or relating to any Group

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                                                                          PAGE 9
   16
                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     Member, the Business or the property of any Group Member (whether in
     machine readable or printed form), including any source material used to
     prepare any of the records described above.

     RELATED BODY CORPORATE means, in relation to a body corporate, a body
     corporate which is related to it within the meaning of section 50 of the
     Corporations Law.

     RELEVANT COMPANY, RELEVANT DATE and RELEVANT SHARES each have the meanings
     provided by Clause 6.7.

     RELIEF means any loss, relief, allowance, exemption or exclusion, set-off,
     deduction, rebate, right to repayment or credit or other relief of a
     similar nature granted by or available in relation to Tax, pursuant to any
     legislation.

     REPORTED EXCESS and REPORTED SHORTFALL have the meanings provided by clause
     10.2(b).

     RULING REQUESTS means applications lodged on behalf of any Group Member
     nominated by the Vendors or the Warrantor, for a private ruling under Part
     IVAA of the Taxation Administration Act 1953 (Cth):

     (a)  that neither Part IVA of the Tax Act nor any other relevant tax
          avoidance provisions in the Tax Act have any application to the
          transaction effected under this Deed; and

     (b)  in relation to any other matter identified by the Vendors or the
          Warrantor and approved by the Purchaser (such approval not to be
          unreasonably withheld).

     SALE SHARES means the shares specified in Part I of Schedule 1 and when
     used in respect of a particular Vendor means the Sale Shares specified
     against its name in Part I of Schedule 1.

     SFC means the Hong Kong Securities and Futures Commission.

     SHARED SERVICES AGREEMENTS means the agreements by which certain members
     of the Vendors' Group and certain of the Companies agree that one will
     provide information technology services and facilities to the other for a
     transition period of no more than 18 months from the Completion Date, to be
     entered into on or before the Completion Date in a form approved in writing
     by the Purchaser.

     SPECIFIC EMPLOYEE DISCLOSURES means Annexures B, C, D and E of the
     Disclosure Letter.

     STATUTORY ACCOUNTS means the annual audited financial statements of BTAL
     and its controlled entities prepared as at the Balance Date.

     STEWARDSHIP COMMITTEE means the "Co-ordination Group" established for the
     purposes of overseeing the operations of the Business from 4 June 1999 to
     the Completion Date.

     STEWARDSHIP DOCUMENT means the document called Deutsche Bank Australia/
     Bankers Trust Australia Limited Management Post COC, a copy of which has
     been initialled for identification by the Purchaser's solicitor on

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                                                                         PAGE 10
   17

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     behalf of the Purchaser and by the Vendors' solicitor on behalf of the
     Vendors.

     SUBSIDIARIES means the subsidiaries of the Companies as described in Part
     IIA of Schedule 2.

     SYSTEM means any computer software and computer hardware howsoever used and
     any embedded system or device used to control, monitor or assist the
     operation of equipment, machinery or plant and includes any data to be.
     used by any of the foregoing.

     TAX includes any tax, impost, deduction, charge, rate, duty, compulsory
     loan or withholding which is collected or administered by a Taxation
     Authority pursuant to a law of any jurisdiction in the nature of a tax on
     income or profits (including capital gains), and any related interest,
     penalty, additional tax, charge, fee or other amount and also includes
     (Without limitation) any withholding taxes, prepayments or advance payments
     with respect to such taxes. TAX also includes customs duty, excise duty,
     sales tax, value added or goods and services tax, franking additional tax,
     fringe benefits tax, payroll tax, stamp duty, taxes in respect of
     superannuation or pensions, other social security taxes and any
     corresponding or similar taxes in any jurisdiction and any related
     interest, penalty, additional tax, charge, fee or other amount.

     TAX ACT means the 1936 Act and the 1997 Act.

     TAX CLAIM means any claim, assessment, notice, determination, demand or
     other document issued or action taken by or on behalf of any Taxation
     Authority whereby any Group Member either is liable or is sought to be made
     liable to make any Tax payment or is denied or sought to be denied any
     Relief and includes any Claim arising from the lodgment of a Ruling
     Request.

     TAX PROVISION means the aggregate amount of the provisions in relation to
     Tax in the Completion Statement.

     TAX WARRANTIES means the warranties set out in Part II of Schedule 4.

     TAX YEAR means the annual period, or in respect of the period including the
     Completion Date the shorter period allowed by a Taxation Authority, in
     respect of which a Tax liability may arise.

     TAXATION AUTHORITY means any governmental authority or instrumentality
     responsible for the collection or administration of Tax.

     TOTAL ADJUSTED PURCHASE PRICE means the Total Purchase Price as adjusted in
     accordance with Clause 10.

     TOTAL PURCHASE PRICE means the total Purchase Price for all of the Sale
     Shares and the Offshore FM Businesses, being the amounts specified in
     Schedule 1.

     TRADE MARKS has the meaning given in the Deed of Assignment of Trade Marks.

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                                                                         PAGE 11
   18
                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     TRANSACTION DOCUMENTS means this Deed, the IB Deed, the Deed of Assignment
     of Trade Marks, the Shared Services Agreements, the BTCO Australia
     Agreement and the BTC Pyramid Agreement.

     TRANSITION DATE means the date which is six months after the Completion
     Date.

     VENDORS' ACCOUNTANTS means KPMG of 45 Clarence Street, Sydney, NSW, 2000.

     VENDORS' ACCOUNTANT'S REPORT means the report by the Vendors' Accountants
     to be delivered under Clause 10.2.

     VENDORS' GROUP means the Vendors, their Related Bodies Corporate (excluding
     Group Members) and all of their Officers and Advisers from time to time.

     WARRANTIES means:

     (a)  the warranties and representations by the Warrantor set out in Parts I
          and II of Schedule 4 of this Deed; and

     (b)  any other conditions, warranties or representations which cannot be
          excluded under statute or the general law by or against the Vendors or
          the Warrantor in connection with the transactions contemplated by the
          Transaction Documents.

     YEAR 2000 ISSUES means any failure of a System to comply with the
     requirements set out in the Australian Standards SAA/SNZ MP77:1998A
     Definition of Year 2000 Conformity Requirements, such requirements being
     that neither performance nor functionality is affected by dates prior to,
     during or after the year 2000. In particular:

     Rule 1:       No value for current date will cause any interruption in
                   operation.

     Rule 2:       Date-based functionality must behave consistently for dates
                   prior to, during and after year 2000.

     Rule 3:       In all interfaces and data storage, the century in any date
                   must be specified either explicitly or by unambiguous
                   algorithms or inferencing rules.

     Rule 4:       Year 2000 must be recognised as a leap year in terms of
                   handling both 29 February and day 366.

     1936 ACT means the Income Tax Assessment Act 1936 (Cth).

     1997 ACT means the Income Tax Assessment Act 1997 (Cth).

1.2  INTERPRETATION

     HEADINGS are for convenience only and do not affect interpretation. The
     following rules of interpretation apply unless the context requires
     otherwise.

     (a)  The SINGULAR includes the plural and conversely.

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                                                                         PAGE 12
   19

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (b)  A GENDER includes all genders.

     (c)  Where a WORD or PHRASE is defined, its other grammatical forms have a
          corresponding meaning.

     (d)  A reference to a PERSON includes a body corporate, an unincorporated
          body or other entity and conversely.

     (e)  A reference to a CLAUSE or SCHEDULE is to a clause of or schedule to
          this Deed.

     (f)  A reference to a PARAGRAPH is to a paragraph in the Clause in which
          the reference appears.

     (g)  A reference to any PARTY to this Deed or any other agreement or
          document includes the party's successors and permitted assigns.

     (h)  A reference to any AGREEMENT or DOCUMENT is to that agreement or
          document as amended, novated, supplemented, varied or replaced from
          time to time, except to the extent prohibited by this Deed or that
          other agreement or document.

     (i)  A reference to any LEGISLATION or to any provision of any legislation
          includes any modification or re-enactment of it, any legislative
          provision substituted for it, and all regulations and statutory
          instruments issued under it.

     (j)  A reference to $ is to Australian currency unless otherwise specified.

     (k)  Each Schedule and exhibit and each certificate and document delivered
          under this Deed forms part of this Deed.

     (l)  A reference to CONDUCT includes any omission, representation,
          statement or undertaking, whether or not in writing.

     (m)  Mentioning anything after INCLUDE, INCLUDES or INCLUDING does not
          limit what else might be included.

     (n)  Any statement made by a party on the basis of its KNOWLEDGE, BELIEF OR
          AWARENESS, is made on the basis that the party has, in order to
          establish that the statement is true and not misleading in any
          material respect, made all reasonable enquiries of the officers,
          managers, employees and other persons who could reasonably be expected
          to have information relevant to the matters to which the statement
          relates and that, as a result of those enquiries, the party has no
          reason to doubt that the statement is true and not misleading in any
          material respect.

     (o)  In the interpretation of this Deed, no rules of construction are to
          apply to the disadvantage of one party on the basis that the party put
          forward this Deed or any part of it,

1.3  PAYMENTS AND CURRENCY

     (a)  (GENERAL) Subject to paragraph (c), where this Deed specifies a
          currency in which a payment must be made, the payment must be

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                                                                         PAGE 13
   20

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          made in that currency and the person obliged to make the payment will
          bear any exchange rate risk. Where no currency is specified then,
          unless the relevant parties agree otherwise, the payment must be made
          in Australian dollars.

     (b)  (COMPLETION STATEMENT AND TAX PROVISION) Notwithstanding the fact that
          the amounts in the Completion Statement are shown in Australian
          currency, the adequacy of a provision, reserve, accrual or allowance
          or, in the case of an asset (such as Relief in the form of a right to
          repayment), the value of that asset in respect of a Group Member,
          whether in the Completion Statement or in the Tax Provision itself, is
          to be measured by reference to:

          (i)  in the case of the Completion Statement, any local currency
               amount which has been converted into Australian currency for the
               purposes of the Completion Statement (and not the corresponding
               amount of Australian currency); and

          (ii) in the case of the Tax Provision, any local currency amount in
               which the relevant liability to Tax or Relief arises, using the
               same conversion rate as is used in the Completion Statement (and
               not the corresponding amount of Australian currency),

          so that the Vendors shall not incur any liability nor obtain any
          benefit under this Deed merely because of a movement in the relevant
          exchange rate after the Completion Date.

     (c)  (TOTAL PURCHASE PRICE) Notwithstanding any other provision of this
          Deed, the Total Purchase Price shall be Payable in US Dollars
          calculated at the exchange rate of AUD1 = USD0.658 and the adjustments
          to the Purchase Price and the Total Purchase Price (if any) payable
          under any Transaction Document shall be in AUD.

2.   CONDITIONS PRECEDENT
- --------------------------------------------------------------------------------

2.1  APPLICATION OF CONDITIONS PRECEDENT

     Clause 2.2 applies in its entirety to the sale and purchase of the Sale
     Shares and Clauses 5 and 6 do not bind the parties unless and until each of
     the conditions in Clause 2.2 is satisfied in respect of such sale or waived
     by the Vendors and the Purchaser.

2.2  CONDITIONS PRECEDENT

     The conditions precedent to which Clauses 5 and 6 of this Deed are subject,
     in the manner specified in Clause 2.1, are as follows:

     (a)  (FOREIGN INVESTMENT APPROVAL) The Purchaser files a notice under
          section 25 of the Foreign Acquisitions and Takeovers Act and any of
          the following occurs:

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                                                                         PAGE 14
   21

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          (i)   (NOTICE OF NO OBJECTION) The Purchaser receives a notice from
                the Australian Treasurer to the effect that there is no
                objection to the acquisition of the BTIA Shares under the
                Commonwealth Government's foreign investment policy. The notice
                must be either unconditional or impose conditions which are not
                materially prejudicial to the interests of the Purchaser,

          (ii)  (EXPIRATION OF WAITING PERIOD) The period provided under the
                Foreign Acquisitions and Takeovers Act, during which the
                Treasurer may make an order under section 18 or an interim order
                under section 22 in relation to the acquisition of the BTIA
                Shares, elapses without such an order being made.

          (iii) (EXPIRATION OF INTERIM ORDER) If an interim order under section
                22 is made, the subsequent period for making a final order
                prohibiting the acquisition of the BTIA Shares elapses without a
                final order being made.

     (b)  (FINANCIAL SECTOR (SHAREHOLDINGS) ACT APPROVAL) The Purchaser files an
          application to acquire a 100% stake in BTAL, Bankers Trust Life
          Limited and BT Australia Limited under section 13(l)13(l) of the
          Financial Sector (Shareholdings) Act 1998 (the FSSA) and receives a
          notice from the Australian Treasurer approving the application under
          the FSSA. The notice must be either unconditional or impose conditions
          which are not materially prejudicial to the interests of the
          Purchaser.

     (c)  (HSR ACT) The Purchaser's Guarantor and the Purchaser on the one hand
          and the Warrantor and the Vendors' Guarantor on the other hand file
          notifications pursuant to the HSR Act and the applicable waiting
          period and any extensions thereof expire or terminate.

     (d)  (INSURANCE REGULATIONS) The Purchaser's Guarantor and the Purchaser
          seek and obtain necessary approvals from the insurance regulatory
          authorities in the State of Iowa and the State of New York as may be
          required for the Purchaser to complete the transactions contemplated
          by the Transaction Documents, where such approvals are either
          unconditional or impose conditions which are not materially
          prejudicial to the interests of the Purchaser's Guarantor or the
          Purchaser, and such approvals have not expired or been rescinded
          before the Completion Date.

2.3  FURTHER CONDITIONS

     Completion of the sale and purchase of:

     (a)  (OIR APPROVAL) the shares in BT Funds Management (NZ) Limited, BT New
          Zealand Nominees Limited and BT Portfolio Services (NZ) Limited is
          conditional upon the Purchaser receiving in writing any consent
          necessary under the Overseas Investment Regulations 1995 of New
          Zealand for the implementation of this Deed.

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                                                                         PAGE 15
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (b)  (HONG KONG SFC) the shares in BTFMA is conditional upon approval from
          the SFC to the Purchaser or its nominee becoming a substantial
          shareholder (as defined in the Securities and Futures Commission
          Ordinance (Cap.24 in the laws of Hong Kong)) in BTFMA.

     (c)  (SINGAPORE MAS) the shares in BTFMS is conditional upon approval from
          the MAS to the Purchaser or its nominee acquiring the entire issued
          share capital of BTFMS.

     The consent, clearance or authorisation (as the case may be) and approvals
     referred to above must be either unconditional or impose conditions which
     are not materially prejudicial to the interests of the Purchaser.

2.4  BENEFIT OF CONDITIONS

     Each of the conditions in Clauses 2.2 and 2.3 are for the benefit of the
     Vendors and the Purchaser and may only be waived if they all agree to do
     so.

2.5  SATISFACTION OF CONDITIONS

     The Purchaser shall file all necessary notices or applications in relation
     to, and the Vendors and the Purchaser shall use all reasonable endeavours
     to ensure the satisfaction of, each of the conditions in Clauses 2.2 and
     2.3, as soon as practicable. Without limiting the generality of the
     foregoing:

     (a)  the Purchaser will promptly inform the Vendors if any condition has
          been imposed in respect of any matter referred to in Clause 2.2 or 2.3
          and whether that condition is considered materially prejudicial to the
          Purchaser's interests;

     (b)  the Purchaser shall in respect of any application for approval
          referred to in Clause 2.2 or 2.3 (unless the Vendors waive such right
          of consultation or disclosure, as applicable):

          (i)  consult with the Vendors as to the content of any such
               application or other material correspondence in relation to such
               application; and

          (ii) provide a copy of all or part of any such application in the
               usual manner (deleting such matters as are confidential or
               commercially sensitive for the Purchaser, in its discretion)
               before lodgement of any such application or, in respect of the
               applications under Clause 2.2(d), as soon as reasonably
               practicable after the date of this Deed; and

     (c)  the Vendors shall provide such information as may reasonably be
          requested by the Purchaser in connection with any such application for
          approval.

     The Purchaser shall at all times keep the Vendors informed of progress in
     satisfying the conditions listed in Clauses 2.2 and 2.3 and of any material
     developments in relation thereto and shall, on the satisfaction of each
     condition, immediately notify the Vendors in writing of that fact.

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                                                                         PAGE 16
   23

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

2.6  TERMINATION FOR FAILURE TO SATISFY CONDITIONS PRECEDENT

     This Deed will automatically terminate on the close of business on the Drop
     Dead Date if, any of the conditions precedent in Clause 2.2 is not
     satisfied or waived by the Vendors and the Purchaser by that time. Any
     termination shall be without prejudice to any right any party may have
     against another party or parties if it or they did not use reasonable
     endeavours as required in Clause 2.5 or for breach of Clause 17 but
     otherwise no party shall have any liability by reason of the termination.

2.7  FAILURE TO SATISFY FURTHER CONDITIONS

     The failure to satisfy any of the conditions in Clause 2.3 shall not
     entitle any party to terminate this Deed. If any condition in Clause 2.3 is
     not satisfied or waived by the Vendors and the Purchaser by the Drop Dead
     Date, then the sale and purchase of the Sale Shares in the relevant Company
     affected by that failure shall not proceed as contemplated in Clause
     6.7(d). Any failure to proceed shall be without prejudice to any right any
     party may have against another party or parties if it or they did not use
     reasonable endeavours as required in Clause 2.5, but otherwise no party
     shall have any liability by reason of that sale and purchase not proceeding
     (other than in relation to the adjustment of the Purchase Price as provided
     for in Clause 12.1 (b)).

2.8  OFFSHORE IB BUSINESSES

     The Purchaser acknowledges that the Offshore IB Businesses are not the
     subject of sale pursuant to this Deed and may be retained or sold by the
     relevant member(s) of the Vendors' Group as they see fit.

2.9  MALAYSIAN SECURITIES COMMISSION

     The Purchaser must apply promptly after the date of this Deed for the
     written approval of the Malaysian Securities Commission for the indirect
     change in control of a shareholder in Commerce Asset Fund Managers Sdn Bhd
     that will arise on Completion of the sale and purchase of the BTIA Shares.
     If such approval is not obtained by the Completion Date, the shareholding
     interest in that company held by BTAL will be transferred, subject to the
     rights of pre-emption, if any, triggered as a result of such proposed
     transfer, on the Completion Date to a member of the Deutsche Group
     nominated by the Vendors' Guarantor at its book value and, in any case,
     Completion of the sale and purchase of the BTIA Shares will proceed.
     Notwithstanding the previous sentence, the Purchaser shall continue to
     comply with Clause 2.5 in respect of the relevant application and, if such
     approval is received on or before the Drop Dead Date unconditionally or on
     terms which are not materially prejudicial to the interests of the
     Purchaser and if the transfer to the member of the Deutsche Group is
     effected without the exercise of the rights of pre-emption and if the
     rights of pre-emption triggered by the following proposed transfer to the
     Purchaser under this Clause 2.5 are not exercised, the Purchaser shall
     acquire such shareholding interest from the then current holder for the
     same book value within 3

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                                                                         PAGE 17
   24

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     business days of receipt of such approval or such later time, if so
     required in order to comply with the rights of pre-emption provisions.

3.   GROUP CONDUCT BEFORE AND AFTER COMPLETION
- --------------------------------------------------------------------------------

3.1  GENERAL

     (a)  Other than any action or transaction expressly contemplated by this
          Deed or by any other Transaction Document, the Vendors shall:

          (i)   ensure that the Group continues to carry on the Business in the
                ordinary and usual course (but subject to the terms of the
                Stewardship Document);

          (ii)  use reasonable endeavours to preserve the Group's present
                business organisation and relationships;

          (iii) use reasonable endeavours to preserve the Group's rights,
                goodwill, reputation and relations with its customers and others
                with whom the Group Members conduct business; and

          (iv)  ensure that any and all insurance contracts which cover Group
                Members as at the date of this Deed are maintained until the
                Completion Date.

          For the purposes of this Deed ORDINARY AND USUAL COURSE OF BUSINESS
          and similar phrases includes taking any action to ensure or facilitate
          compliance with any new regulatory or legislative requirements
          (including, for example, MIA Transition).

     (b)  Without limiting the generality of paragraph (a) above and except as
          contemplated by this Deed or any other Transaction Document, the
          Vendors shall ensure that, subject to Clause 3.2, no Group Member
          does, or agrees to do, any of the following things during the period
          from the date of this Deed to the Completion Date (inclusive) without
          the prior written consent of the Purchaser.

          (i)    (NO BUSINESS ACQUISITIONS) Acquire any assets the consideration
                 for which is in excess of $2,000,000.

          (ii)   (NO DISPOSALS) Dispose of or create any Encumbrance, over any
                 asset of a value, individually or in the aggregate, in excess
                 of $2,000,000.

          (iii)  (NO FINANCIAL INDEBTEDNESS) Incur any financial indebtedness or
                 obtain any financial accommodation or give any guarantee or
                 indemnity in excess of $2,000,000 or any series of similar
                 commitments which would involve liability in excess of
                 $2,000,000 in total.

          (iv)   (NO MATERIAL COMMITMENTS) Enter into any other commitment which
                 will involve expenditure by the Group Member in excess of
                 $2,000,000 or any series of similar

- --------------------------------------------------------------------------------
                                                                         PAGE 18
   25

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

                 commitments which would involve expenditure by the Group
                 Member in excess of $2,000,000 in total.

          (v)    (NO NEW ISSUES) Allot or issue any share capital or any
                 securities or other rights which are convertible into share
                 capital of any Group Member.

          (vi)   (NO DISTRIBUTIONS) Declare or pay any dividend, make any other
                 distribution of its profits, reserves or assets, reduce its
                 capital, repay any shareholder's loan or advance or buy back
                 any of its shares.

          (vii)  (NO ALTERATIONS TO CONSTITUENT DOCUMENTS) Make any alterations
                 to its constitution.

          (viii) (EMPLOYMENT CONDITIONS) Vary, whether orally or in writing, the
                 terms of employment, including severance, redundancy or change
                 in control entitlements, of any Employees.

          (ix)   (NO AFFILIATE TRANSACTIONS) Enter into any transaction with BTC
                 or any other member of the Deutsche Group (but not including
                 Group Members) involving payments in excess of $500,000 in the
                 aggregate.

          (x)    (MOVEMENT OF EMPLOYEES TO FM) Move or re-allocate any Employees
                 from the IB Businesses or Corporate Services to the FM
                 Businesses.

          (xi)   (NO HIRE) Hire any employee with an annual total compensation
                 (excluding discretionary bonuses) in excess of $100,000.

          (xii)  (NO COMPENSATION INCREASES) Increase or commit to increase the
                 compensation, including any commission, bonus, retention
                 payments or other direct or indirect remuneration, paid or
                 payable to any Employee (other than normal compensation
                 increases made in the ordinary course of business consistent
                 with prior practice).

          (xiii) (NO CAPITAL EXPENDITURES) Make any capital expenditures in
                 excess, in aggregate, of $1,000,000.

          (xiv)  (NO ALTERATIONS TO ACCOUNTING PRINCIPLES) Amend, modify or
                 supplement in any respect the Accounting Principles.

          (xv)   (NO ALTERATIONS TO CONTRACTS) Create, renew, amend, terminate
                 or cancel, or take any other action that may result in the
                 creation, renewal, amendment, termination or cancellation of,
                 any Contract except in the ordinary course of business.

          (xvi)  (NO TERMINATIONS) Terminate the employment of any Employee of
                 the Business at the Senior Vice President level or above.
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                                                                         PAGE 19
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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          (xvii)  (NO NEW LINE OF BUSINESS) Enter into any new line of business.

          (xviii) (NO CORPORATE RESTRUCTURING) Effect any restructuring relating
                  to or affecting the Group other than the Group Restructuring.

3.2  FIDUCIARY AND CERTAIN INVESTMENT BANKING ACTIVITIES

     Nothing in Clause 3.1 restricts, or requires the Purchaser's consent to,
     any action which may be undertaken by a Group Member:

     (a)  as manager, trustee or custodian of a collective investment scheme or
          in any other fiduciary capacity;

     (b)  in the ordinary and usual course of carrying out the investment
          banking business of the Group's Sales and Trading Division, Finance
          Division or Equities Division; or

     (c)  in the performance of any rights or obligations under any Transaction
          Document.

     Any transaction not capable of being undertaken without alteration of the
     management or credit approval limits applicable as at the date of this Deed
     would not be entered into in the ordinary and usual course of business.

3.3  GROUP RESTRUCTURING

     The Purchaser acknowledges and consents to the implementation of the Group
     Restructuring and the Vendors undertake to complete the Group Restructuring
     before the Completion Date except in respect of the payment of dividends
     declared on or before the Completion Date which dividends the parties shall
     procure will be paid on the dates determined in accordance with Schedule 3.

3.4  CONTINUATION OF INFRASTRUCTURE SUPPORT

     (a)  (SERVICES TO CONTINUE) The Warrantor must ensure that all
          Infrastructure Support provided to the FM Businesses by the BTIB Group
          or by a member of the Vendor's Group as at the date of this Deed,
          continues to be provided to the FM Businesses, on no less favourable
          terms, for such transition period after the Completion Date as the
          Purchaser reasonably requires (but not exceeding 6 months) to replace
          those services without any material adverse effect on the FM
          Businesses.

     (b)  (SHARED SERVICES) The Warrantor and the Purchaser must use all
          reasonable endeavours to procure that the relevant companies enter
          into the Shared Services Agreements at or prior to the Completion Date
          in respect of the services to be provided by members of the Vendors'
          Group to certain of the Group Members and by certain Group Members to
          members of the Vendors' Group, together with

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                                                                         PAGE 20
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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          any other services required to be provided under paragraph (a) or
          otherwise agreed by the parties.

     (c)  (PURCHASER'S ROLE) Subject to the arrangements made under paragraphs
          (a) and (b), the Purchaser shall be responsible for providing
          Infrastructure Support to the Group and the Offshore FM Businesses
          from the Completion Date and shall use all reasonable endeavours to
          ensure that it is in a position to do so. This obligation shall only
          apply in respect of IB Businesses if and for so long as the Purchaser
          owns them.

     (d)  (CO-OPERATION) Subject to the arrangements made under paragraphs (a)
          and (b), the Vendors and the Purchaser shall cooperate and do all
          things reasonably necessary to achieve an orderly handover from the
          Vendors' Group to the Purchaser of the responsibility for providing
          Infrastructure Support to the Group and the Offshore FM Businesses.
          This obligation shall only apply in respect of IB Businesses if and
          for so long as the Purchaser owns them.

3.5  TRANSITIONAL ARRANGEMENTS

     On and from the date of this Deed to the Completion Date the following
     arrangements shall apply to assist in ensuring a smooth and efficient
     transfer of the Business:

     (a)  the Vendors shall ensure that the Purchaser Entities and their
          Officers and Advisers are given reasonable access during normal
          business hours to inspect the assets, properties, books of accounts,
          records and documents of the Business;

     (b)  the Purchaser Entities and their Officers and Advisers shall keep
          confidential any confidential information so obtained;

     (c   the Vendors' Group and the Purchaser Entities shall ensure that they
          provide such reasonable assistance as requested by the other party for
          the purposes of Clause 3.4 and the Shared Services Agreements;

     (d)  the Vendors' Group shall ensure that the Purchaser has reasonable
          access to all Employees and clients of the Business;

     (e)  the Vendors shall provide the Purchaser with an office in the Group's
          Chifley Tower premises for the purpose of monitoring and implementing
          the transitional arrangements under Clause 3.4 to Clause 3.6. The
          office will be of a size and with access to facilities necessary for
          this purpose; and

     (f)  the Warrantor shall ensure that the Stewardship Committee consists of
          representatives of the Purchaser in a number equal to the number of
          representatives of the Warrantor.

3.6  IB LINKAGES

     As soon as practicable after the date of this Deed, the Warrantor shall
     procure that the Purchaser is provided with sufficient information to
     enable

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                                                                         PAGE 21
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     the Purchaser to determine the Employees and services that are, as at the
     date of this Deed, provided to or shared with the FM Businesses by the BTIB
     Group or Corporate Services (respectively, SHARED EMPLOYEES and SHARED
     SERVICES). Within 10 business days of receipt of such information, the
     Purchaser must notify the Warrantor of the Shared Employees and Shared
     Services it requires for the purposes of running the FM Businesses with
     effect from the Completion Date and:

     (a)  any Shared Services notified by the Purchaser will form part of the
          FM Businesses for all purposes;

     (b)  any Shared Employees notified by the Purchaser will form part of the
          FM Businesses for all purposes; and

     (c)  any Shared Services and Shared Employees not notified by the Purchaser
          will remain or form part of the BTIB Group.

3.7  CLIENT CONFIDENTIAL INFORMATION

     The Warrantor shall ensure that, from the date of this Deed to the
     Completion Date, none of the members of the Deutsche Group or any of
     their respective employees use any Client Confidential Information to
     develop, market, offer for sale or sell any of its fund management products
     (other than, until the Completion Date, the products of the FM Business) to
     any person.

4.   EMPLOYEE ARRANGEMENTS
- --------------------------------------------------------------------------------

     (a)  (RETENTION ARRANGEMENTS) The Purchaser shall be responsible to make
          whatever arrangements it may consider necessary or desirable with
          effect on and from the Completion Date to secure from such time the
          continuing services of any Employees.

     (b)  (VENDORS' ROLE) The Vendors have no obligation to use any endeavours
          to retain any Employees in employment or to make any arrangements to
          seek to ensure that their employment or services continue before or
          after the Completion Date. The Purchaser shall not be entitled to make
          any Claim before or after the Completion Date against any member of
          the Vendors' Group nor shall any right of rescission or termination of
          any Transaction Document arise by reason of any person ceasing at any
          time to be an Employee.

     (c)  (REDUNDANCY INDEMNITY FROM THE PURCHASER) The Purchaser shall
          indemnify the Vendors and the Warrantor for any loss suffered or
          incurred by any of them (including as a result of any reduction made
          in calculating the Net Assets to reflect a payment made by a Group
          Member before the Completion Date) as a result of:

          (i)   any Employee being made redundant after the date of this Deed
                but before the Completion Date at the written request of the
                Purchaser; or

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                                                                         PAGE 22
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          (ii)  any Claim made against the Vendors or the Warrantor by any
                Employee where a provision has been in made in the Completion
                Statement in accordance with section 3.3 of the Accounting
                Principles but only to the extent of that provision.

     (d)  (COC PLANS AND REDUNDANCY POLICIES) The Purchaser represents and
          warrants that it is aware of the terms of the plans called the Bankers
          Trust New York Corporation Change in Control Severance Plan I and
          Bankers Trust New York Corporation Change in Control Severance Plan II
          (each a PLAN and, together, the PLANS) and the policies known as the
          BTAL Redundancy Policy for Professional Employees and BTAL Redunduncy
          Policy for Fortnightly Employees (each a POLICY and, together the
          POLICIES) copies of which were included in the Disclosure Material.

     (e)  (COC PAYMENTS) The Vendors shall ensure that all amounts to which
          Employees become entitled as a direct result of the merger between BTC
          and Circle Acquisition Corporation will be paid to those Employees on
          or before the Completion Date. This obligation does not relate to
          amounts payable pursuant to the Plans or Policies.

     (f)  (OBLIGATIONS TO EMPLOYEES) The Purchaser shall (or shall procure one
          of its Related Bodies Corporate to) with effect from the Completion
          Date and until 4 June 2001:

          (i)   provide similar plans to the Plans or similar benefits as
                provided under the Plans, to the extent referred to in clause 10
                of those Plans; and

          (ii)  provide or continue to provide all Employees who are employed by
                the Group or the Offshore FM Businesses at the Completion Date
                with Comparable Employment (as defined in clause 10 of the Plan
                in which they participate) or pay to any Employee who is not
                provided with Comparable Employment (or who is made Redundant
                (as defined in clause 2.8 of the Policies)) their full
                entitlements under the Plan and/or Policy in which the Employee
                is a participant.

     (g)  (INDEMNITY FROM THE PURCHASER) The Purchaser shall indemnify the
          Vendors' Group against any Claim arising from the Purchaser's failure
          to fulfil its obligations under paragraph (f). Any of the Vendors may
          enforce this indemnity in its own name and/or on behalf of any other
          member of the Vendors' Group.

     (h)  (NO POACHING) For a period of 12 months from the date of execution
          of this Deed:

          (i)   the Warrantor will ensure that none of the Deutsche Group shall
                solicit or endeavour to entice away, employ or offer to employ
                any Employee; and

          (ii)  the Purchaser shall not, and shall ensure that its Related
                Bodies Corporate do not, entice away, employ or offer to employ
                any person who, as at the Completion Date, is an

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                                                                         PAGE 23
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

                employee of BTC and its Closely-held Subsidiaries in the United
                States of America or Japan who conduct funds management
                activities.

     (i)  (NO POACHING CARVE-OUT) Paragraph (h) does not prohibit any members of
          Deutsche Group or the Purchaser and its Related Bodies Corporate (as
          applicable) from employing or seeking to employ any such employee:

          (i)   who seeks employment with one of those entities on his or her
                own initiative; or

          (ii)  who responds to a bona fide public advertisement for a vacant
                position with one of those entities provided that the
                advertisement is not targeted specifically at the employee
                concerned,

          in each case without any direct or indirect solicitation by or on
          behalf of any member of the Deutsche Group or the Purchaser and its
          Related Bodies Corporate, as the case may be. If paragraph (i) or (ii)
          apply, the new employer must provide the other parties with
          information to establish the application of paragraph (i) or (ii) on
          request.

     (j)  (NO POACHING CARVE-OUT FOR BTIB EMPLOYEES) Paragraph (h) does not
          prohibit any members of the Deutsche Group from employing or seeking
          to employ any BTIB Employee (as defined in the IB Deed).

5.   SALE AND PURCHASE
- --------------------------------------------------------------------------------

     On Completion:

     (a)  each Vendor will sell those of the Sale Shares of which it is holder
          (as specified against that Vendor's name in Schedule 1) for the
          Purchase Price of those shares; and

     (b)  the Purchaser will purchase those Sale Shares for that Purchase Price
          free and clear of all Encumbrances.

6.   COMPLETION
- --------------------------------------------------------------------------------

6.1  PLACE FOR COMPLETION

     Subject to Clause 6.7, Completion will take place at the offices of
     Sullivan & Cromwell in New York, New York before 3 pm on the Completion
     Date.

6.2  DELIVERY OF TITLE DOCUMENTS

     Subject to Clause 6.7, the Vendors shall ensure that the following
     documents are delivered to the Purchaser on or before the Completion Date:

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                                                                         PAGE 24
   31
                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (a)  (SHARE CERTIFICATES) The share certificates (if any) in respect of the
          Sale Shares.

     (b)  (TRANSFERS) Transfers in registrable form (subject only to payment of
          stamp duty, if applicable) in favour of the Purchaser or the
          Purchaser's nominee (being a nominee that is a Closely-held Subsidiary
          of the Purchaser's Guarantor), duly executed by each registered holder
          as transferor of the Sale Shares and, in the case of BTFMS, together
          with such other documents as may be required for submission to the
          Commissioner of Stamp Duties for the purpose of stamping the transfers
          of the Sale Shares. The Purchaser's Guarantor enters into this Deed in
          its own right and as trustee for any nominee pursuant to this Clause
          to the intent that any such nominee may enforce this Deed to the same
          extent as if it had executed this Deed as the Purchaser.

     (c)  (POWERS OF ATTORNEY) A power of attorney in the form set out in
          Schedule 5 granted by each registered holder of the Sale Shares.

     (d)  (SOLD NOTES FOR BTFMA) One sold note executed by BTID in respect of
          349,999 common shares in BTFMA and one sold note executed by BTNHK in
          respect of 1 common share in BTFMA.

6.3  DELIVERY OF GENERAL DOCUMENTS

     Subject to Clause 6.7, on the Completion Date, the Vendors shall deliver
     the following documents to the Purchaser:

     (a)  (RECORDS) For each Group Member, the register of members, register of
          charges, minute books, ledgers, journals and books of account, the
          certificate of registration (or equivalent document), the common seal
          (if any), share certificate books, and all records and documents
          relating to the business and property of the Group Member.

     (b)  (DISCLOSURE MATERIAL) The Disclosure Material.

     (c)  (RESIGNATIONS) The written resignation of each director and any
          secretary (if any) of each Group Member who is so nominated by the
          Purchaser or the Vendors at least 5 days prior to the Completion Date
          with effect from Completion, subject to the requirement in respect of
          BTFMA to maintain at all times one dealing director as approved by the
          SFC, in respect of BTFMS to maintain a director who is resident in
          Singapore and a managing director approved by the MAS and, in respect
          of any other Group Member, any other legal or regulatory requirements
          concerning the composition of the relevant board of directors.

     (d)  (TRANSACTION DOCUMENTS) The Transaction Documents (other than the IB
          Deed) as executed by the relevant member of the Vendors' Group.

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                                                                         PAGE 25
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     (e)  (INTRAGROUP AGREEMENTS) Documents (signed by each of the parties to
          the agreements respectively listed in Schedule 8) cancelling such of
          those agreements as nominated by the Warrantor. The Purchaser
          acknowledges that some or all of these agreements may be cancelled
          before such time if so determined by the Warrantor,

     (f)  (INTER-COMPANY AGREEMENTS) Written evidence to the reasonable
          satisfaction of the Purchaser that, other than in respect of such
          arrangements as are notified in writing by the Purchaser to the
          Vendors within 5 business days before the Completion Date:

          (i)   all inter-company accounts (other than as contemplated in Clause
                6.3(h)) between any member of the Deutsche Group (other than
                Group Members), on the one hand, and any Group Member on the
                other hand; and

          (ii)  all intercompany agreements (other than Parent Support
                Obligations, the Transaction Documents, the agreement
                contemplated by Clause 6.11, any agreements entered into in
                accordance with Clause 6.8 and the agreement referred to in
                Clause 6.12, and subject to Clause 6.3(e)) between any member of
                the Deutsche Group (other than Group Members), on the one hand,
                and any Group Member, on the other hand,

          shall have been terminated in writing.

     (g)  (REPAYMENT OF FACILITY) Written acknowledgement that the debt
          described in Schedule 9 has been fully and finally repaid in
          accordance with that Schedule.

     (h)  (FM BUSINESSES FACILITY) Documentation in a form reasonably
          satisfactory to the Purchaser under which the Warrantor agrees to
          provide a facility for a period of 3 months from the Completion Date
          for the benefit of BTAL for up to an amount of $1,250,000,000 which is
          available throughout that period to be used by BTAL for the FM
          Businesses (including in the margin lending business) carried on and
          conducted in Australia or New Zealand by the Group on terms no less
          favourable to BTAL than the facility in place as at the date of this
          Deed.

     The Vendors may effect delivery of the documents described in paragraphs
     (a) and (b) above by making them available at the offices of any of the
     Companies.

6.3A LEGAL OPINION

     On or before the Completion Date, the Warrantor shall provide to the
     Purchaser's Guarantor and the Purchaser's Guarantor shall provide to the
     Warrantor customary legal opinions in relation to their due execution of
     the Transaction Documents and the due execution of the Transaction
     Documents by their respective Related Bodies Corporate.

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                                                                         PAGE 26
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

6.4  APPROVAL OF TRANSFERS

     Subject to Clause 6.7, the Vendors shall ensure that a meeting of the
     directors of each Company is held, or resolutions are otherwise duly
     passed, on or before the Completion Date at which the directors resolve:

     (a)  to approve the registration of the transfers of the relevant Sale
          Shares (subject only to payment of stamp duty, if applicable); and

     (b)  to issue new share certificates (if required) for the relevant Sale
          Shares in the names of the transferees (subject only to payment of
          stamp duty, if applicable).

6.5  COMPLETION DATE BOARD MEETINGS

     Subject to Clause 6.7, the Vendors shall ensure that a meeting of the
     directors of each Group Member is held on or before the Completion Date at
     which the nominees of the Purchaser, subject to the approval, if required,
     of the MAS in respect of BTFMS and of the SFC in respect of BTFMA, are
     appointed as directors and secretaries and the resignation of each
     resigning director and secretary is accepted.

6.6  PAYMENT OF PURCHASE PRICE, RE-FINANCING AND TRANSACTION DOCUMENTS

     On the Completion Date and subject to compliance with Clauses 6.2 to 6.5 by
     the Vendors, the Purchaser shall:

     (a)  pay an amount equal to the Total Purchase Price by telegraphic
          transfer in immediately available funds to an account or accounts as
          nominated by the Vendors;

     (b)  subject to Clause 6.7, deliver to the Vendors one bought note executed
          by the Purchaser in respect of 349,999 common shares in BTFMA and one
          bought note executed by the Purchaser in respect of 1 common share in
          BTFMA;

     (c)  subject to Clause 6.7, provide to the Vendors a cheque made payable to
          the Government of the Hong Kong Special Administration Region for an
          amount in Hong Kong dollars calculated by the Vendors to be the Hong
          Kong dollar equivalent to 0.25% of the higher of the Purchase Price
          payable for Sale Shares in BTFMA as set out in Column 4 of Schedule 1
          and the value of those Sale Shares as determined from BTFMA's latest
          audited accounts;

     (d)  subject to Clause 6.7, provide to the Vendors a written undertaking in
          favour of the Inland Revenue Department of the Hong Kong Special
          Administrative Region to pay all stamp duty properly assessed under
          the Stamp Duty Ordinance on the transfer of the Sale Shares in BTFMA;
          and

     (e)  deliver counterparts of the Transaction Documents delivered by the
          Vendors in accordance with Clause 6.3(d) executed by it or a Purchaser
          Entity (as the case may be) to which it is a party.

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                                                                         PAGE 27
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------
6.7  DELAY IN SATISFYING CONDITIONS IN CLAUSE 2.3

     (a)  If any of the conditions for Completion of the sale and purchase of
          the Sale Shares (the RELEVANT SHARES) in a particular Company (the
          RELEVANT COMPANY) specified in Clause 2.3 have not been satisfied or
          waived by the Vendors and the Purchaser on or before the Completion
          Date, the obligations of the parties in respect of the Relevant Shares
          and the Relevant Company under Clauses 6.1,6.2, 6.3(a) and (c), 6.4,
          6.5 and (if the Relevant Company is BTFMA) 6.6(b), (c) and (d) shall
          be deferred until the business day (the RELEVANT DATE) which is 2
          business days after those conditions are duly satisfied or waived.

     (b)  The Purchaser shall be responsible for the day to day management of
          the Companies on and from Completion of the sale and purchase of the
          BTIA Shares and, if Clause 6.7(a) applies, shall ensure that the
          Business of the Relevant Company is carried on in the ordinary and
          usual course until the earlier of the Relevant Date and the Drop Dead
          Date, provided that the Purchaser shall ensure that the Relevant
          Company does not do or agree to do, any of the things specified in
          Clause 3.1(b), subject to Clause 3.2, during that period without the
          prior written consent of the Warrantor.

     (c)  If the Relevant Date occurs on or before the Drop Dead Date, the
          Warranties given in respect of the Relevant Shares and Relevant
          Company shall be taken to have been given on, and with effect as at,
          the Relevant Date.

     (d)  If the Relevant Date does not occur on or before the Drop Dead Date,
          then the sale and purchase of the Relevant Shares shall not proceed
          and:

          (i)   the Purchase Price or Adjusted Purchase Price (as the case may
                be) of Relevant Shares shall be refunded to the Purchaser as
                provided for in Clause 12.1(b);

          (ii)  the Purchaser shall indemnify the Vendors of the Relevant
                Company against any loss suffered by the Relevant Company or the
                Vendors as set out in paragraph (e) only to the extent to which
                the loss arises as a result of the negligence or wilful
                misconduct of an Officer of the Relevant Company; and

          (iii) the provisions of Clause 3.4 shall cease to apply in respect of
                the Relevant Company.

     (e)  For the purposes of paragraph (d)(ii), LOSS shall include:

          (i)   any decrease in the value of the net assets of the Relevant
                Company from the Completion Date to the Drop Dead Date (which
                decrease shall be determined by similar procedures and upon the
                same basis as applicable to the preparation of the Completion
                Statement under Clause 10); and

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                                                                         PAGE 28
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          (ii)  any Claims (whenever made) against the Relevant Company or any
                member of the Vendors' Group in respect of any acts or omissions
                or any breach of contract, fiduciary duty, law or the terms of
                any Authorisation by the Relevant Company or any of its Officers
                or otherwise arising from the conduct of the Business or affairs
                of the Relevant Company between the Completion Date and the Drop
                Dead Date.

6.8  OFFSHORE FM BUSINESSES

     (a)  (IRELAND) On and from the date of this Deed, the Purchaser shall use
          reasonable endeavours to obtain all necessary regulatory approvals,
          including from the Central Bank of Ireland and the SFC, to effect a
          change in the manager of the BT International Investment Series of
          funds, as performed in Ireland, from BT Fund Managers (Ireland)
          Limited to the Purchaser or a Related Body Corporate of the Purchaser
          to have effect not before the Completion Date and no later than the
          Drop Dead Date.

          If so requested by the Purchaser, the Warrantor agrees (at the cost of
          the Purchaser) to procure the resignation of BT Trustee Company
          (Ireland) Limited as trustee of the BT International Investment Series
          or, if so requested by the Warrantor, the Purchaser agrees (at the
          cost of the Warrantor) to permit the resignation of BT Trustee Company
          (Ireland) Limited and, in either case, the Purchaser shall procure the
          appointment of a successor trustee, subject to receipt of any
          necessary regulatory and unitholder approvals.

          Pending such transfer of this Offshore FM Business, the Vendors and
          the Purchaser shall take all reasonable steps to ensure that this
          Offshore FM Businesses is carried on in the ordinary and usual course.

     (b)  (UK) On and from the date of this Deed, the Purchaser shall use
          reasonable endeavours to obtain all necessary regulatory approvals,
          including from the Securities and Futures Authority, to permit a
          Purchaser Entity to operate the FM Businesses of the Group conducted
          in the United Kingdom by BTI, such approvals to have effect not before
          the Completion Date and no later than the Drop Dead Date.

          With effect on and from the receipt of all necessary approvals
          contemplated in this paragraph (b) (CHANGEOVER DATE), the Purchaser or
          its Related Body Corporate shall make an offer of employment, in a
          form satisfactory to the Vendors, to all the then current Employees
          employed by BTI in London in carrying out the activities of this
          Offshore FM Business (RELEVANT EMPLOYEES) on terms no less favourable
          than they enjoy at such time. The Warrantor shall, at least 15
          business days before the Changeover Date, provide to the Purchaser
          sufficient details of the Relevant Employees and
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                                                                         PAGE 29
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          their terms of employment to allow the Purchaser or its Related Body
          Corporate to make such offers of employment.

          Pending such transfer of this Offshore FM Business, the Vendors and
          the Purchaser shall take all reasonable steps to ensure that this
          Offshore FM Business is carried on in the ordinary and usual course.

     (c)  (ALBERTA TREASURY IMC) On and from the Completion Date, the Warrantor
          and the Purchaser shall use all reasonable endeavours to procure the
          novation of the rights and obligations of BTC under the Individually
          Managed Client Agreement dated 8 November 1991 made between Her
          Majesty the Queen in the Right of the Province of Alberta as
          represented by the Provincial Treasurer and BTC (the ALBERTA CONTRACT)
          in favour of BTFMIL to have effect not before the Completion Date and
          no later than the Drop Dead Date. Pending the novation of the Alberta
          Contract, the Warrantor shall ensure that BTC complies with all of its
          obligations under the Alberta Contract and the Purchaser shall ensure
          that the Group Members continue to carry on the activities related to
          the Alberta Contract in the ordinary and usual course.

     (d)  (COMMON FUND IMC) Up to the Completion Date, the Warrantor shall
          ensure that BTC does not dismiss Craig McCauley as an employee (other
          than for cause) and permits him to manage US securities for the Common
          Fund Bond Portfolio under the Individually Managed Client Agreement
          dated 1 June 1995 made between the Common Fund and BTFMIL. After the
          Completion Date, the Purchaser shall make whatever arrangements are
          necessary to enable BTFMIL to continue managing that portfolio and the
          Warrantor shall have no continuing obligations under this paragraph.

6.9  POST COMPLETION LOAN BALANCES

     (a)  Except as required by the IB Deed and subject to Clauses 6.3(f) and
          (h), all outstanding amounts made available by the Deutsche Group
          (other than Group Members) to Group Members before the Completion Date
          shall be repaid in full on or before the Completion Date.

     (b)  No later than 3 months after the Completion Date, the Purchaser shall
          ensure that all monies drawn down under the facility referred to in
          Clause 6.3(h) are fully repaid.

6.10 PARENT SUPPORT OBLIGATIONS

     The Purchaser:

     (a)  will use reasonable endeavours to ensure that all Parent Support
          Obligations listed in Schedule 14 are fully released as soon as
          practicable after the Completion Date and that all other Parent
          Support Obligations are fully released as soon as practicable after
          they are identified; and

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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     (b)  indemnifies the Vendors, the Warrantor and the Vendors' Guarantor
          against any Claim arising as a result of the continued existence or
          enforcement of any Parent Support Obligation following the Completion
          Date, except, in each case, to the extent that any Parent Support
          Obligation or Claim relates to any Group Member or Offshore FM
          Business which is not ultimately sold to the Purchaser under this
          Deed.

6.11 CUSTODY ARRANGEMENTS

     The Purchaser acknowledges and agrees (despite Clause 3.1) that BTC
     proposes to formalise with Group Members on arms length terms the custody
     and sub-custody services (and services incidental to them) provided by BTC
     and BTCO to Group Members and by Group Members to BTC and BTCO as at the
     date of the Deed. The Vendors shall use reasonable endeavours to do this
     before Completion but if they are unable to do so, the Purchaser will use
     reasonable endeavours to procure that the relevant Group Members enter into
     appropriate contracts with BTC as soon as practicable after the Completion
     Date. Within a reasonable time of the Completion Date, the Purchaser and
     the relevant Group Members shall negotiate in good faith with BTCO to
     determine the basis, if any, on which the relevant members of the Group and
     BTCO may continue to provide custody and sub- custody services (and
     services incidental to them) to their respective clients,

6.12 DEUTSCHE FUNDS MANAGEMENT

     The Warrantor covenants to ensure that the agreement between Deutsche Funds
     Management and BT Portfolio Services Limited dated 8 December 1998 will not
     be terminated in consequence of the entry into or performance of this Deed.

7.   NOTICE TO COMPLETE
- --------------------------------------------------------------------------------

7.1  NOTICE BY THE PURCHASER

     If any Vendor fails to satisfy its obligations under Clauses 6.1 to 6.6 in
     respect of the BTIA Shares on the due date (the DEFAULTING VENDOR), the
     Purchaser may give the Vendors a notice requiring the Defaulting Vendor to
     satisfy those obligations within a period of 10 business days from the date
     of receipt of the notice and declaring time to be of the essence in all
     respects. If the Defaulting Vendor fails to satisfy those obligations on
     the date specified in the Purchaser's notice, the Purchaser may, without
     affecting or limiting any other rights it might have, terminate this Deed.

7.2  NOTICE BY THE VENDORS

     If the Purchaser fails to satisfy its obligations under Clauses 6.1 to 6.6
     in respect of the BTIA Shares on the due date, the Vendors may give the
     Purchaser a notice requiring it to satisfy those obligations within a
     period of

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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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     10 business days from the date of receipt of the notice, and declaring time
     to be of the essence in all respects. If the Purchaser fails to satisfy
     those obligations on the date specified in the Vendors' notice, the Vendors
     may, without affecting or limiting any other rights it might have,
     terminate this Deed.

8.   WARRANTIES, CLAIMS AND DISPUTES
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8.1  WARRANTIES AND INDEMNITY BY THE WARRANTOR

     (a)  The Warrantor represents and warrants to the Purchaser, the
          Purchaser's Guarantor and the Purchaser Entities in the terms set out
          in Parts I and II of Schedule 4 and makes no other warranties.

     (b)  Subject to the other provisions of this Clause 8, the Warrantor
          indemnifies the Purchaser against any Claim which is incurred or
          suffered by or brought or made or recovered against any Group Member
          Or in respect of any Offshore FM Business and which constitutes a
          breach of the Warranties.

8.2  WARRANTIES BY THE PURCHASER AND PURCHASER'S GUARANTOR

     The Purchaser and the Purchaser's Guarantor represent and warrant to the
     Vendors and the Warrantor in the terms set out in Part III, and undertake
     to comply with the terms set out in Part IV, of Schedule 4.

8.3  EFFECTIVE DATES

     Subject to Clause 6.7(c), the Warranties are given as at the date of this
     Deed and as at the Completion Date, except where a Warranty is expressed to
     be made as at or in respect of a particular date.

8.4  DISCLOSURES

     (a)  The Purchaser and the Purchaser's Guarantor acknowledge that the
          Vendors and the Warrantor have disclosed, or are taken to have
          disclosed, to them any matter:

          (i)   provided for or described in this Deed or any other Transaction
                Document;

          (ii)  fairly disclosed in the Disclosure Material;

          (iii) disclosed in writing to the Purchaser or the Purchaser's
                Guarantor or any of their respective directors, employees,
                Advisers or agents who have participated in the investigation
                any of them undertakes of the affairs of the Group; or

          (iv)  that would have been disclosed had searches been conducted prior
                to the Completion Date of records open to public inspection
                maintained by Australian Stock Exchange Limited, Sydney Futures
                Exchange Limited, the Australian Securities

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                                                                         PAGE 32
   39

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

                and Investments Commission, the Trade Marks Office, the, High
                Court, the Federal Court and the Supreme Courts and Land Titles
                Offices in any State or Territory in Australia and each
                equivalent Public Authority in the United States of America,
                Hong Kong, Singapore, Malaysia and New Zealand against a Vendor
                or any Group Member.

          For the purposes of this Clause, a matter is FAIRLY DISCLOSED if
          sufficient information has been disclosed that, if disclosed to a
          reasonable person (in the position of and with the Advisers used by
          the Purchaser and the Purchaser's Guarantor), that person would be
          aware of the substance and significance of the information.

     (b)  The Purchaser and the Purchaser's Guarantor acknowledge that where a
          matter has been disclosed or taken to have been disclosed to the
          Purchaser and the Purchaser's Guarantor under paragraph (a) and that
          disclosure would have prompted a reasonable person to make further
          enquiries, any matter which would have been disclosed had the
          Purchaser or the Purchaser's Guarantor made those enquiries will be
          taken to have been disclosed to the Purchaser and the Purchaser's
          Guarantor.

8.5  CONSTRUCTION

     Each Warranty is to be construed independently of the others and is not
     limited by reference to any other Warranty.

8.6  LIMITATION ON WARRANTOR'S AND VENDORS' LIABILITY

     Notwithstanding any other provision of this Deed each of the following
     applies.

     (a)  (MAXIMUM LIABILITY) Except for Warranty 3.1 in Part 1 of Schedule 4
          (the TITLE WARRANTY), the Tax Warranties, or in the case of fraudulent
          misstatement, the maximum aggregate liability of the Warrantor and the
          Vendors for breach of the Warranties (including pursuant to Clause 8.1
          (b)) will be limited to the amount of $500,000,000. In the case of a
          breach of the Title Warranty in respect of any Sale Shares, the
          maximum liability of the Warrantor and the Vendors will be the
          Purchase Price or the Adjusted Purchase Price (as the case may be) of
          those Sale Shares. In the case of a breach of the Tax Warranties, the
          maximum liability of the Warrantor and the Vendors will be the Total
          Purchase Price or the Total Adjusted Purchase Price (as the case may
          be). The particular limits set out above are subject to the overriding
          limit that the maximum aggregate liability of the Warrantor and the
          Vendors for breach of the Warranties will be limited to the Total
          Purchase Price or the Total Adjusted Purchase Price (as the case may
          be).

     (b)  (TIME LIMIT) The Warrantor and the Vendors will not have any liability
          in respect of any Claim:

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                                                                         PAGE 33
   40

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
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          (i)   under the Warranties (other than Tax Warranties), unless
                reasonable particulars of the Claim are given to the Warrantor
                or the Vendor (as applicable) before 31 March 2003; or

          (ii)  under the Tax Warranties, unless reasonable particulars of the
                Claim are given to the Warrantor or the Vendor (as applicable)
                within the period described in a law relating to Tax allowing
                the increase by a Tax Authority of a particular Tax liability,
                but in any event, before 30 June 2006. No time limit shall apply
                to any Claim under the Tax Warranties which relates to an
                obligation to pay, collect or remit withholding tax or involves
                an avoidance of Tax due to fraud or evasion by a Group Member.

     (c)  (NOTICE BEFORE COMPLETION) If the Purchaser does not comply with
          Clause 815(a), the Warrantor and the Vendors shall not be liable for
          breach of Warranty in respect of the relevant Claim whenever arising
          to the extent to which the Purchaser's failure to comply has had a
          material prejudicial effect on the Warrantors or the Vendors.

     (d)  (POST COMPLETION ACTIONS OR OMISSIONS) The liability of the Warrantor
          or the Vendors in respect of any Claim under the Warranties will be
          reduced or extinguished (as the case may be) to the extent that any
          act or omission after Completion by the Purchaser, any Related Body
          Corporate of the Purchaser or any of their Officers or any person
          acting or purporting to act on their behalf or deriving title from
          them has resulted in, or contributed to the amount of, the Claim. An
          act or omission of the Purchaser shall include any of:

          (i)   a claim, election, surrender or disclaimer made or notice or
                consent given by the Purchaser or the Group Member after
                Completion, otherwise than at the request of the Vendor under
                the provisions of this Deed;

          (ii)  a failure or omission by the Group Member to make any claim,
                election, surrender or disclaimer or give any notice or consent
                or do any other thing after Completion, the making, giving or
                doing of which was taken into account in computing a Tax
                Provision;

          (ill) a failure by the Purchaser to comply with any of its obligations
                under Clauses 8.10, 8.11 or 8.12; and

          (iv)  a failure by the Purchaser to comply with any of its obligations
                under Part IV of Schedule 4.

     (e)  (CREDIT) If after the Warrantor or the Vendor has made a payment to
          the Purchaser under a Claim made under the Warranties, the Purchaser
          receives any benefit or credit (including any Tax benefit) in respect
          of the matters to which the Claim relates, then the Purchaser shall
          immediately repay to the Warrantor a sum corresponding to the amount
          of the payment or (if less) the amount of the benefit or credit.

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                                                                         PAGE 34
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                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
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     (f)  (DISCLOSURES) It is not a breach of Warranty if the matter which is
          the subject of the Warranty or the Claim for breach of Warranty has
          been disclosed (or taken to be disclosed) by virtue of Clause 8.4.
          This provision does not apply in respect of a Tax Warranty.

     (g)  (THRESHOLDS) The Warrantor and the Vendors will not be liable to the
          Purchaser for any Claim under the Warranties unless the amount of the
          Claim suffered or incurred by the Purchaser or the Group Members:

          (i)  is for an amount in excess of $1,000,000; and

          (ii) either alone or when aggregated with the amount of any other
               claims under the Warranties properly made against the Warrantor
               and the Vendors under this Deed exceeds, in respect of a Tax
               Warranty, $50,000,000 and, in respect of any other Warranty,
               $25,000,000 and, in both cases, only to the extent of such
               excess.

     (h)  (CHANGE OF LAW OR INTERPRETATION) It is not a breach of Warranty:

          (i)  where the Claim arises as a result of any legislation not in
               force at the date of this Deed (other than Bills introduced into
               the Australian parliament in their tabled form as at 11 June
               1999), including legislation which takes effect retrospectively
               and any change in rates of Tax announced after the date of this
               Deed; or

          (ii) where the Claim arises as a result of or in respect of a change
               in the judicial or administrative interpretation of the law or
               any change in practice or policy of any Public Authority in any
               jurisdiction after the date of this Deed, including the change or
               withdrawal after the date of this Deed of any ruling,
               determination, policy or practice previously published or
               followed by any Taxation Authority.

     (i)  (RECOVERY UNDER ANY OTHER RIGHT) The Warrantor and the Vendors will
          not be liable to the Purchaser for any Claim under any Warranty to the
          extent that the Purchaser or any Group Member is or would be, but for
          this paragraph (i), entitled to claim an indemnity against, or to
          otherwise recover from a person other than the Warrantor or the
          Vendors in respect of, any loss or damage suffered by the Purchaser or
          that Group Member arising out of the Claim, whether by way of
          contract, indemnity or otherwise.

     (j)  (PROVISION) Any amount which has been included as a provision or
          allowance in the Completion Statement is not an amount which may be
          included in a Claim for breach of Warranty.

     (k)  (DOING PROHIBITED ACTS) The Warrantor and the Vendors will not be
          liable in respect of a Claim made under or in respect of this Deed
          where the liability would not have arisen but for the doing of an act,

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                                                                         PAGE 35
   42
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

          or the failure to act, by the Purchaser or the Purchaser's Guarantor
          in breach of any provision of this Deed.

     (l)  (COMPENSATING BENEFITS) If the Warrantor can demonstrate to the
          reasonable satisfaction of the Purchaser that either:

          (i)  an accrual, allowance, provision or reserve in respect of any Tax
               in respect of a Group Member in the Completion Statement or, if
               not in the Completion Statement, in the Tax Provision exceeds the
               actual liability in respect of that Tax; or

          (ii) an entitlement to any Relief which is shown as an asset in
               respect of a Group Member in the Accounts (and in this respect no
               such asset means a value of nil) is understated and the amount of
               the understatement is able to be actually availed of by the Group
               Member,

          then its liability to the Purchaser for a Claim for breach of any
          Warranty shall be reduced by the amount of the excess or the
          understatement, respectively.

     (m)  (TIMING DIFFERENCES) To the extent that a Tax Claim only involves a
          timing difference (which through the effluxion of time and the
          operation of a Tax law does not give rise to a permanent difference)
          (for example, an amount being assessable in the year ending 31
          December 1998, rather than in the succeeding year, or an amount being
          deductible in the year ending 31 December 1999 (or over that year and
          later years), rather than in the preceding year (or the 31 December
          1998 year)), then the Claim shall be limited to any interest, penalty
          or other charge levied as a result of the late payment of Tax.

8.7  NO RELIANCE

     (a)  The Purchaser and the Purchaser's Guarantor represent and warrant to
          the Vendors' Group, the Warrantor and the Deutsche Group that:

          (i)  at no time has the Warrantor or any other member of the (Vendors'
               Group or the Deutsche Group, made or given any representation,
               warranty, promise or forecast upon which the Purchaser or the
               Purchaser's Guarantor has relied except those referred to in
               Clause 8.1 (a);

          (ii) no other statements or representations:

               (A)  have induced or influenced the Purchaser or the Purchaser's
                    Guarantor to enter into this Deed or agree to any or all of
                    its terms;

               (B)  have been relied on in any way as being accurate by the
                    Purchaser or the Purchaser's Guarantor;

               (C)  have been warranted to the Purchaser or the Purchaser's
                    Guarantor as being true; or

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                                                                         PAGE 36
   43

                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

               (D)  have been taken into account by the Purchaser or the
                    Purchaser's Guarantor as being important to its decision to
                    enter into this Deed or agree to any or all of its terms;
                    and

         (iii) each has had the opportunity to make and has made reasonable
               enquiries in relation to all matters material to it which relate
               to the Group and which are not covered by the Warranties and
               satisfied itself in relation to the matters arising from those
               investigations.

     (b)  The Purchaser and the Purchaser's Guarantor acknowledge that the
          Vendors, the Warrantor and the Deutsche Group have relied on the
          agreement by the Purchaser and the Purchaser's Guarantor to make the
          representations and warranties referred to in paragraph (a) in
          selecting the Purchaser as the purchaser of the Sale Shares and
          Offshore FM Businesses, that such representations and warranties are a
          fundamental term of this Deed and that the Vendors, the Warrantor and
          the Deutsche Group would not have selected the Purchaser as the
          purchaser of the Sale Shares and Offshore FM Businesses or entered
          into this Deed or any Transaction Document with the Purchaser and the
          Purchaser's Guarantor if the Purchaser and the Purchaser's Guarantor
          were not prepared to make those representations and warranties.

     (c)  The Vendors receive the benefit of this Clause 8.7 and Clauses 8.8 and
          8.9 in their own right and as agent for each member of the Vendors'
          Group and the Deutsche Group.

8.8  STATUTORY ACTIONS

     In recognition of the representations and warranties given by the Purchaser
     and the Purchaser's Guarantor under Clause 8.7 and by the Warrantor under
     Clause 9 of Part 1 of Schedule 4 and to the extent permitted by law, each
     of the Purchaser and the Purchaser's Guarantor agree not to make and waive
     any right it may have to make any Claim against any Vendor, the Warrantor
     or any member of the Deutsche Group or any of their respective Officers,
     employees, agents or Advisers, whether in respect of the Warranties or
     otherwise, under:

     (a)  (AUSTRALIA) section 52 of the Trade Practices Act 1974, section 12DA
          of the Australian Securities and Investments Commission Act or any
          provision of Part 7.11 of the Corporations Law, or any corresponding
          or similar provision of any Australian state or territory legislation;

     (b)  (NEW ZEALAND) the New Zealand Fair Trading Act 1986, or any
          corresponding or similar provision of any other legislation in New
          Zealand; and

     (c)  (OTHER JURISDICTIONS) any similar provision of any legislation in any
          other relevant jurisdiction.

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                                                                         PAGE 37
   44
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

8.9  INDEMNITY

     (a)  If the Purchaser, the Purchaser's Guarantor, any other Purchaser
          Entity, or any person acting through them, makes a Claim against any
          member of the Vendors' Group, the Warrantor or the Deutsche Group (an
          INDEMNIFIED PARTY) contrary to Clause 8.7 or 8.8, then the Purchaser
          and the Purchaser's Guarantor will release, or will procure the
          release by the Purchaser Entity or by the person, of the Indemnified
          Party from, and will indemnify the Indemnified Party against, such a
          Claim.

     (b)  Each of the Vendors and the Warrantor has sought the indemnity
          received under paragraph (a) both on its own behalf and on behalf of
          the other Indemnified Parties and any of the Vendors or the Warrantor
          may enforce the indemnity given under paragraph (a) in its own name
          and/or on behalf of any such Indemnified Party.

     (c)  Notwithstanding any other provision of this Deed, the Purchaser agrees
          to indemnify the Vendors and the Warrantor against the amount of any
          additional Tax or in respect of the loss of any Tax benefit or Relief
          arising out of any breach of any provision in Part IV of Schedule 4.

8.10 DEALING WITH THIRD PARTY CLAIM OR TAX CLAIM AFTER COMPLETION DATE

     (a)  (THIRD PARTY CLAIM) If the Purchaser or the Purchaser's Guarantor
          become aware after the Completion Date of any circumstances which
          constitute or could (whether alone or with any other possible
          circumstances) constitute a Claim (other than a Tax Claim) against the
          Purchaser or any Group Member (other than a Claim to which Clause 8.9
          applies) which if satisfied might reasonably result in a Claim (other
          than a Tax Claim) against the Warrantor or the Vendors for breach of
          any Warranty or pursuant to the IB Indemnity (a THIRD PARTY CLAIM),
          the Purchaser must do each of the following:

          (i)   as soon as reasonably practicable give the Warrantor full
                details of the circumstances and any further related
                circumstances of which the Purchaser or the Purchaser's
                Guarantor became aware;

          (ii)  until it notifies the Warrantor in accordance with paragraph
                (i), take reasonable steps to mitigate any loss which may give
                rise to such a Claim against the Warrantor or a Vendor;

          (iii) not make any admission of liability, agreement or compromise
                with any person in relation to the Third Party Claim without
                first consulting with and obtaining the approval of the
                Warrantor (which approval shall not be unreasonably withheld or
                delayed);

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                                                                         PAGE 38

   45
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

          (iv) give the Warrantor and its Advisers access on such terms as would
               satisfy section 263 of the Tax Act, but subject to any
               confidentiality obligations which the Purchaser or a Group Member
               may be subject to arising by operation of law, to:

               (A)  the personnel and premises of the Purchaser and any Group
                    Member; and

               (B)  relevant chattels, accounts, documents and records within
                    the power, possession or control of the Purchaser and any
                    Group Member,

               to enable the Warrantor and its Advisers to examine the
               circumstances, premises, chattels, accounts, documents and
               records relating to the Third Party Claim and to obtain copies
               (including certified copies) or photographs of them at their own
               expense; and

          (v)  (A) at the Warrantor's expense, take all action in good faith and
                   with due diligence that the Warrantor reasonably directs to
                   avoid, remedy or mitigate the Third Party Claim, including
                   legal proceedings and disputing, defending, appealing or
                   compromising the Third Party Claim and any adjudication
                   of it; and

               (B) with the consent of the Purchaser (such consent not to be
                   unreasonably withheld or delayed) conduct the action using
                   professional advisers nominated by the Warrantor and
                   approved by the Purchaser for this purpose and, if requested
                   by the Warrantor, grant carriage of the action to the
                   Warrantor. If the Purchaser so requests:

                   (1)  the Purchaser shall be entitled to be kept informed of
                        all material matters pertaining to such action and
                        shall be entitled to see copies of all correspondence
                        and other documents pertaining to such action; and

                   (2)  the Warrantor and Vendor shall make no settlement or
                        compromise of the Third Party Claim, nor agree any
                        matter in the conduct of the dispute, which is likely
                        to affect the future liability of any Group Member,
                        without the prior written approval of the Purchaser,
                        such approval not to be unreasonably withheld or
                        delayed.

     (b)  (TAX CLAIMS) If the Purchaser or the Purchaser's Guarantor become
          aware after the Completion Date of any circumstances which constitute
          or could (whether alone or with any other possible

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                                                                         PAGE 39
   46
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

          circumstances) constitute a Tax Claim (other than a Claim to which
          Clause 8.9 applies), the Purchaser must do each of the following:

          (i)   as soon as reasonably practicable give the Warrantor full
                details of the circumstances and any further related
                circumstances of which the Purchaser or the Purchaser's
                Guarantor become aware, including, the provision on a continuous
                basis of any written notes of any material oral communications
                the Purchaser, the Purchaser's Guarantor, a Group Member or any
                person acting on their behalf has had with any representative of
                a Taxation Authority concerning any material matter relating to
                a Tax Claim or potential Tax Claim which relates to a period
                prior to Completion;

          (ii)  forward, or cause to be forwarded, to the Warrantor within 10
                business days of receipt by the addressee a copy of any Notice
                of Assessment, Notice of Amended Assessment, any other demand
                for payment, any notice, correspondence or other document
                relating to a Tax Claim or potential Tax Claim received from a
                Taxation Authority or any legal representative of a Taxation
                Authority or any court or tribunal in connection with or related
                to a Tax Claim;

          (iii) consult with the Warrantor as to the appropriate response to any
                notice, correspondence, demand or other document referred to in
                (ii) above, which may include without limitation, the
                preparation and lodgment of a Notice of Objection, a reference
                to the relevant Tribunal or an action in or appeal to a Court;

          (iv)  ensure, subject to subparagraph (vii) below, that a relevant
                Group Member takes all reasonable action (including the making
                of objections and appeals) that the Warrantor requests to avoid,
                resist, compromise or defend a demand or notice issued by a
                Taxation Authority which gives rise to the Tax Claim, provided
                that the Warrantor indemnifies the Purchaser and any Group
                Member against any costs which may be suffered or reasonably be
                incurred as a result of compliance with their request;

          (v)   ensure the Warrantor has control over the form and substance of
                the action to be taken and any appeals or further actions in
                respect of such action, notwithstanding that any Group Member is
                a party to such action;

          (vi)  ensure that neither it nor any Group Member will compromise or
                discontinue any proceedings taken under this Clause without the
                prior written consent of the Warrantor;

          (vii) ensure that both it and each relevant Group Member does, at the
                Warrantor's cost and expense, all that the Warrantor reasonably
                requests it to do to pursue any and all of the steps

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                                                                         PAGE 40
   47
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

               contemplated by this paragraph 8.10(b) unless in the case of an
               appeal or other relevant litigation, it reasonably considers that
               such an appeal or other relevant litigation would be injurious to
               the name or reputation of the Purchaser or a Group Member and in
               any such case, an independent tax adviser (appointed by agreement
               between the Purchaser and the Warrantor or, failing such
               agreement, selected by the President for the time being of the
               Taxation Institute of Australia) advises in writing that in his
               or her opinion the basis for any objection, application, appeal
               or other relevant litigation requested by the Warrantor would not
               be arguable on reasonable grounds and would be an abuse of
               process; and

        (viii) give the Warrantor and its Advisers access on such terms as
               would satisfy section 263 of the Tax Act, but subject to any
               confidentiality obligations which the Purchaser or a Group Member
               may be subject to arising by operation of law, to:

               (A)  the personnel and premises of the Purchaser and any Group
                    Member; and

               (B)  relevant chattels, accounts, documents and records within
                    the power, possession or control of the Purchaser and any
                    Group Member,

               to enable the Warrantor and its Advisers to examine the
               circumstances, premises, chattels, accounts, documents and
               records relating to the Tax Claim and to obtain copies (including
               certified copies) or photographs of them at their own expense.

     (c)  (FAILURE TO COMPLY) Any failure by the Purchaser to comply with this
          Clause 8.10 does not prevent the Purchaser or any Group Member either
          from recovering any loss incurred in connection with the Third Party
          Claim or the Tax Claim against it or any Group Member except to the
          extent such failure materially prejudices the ability of the Warrantor
          or the Vendor to defend the Third Party Claim or the Tax Claim or
          otherwise materially increases the liability of the Warrantor or the
          Vendors.

     (d)  (WARRANTOR'S CAPACITY) For the purposes of Clause 8.10, the Warrantor
          shall act on its own behalf and on behalf of the Vendors (if
          applicable).

8.11 TAX ASSESSMENT

     If a Tax Claim against a Group Member gives rise to a Claim against the
     Warrantor under this Deed, the Purchaser shall cause the Group Member,
     upon written request by the Warrantor, to co-operate in seeking an
     extension of time to pay all or part of the Tax assessed pending objection
     and/or appeal and to refrain from paying the Tax during the period of any
     extension of time.

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                                                                         PAGE 41
   48
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

8.12 PROCEDURE FOR MAKING CLAIM

     (a)  The Purchaser shall not make a Claim against a Vendor or the Warrantor
          under or in respect of this Deed (other than under Clause 10) unless:

          (i)   the Purchaser acts bona fide as to the existence, nature and
                amount of such Claim;

          (ii)  such Claim is made under this Clause 8.12 (not by any other
                means) and subject to and in accordance with the provisions of
                this Deed and any other Transaction Document applicable to such
                Claim; and

          (iii) the Purchaser gives prompt notice to the Vendor or the Warrantor
                (as the case may be) specifying details of the Claim and/or the
                amount (including any interest payable under this Deed) claimed
                (a CLAIM NOTICE).

     (b)  If the Vendor or Warrantor (as the case may be) disputes the
          Purchaser's Claim under a Claim Notice, then it must serve a notice on
          the Purchaser within 20 business days after receipt of the Purchaser's
          notice (a DISPUTE NOTICE).

     (c)  If the Vendor or Warrantor (as the case may be) do not serve a Dispute
          Notice, the Purchaser is entitled, in relation to the Claim, to the
          amount claimed by the Purchaser in the Claim Notice above (subject to
          the application of Clauses 8.6(a) and 8.6(g) or any other amount
          agreed between the Vendor or Warrantor (as the case may be) and the
          Purchaser.

     (d)  If the Vendor or Warrantor (as the case may be) serves a Dispute
          Notice:

          (i)  the Purchaser and the Vendor or Warrantor (as the case may be)
               must, for a period of 10 business days after receipt by the
               Purchaser of the Dispute Notice, negotiate in good faith to agree
               the amount (if any) to which the Purchaser is entitled in
               relation to the Claim or, failing agreement, refer the matter in
               writing for determination by an Expert appointed and acting in
               accordance with Clause 8.13; and

          (ii) if the Claim is (during that period or subsequently) agreed,
               compromised, determined or settled in favour of the Purchaser
               then the Purchaser is entitled, in relation to the Claim, to the
               amount payable to the Purchaser under that agreement, compromise
               or settlement.

     (e)  Any allegation of fraud shall not be referred to the Expert under
          paragraph (d), and the Purchaser shall be entitled to pursue such
          legal remedy as it thinks fit.

     (f)  Each party must bear its own costs and expenses, (including legal,
          accounting and actuarial fees) arising from observing this Clause
          8.12.

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                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

8.13 EXPERT

     For the purposes of Clause 8.12:

     (a)  the Expert shall be instructed to make its determination within 20
          business days;

     (b)  each party:

          (i)  must provide the Expert full access to its books and records and
               any information required by the Expert to complete its
               determination; and

          (ii) is entitled to make written submissions to the Expert in respect
               of the matter for determination within 10 business days of the
               date of the referral to the Expert;

     (c)  the Expert, when appointed, shall act as an expert and not as an
          arbitrator;

     (d)  the determination of the Expert shall be final and binding on the
          parties and shall be notified to the Purchaser and the Vendor or
          Warrantor (as the case may be); and

     (e)  the Expert's costs shall be borne by the Vendor or the Warrantor in
          the proportions determined by the Expert (the parties acknowledging
          that such power of determination will not deny the operation of
          paragraph (c)).

8.14 ALTERATIONS TO PURCHASE PRICE OR ADJUSTED PURCHASE PRICE

     (a)  Any monetary compensation received by the Purchaser in satisfaction of
          a Claim for any breach by the Warrantor or a Vendor of any Warranty or
          under the IB Indemnity shall be taken to be in reduction and refund of
          the Purchase Price or the Adjusted Purchase Price (as the case may
          be).

     (b)  If, subsequent to the payment by the Warrantor of a Claim by way of
          refund and reduction of the Purchase Price or the Adjusted Purchase
          Price (as the case may be), the whole or part of the Claim is refunded
          to a Group Member or otherwise applied for the benefit of a Group
          Member pursuant to a relevant Tax law or otherwise, then the Purchaser
          shall forthwith pay by way of additional Purchase Price or Adjusted
          Purchase Price (as the case may be) the amount refunded or applied
          pursuant to the relevant law or otherwise.

     (c)  If any interest is paid or credited to the Group Member in respect of
          any amount payable to the Warrantor as provided in paragraph (b), the
          Purchaser shall, in addition, pay by way of additional Purchase Price
          or Adjusted Purchase Price (as applicable) a sum equal to the interest
          net of any tax payable by the Purchaser in respect of that interest.

     (d)  Any adjustment to the Purchase Price or the Adjusted Purchase Price
          shall relate to particular Sale Shares or particular Offshore FM

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                                                                         PAGE 43
   50
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
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           Businesses, and the Purchase Price or Adjusted Purchase Price shall
           be adjusted in relation to the particular Sale Shares or Offshore FM
           Business to which the adjustment relates and, if there is no direct
           relationship, then in accordance with the reasonable determination
           of the Vendors or, failing such determination, in the proportions in
           which they comprise the Total Purchase Price.

8.15 NOTIFICATION OF WARRANTY BREACH BEFORE COMPLETION

     (a)  If before Completion the Purchaser or Purchaser's Guarantor become
          aware of a matter that constitutes a breach of any Warranty, or that
          the Purchaser or Purchaser's Guarantor believes is likely to
          constitute a breach of a Warranty (other than a Tax Warranty):

          (i)  the Purchaser must notify the Warrantor and Vendors of this; and

          (ii) the Warrantor and Vendors shall have a reasonable opportunity to
               remedy the breach or likely breach.

     (b)  If the Warrantor or Vendors are unable to remedy the breach or
          potential breach of Warranty or if the Purchaser does not accept the
          result as a remedy, the Purchaser must still complete the sale and
          purchase of the Sale Shares in accordance with this Deed.

9.    ACCESS TO AND RETENTION OF RECORDS
- --------------------------------------------------------------------------------

9.1  ACCESS

     (a)  The Purchaser undertakes that it shall preserve all Records referable
          to any time up to the end of the fiscal year in which Completion
          occurs, for a period whichever is the greater of (i) 5 years from the
          Completion Date, or (ii) the relevant length of time which is required
          by statute.

     (b)  After Completion, to the extent that the Vendors require such access
          to enable the Vendors' Group to prepare their Tax returns, accounts
          and other financial statements, to discharge any statutory obligation,
          or in connection with any Tax or Relief or the conduct of legal or
          arbitration proceedings by the Vendors, the Purchaser agrees to allow
          the Vendors and their Advisers, on receiving reasonable notice from
          the Vendors:

          (i)  access on such terms as would satisfy section 263 of the Tax Act
               to the Records at all reasonable times, to inspect (free of
               charge) and obtain copies including certified copies (at the
               Vendors' expense) of, the Records; and

          (ii) reasonable access to employees of the Purchaser or the Group to
               assist the Vendors in preparing the tax returns, accounts

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                                                                         PAGE 44
   51
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

               and statements and in dealing with any such statutory
               obligations, Tax, Relief or legal or arbitration proceedings.

     (c)  The Vendors will reimburse the Purchaser for any reasonable costs
          incurred by the Purchaser in retrieving any Records for the Vendors
          under this Clause 9.1.

     (d)  No Purchaser Entity shall be obliged to waive privilege. Each
          Purchaser Entity may require the Vendors to take reasonable steps to
          preserve confidentiality.

9.2  RETENTION

     The Purchaser agrees to, and shall ensure that the Group Members, permit
     the Vendors to retain for their own purposes, but not for commercial or
     business development purposes, a copy of any Record which is in the
     possession of the Vendors or the Vendors' Guarantor on Completion. The
     Vendors or Vendor's Guarantor shall keep all such Records confidential
     other than disclosures:

     (a)  to its Advisers, if those Advisers undertake to keep the information
          disclosed confidential; or

     (b)  made in compliance with any applicable law or requirement of any
          regulatory body (including any relevant Stock Exchange).

10.  THE COMPLETION STATEMENT
- --------------------------------------------------------------------------------

10.1 PREPARATION OF COMPLETION STATEMENT

     The Vendors and the Purchaser shall co-operate to ensure that as soon as
     practicable after the Completion Date and in any event not later than 40
     business days thereafter the draft Completion Statement shall have been
     prepared by the Vendors.

10.2 DELIVERY OF COMPLETION STATEMENT AND VENDORS' ACCOUNTANTS REPORT

     Within 10 business days after the preparation of the draft Completion
     Statement in accordance with Clause 10.1 the Vendors shall procure the
     Vendors' Accountants to provide to the Vendors and the Purchaser a copy of
     the Completion Statement together with a written report:

     (a)  stating that, in their opinion, the Completion Statement has been
          prepared in the manner provided in Clause 10.5;

     (b)  stating their opinion as to the amount of Net Assets and the amount
          (if any) by which Net Assets exceeds or is less than the amount of
          Preliminary Net Assets (respectively a REPORTED EXCESS or a REPORTED
          SHORTFALL);

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   52
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

     (c)  stating their opinion as to the amount of the Total Adjusted Purchase
          Price and, if applicable, the allocation thereof among the Sale Shares
          and Offshore FM Business to which any adjustment relates; and

     (d)  stating their opinion as to the allocation of assets and liabilities
          of the Group as between the FM Businesses and the IB Businesses.

10.3 ACCESS TO INFORMATION

     The Purchaser shall:

     (a)  provide or ensure the provision of all information and assistance
          which may be requested by the Vendors and the Vendors' Accountants in
          connection with the preparation and review of the Completion
          Statement; and

     (b)  permit representatives of the Vendors and the Vendors' Accountants to
          have access to and take extracts from or copies of any books,
          correspondence, accounts or other records relating to the Group in its
          possession or control.

10.4 REVIEW BY PURCHASER'S ACCOUNTANTS

     The Purchaser shall instruct the Purchaser's Accountants to examine and
     review the working papers of the Vendors and the Vendors' Accountants
     relating to the preparation of the Completion Statement. The Purchaser's
     Accountants shall conduct this examination and review on receipt of the
     Completion Statement and working papers under Clause 10.2 and shall
     complete it within 15 business days of such receipt (the REVIEW PERIOD).
     The parties shall co-operate to ensure that the Purchaser's Accountants are
     given all information and explanations they reasonably request in relation
     to the Completion Statement during the Review Period.

10.5 BASIS OF PREPARATION OF COMPLETION STATEMENT

     The Completion Statement shall be prepared in accordance with the
     Accounting Principles and in the form set out in Schedule 6.

10.6 REPORT BY PURCHASER'S ACCOUNTANTS

     The Purchaser shall instruct the Purchaser's Accountants to provide to the
     Vendors and the Purchaser, by no later than the end of the Review Period, a
     report by the Purchaser's Accountants:

     (a)  stating whether the Purchaser's Accountants agree with the amount of
          Net Assets and the allocation of assets and liabilities between the FM
          Businesses and the IB Businesses stated in the Completion Statement
          and the Total Adjusted Purchase Price or the allocation thereof among
          the Sale Shares and Offshore FM Businesses notified by the Vendors'
          Accountants; or

     (b)  if the Purchaser's Accountants do not agree with the amount of Net
          Assets or the allocation of assets and liabilities between the FM

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                                                                         PAGE 46

   53
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

          Businesses and the IB Businesses stated in the Completion Statement or
          the Total Adjusted Purchase Price or the allocation thereof in
          accordance with Clause 10.10 notified by the Vendors' Accountant,
          setting out:

          (i)   the matters in respect of which the Purchaser's Accountants
                disagree with the Vendors' Accountants;

          (ii)  the grounds on which the Purchaser's Accountants disagree with
                the Vendors' Accountants; and

          (iii) their opinion as to the amount of Net Assets, the allocation of
                assets and liabilities between the FM Businesses and the IB
                Businesses and Total Adjusted Purchase Price and the allocation
                of it in accordance with Clause 10.10.

10.7 APPLICATION OF CLAUSE 11.1

     Clause 11.1 will apply if the Purchaser's Accountants:

     (a)  state in their report delivered under Clause 10.6 that they agree with
          the amount of Net Assets and the allocation of assets and liabilities
          between the FM Businesses and the IB Businesses stated in the
          Completion Statement and the amount of the Total Adjusted Purchase
          Price and the allocation of it in accordance with Clause 10.10, as
          notified by the Vendors' Accountants; or

     (b)  fail to deliver their report by the end of the Review Period (in
          respect of which time is of the essence).

10.8 RESOLUTION OF DISPUTES AND APPLICATION OF CLAUSE 11.2

     (a)  Clause 11.2 will apply if, and only if, the Purchaser's Accountants
          deliver a report of the kind contemplated by Clause 10.6(b). The
          matters of disagreement stated in the report by the Purchaser's
          Accountants, if not resolved between the Vendors and the Purchaser
          within 10 business days of delivery of the report by the Purchaser's
          Accountants, will be referred for resolution to an Expert.

     (b)  The Expert shall be instructed to:

          (i)   decide within the shortest practicable time the matters of
                disagreement;

          (ii)  amend the Completion Statement accordingly; and

          (iii) deliver a report stating, on the basis of his decision, his
                opinion as to the amount of Net Assets, the allocation of assets
                and liabilities between the FM Businesses and the IB Businesses
                and the Total Adjusted Purchase Price and the allocation of it
                in accordance with Clause 10.10.

     (C)  The Expert shall decide the procedures to be followed in order to
          resolve the matters of disagreement. The Vendors and the Purchaser
          shall provide, and shall ensure that the Vendors' Accountants and the

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                                                                         PAGE 47
   54

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          Purchaser's Accountants respectively provide, to the Expert all
          information and assistance he reasonably requests for the purpose of
          his report.

10.9  CONCLUSIVENESS OF REPORT

      For the purposes of this Clause 10:

      (a)  the Vendors' Accountants and the Purchaser's Accountants shall act as
           independent experts, not as arbitrators;

      (b)  except to the extent that Clauses 10.6(b) and 10.8 may be applicable,
           the Vendors' Accountants' decision as to the Completion Statement,
           the amount of Net Assets, the allocation of assets and liabilities
           between the FM Businesses and the IB Business, the Total Adjusted
           Purchase Price and the allocation of it among the Sale Shares and
           Offshore FM Businesses shall be conclusive, final and binding on the
           parties (except in the case of manifest error); and

      (c)  the Expert (if appointed) shall act as an independent expert, not as
           arbitrator. The Expert's decision as to the amount of Net Assets, the
           allocation of assets and liabilities between the FM Businesses and
           the IB Business, the Total Adjusted Purchase Price and the allocation
           of it among the Sale Shares and Offshore FM Businesses shall be
           conclusive, final and binding on the parties (except in the case of
           manifest error).

10.10 ADJUSTMENT OF PURCHASE PRICE

      If the Completion Statement or, if applicable, the Expert's Report states
      that any adjustment of the Total Purchase Price should relate to
      particular Sale Shares or Offshore FM Business, the Purchase Price of that
      asset shall be adjusted accordingly. Otherwise any adjustment shall be
      deemed to be made to the Purchase Price of the Sale Shares or Offshore FM
      Business in the proportions in which they comprise the Total Purchase
      Price.

10.11 COSTS

      The Vendors and the Purchaser shall bear their own costs of and incidental
      to this Clause 10, the Vendors shall bear the costs of the Vendors'
      Accountants, the Purchaser shall bear the costs of the Purchaser's
      Accountants and the costs of the Expert (if appointed) shall be borne one
      half by the Vendors and one half by the Purchaser.

11.   POST-COMPLETION ADJUSTMENT
- --------------------------------------------------------------------------------

11.1  IF COMPLETION STATEMENT FINAL

      If this Clause applies by operation of Clause 10.7 then, if the amount of
      Net Assets set out in the Completion Statement:

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                                                                         PAGE 48
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

      (a)  is less than the amount of Preliminary Net Assets, the Vendors shall
           within 2 business days of the triggering of this Clause pay by
           telegraphic transfer cheque to the Purchaser an amount equal to the
           Reported Shortfall;

      (b)  exceeds Preliminary Net Assets, the Purchaser shall within 2 business
           days of the triggering of this Clause pay by telegraphic transfer to
           the Vendors an amount equal to the Reported Excess; and

      (c)  equals Preliminary Net Assets, no adjustment to the consideration
           payable by the Purchaser shall be made.

11.2  If the Accountants have disagreed

      If this Clause applies by operation of Clause 10.8, within 2 business days
      of the disagreement between the Vendors' Accountants and the Purchaser's
      Accountants being resolved between the parties or of the delivery of the
      report by the Expert under Clause 10.8 (as the case may be), if the amount
      of Net Assets set out in the Completion Statement (as resolved by the
      parties or decided by the Expert):

      (a)  is less than the amount of Preliminary Net Assets, the Vendors shall
           pay by bank cheque to the Purchaser an amount equal to the shortfall;

      (b)  exceeds Preliminary Net Assets, the Purchaser shall pay by bank
           cheque to the Vendors (or as they direct) an amount equal to .the
           excess;

      (c)  equals Preliminary Net Assets, no adjustment to the consideration
           payable by the Purchaser shall be made.

11 3. INTEREST ON ANY ADJUSTMENT AMOUNT

      The party required to pay an adjustment amount pursuant to Clause 11.1 or
      11.2 shall, at the time it makes such payment, also pay to the person
      entitled to the adjustment amount an amount equal to interest payable on
      the adjustment amount calculated from the Completion Date to the date of
      payment at the rate of 6% per annum.

12.   DROP DEAD DATE ADJUSTMENTS
- --------------------------------------------------------------------------------

12.1  FAILURE TO COMPLETE

      If Clause 2.7 applies:

      (a)  the Completion Statement shall be adjusted to reflect the fact that
           the sale and purchase of the Excluded Shares is not proceeding;

      (b)  the Purchase Price or Adjusted Purchase Price (as the case may be) of
           the Excluded Shares plus interest under Clause 11.3 shall be refunded
           to the Purchaser as soon as practicable; and

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                                                                         PAGE 49
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

      (c)  any Disclosure Material and Records relating solely or primarily to
           the Excluded Shares or the Excluded Company will be returned to the
           relevant Vendor.

13.   USE OF NAMES AND TRADE MARKS
- --------------------------------------------------------------------------------

13.1  Covenant not to use by Purchaser The Purchaser undertakes to each Vendor
      and the Warrantor (on behalf of BTC) that, without their written consent,
      the Purchaser shall not, nor shall any Purchaser Entity, whether:

      (a)  on its own account; or

      (b)  jointly with or on behalf of any other person or body corporate, do
           any of the following:

      (c)  anywhere in the world -

           (i)   at any time after the Transition Date, use an Excluded Name or
                 the Pyramid Device for any purpose, including as a part of a
                 business name, company name, trade mark or logo; or

           (ii)  at any time, apply for the registration, or procure any other
                 person to apply for the registration, of any trade mark,
                 business name or company name that is or includes an Excluded
                 Name or the Pyramid Device;

      (d)  outside of Australia and New Zealand -

           (i)   at any time after the Transition Date, use, or carry on any
                 business involving the use of, the BT Name for any purpose,
                 including as part of a business name, company name, trade mark
                 or logo unless permitted under Clause 13.2 or 13.9; or

           (ii)  at any time, apply for the registration, or procure any other
                 person to apply for the registration, of any trade mark,
                 business name or company name that is or includes the BT Name.

13.2  PURCHASER'S USE OF BT NAME

      (a)  The Purchaser Entities shall be entitled on and from the Completion
           Date to use the BT Name, whether as a registered or unregistered
           trade mark, business name or company name but only:

           (i)   in connection with the business activities of funds management,
                 portfolio services or margin lending, as carried on or
                 conducted in Australia or New Zealand;

           (ii)  in connection with the business activities of the IB Businesses
                 anywhere in the world but only until the Transition Date;

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                                                                         PAGE 50
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

           (iii) in connection with the business activities of funds management,
                 portfolio services or margin lending conducted outside
                 Australia and New Zealand until the Transition Date; and

           (iv)  (subject to clause 13.9) in connection with the business
                 activities of funds management, portfolio services or margin
                 lending conducted outside Australia and New Zealand after the
                 Transition Date where:

                 (A)  the use is associated with the offering of a product or
                      service where the funds management, margin lending or
                      portfolio services activity in respect of that product or
                      service is performed by a Purchaser Entity in Australia or
                      New Zealand; or

                 (B)  such use is necessarily incidental to its funds
                      management, portfolio services or margin lending
                      businesses as carried on and conducted in Australia or New
                      Zealand,

                 and, without prejudice to Clause 13.9, no member of the
                 Vendors' Group will be entitled to bring any Claim against any
                 Purchaser Entity for such use.

      (b)  The Warrantor agrees to procure BTC to apply to the trade marks
           offices in Australia and New Zealand for registration of the mark BT
           Margin Lending and BT Portfolio Services in a form prepared by the
           Purchaser within 15 business days from the Completion Date and to '
           assign all rights in and entitlement to such application or
           applications to the Purchaser or its nominee (being a Closely-held
           Subsidiary of the Purchaser) on request for $1.00.

      (c)  No Purchaser Entity or any of its Officers will be permitted to use
           the name Pyramid anywhere in the world.

13.3  COVENANT NOT TO USE BY THE WARRANTOR

      The Warrantor undertakes to the Purchaser that at all times after the
      Transition Date it shall not, nor shall any Related Body Corporate or
      child entity of the Warrantor (as that expression is defined in Part 2E.2
      of the Corporations Law), whether:

      (a)  on its own account; or

      (b)  jointly with or on behalf of any other person or body corporate,
           within Australia and New Zealand:

      (c)  use, or carry on any business involving the use of, the name Bankers
           Trust, the name BT Pyramid, the Pyramid Device or the BT Name for any
           purpose, including as part of a business name, company name, trade
           mark or logo unless such use is permitted under Clause 13.4 or with
           the consent of the Purchaser; or

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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

      (d)  enter into any agreement to transfer, license or authorise the use of
           the name Bankers Trust, the name BT Pyramid, the Pyramid Device or
           the BT Name in any manner contrary to Clause 13.3(c).

13.4  CONTINUING USE BY WARRANTOR OR DEUTSCHE GROUP

      The  Deutsche Group and the Warrantor will continue to be permitted to:

      (a)  use the names Alex. Brown, Wolfensohn and Pyramid in Australia and
           New Zealand;

      (b)  offer in Australia and New Zealand services which are performed
           outside of Australia and New Zealand under the name Bankers Trust in
           connection with:

           (i)   US dollar clearing services;

           (ii)  funds transfer, treasury and liquidity management;

           (iii) operational and transaction services;

           (iv)  global custody services; or

      (c)  use the name Bankers Trust in Australia and New Zealand, in
           connection with the completion of client transactions and client
           contracts entered into prior to the Completion Date in the name of a
           company whose name includes Bankers Trust, but

      (d)  will not be permitted to assign, license or otherwise authorise a
           person (other than a Purchaser Entity) the right to use the BT Name
           in Australia or New Zealand.

13.5  CANCELLATION OF REGISTRATION

      The Warrantor agrees to procure BTC to apply on or before the Transition
      Date for cancellation in Australia of the BT Portfolio Services and Device
      mark no. 759539 and in New Zealand of the BT Portfolio Services and Device
      mark no. 299026, The Warrantor also covenants in furtherance of Clauses
      13.2 and 13.3 that, if so requested by the Purchaser, it will procure the
      cancellation by BTC of the registration in Australia of the BT and Device
      mark no. 666113.

13.6  ACKNOWLEDGEMENT BY THE PURCHASER

      The Purchaser acknowledges that the Warrantor, BTC and their respective
      Related Bodies Corporate (and any person acting through or in succession
      to any of them) are and will be entitled to use:

      (a)  outside of Australia and New Zealand:

           (i)   an Excluded Name for any purpose, including as part of a
                 business name, company name, trade mark or logo;

           (ii)  the Pyramid Device for any purpose; and

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                                                                         PAGE 52
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

           (iii) the BT Name for any purpose, including as part of a business
                 name, company name, trade mark or logo;

      (b)  in Australia and New Zealand, the BT Name in connection with the
           custody business carried on by BTCO Australia Pty Limited until the
           Transition Date;

      (c)  anywhere in the world, the Pyramid name (alone or in connection with
           any other name), but subject to Clauses 13.3 and 13.4; and

      (d)  within Australia and New Zealand, the Excluded Names as contemplated
           in Clauses 13.3 and 13.4,

      and that the Purchaser will not be entitled to bring any Claim against the
      Warrantor, BTC or any of their respective Related Bodies Corporate for
      such use, including for any allegation of infringement of trade mark,
      passing off or false or misleading conduct.

13.7  ASSIGNMENT OR DISPOSAL OF BT NAME

      The Purchaser covenants that, it will not, and will ensure that the
      Purchaser Entities do not, assign, license or otherwise dispose of the
      Purchaser's rights to the BT Name to an entity that is not a Purchaser
      Entity unless the relevant assignee agrees to the limitations of use of
      the BT Name, Excluded Name and Pyramid Device as set out in this Clause 13
      in an agreement expressly in favour of the Warrantor.

13.8  RELINQUISH NAMES

      Notwithstanding the foregoing, the Purchaser shall procure that on the
      date which is 60 days after the Completion Date in respect of an Excluded
      Name and the Transition Date in respect of the BT Name:

      (a)  each Group Member listed in Schedule 10 will change its company name
           to one that does not include any Excluded Name or BT Name;

      (b)  each Group Member which has registered an Excluded Business Name
           under a Business Names Act will furnish Cessation of Business under
           Business Names forms for each of the Excluded Business Names
           under each relevant Business Names Act to the Warrantor. Each
           statement shall be properly executed by the registered proprietor of
           the Excluded Business Name;

      (c)  each Group Member listed in Schedule 10 destroys all unused
           stationery and other items which bear any words or marks that
           includes an Excluded Name or a BT Name, and if the Warrantor so
           specifies, confirm to it in writing the destruction of all unused
           stationery and other items in the possession of any Group Member
           bearing such words or marks; and

      (d)  BTAL shall terminate the license granted under clause 20.1 of the
           Malaysian Agreement in accordance with clause 20.2.

- --------------------------------------------------------------------------------
                                                                         PAGE 53
   60

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

13.9  DISTINCTIVE USE

      (a)  The Purchaser shall ensure that the use of the BT Name by the
           Purchaser Entities:

           (i)   does not represent, suggest or identify a continuing connection
                 or association with the Warrantor, its Related Bodies Corporate
                 or any services or products offered by them; and

           (ii)  is not misleading or deceptive in respect of such matters.

           This obligation shall commence no later than the Transition Date.

      (b)  The actions to be taken under paragraph (a) shall consist of the
           requirement to issue all public documents (as defined in the
           Corporations Law) and all letters, business cards, marketing
           material, promotional items and advertisements to be distributed or
           issued outside of Australia and New Zealand where the BT Name, or a
           name of a Purchaser Entity which includes the BT Name, appears in or
           on such an item, by displaying in reasonable proximity to where the
           name first appears, a statement to the following effect:

                 A subsidiary of Principal Financial Services, Inc.; or

                 A member of Principal Financial Services Group.

      (c)  The Purchaser will be entitled to use the BT Name on an internet site
           or webpage but only if a statement to the effect of:

                 A subsidiary of Principal Financial Service, Inc.; or

                 A member of Principal Financial Services Group.

           or a logo of the Purchaser satisfactory to the Warrantor appears
           immediately under or above the use of such name on the first page of
           such site or webpage.

13.10 PROTECTION OF BT NAME

      (a)  For the purposes of Clause 13 and the Deed of Assignment of Trade
           Marks, the Warrantor shall (at its own cost), and shall procure BTC
           to, provide to the Purchaser Entities such assistance as the
           Purchaser may reasonably require:

           (i)   in relation to the defence of any proceedings or claim by a
                 person challenging or opposing the use of the BT Name by a
                 Purchaser Entity or the registration by a Purchaser Entity of
                 trade marks incorporating the BT Name (including but not
                 limited to a challenge pursuant to Section 92 of the Trade
                 Marks Act 1995); and

           (ii)  to apply for and maintain the registration of trade marks
                 incorporating the BT Name.

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                                                                         PAGE 54
   61
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

                The assistance which the Warrantor and BTC must provide includes
                the provision of evidence as to BTC's use of the BT Name.

        (b)     The Warrantor must not, and must ensure that BTC and all other
                members of the Vendors' Group do not, challenge or call into
                question in any way the right of any Purchaser Entity to use the
                BT Name.

        (c)     The obligations of the Warrantor (and BTC) under this Clause
                13.10 only apply in respect of actions taken or to be taken by a
                Purchaser Entity which do not constitute a breach by it or the
                Purchaser of any of the terms of Clause 13.

13.11   BREACH OF COVENANT

        The parties acknowledge that damages alone would not constitute an
        adequate remedy for a breach of any of the provisions of this Clause 13
        and that the innocent party will be entitled in that event to pursue all
        legal and equitable remedies in connection with the breach.

13.12   BENEFIT OF PURCHASER COVENANTS

        The covenants given by the Purchaser under this Clause 13 are given for
        the benefit of the Warrantor, the Vendors and their respective Related
        Bodies Corporate by the Purchaser as principal and on behalf of the
        Purchaser Entities and will be repeated by the Purchaser in respect of
        any entities that become Purchaser Entities at such time and any action
        taken by Purchaser Entities that is inconsistent with the provisions of
        this Clause 13 shall be deemed to be a breach of such provision by the
        Purchaser and the defaulting Purchaser Entities.

 14.   YEAR 2000 ISSUE
- --------------------------------------------------------------------------------

       (a)      The Purchaser acknowledges that neither the Vendors' Group nor
                the Warrantor make any representation or warranty in respect of
                the Year 2000 Issue other than Warranty 11 in Part I of Schedule
                4.

       (b)      The Purchaser represents and warrants that it has reviewed the
                Vendors' Group Year 2000 Issue compliance program.

       (c)      Notwithstanding any other provision of this Deed other than
                Warranty 11 in Part I of Schedule 4, none of the Vendors or the
                Warrantor shall be liable to the Purchaser in respect of any
                Claim incurred or suffered by the Purchaser or any Group Member
                (including loss or damage caused by negligence), arising
                directly or indirectly as a result of:

                (i)     a System of any Group Member being affected by Year
                        2000 Issues;

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                                                                         PAGE 55
   62
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

                (ii)    the failure of any third party to supply goods or
                        services to any Group Member directly or indirectly as
                        a result of Year 2000 Issues; or

                (iii)   any defect in goods or disruption of services supplied
                        to any Group Member by a third party or supplied by any
                        Group Member to a third party directly or indirectly as
                        a result of Year 2000 Issues.

15. INSURANCE
- --------------------------------------------------------------------------------

       (a)      The Purchaser acknowledges that it has reviewed in the
                Disclosure Material the insurance arrangements for the Group.

       (b)      The Purchaser acknowledges that on and from Completion no member
                of the Group will have the benefit of any indemnity or other
                cover under any insurance policy or contract taken out by or in
                the name of any member of the Deutsche Group or the Vendors'
                Group.

16. NOTICES
- --------------------------------------------------------------------------------
      Any notice given under this Deed:

       (a)      must be in writing addressed to the intended recipient at the
                address shown below or the address last notified by the intended
                recipient to the sender:

                the Vendors and the Warrantor:

                c/o Bankers Trust Corporation
                BT Plaza
                130 Liberty Street
                New York, New York 10005
                United States of America
                Attention: Mr Fritz Link
                           General Counsel
                Fax:    +1-212-250-2154

                with a copy to:

                Deutsche Bank AG
                Level 18
                225 George Street
                Sydney NSW 2000
                Australia
                Attention: Mr Robert Pride
                           General Counsel
                Fax:    +61-2-9258-1101101

- --------------------------------------------------------------------------------
                                                                         PAGE 56
   63
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
                the Purchaser and the Purchaser's Guarantor:

                Principal Financial Services, Inc.
                711 High Street
                Des Moines IA   50392-0300
                Attention:      Karen E. Shaff
                                Senior Vice President and Deputy General Counsel
                Fax:            +1-515-235-9852

        (b)     must be signed by a person duly authorized by the sender; and

        (c)     will be taken to have been given or made:

                (i)     (in the case of delivery in person or by post) when
                        delivered, received or left at the above address; and

                (ii)    (in the case of fax) on receipt by the sender of the
                        confirmation of transmission,

                but if delivery or receipt occurs on a day on which business is
                not generally carried on in the place to which the communication
                is sent or is later than 4 pm (local time) it will be taken to
                have been duly given or made at the commencement of business on
                the next day on which business is generally carried on in the
                place.

        (d)     Any notice to be given by one or more of the Vendors and the
                Warrantor may be signed on behalf of that Vendor, Vendors or the
                Warrantor by a person from time to time authorized to give
                notice under any Transaction Document by the Warrantor.

        (e)     A notice given to the Warrantor shall be taken to be a notice
                given to the Vendors.

17.   NON-DISCLOSURE
- --------------------------------------------------------------------------------

17.1  CONFIDENTIALITY

        Subject to Clause 17.2, each party shall keep the terms of this Deed
        confidential.

17.2 EXCEPTIONS

        A party may make any disclosures in relation to this Deed as, in its
        absolute discretion, it thinks necessary to:

        (a)     its Advisers and financiers, if those persons undertake to keep
                the information disclosed confidential;

        (b)     comply with any applicable law or requirement of any
                regulatory body (including any relevant stock exchange) or
                ratings agency provided that the party first informs the other
                parties in relation to its intention to make such disclosure; or

- --------------------------------------------------------------------------------
                                                                         PAGE 57
   64
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

        (c)     any of its employees to whom it is necessary to disclose the
                information, on receipt of an undertaking from that employee to
                keep the information confidential.

17.3   PUBLIC ANNOUNCEMENTS

                 Except as required by applicable law or the requirements of any
                 regulatory body (including any relevant stock exchange), in
                 which case each party agrees to first inform the other parties
                 of its intention to make such a disclosure, all press releases
                 and other public announcements relating to the transactions
                 dealt with by this Deed must be in terms agreed by the parties.

18.    THE VENDORS' GUARANTOR'S GUARANTEE
- --------------------------------------------------------------------------------

18.1   UNDERTAKING

        In consideration of the Purchaser and the Purchaser's Guarantor entering
        into this Deed at the request of the Vendors' Guarantor, the Vendors'
        Guarantor:

        (a)     unconditionally and irrevocably guarantees to the Purchaser and
                the Purchaser's Guarantor on demand the due and punctual
                performance by each of the Vendors of all its obligations under
                this Deed; and

        (b)     shall indemnify the Purchaser and the Purchaser's Guarantor
                against each Claim incurred or suffered by or brought or made or
                recovered against the Purchaser or the Purchaser's Guarantor in
                connection with any default or delay by any Vendor in the due
                and punctual performance of its obligations under this Deed.

18.2    PRINCIPAL OBLIGATION

        This Clause 18 shall:

        (a)     be a principal obligation of the Vendors' Guarantor and shall
                not be treated as ancillary or collateral to any right or
                obligation;

        (b)     extend to cover this Deed as amended, varied or replaced,
                whether with or without the consent of the Vendors' Guarantor;
                and

        (c)     be a continuing guarantee and indemnity and shall remain in full
                force and effect for so long as any Vendor has any liability or
                obligation to the Purchaser or the Purchaser's Guarantor and
                until all of those liabilities or obligations have been fully
                discharged.

18.3    NO WITHHOLDINGS

        The Vendors' Guarantor will make all payments which may be or become .
        due under this Clause 18 free and clear and without deduction of any and
        all present and future taxes, duties, levies, imposts, deductions,
        charges and withholdings of Australia or any other country or
        jurisdiction. If the Vendors' Guarantor is compelled by law to deduct
        any such tax, duty, levy,

- --------------------------------------------------------------------------------
                                                                         PAGE 58
   65
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
        impost, deduction, charge or withholding it will pay to the Purchaser or
        the Purchaser's Guarantor (as the case may be) such additional amounts
        as may be necessary so that the net payment of the amount due under this
        Clause 18 after that deduction shall be not less than the payment would
        have been had there been no deduction.

18.4    NO SET OFF

        The Vendors' Guarantor has no right to set off or otherwise deduct or
        withhold any moneys which it may be or become liable to pay to the
        Purchaser or the Purchaser's Guarantor under this Clause 18 against any
        moneys which the Purchaser, the Purchaser's Guarantor or any Purchaser
        Entity may be or become liable to pay to any of the Vendors or the
        Vendors' Guarantor whether under this Deed or otherwise.

19.     DEFAULT INTEREST
- --------------------------------------------------------------------------------

19.1    RATE

        If a party fails to pay any amount payable under this Deed on the due
        date for payment, that party must pay interest on the amount unpaid at
        the greater of 7.5% per annum or the rate (if any) fixed or payable
        under any judgement obtained in respect of the amount owing.

19.2    ACCRUALS

        The interest payable under Clause 19.1:

        (a)      accrues from day to day from the due date for payment up to the
                 actual date of payment; and

        (b)      may be capitalised by the person to whom it is payable at
                 monthly intervals.

20.     FURTHER ASSURANCES
- --------------------------------------------------------------------------------
        Each party shall take all steps, execute all documents and do everything
        reasonably required by any other party to give effect to any of the
        transactions contemplated by this Deed.

21.     ENTIRE AGREEMENT
- --------------------------------------------------------------------------------
        This Deed and the other Transaction Documents contain the entire
        agreement of the parties with respect to their subject matter. They
        constitute the only conduct relied on by the parties (and supersede all
        earlier conduct by the parties) with respect to their subject matter. '

- --------------------------------------------------------------------------------
                                                                         PAGE 59

   66
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

22.     AMENDMENT
- --------------------------------------------------------------------------------
        This Deed may be amended only by another agreement executed by all
        parties who may be affected by the amendment.

23.     ASSIGNMENT
- --------------------------------------------------------------------------------
        The rights and obligations of each party under this Deed. are personal.
        They cannot be assigned, charged or otherwise dealt with, and no party
        shall attempt or purport to do so, without the prior written consent of
        all the parties.

24.     NO WAIVER
- --------------------------------------------------------------------------------
        No failure to exercise and no delay in exercising any right, power or
        remedy under this Deed will operate as a waiver. Nor will any single or
        partial exercise of any right, power or remedy preclude any other or
        further exercise of that or any other right, power or remedy.

25.     WAIVER EFFECTIVE
- --------------------------------------------------------------------------------
        A waiver of, or of any breach of, any condition, right or obligation
        under this Deed by a party of one part who has the benefit of that
        condition right or obligation or is otherwise entitled to waive it will
        only be effective upon the giving of written notice to each party of
        another part specifying the breach, condition, right or obligation
        waived.

26.     SEVERANCE
- --------------------------------------------------------------------------------
        Any provision or part of a provision of this Deed which is prohibited or
        unenforceable in any jurisdiction will be ineffective in that
        jurisdiction to the extent of the prohibition or unenforceability. That
        will not invalidate the remaining provisions of this Deed nor affect the
        validity or enforceability of that provision in any other jurisdiction.

27.     NO MERGER
- --------------------------------------------------------------------------------
        The rights and obligations of the parties will not merge on completion
        of any transaction under this Deed. They will survive the execution and
        delivery of any assignment or other document entered into for the
        purpose of implementing any transaction.

- --------------------------------------------------------------------------------
                                                                         PAGE 60
   67
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
28.     COUNTERPARTS
- --------------------------------------------------------------------------------
        This Deed may be executed in any number of counterparts. All
        counterparts taken together will be taken to constitute one agreement.

29.     STAMP DUTY AND COSTS
- --------------------------------------------------------------------------------
        Each party shall bear its own costs arising out of the preparation of
        this Deed and the other Transaction Documents but the Purchaser shall
        bear any stamp duty or similar impost (including fines, interest and
        penalties) chargeable in any jurisdiction on this Deed and the other
        Transaction Documents, on any instruments entered into under this Deed
        or the other Transaction Documents, and in respect of a transaction
        evidenced by this Deed or the other Transaction Documents (but not the
        Group Restructuring). The Purchaser shall indemnify the Vendors on
        demand against any liability for that stamp duty (including fines,
        interest and penalties).

30.     GOVERNING LAW
- --------------------------------------------------------------------------------
        This Deed is governed by the laws of New South Wales. The parties submit
        to the non-exclusive jurisdiction of the courts exercising jurisdiction
        there.

31.     THE PURCHASER'S GUARANTOR'S GUARANTEE
- --------------------------------------------------------------------------------

31.1    UNDERTAKING

        In consideration of each of the Vendors and the Warrantor entering into
        this Deed at the request of the Purchaser's Guarantor, the Purchaser's
        Guarantor:

        (a)     unconditionally and irrevocably guarantees to each of the
                Vendors and the Warrantor on demand the due and punctual
                performance by the Purchaser of all its obligations under this
                Deed; and

        (b)     shall indemnify each of the Vendors and the Warrantor against
                each Claim incurred or suffered by or brought or made or
                recovered against any of the Vendors or the Warrantor in
                connection with any default or delay by the Purchaser in the due
                and punctual performance of its obligations under this Deed.

31.2    PRINCIPAL OBLIGATION

        This Clause 31 shall:

        (a)     be a principal obligation of the Purchaser's Guarantor and shall
                not be treated as ancillary or collateral to any right or
                obligation;

        (b)     extend to cover this Deed as amended, varied or replaced,
                whether with or without the consent of the Purchaser's
                Guarantor; and

- --------------------------------------------------------------------------------
                                                                         PAGE 61
   68
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

        (c)     be a continuing guarantee and indemnity and shall remain in full
                force and effect for so long as the Purchaser has any liability
                or obligation to any of the Vendors or the Warrantor and until
                all of those liabilities or obligations have been fully
                discharged.

31.3    NO WITHHOLDINGS

        The Purchaser's Guarantor will make all payments which may be or become
        due under this Clause 31 free and clear and without deduction of any and
        all present and future taxes, duties, levies, imposts, deductions,
        charges and withholdings of Australia or any other country or
        jurisdiction. If the Purchaser's Guarantor is compelled by law to deduct
        any such tax, duty, levy, impost, deduction, charge or withholding it
        will pay to the Vendor or the Warrantor (as the case may be) such
        additional amounts as may be necessary so that the net payment of the
        amount due under this Clause 31 after that deduction shall be not less
        than the payment would have been had there been no deduction.

31.4    NO SET OFF

        The Purchaser's Guarantor has no right to set off or otherwise deduct or
        withhold any moneys which it may be or become liable to pay to any of
        the Vendors or the Warrantor under this Clause 31 against any moneys
        which the Vendor, the Warrantor or any of their Related Bodies Corporate
        may be or become liable to pay to the Purchaser or the Purchaser's
        Guarantor whether under this Deed or otherwise.

32.     SPECIAL INDEMNITY
- --------------------------------------------------------------------------------

        (a)     (PARTIES' INTENTION) It is the intention of the parties that:

                (i)     the provisions of this Clause 32 shall be applied so as
                        to put the Indemnitees (as defined below) in the same
                        position that would have existed had the Purchaser not
                        purchased the IB Businesses and consummated the other
                        transactions related thereto contemplated by this Deed;

                (ii)    if the Purchaser shall have received, not later than
                        June 30, 2001, not less than $112 million in cash in
                        accordance with the IB Deed, no Indemnitee shall be
                        entitled to claim under this Clause 32 for any loss
                        suffered by reason of diminution in value of the IB
                        Businesses;

                (iii)   no payment shall be required under this Clause 32 until
                        the Claim at the time in question (other than a claim
                        for diminution in value) involves the obligation of
                        immediate or imminent payment by the Indemnitee;

                (iv)    no Claim in respect of any diminution in value of the IB
                        Businesses or of any asset or property thereof such as,
                        without limitation, an IB Business trading loss in the
                        ordinary course

- --------------------------------------------------------------------------------
                                                                         PAGE 62
   69
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

                        of business, shall be covered by this Clause 32 unless
                        and until an Indemnitee (as distinguished from the
                        affected IB Businesses themselves) has incurred or
                        suffered a Claim;

                (v)     the Indemnitees shall not be entitled to any double
                        recovery in respect of any Claim or the circumstances
                        giving rise to that Claim; and

                (vi)    the Indemnitees shall be protected fully from any Claim
                        which is incurred or suffered by any Indemnitee at any
                        time relating to or arising out of the IB Businesses,

                and this Clause 32 shall be construed to give effect to these
                intentions.

       (b)      (INDEMNITY) From and after the date of this Deed, the Warrantor
                agrees unconditionally and irrevocably upon demand to pay and
                indemnify the Purchaser and (without duplication) each Purchaser
                Entity (other than the BTIB Companies) and their respective
                successors and assigns (collectively, the INDEMNITEES) in
                respect of any Claim of any kind whatsoever, including any Claim
                for diminution in value (whether direct or indirect, actual or
                contingent and howsoever and whenever arising and whether or not
                any person was, prior to the Completion Date, aware of the Claim
                or the circumstances giving rise to it) incurred or suffered by
                or brought or made or recovered against any Indemnitee:

                (i)     to the extent that it relates to the IB Businesses or
                        results from any action taken or not taken by the IB
                        Businesses or (any member of the Vendors' Group in
                        relation to the IB), Businesses, including any
                        acquisition, ownership, sale or other disposition,
                        direct or indirect, of or by any member of the Group of
                        all or any portion of the IB Businesses (including the
                        entry by any member of the Group or any Indemnitee into
                        any agreement, arrangement or understanding in relation
                        to the IB Businesses), whether before or after the
                        Completion Date, including any Claim incurred or
                        suffered as a result of any breach of warranty under any
                        agreement entered into pursuant to clause 2.1 of the IB
                        Deed; or

                (ii)    relating to any Claim by a Public Authority in
                        connection with Vendors' sale of the Sale Shares,

                        PROVIDED THAT:

                        (A)     this Clause 32(b) shall not relieve any
                                Indemnitee from performance under the terms of
                                any written contractual obligation (including
                                any obligation to pay money) arising under any
                                Transaction Document, nor shall the existence of
                                any such contractual obligation relieve the
                                Warrantor of its obligations under this

- --------------------------------------------------------------------------------
                                                                         PAGE 63
   70
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

                               Clause 32 in respect of any Claim (including any
                               loss arising from diminution in value);

                        (B)    in calculating any loss incurred or suffered by
                               the Indemnitees, credit shall be given for all
                               amounts or benefits received by the Indemnitees
                               or by a BTIB Company (other than those amounts to
                               which an Indemnitee is entitled under the IB
                               Deed) to the extent to which such amounts relate
                               to the BTIB Group or otherwise to the IB
                               Businesses except to the extent to which such.
                               amounts or benefits are applied to meet
                               liabilities of the IB Businesses or paid to a
                               member of the Deutsche Group pursuant to the IB
                               Deed;

                        (C)    Clause 8.6(e) shall apply to this Clause 32 as if
                               it were a Warranty;

                        (D)    the amount to be indemnified pursuant to this
                               Clause in respect of a Claim shall equal the
                               amount of the Claim plus any additional amount
                               such that the Indemnitee will be made whole in
                               respect the Claim in question on an after tax
                               basis; and

                        (E)    the Warrantor and each Indemnitee shall act
                               reasonably in relation to any circumstance which
                               could give rise to a claim under this Clause 32.

        (c)     (PRINCIPAL OBLIGATION) Clause 32(b) shall:

                (i)     be a principal obligation of the Warrantor and shall not
                        be treated as ancillary or collateral to any right or
                        obligation;

                (ii)    be a continuing indemnity and shall remain in full
                        force and effect without any limit as to time; and

                (iii)   subject to Clause 32(a), be construed broadly in
                        favour of Indemnitees.

                The rights of the Indemnitees under this Clause 32 shall not be
                limited or restricted by any other provision of this Deed, the
                IB Deed or any other Transaction Document and, without
                limitation, shall not be subject to any maximum or "cap",
                deductible or threshold, or any other  similar  limitation
                provision.

        (d)     (NO WITHHOLDINGS) The Warrantor will make all payments which may
                be or become due under Clause 32(b) free and clear and without
                deduction of any and all present and future Taxes, duties,
                levies, imposts, deductions, charges and withholdings of
                Australia or any other country or jurisdiction. If the Warrantor
                is compelled by law to deduct any such Tax, duty, levy, impost,
                deduction, charge or withholding it will pay to the Indemnitees
                (as the case may be) such additional amounts as may be necessary
                so that the net payment of

- --------------------------------------------------------------------------------
                                                                         PAGE 64
   71
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
                the amount due under Clause 32(b) after that deduction is not
                less than the payment would have been had there been no
                deduction.

        (e)     (NO SET OFF) Neither the Warrantor nor any member of the
                Vendors' Group shall set off or otherwise deduct or withhold any
                moneys which it may be or become liable to pay to an Indemnitee
                under this Clause 32 against any moneys which the Indemnitee may
                be or become liable to pay to the Warrantor or any of the
                Vendors or any other member of Vendors' Group or the Vendors'
                Guarantor whether under this Deed or otherwise.

- --------------------------------------------------------------------------------
                                                                         PAGE 65

   72
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

SCHEDULE 1

SHARES AND BUSINESSES
- --------------------------------------------------------------------------------

PART I
- --------------------------------------------------------------------------------
   COLUMN 1:     COLUMN 2:        COLUMN 3:     COLUMN 4:         COLUMN 5:

    VENDOR      COMPANY IN       NO. OF SALE  PURCHASE PRICE    PERCENTAGE OF
                WHICH SALE         SHARES                       ISSUED CAPITAL
             SHARES ARE HELD
================================================================================
BTLLC        BT Investments        1,108      $1,994,713,987         100%
             (Australia)     ordinary shares
             Limited
             (BTIA)
- --------------------------------------------------------------------------------
BTNZ         BT Funds            14,488,336     $89,839,683          100%
             Management      ordinary shares
             (NZ) Limited
- --------------------------------------------------------------------------------
BTNZ         BT New               212,643        $160,317            100%
             Zealand         ordinary shares
             Nominees
             Limited
- --------------------------------------------------------------------------------
BTNZ         BT  Portfolio       10,006,344     $8,628,389           100%
             Services (NZ)   ordinary shares
             Limited
- --------------------------------------------------------------------------------
BTID         BT Funds             349,999       $4,834,695         99.9999%
             Management       common shares
             Asia Limited
             (BTFMA)
- --------------------------------------------------------------------------------
BTNHK        BTFMA              1 common            $1              0.0001%
                                 share
- --------------------------------------------------------------------------------
BTFIC        BT Funds          100 Class A       $701,125            100%
             Management       common shares
             (Singapore)
             Limited
             (BTFMS)
- --------------------------------------------------------------------------------
BTFIC        BTFMS             160 Class B      $1,121,799           100%
                              common shares
- --------------------------------------------------------------------------------
                                                                          PAGE 1
   73
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

PART II
- --------------------------------------------------------------------------------
        COLUMN 1:                   COLUMN 2:                      COLUMN 3:
         VENDORS                    BUSINESS                     PURCHASE PRICE
================================================================================
BT Fund Managers             Offshore FM Business                $1
(Ireland) Limited            (Ireland)
- --------------------------------------------------------------------------------
BTI                          Offshore FM Business                $1
                             (UK)
- --------------------------------------------------------------------------------
BTC                          Offshore FM Business                $1
                             (Alberta)
- --------------------------------------------------------------------------------
BTC                          Offshore FM Business                $1
                             (Common Fund)
- --------------------------------------------------------------------------------

TOTAL PURCHASE PRICE:        A$2,100,000,000
(PARTS I AND II)

- --------------------------------------------------------------------------------
                                                                          PAGE 2
   74
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
SCHEDULE  2

THE COMPANIES AND OTHER GROUP MEMBERS AS AT COMPLETION
- --------------------------------------------------------------------------------
PART I - THE COMPANIES

1.   BTIA

     (a)  Issued capital: US$1,108 divided into 1,108 ordinary shares each fully
          paid

     (b)  Registered holders of shares and class and number of shares held:

          Registered holder              Class           No. of shares

          BTLLC                          Common          1,108

     (c)  Beneficial owner of shares and number of shares owned:

          Beneficial owner               Class           No. of shares

          BTLLC                          Common          1,108

     (d)  Place of incorporation:        Delaware, United States

     (e)  Registered office:             1209 Orange Street,
                                         Wilmington, Delaware,
                                         United States of America

     (f)  Nature of business:            Holding Company

2. BT FUNDS MANAGEMENT (NZ) LIMITED

     (a)  Issued capital NZ$14,488,336 divided into 14,488,336 ordinary shares
          each fully paid

     (b)  Registered holders of shares and class and number of shares held:

          Registered holder              Class           No. of shares

          BTNZ                           ordinary        14,488,336

     (c)  Beneficial owner of shares and number of shares owned:

          Beneficial owner               Class           No. of shares

          BTNZ                           ordinary        14,488,336

     (d)  Place of incorporation:        Auckland, New Zealand

     (e)  Registered office:             Level 7
                                         PriceWaterhouse Centre,
                                         66 Wyndham Street,
                                         Auckland, New Zealand

     (f)  Nature of business:            Funds management/securities dealer
- --------------------------------------------------------------------------------
                                                                          PAGE 1

   75
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------
3.   BT NEW ZEALAND NOMINEES LIMITED

     (a)  Issued capital:

          NZ$212,643 divided into 212,643 ordinary shares each fully paid

     (b)  Registered holders of shares and class and number of shares held:

          Registered holder              Class           No. of shares

          BTNZ                           ordinary        212,643

     (c)  Beneficial owner of shares and number of shares owned:

          Beneficial owner               class           No. of shares

          BTNZ                           ordinary        212,643

     (d)  Place of incorporation:        Auckland, New Zealand

     (e)  Registered office:             Level 7
                                         PriceWaterhouse Centre,
                                         66 Wyndham Street,
                                         Auckland, New Zealand

     (f)  Nature of business:            Custody

4.   BT PORTFOLIO SERVICES (NZ) LIMITED

     (a) Issued capital:

         NZ$10,006,344 divided into 10,006,344 ordinary shares each fully paid

     (b) Registered holders of shares and class and number of shares held:

         Registered holder               Class           No. of shares.

         BTNZ                            ordinary        10,006,344

     (c) Beneficial owner of shares and number of shares owned

         Beneficial owner                Class           No. of shares

         BTNZ                            ordinary        10,006,344

     (d) Place of incorporation:         Auckland, New Zealand

     (e) Registered office:              Level 7
                                         PriceWaterhouse Centre,
                                         66 Wyndham Street,
                                         Auckland, New Zealand

     (f) Nature of business:             Registry Management

5.   BTFMA

     (a) Issued capital:

         US$350,000 divided into 350,000 common shares each fully paid
- --------------------------------------------------------------------------------
                                                                          PAGE 2
   76
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

     (b)  Registered holders of shares and class and number of shares held:

          Registered holder             Class     No. of shares

          BTID                          common    349,999

          BTNHK                         common    1

     (c)  Beneficial owner of shares and number of shares owned:

          Beneficial owner              Class     No. of shares

          BTID                          common    349,999

          BTID                          common    1

     (d)  Place of incorporation:       Victoria, Hong Kong

     (e)  Registered office:            36/F Two Pacific Place,
                                        88 Queensway, Victoria,
                                        Hong Kong

     (f)  Nature of business:           Funds Management

6.   BTFMS

     (a)  Issued capital S$260 divided into 100 Class A common shares and 160
          Class B common shares each fully paid

     (b)  Registered holders of shares and class and number of shares held:

          Registered holder             Class             No. of shares

          BTFIC                         Class A Common    100

          BTFIC                         Class B Common    160

     (c)  Beneficial owner of shares and number of shares owned:

          Beneficial owner              Class             No. of shares

          BTFIC                         Class A Common    100

          BTFIC                         Class B Common    160

     (d)  Place of incorporation:       Singapore

     (e)  Registered office:            6 Temasek Boulevard,
                                        #23-03 Suntec Tower 4,
                                        Singapore 038986

     (f)  Nature of business:           Funds management

- --------------------------------------------------------------------------------
                                                                          PAGE 3
   77
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

PART II - SUBSIDIARIES

PART IIA

NAME OF COMPANY                                                  % BUSINESS

BT IB Holdings Pty Limited                                           100.00
Bankers Trust Australia Limited                                      100.00
   Airport Motorway Infrastructure No. 1 Limited                     100.00
   BT Australia (H.K.) Financial Services Limited                    100.00
   BT Australia Securities Pty Limited                               100.00
   BT IB Limited                                                     100.00
   BT Structured Equities Pty Limited                                100.00
   BT Australia Limited                                              100.00
     Aldisa Nominees Pty Limited                                     100.00
     Bankers Trust Life Limited                                      100.00
     Barvarde Pty Limited                                            100.00
     Bavian Pty Limited                                              100.00
     Bendalba Pty Limited                                            100.00
     Bittoorong Pty Limited                                          100.00
     BT (Queensland) Pty Limited                                     100.00
     BT Alex. Brown Australia Limited                                100.00
        BT Structured Equities Pty Limited                           100.00
        Buttonwood Nominees Pty Limited                              100.00
        Nanway Nominees Pty Limited                                  100.00
        Upmill Nominees Pty Limited                                  100.00
        Woodross Nominees Pty Limited                                100.00
     BT Australia Corporate Services Pty Limited                     100.00
        BT Finance Pty Limited                                       100.00
        BT Nominees Pty Limited                                      100.00
        Chifley Services Pty Limited                                 100.00
     BT Australia (HK) Limited                                       100.00
        BT Pacific Management Limited                                100.00
     BT Capital Markets Nominees Pty Limited                         100.00
     BT Corporate Finance Limited                                    100.00
     BT Funds Management (International) Limited                     100.00
     BT Funds Management Limited                                     100.00
        BT Tactical Asset Management Pty Limited                     100.00
     BT Infrastructure Pty Limited                                   100.00
     BT Lease Management Pty Limited                                 100.00
     *BT Life Nominees Pty Limited                                   100.00
     BT Management Services Pty Limited                              100.00
     BT Portfolio Services Limited                                   100.00
        BT Custodial Services Pty Limited                            100.00
          BT Custodians Limited                                      100.00
          Dellarak Pty Limited                                       100.00
        BT Finance & Investments Pty Limited                         100.00
        National Registry Services Pty Limited                       100.00
        National Registry Services (WA) Pty Limited                  100.00

- --------------------------------------------------------------------------------
                                                                          PAGE 4
   78
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

     BT Properties Pty Limited                                      100.00
     BT Risk Management Advisory Pty Limited                        100.00
     BT Securities Limited                                          100.00
     BT Securitisation Management Pty Limited                       100.00
     BT Technology Pty Limited                                      100.00
     Cazinon Pty Limited                                            100.00
     Cemasta Pty Limited                                            100.00
     Cenford Pty Limited                                            100.00
     Channar Investment Nominee Pty Limited                         100.00
        Pandrew Pty Limited                                         100.00
     Colmoro Pty Limited                                            100.00
     CrownLease Pty Limited                                         100.00
     Deccand Pty Limited                                            100.00
     Deline Pty Limited                                             100.00
     Dentire Pty Limited                                            100.00
     Erech Pty Limited                                              100.00
     Gemata Pty Limited                                             100.00
     Graldon Pty Limited                                            100.00
     Infrastructure Investments No 1 Pty Limited                    100.00
     Infrastructure Investment No 2 Limited                         100.00
     Kedgeree Pty Limited                                           100.00
     Kepile Pty Limited                                             100.00
     Mequab Pty Limited                                             100.00
     Mulcair Pty Limited                                            100.00
     Oniston Pty Limited                                            100.00
     Penderlyn Pty Limited                                          100.00
     Pokrova Pty Limited                                            100.00
     *Portland Investments A Pty Limited                            100.00
     *Portland Investments B Pty Limited                            100.00
     *Portland Investments C Pty Limited                            100.00
     Rawpindi Pty Limited                                           100.00
     Rugarno Pty Limited                                            100.00
     Sanlucar Pty Limited                                           100.00
     Stenquab Pty Limited                                           100.00
     Talamba Pty Limited                                            100.00
     Taralie Pty Limited                                            100.00
     Tecsal Pty Limited                                             100.00
     Vanne Pty Limited                                              100.00
     Wuxta Pty Limited                                              100.00
   BT Science Holdings Limited                                      100.00
     Aluminium Casting Pty Limited                                  100.00
     Anti-Asthma R & D Pty Ltd                                      100.00
     BT Computer Leasing Pty Limited                                100.00
     BT Project Finance Pty Limited                                 100.00
     BT R&D No 1 Pty Limited                                        100.00
     BT R&D No 7 Pty Limited                                        100.00
     Colanera Pty Limited                                           100.00
     Ensenaba Pty Limited                                           100.00
     Garachine Pty Limited                                          100.00

- --------------------------------------------------------------------------------
                                                                          PAGE 5
   79
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

     Himakin Pty Ltd                                                 100.00
     Kayoota Pty Limited                                             100.00
     Sucrafeed No 1 Pty Limited                                      100.00
     Sucrafeed No 2 Pty Limited                                      100.00
   Santorini One Pty Limited                                         100.00
   Structured Prime Asset Receivables (SPARS) No. 1 Limited          100.00

- --------------------------------------------------------------------------------
                                                                          PAGE 6
   80
                                                                    Allen  Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

PART IIB. BTIB COMPANIES

                                                                        % OWNED

BT IB Holdings Pty Limited                                               100.00
   Airport Motorway Infrastructure No. 1 Limited                         100.00
   BT Australia (H-K) Financial Services Limited                         100.00
BT Australia Securities Pty Limited                                      100.00
   BT IB Limited                                                         100.00
   BT Structured Equities Pty Limited                                    100.00
     Aldisa Nominees Pty Limited                                         100.00
     Barvarde Pty Limited                                                100.00
     Bavian Pty Limited                                                  100.00
     Bendalba Pty Limited                                                100.00
     Bittoorong Pty Limited                                              100.00
     BT Alex. Brown Australia Limited                                    100.00
        Buttonwood Nominees Pty Limited                                  100.00
        Nanway Nominees Pty Limited                                      100.00
        Upmill Nominees Pty Limited                                      100.00
        Woodross Nominees Pty Limited                                    100.00
   BT Australia (HK) Limited                                             100.00
        BT Pacific Management Limited                                    100.00
   BT Capital Markets Nominees Pty Limited                               100.00
   BT Corporate Finance Limited                                          100.00
   BT Infrastructure Pty Limited                                         100.00
   BT Lease Management Pty Limited                                       100.00
   BT Management Services Pty Limited                                    100.00
   BT Properties Pty Limited                                             100.00
   BT Risk Management Advisory Pty Limited                               100.00
   BT Securitisation Management Pty Limited                              100.00
   BT Technology Pty Limited                                             100.00
   Cazinon Pty Limited                                                   100.00
   Cemasta Pty Limited                                                   100.00
   Cenford Pty Limited                                                   100.00
   Channar Investment Nominee Pty Limited                                100.00
     Pandrew Pty Limited                                                 100.00
   Colmoro Pty Limited                                                   100.00
   CrownLease Pty Limited                                                100.00
   Deccand Pty Limited                                                   100.00
   Deline Pty Limited                                                    100.00
   Dentire Pty Limited                                                   100.00
   Erech Pty Limited                                                     100.00
   Gemata Pty Limited                                                    100.00
   Graldon Pty Limited                                                   100.00

- --------------------------------------------------------------------------------
                                                                          PAGE 7
   81
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

    Infrastructure Investments No 1 Pty Limited                        100.00
    Infrastructure Investment No 2 Limited                             100.00
    Kedgeree Pty Limited                                               100.00
    Kepile Pty Limited                                                 100.00
    Mequab Pty Limited                                                 100.00
    Mulcair Pty Limited                                                100.00
    Penderlyn Pty Limited                                              100.00
    Pokrova Pty Limited                                                100.00
    *Portland Investments A Pty Limited                                100.00
    *Portland Investments B Pty Limited                                100.00
    *Portland Investments C Pty Limited                                100.00
    Rawpindi Pty Limited                                               100.00
    Rugarno Pty Limited                                                100.00
    Sanlucar Pty Limited                                               100.00
    Stenquab Pty Limited                                               100.00
    Talamba Pty Limited                                                100.00
    Taralie Pty Limited                                                100.00
    Tecsal Pty Limited                                                 100.00
    Vanne Pty Limited                                                  100.00
    Wuxta Pty Limited                                                  100.00
  BT Science Holdings Limited                                          100.00
    Aluminum Casting Pty Limited                                       100.00
    Anti-Asthma R & D Pty Ltd                                          100.00
    BT Computer Leasing Pty Limited                                    100.00
    BT Project Finance Pty Limited                                     100.00
    BT R&D No 1 Pty Limited                                            100.00
    BT R&D No 7 Pty Limited                                            100.00
    Colanera Pty Limited                                               100.00
    Ensenaba Pty Limited                                               100.00
    Garachine Pty Limited                                              100.00
    Himakin Pty Ltd                                                    100.00
    Kayoota Pty Limited                                                100.00
    Sucrafeed No 1 Pty Limited                                         100.00
    Sucrafeed No 2 Pty Limited                                         100.00
  Santorini One Pty Limited                                            100.00
  Structured Prime Asset Receivables (SPARS) No. 1 Limited             100.00

PART IIC. FM COMPANIES

  Bankers Trust Australia Limited                                      100.00
  BT Australia Limited                                                 100.00
  Bankers Trust Life Limited                                           100.00
  BT (Queensland) Pty Limited                                          100.00
  BT Australia Corporate Services Pty Limited                          100.00
  BT Finance Pty Limited                                               100.00
  BT Nominees Pty Limited                                              100.00

- --------------------------------------------------------------------------------
                                                                          PAGE 8
   82
                                                                     Allen Allen
SHARE SALE DEED                                                        & Hemsley
- --------------------------------------------------------------------------------

  Chifley Services Pty Limited                                         100.00
  BT Funds Management (International) Limited                          100.00
  BT Funds Management Limited                                          100.00
  BT Tactical Asset Management Pty Limited                             100.00
  * BT Life Nominees Pty Limited                                       100.00
  BT Portfolio Services Limited                                        100.00
  BT Custodial Services Pty Limited                                    100.00
  BT Custodians Limited                                                100.00
  Dellarak Pty Limited                                                 100.00
  BT Finance & Investments Pty Limited                                 100.00
  National Registry Services Pty Limited                               100.00
  National Registry Services (WA) Pty Limited                          100.00
  BT Securities Limited                                                100.00
  Oniston Pty Limited                                                  100.00

 (*) In liquidation

- --------------------------------------------------------------------------------
                                                                          PAGE 9
   83
                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

SCHEDULE 3

GROUP RESTRUCTURING
- --------------------------------------------------------------------------------

The required pre-Completion group restructuring steps are as set out below.

     (a)  The ordinary shares in BTCO are transferred from BT Investments
          (Australia) Limited to BTFIC for their issue value (which the Vendors
          believe to be not materially different from its market value) and
          before this transfer, the redeemable preference shares held by BT
          Investments (Australia) Limited in BTCO shall be redeemed.

     (b)  On or before the Completion Date, each subsidiary company of BTAL
          shall, to the extent permitted by law, declare and pay such dividends,
          which may be franked to an extent which does not exceed the maximum
          required franking amount (as that term is defined in section 160AQE of
          the 1936 Act), as may be required to enable BTAL to declare and pay
          the dividends referred to in paragraph (c).

     (c)  Before the Completion Date, BTAL will declare, so as to create an
          actual indebtedness in favour of BT Investments (Australia) Limited,
          two dividends in favour of BT Investments (Australia) Limited as
          follows:

          (i)   to the maximum extent permitted by law, a dividend in an amount
                not exceeding A$1.1 billion, to be paid on the Completion Date;
                and

          (ii)  to the maximum extent permitted by law, a dividend payable on
                the delivery of the Completion Statement and the Vendors'
                Accountants Report as provided for in Clause 10.2 equal to the
                aggregate of:

                (A)  the amount necessary to reduce the Net Assets as disclosed
                     in the Completion Statement to a figure of $382.8 million;
                     and

                (B)  an interest factor of 5% per annum from the Completion Date
                     to the date of payment,

          such dividends to be franked to an extent which does not exceed the
          maximum required franking amount (as that term is defined in section
          160AQE of the 1936 Act).

     (d)  BT Investments (Australia) Limited will declare before the Completion
          Date and having a record date before the Completion Date so as to
          create an actual indebtedness in favour of BT Investments (Australia)
          LLC, two dividends in favour of BT Investments (Australia) LLC as
          follows:

- --------------------------------------------------------------------------------
                                                                         PAGE 1
   84

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          (i)  a dividend in an amount equal to the dividend declared in
               paragraph (c)(i), to be paid to BT Investments (Australia) LLC on
               the Completion Date; and

          (ii) a dividend in an amount calculated on the basis set out in
               paragraph (c)(ii), which dividend shall be payable to BT
               Investments (Australia) LLC on the date of receipt by BT
               Investments (Australia) Limited of the dividend to be paid under
               paragraph (c)(ii).

- --------------------------------------------------------------------------------
                                                                          PAGE 2
   85

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

SCHEDULE 4

WARRANTIES AND OTHER OBLIGATIONS
- --------------------------------------------------------------------------------

PART I - WARRANTOR'S WARRANTIES

1.   SALE SHARES, POWER AND AUTHORITY

1.1  Each Vendor is the registered holder of the Sale Shares appearing opposite
     its name in Schedule 1.

1.2  Part I of Schedule 2 sets out the beneficial owner of the Sale Shares.

1.3  The Sale Shares are all fully paid and comprise the whole of the issued
     ordinary share capital of the Companies. There are no commitments in place
     under which a Company is obliged at any time to issue any shares or other
     securities convertible into shares.

1.4  There are no Encumbrances over or affecting the Sale Shares.

1.5  Each of the Vendors, the Vendors' Guarantor and the Warrantor has the power
     to enter into and perform this Deed and the Transaction Documents to which
     it is a party and has obtained all necessary consents to enable it to do
     so. This Deed and each of the Transaction Documents has been duly executed
     by each of the Vendors, the Vendors' Guarantor and the Warrantor who is a
     party to any such document and is a legal, valid and binding agreement
     enforceable against it in accordance with the terms of this Deed or such
     document, as appropriate.

1.6  The entry into and performance of this Deed by each of the Vendors, the
     Vendors' Guarantor and the Warrantor does not constitute a breach of any
     obligation (including any statutory, contractual or fiduciary obligation),
     or default under any agreement or undertaking, by which it is bound.

1.7  No meeting has been convened or resolution proposed, or petition presented,
     and no order has been made, for the winding-up of a Vendor, the Vendors'
     Guarantor and or the Warrantor. No voluntary arrangement has been proposed
     or reached with any creditors of a Vendor, the Vendors' Guarantor and or
     the Warrantor. Each of the Vendors, the Vendors' Guarantor and the
     Warrantor is able to pay its debts as and when they fall due.

2.   GROUP MEMBERS AND OTHER COMPANIES

2.1  Each Group Member:

     (a)  is duly incorporated and accurately described in Schedules 1 and 2;

     (b)  has full corporate power to own its properties, assets and business
          and to carry on its business as it is now conducted; and

- --------------------------------------------------------------------------------
                                                                          PAGE 1
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (c)  has done everything necessary to do business lawfully in all
          jurisdictions in which its business is carried on.

2.2  There are no Encumbrances over or affecting any of the shares in any Group
     Member.

2.3  No meeting has been convened or resolution proposed, or petition or other
     process presented or threatened, and no order has been made, for the
     winding-up of a Group Member. No distress, execution or other similar order
     or process has been levied on any of the property or assets of a Group
     Member. No voluntary arrangement has been proposed or reached with any
     creditors of a Group Member. No receiver, receiver and manager or other
     controller (as defined in the Corporations Law), administrator or other
     similar officer has been appointed, or is threatened or expected to be
     appointed, in relation to a Group Member or over any part of the assets of
     a Group Member. There are no circumstances justifying such an appointment.
     Each Group Member is able to pay its debts as and when they fall due.

2.4  No writ of execution has issued against a Group Member or the property of a
     Group Member and, as far as the Warrantor is aware, there are no
     circumstances justifying a writ.

2.5  On the Completion Date, BTAL shall be the registered and beneficial owner
     free and clear of all Encumbrances of 30% of the fully paid issued capital
     in:

     (a) the Malaysian Company; and

     (b) Commerce Asset Fund Managers Sdn Bhd, subject to Clause 2.9

2.6  On the Completion Date, BT Funds Management (International) Limited shall
     be the registered and beneficial owner free and clear of all Encumbrances
     of 25% of the issued shares in Thai Capital Management Co., Limited.

3.   STATUTORY ACCOUNTS, ACCOUNTS AND COMPLETION STATEMENT

3.1  The Statutory Accounts have been prepared in accordance with:

     (a)  the Corporations Law, including:

          (i)  giving a true and fair view of BTAL's and consolidated entities'
               financial position as at the Balance Date and of their
               performance for the year ended on that date; and

          (ii) complying with accounting standards and the Corporations
               Regulations; and

     (b)  other mandatory professional reporting requirements.

3.2  The Accounts have been prepared in accordance with the Accounting
     Principles.

3.3  The Completion Statement will:

     (a)  be prepared; and

- --------------------------------------------------------------------------------
                                                                          PAGE 2
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (b)  present fairly the assets and liabilities of the Group and the
          Offshore FM Businesses as at the Completion Date,

     in accordance with the Accounting Principles.

3.4  The Records taken as whole (but not including the Accounts or Completion
     Statement), present fairly the trading transactions, financial and
     contractual position, assets and liabilities of the Group Members and the
     Business in all material respects.

3.4  The Accounts insofar as they relate to the FM Businesses present fairly, in
     all material respects in accordance with the Accounting Principles, the
     assets and liabilities of the FM Businesses as at the Balance Date.

3.5  On the Completion Date, the FM Businesses will have no material
     liabilities, except as and to the extent accrued or reserved against as
     liabilities and provided for in the Completion Statement.

4.   REAL PROPERTY

4.1  (REAL PROPERTY) The Real Property comprises all the freehold and leasehold
     land and premises owned, used or occupied by any Group Member (except " for
     real property held by a Group Member as trustee or custodian on behalf of a
     collective investment scheme or otherwise on behalf of others in the
     ordinary and usual course of its business). No Group Member has any
     freehold or leasehold interest in land except for the Real Property.

4.2  (OCCUPATION) The relevant Group Member has exclusive occupation and quiet
     enjoyment of the relevant item of Real Property.

5.   EMPLOYEES

5.1  (DISCLOSURE MATERIAL) The information in the Disclosure Material with
     respect to:

     (a)  the position of the officers and employees of each Group Member;

     (b)  the employment terms (including incentives) of the officers and
          employees of each Group Member; and

     (c)  the period of service of the officers and employees of each Group
          Member and accrued long service leave and annual leave entitlements,

     is accurate in all material respects as at the date shown in the Disclosure
     Material.

5.2  (PLANS AND POLICIES) The Plans and Policies referred to in Clause 4(d) and
     the Specific Employee Disclosures, contain the full terms as at the date of
     the Disclosure Letter of the severance and redundancy entitlements of all
     Employees other than those which arise under statute or are implied by
     general law.

5.3  (EQUITY PLANS) All plans under which Employees have, or may have been
     provided with shares, other forms of equity, rights of conversion into
     equity,

- --------------------------------------------------------------------------------
                                                                          PAGE 3
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     or rights in substitution therefor have been terminated and all amounts
     payable in relation thereto have been paid or will be fully provided for in
     the Completion Statement.

5.4  (SPECIFIC EMPLOYEE DISCLOSURES) The Specific Employee Disclosures are
     accurate in all material respects.

6.   ASSETS

6.1  Upon Completion the Group will own, or have the right (on terms no less
     favourable to the Group than the terms applicable as at the date of this
     Deed) to use all of the properties and assets which, together with the
     assets and services to be provided pursuant to the Shared Services
     Agreements, are all of the material properties and assets used to conduct
     the FM Businesses as historically conducted.

6.2  All material licences, consents, permits and authorities (public and
     private) have been obtained by each of the Group Members to enable it to
     carry on the Business in the places and in the manner in which such
     Business is now carried on by it and all such licences, consents, permits
     and authorities are valid and subsisting.

6.3  The Warrantor does not know of any factor which is likely to prejudice the
     continuance or renewal of any license, consent, permission authority or
     permit referred to in Warranty 6.2.

6.4  That:

     (a)  BTC is the registered proprietor in Australia of the registrations of
          the Trade Marks (the REGISTRATIONS);

     (b)  each Registration is valid and subsisting and there is no matter, fact
          or circumstance which would render void or voidable nor otherwise
          susceptible to removal, the registration of any Registration on any
          grounds (including under section 92(4)(a) of the Trade Marks Act 1995
          (Cth));

     (c)  there is no restriction, limitation, outstanding encumbrance or other
          matter preventing BTC from assigning any of the Trade Marks and the
          Registration to the Assignee (as defined in the Deed of Assignment of
          Trade Marks); and

     (d)  in respect of each Trade Mark, the use of that mark by the Assignee
          upon or in relation to the goods or services in respect of which the
          mark is registered will not infringe the rights of any other person
          and will not give rise to an obligation on the part of the Assignee to
          pay compensation or a royalty to any other person.

7.   CONDUCT OF BUSINESS

     Except for:

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                                                                          PAGE 4
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (a)  any impacts of either the merger between the Warrantor and BTC or the
          announcement by the Warrantor of the intended disposal of the
          Business; and

     (b)  the implementation of the Stewardship Document,

     the Business has been conducted in all material respects in the ordinary
     and usual course since the Balance Date.

8.   DISCLOSURE MATERIAL

     The Disclosure Material, taken as a whole, is complete and accurate in all
     material respects and includes all the information which a prospective
     purchaser of the FM Businesses in the position of the Purchaser would
     reasonably require for the purpose of making a decision whether or not to
     acquire the FM Businesses. For the purposes of this Warranty, a person in
     the position of the Purchaser is to be taken as having taken, in full the
     opportunity referred to in Clause 2 of Part III of this Schedule and to
     have obtained all professional advice from the Advisers used by the
     Purchaser which a prudent purchaser could reasonably be expected to have
     sought.

9.   LITIGATION AND AUTHORISATIONS

9.1  There is no material litigation against a Group Member which is current,
     pending or threatened nor of any circumstance, act or omission which is
     likely to give rise to any material litigation against a Group Member
     including litigation arising out of any acts or omissions of Group Members
     in acting in any capacity in relation to any superannuation trust,
     prescribed interest undertaking or managed investment scheme, arising out
     of any breach of any client mandates or arising out of any product or
     service provided by such Group Member.

9.2  Each Group Member:

     (a)  holds all necessary Authorisations necessary for the lawful conduct of
          its Business; and

     (b)  has, subject to exemptions or waivers, conducted its Business
          materially in accordance with the conditions imposed by its
          Authorisations.

10.  TRUSTS

10.1 A Group Member is the trustee, manager or single responsible entity (SRE)
     of all of the trusts and managed investments schemes listed in Schedule 13
     (each a TRUST).

10.2 Each of:

     (a)  the trust deed of each Trust; and

     (b)  the supplemental deeds amending those trust deeds; and

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                                                                          PAGE 5
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

     (c)  the deeds effecting a retirement or appointment of a trustee, manager
          or SRE of those Trusts;

     has been validly executed and, to the extent required by law, duly approved
     by the Australian Securities and Investments Commission (or its
     predecessors or delegates).

10.3 Except as required or contemplated by .MIA Transition, no circumstance has
     occurred or is proposed in relation to a Group Member or any Trust that
     will or may give rise to the Group Member ceasing to be the trustee,
     manager or SRE of the Trust.

10.4 Each Group Member has complied in all material respects with:

     (a)  all of the applicable provisions included or taken to be included in
          the trust deeds of all Trusts; and

     (b)  the Corporations Law and other applicable laws,

     while acting as the trustee, manager or SRE of the Trusts.

10.5 Except as required or contemplated by MIA Transition or as required by the
     Listing Rules of the Australian Stock Exchange to approve a transaction
     relating to a Trust, no Group Member proposes to hold a meeting of
     unitholders of any Trust of which it is trustee, manager or SRE and the
     Warrantor is not aware of any proposal to requisition such a meeting.

10.6 The Warrantor does not know of any circumstance giving rise to an existing
     or potential loss by a Group Member of its right of indemnity from a
     Trust.

11.  YEAR 2000 ISSUE

     The Warrantor and the Vendors warrant that the Group Members will continue
     to carry out the Vendors' Group Year 2000 Issues compliance program as
     identified in the Disclosure Material with all reasonable due diligence up
     to the Completion Date.

PART II - TAX WARRANTIES

12.  TAX WARRANTIES

12.1 (TAX PROVISION AND ACCOUNTS) The Completion Statement contains Tax
     Provisions, reserves, accruals or allowances adequate to cover Taxes
     payable for or in respect of each Group Member for all periods up to the
     Completion Date. For the purposes of this Warranty 12.1, a Tax payable for
     or in respect of each Group Member includes Taxes for which the Group
     Member becomes liable by reason of its membership or inclusion in any,
     consolidated or combined tax group or Taxes for which such Group Member may
     have a liability by reason of any tax sharing agreement or other
     contractual obligation.

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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

12.2 (DEDUCTIONS) Each Group Member has deducted all Tax required to be deducted
     from any payments made by it. When necessary, the relevant Group Member has
     accounted for or remitted on a timely basis that Tax in accordance with
     relevant law.

12.3 (PAYMENT OF TAX) All Taxes which have been or were deemed to have been
     assessed or imposed on any Group Member, or have been required to be
     withheld from any payment made by any Group Member to another person:

     (a)  which have become due and payable, have been paid by the due date for
          payment by that Group Member; and

     (b)  which are not yet payable but become payable before the Completion
          Date, shall be paid by the due date.

12.4 (RETURNS ETC.) All necessary returns:

     (a)  have been submitted by each Group Member to each relevant Taxation
          Authority in respect of Taxes for or in respect of that Group Member
          for all periods up to the date of this Deed; and

     (b)  will continue to be submitted when due in respect of periods after the
          date of this Deed until the Completion Date in respect of those later
          periods.

12.5 (FRANKING AND CAPITAL) Each Group Member:

     (a)  maintains and has retained for the period required by law, accurate
          records. of franking credits and franking debits (as defined in the
          Tax Act) in respect of its current and earlier accounting periods;

     (b)  has franked to no less than the required franking amount (as provided
          for in section 160AQE of the Tax Act) any dividend declared or paid
          since the Balance Date;

     (c)  shall have a Franking Account at 30 June 1999 and at the Completion
          Date the balance in which shall not be less than zero; and

     (d)  will not have a tainted share capital account (as defined in the Tax
          Act) as at the Completion Date.

12.6 (INVESTIGATIONS AND DISPUTES) Neither the Warrantor nor any Group Member is
     aware that the Australian Commissioner of Taxation or any other Taxation
     Authority is at present conducting, or proposing to conduct, any
     investigation into all or any part of the tax affairs of any Group Member
     and there is no unresolved dispute with any Taxation Authority.

12.7 (GROUP LOSS TRANSFERS) As far as the Warrantor is aware, any loss which has
     been transferred to or by any Group Member was validly transferred for the
     purposes of section 80G of the 1936 Act or of Division 170 of the 1997 Act
     or any corresponding provision or provision to a similar effect under the
     applicable law of any foreign jurisdiction.

12.8 (RECORDS) As far as the Warrantor is aware, each Group Member has retained
     for the period required by law all records required to be kept pursuant to
     any Tax Law.

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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

12.9  (TAX CLASSIFICATION OF BTIA FOR US FEDERAL INCOME TAX PURPOSES) For US
      federal income tax purposes, BTIA is an association taxable as a
      corporation.

12.10 (STAMP DUTY) No stamp duty liability will be triggered in respect of
      transactions entered into prior to the date of this Deed as a consequence
      of the execution of: the Deed; of the other Transaction Documents; of any
      instruments entered into under the Deed or the other Transaction
      Documents.

12.11 (DEGROUPING) Section 160ZZOA of the 1936 Act would not apply to deem a
      disposal of an asset by a Group Member, and section 104475 of the 1997 Act
      will not deem a CGT event to happen in relation to a Group Member, as a
      result of entry into a Transaction Document by the Purchaser.

12.12 (GROUP MEMBERSHIP) BTIA and the Group Members listed as 100% subsidiaries
      of BTIA in Part II of Schedule 2 will be members of the same wholly owned
      group as defined in Subdivision 975-W of the 1997 Act at the Completion
      Date.

PART III - PURCHASER'S AND THE PURCHASER'S GUARANTOR WARRANTIES

1.    POWER AND AUTHORITY

1.1   (POWER AND AUTHORITY) The Purchaser and the Purchaser's Guarantor have the
      power and authority to execute and exchange this Deed and perform and
      observe all its terms. This Deed has been duly executed by the Purchaser
      and the Purchaser's Guarantor and is a legal, valid and binding agreement
      of the Purchaser and the Purchaser's Guarantor enforceable against them in
      accordance with the terms of this Deed.

1.2   (SOLVENCY) No step has been taken in relation to any of the Purchaser or
      Purchaser's Guarantor or their respective Related Bodies Corporate to wind
      it up, appoint a controller or administrator, seize or take possession of
      any of their assets or make an arrangement, compromise or composition with
      any of their creditors.

2.    DISCLOSURE MATERIAL

      The Purchaser and the Purchaser's Guarantor have been given the
      opportunity by the Vendors to review the Disclosure Material, have taken
      that opportunity and have independently and without the benefit of any
      inducement, representations or warranty (other than the Warranties
      provided in Parts I and II of this Schedule) from any member of the
      Vendors' Group or the Deutsche Group determined to enter into this Deed.
      The Purchaser and the Purchaser's Guarantor have not reviewed the IB
      Disclosure Material.

- --------------------------------------------------------------------------------
                                                                          PAGE 8
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

PART IV  - CONTINUING OBLIGATIONS OF PURCHASER

3.   OBLIGATION TO NOTIFY

     Irrespective of whether a Claim arises, the Purchaser shall notify the
     Warrantor in writing of any notice or commencement of any audit or
     investigation or exercise of powers under section 263 or 264 of the Tax Act
     or dispute with any Taxation Authority in relation to the Tax affairs of a
     Group Member, within 3 business days of receipt of such notice or of such
     commencement (whichever occurs first), which arises in relation to the
     transactions contemplated by the Transaction Documents or any Group Member
     in relation to any period up to the end of the tax year in which the
     Completion Date occurs.

4.   COMPLETION YEAR TAX RETURN

     The Purchaser shall give the Vendor the opportunity to review any income
     tax return to be filed by any Group Member in respect of the period up to
     the end of the Tax Year under the Tax Act in which the Completion Date
     occurs at least 15 working days prior to them being filed, and give bona
     fide and reasonable consideration to any of the Vendor's comments thereon
     and requests in relation thereto, and once filed, provide the Vendor with a
     copy of such returns as filed.

5.   PRESERVATION

     The Purchaser shall not, without the approval of the Vendor (such approval
     not to be unreasonably withheld):

     (a)  amend, or permit the self amendment by the relevant Group Member of,
          any tax return lodged by a Group Member prior to the Completion Date;

     (b)  apply for any binding or non-binding advance opinion, determination or
          ruling in respect of any event which occurred prior to or on the
          Completion Date;

     (c)  do any other thing which, apart from the operation of any threshold
          under Clause 8.6(g), might reasonably lead to any Claim for breach of
          this Deed.

6.   OTHER OBLIGATIONS

     The Purchaser:

     (a)  shall not procure or cause the negation or modification of any
          election or choice made by, on behalf of, or in respect of a Group
          Member such that there is an increase in liability of the consolidated
          group of the Vendors' Guarantor for United States Taxes (or any

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                                                                          PAGE 1
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                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

          decrease in the amount of foreign tax credits of that consolidated
          group) in respect of the period up to and including the end of the Tax
          Year next ending after the Completion Date;

     (b)  shall make, at the Completion Date, a joint election with the Vendor's
          Guarantor, under Section 338(h)(10) of the Internal Revenue Code, to
          treat the sale of BTIA Shares as a sale of the assets of BTIA, which
          election shall be irrevocable;

     (c)  shall make, at the Completion Date, an election under Section 338(g)
          of the Internal Revenue Code to treat BTAL and all of its subsidiaries
          as having sold their assets for US Tax purposes, which election shall
          be irrevocable; and

     (d)  shall permit the lodgment of Ruling Requests by the Vendors or
          Warrantor (and at their cost) on behalf of such Group Members as may
          be nominated by them. The Ruling Requests shall be prepared having due
          regard to the maintenance of the good name, reputation and
          relationship with the Australian Taxation Office of each of the
          Purchaser, the Purchaser's Guarantor, the Group Members, the Vendors
          and the Warrantor, and in particular, to prevent any actual or
          perceived damage to such good name, reputation or relationship flowing
          from recent uninformed and inaccurate press coverage of this
          transaction. To facilitate the preparation and lodgment of the Ruling
          Requests the Purchaser shall grant or procure the grant of access to
          the materials and records of such Group Members as shall be necessary
          to lodge the Ruling Requests, subject always to the preservation of
          the confidentiality of those records to the same degree provided for
          in Clause 8.10(b)(viii) of this Deed. The Purchaser shall have a
          reasonable opportunity to review and comment promptly upon the Ruling
          Requests before they are lodged with the Australian Taxation Office
          and in this regard the Vendor or Warrantor will keep the Purchaser
          informed of the timing of lodgment of the Ruling Requests and the time
          available to the Purchaser to review and comment on the requests.

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                                                                          PAGE 2
   95

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

SCHEDULE 5

POWER OF ATTORNEY
- --------------------------------------------------------------------------------

DEED POLL  dated                1999 by:

[*] LIMITED (ACN [*] incorporated in [*] of [*] (the  Principal)

RECITES that the Principal has transferred to [*] (ACN [*] (the PURCHASER)
the full beneficial interest in [*] ordinary shares of $[*] each fully paid
(the SHARES) in [*] [Limited] (the COMPANY) of which the Principal is the
registered holder.

APPOINTS

1.   APPOINTMENT AND AUTHORITY

     In consideration of the Purchaser purchasing the Shares the Principal
     appoints each of the directors for the time being of the Purchaser (each an
     Attorney) severally as the attorney of the Principal with authority to
     exercise all rights attaching to the Shares including, without limitation,
     the rights to:

     (a)  receive notices of and attend and vote at all meetings of the members
          of the Company;

     (b)  consent to short notice and execute all instruments of proxy or other
          documents for the purpose of enabling the Purchaser to attend and vote
          at any such meeting; and

     (c)  appoint and remove directors and alternate directors of the Company.

2.   RATIFICATION

     The Principal will ratify everything done or caused to be done by an
     attorney under this Power of Attorney.

3.   TERM

     This Power of Attorney shall terminate upon the registration of the
     Purchaser as the holder of the Shares. It may not be revoked by the
     Principal.

EXECUTED as a Deed,

[*] LIMITED                   )
                              )

- -------------------------------       ------------------------------------------
Signature                             Signature

- ------------------------------        ------------------------------------------
Print name                            Print name

- ------------------------------        ------------------------------------------
Office held                           Office held

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                                                                          PAGE 1
   96

                                                                    Allen Allen
SHARE SALE DEED                                                       & Hemsley
- --------------------------------------------------------------------------------

SCHEDULE 6

COMPLETION STATEMENT
- --------------------------------------------------------------------------------

The Completion Statement shall be in such form as the Vendors' Accountants deem
appropriate for the purpose, but in any event will contain summary schedules as
per the attached templates.

- --------------------------------------------------------------------------------
                                                                          PAGE 1
   97
                                                                       EXHIBIT 1

                  EXHIBIT TO SCHEDULE 6 OF THE SHARE SALE DEED

                   TEMPLATE FOR COMPLETION STATEMENT OF BTAG

                                                                       BTFM (including   BTIB (excluding
                                                                       Offshore FM       Offshore IB
                                                                       Businesses)(1)    Businesses)       Surplus Capital    BTAG
                                                                       ---------------   ---------------   ---------------    ----
                                                                                                               
SCHEDULE 20010   Cash & Due From Banks:
SCHEDULE 20030   IB Deposits With Banks
SCHEDULE 20055   Securities Purchased Under Resale Agreement
SCHEDULE 20070   IB & NIB Trading Account Assets
SCHEDULE 20105   Securities Available For Sale
SCHEDULE 20110   Investment In Consol Sub
SCHEDULE 20130   Loans & Leases Intercompany
SCHEDULE 20131   Gross Loans & Lease Financing
SCHEDULE 20132   Overdrafts
SCHEDULE 20160   Unearned Income
SCHEDULE 20180   Allowance For Credit Loss
SCHEDULE 20210   Premises & Equipment Net
SCHEDULE 20230   Bankers' Acceptances
SCHEDULE 20240   Accrued Int Rec, A/C Rec & Rec On Sec Transactions
SCHEDULE 20270   Goodwill
SCHEDULE 20270   Other Assets

                 Total Assets

SCHEDULE 20360   Interest Bearing Deposits
SCHEDULE 20390   IB & NIB Trading Account Liabilities
SCHEDULE 20395   Sec Sold Under Repurchase Agreements
SCHEDULE 20400   Other Short Term Borrowings
SCHEDULE 20450   Accrued Expenses & Accrued Interest Payable
SCHEDULE 20470   Other Liabilities
SCHEDULE 20510   Long Term Debt

                 Total Liabilities

                 Net Assets                                                95,500,000        287,300,000        --       382,800,000
                                                                           ----------        -----------       ----      -----------

Note:

(1)              Refer Exhibit 2

06/17/1999                                                                 Confidential                                  Page 1 of 4

   98
                                                                       EXHIBIT 2

                   TEMPLATE FOR COMPLETION STATEMENT OF BTAG

                       COMPOSITION OF BTFM BALANCE SHEET

                                                                                                    BT Funds
                                                                           BT Funds                 Management
                                                                           Management               Offshore
                                                                           within BTAL Group        Businesses(1)       Total BTFM
                                                                           -----------------        -------------       ----------
                                                                                                            
SCHEDULE 20010   Cash & Due From Banks:
SCHEDULE 20030   IB Deposits With Banks
SCHEDULE 20055   Securities Purchased Under Resale Agreement
SCHEDULE 20070   IB & NIB Trading Account Assets
SCHEDULE 20105   Securities Available For Sale
SCHEDULE 20110   Investment In Consol Sub
SCHEDULE 20130   Loans & Leases Intercompany
SCHEDULE 20131   Gross Loans & Lease Financing
SCHEDULE 20132   Overdrafts
SCHEDULE 20160   Unearned Income
SCHEDULE 20180   Allowance For Credit Loss
SCHEDULE 20210   Premises & Equipment Net
SCHEDULE 20230   Bankers' Acceptances
SCHEDULE 20240   Accrued Int Rec, A/C Rec & Rec On Sec Transactions
SCHEDULE 20270   Goodwill
SCHEDULE 20270   Other Assets (Exhibit 2.1)

                 Total Assets

SCHEDULE 20360   Interest Bearing Deposits
SCHEDULE 20390   IB & NIB Trading Account Liabilities
SCHEDULE 20395   Sec Sold Under Repurchase Agreements
SCHEDULE 20400   Other Short Term Borrowings
SCHEDULE 20450   Accrued Expenses & Accrued Interest Payable
SCHEDULE 20470   Other Liabilities (Exhibit 2.1)
SCHEDULE 20510   Long Term Debt

                 Total Liabilities

                 Net Assets                                                                                             95,500,000
                                                                           -----------------        -------------       ----------

Note:

(1)              Refer Exhibit 3

06/17/1999                                                                 Confidential                                 Page 2 of 4

   99
                                                                     EXHIBIT 2.1

                   TEMPLATE FOR COMPLETION STATEMENT OF BTAG

                       COMPOSITION OF BTFM BALANCE SHEET

                                                           -----------------
                                                           BT Funds
                                                           Management
                                                           (extracted from
                                                           BTAL Statutory
                                                           Accounts)
                                                           -----------------

Notes:

(1)    Other assets include:

         Management fees receivable (from BT managed funds)
         Related party management fees (Japan and US funds)
         Related party receivables
         Investment in Malaysian JV
         Trade debtors
         FITB
         Other
                                                                ------------
                                                                ============

(2)    Other liabilities include:

         Employee entitlements (allocated from Corporate)
         Accounts payable
         Interest received in advance
         Futures margin payable (overlay accounts)
         Commissions payable
         Related party liabilities
         Trade creditors
         Other liabilities
                                                                ------------
                                                                ============

06/17/1999                      Confidential                         Page 3 of 4
   100
                                                                       EXHIBIT 3

                   TEMPLATE FOR COMPLETION STATEMENT OF BTAG

                    COMPOSITION OF BTFM OFFSHORE BUSINESSES

                                                                                     BT Portfolio   BT Funds         BT Funds
                                                                  BT New Zealand     Services (NZ)  Management (NZ)  Management Asia
                                                                  Nominees Limited   Limited        Limited          Limited
                                                                  ----------------   -------------  ---------------  ---------------
                                                                                                      
SCHEDULE 20010   Cash & Due From Banks:
SCHEDULE 20030   IB Deposits With Banks
SCHEDULE 20055   Securities Purchased Under Resale Agreement
SCHEDULE 20070   IB & NIB Trading Account Assets
SCHEDULE 20105   Securities Available For Sale
SCHEDULE 20110   Investment In Consol Sub
SCHEDULE 20130   Loans & Leases Intercompany
SCHEDULE 20131   Gross Loans & Lease Financing
SCHEDULE 20132   Overdrafts
SCHEDULE 20160   Unearned Income
SCHEDULE 20180   Allowance For Credit Loss
SCHEDULE 20210   Premises & Equipment Net
SCHEDULE 20230   Bankers' Acceptances
SCHEDULE 20240   Accrued Int Rec, A/C Rec & Rec On Sec Transactions
SCHEDULE 20270   Goodwill
SCHEDULE 20270   Other Assets

                 Total Assets

SCHEDULE 20360   Interest Bearing Deposits
SCHEDULE 20390   IB & NIB Trading Account Liabilities
SCHEDULE 20395   Sec Sold Under Repurchase Agreements
SCHEDULE 20400   Other Short Term Borrowings
SCHEDULE 20450   Accrued Expenses & Accrued Interest Payable
SCHEDULE 20470   Other Liabilities
SCHEDULE 20510   Long Term Debt

                 Total Liabilities

                 Net Assets

Notes:

(1)              Other assets include:

                 Trade debtors
                 Related party receivables
                 FITB
                 Other receivables
                                                                  ----------------   -------------  ---------------  ---------------
(2)              Other liabilities include:

                 Trade creditors
                 Related party liabilities
                 Provision for employee entitlements
                 Other liabilities
                                                                  ----------------   -------------  ---------------  ---------------

                                                                  BT Funds        25% Share Thai     Offshore FM          BT Funds
                                                                  Management      Capital            business (Ireland),  Management
                                                                  (Singapore)     Management Co      Offshore FM          Offshore
                                                                  Limited         Ltd                business (UK)        Businesses
                                                                  -----------     -------------      ------------------   ----------
                                                                                                           
SCHEDULE 20010   Cash & Due From Banks:
SCHEDULE 20030   IB Deposits With Banks
SCHEDULE 20055   Securities Purchased Under Resale Agreement
SCHEDULE 20070   IB & NIB Trading Account Assets
SCHEDULE 20105   Securities Available For Sale
SCHEDULE 20110   Investment In Consol Sub
SCHEDULE 20130   Loans & Leases Intercompany
SCHEDULE 20131   Gross Loans & Lease Financing
SCHEDULE 20132   Overdrafts
SCHEDULE 20160   Unearned Income
SCHEDULE 20180   Allowance For Credit Loss
SCHEDULE 20210   Premises & Equipment Net
SCHEDULE 20230   Bankers' Acceptances
SCHEDULE 20240   Accrued Int Rec, A/C Rec & Rec On Sec Transactions
SCHEDULE 20270   Goodwill
SCHEDULE 20270   Other Assets

                 Total Assets

SCHEDULE 20360   Interest Bearing Deposits
SCHEDULE 20390   IB & NIB Trading Account Liabilities
SCHEDULE 20395   Sec Sold Under Repurchase Agreements
SCHEDULE 20400   Other Short Term Borrowings
SCHEDULE 20450   Accrued Expenses & Accrued Interest Payable
SCHEDULE 20470   Other Liabilities
SCHEDULE 20510   Long Term Debt

                 Total Liabilities

                 Net Assets

Notes:

(1)              Other assets include:

                 Trade debtors
                 Related party receivables
                 FITB
                 Other receivables
                                                                  -----------     -------------      ------------------   ----------
(2)              Other liabilities include:

                 Trade creditors
                 Related party liabilities
                 Provision for employee entitlements
                 Other liabilities
                                                                  -----------     -------------      ------------------   ----------

06/17/1999                                                                 Confidential                                  Page 4 of 4

   101
                                                        Allen Allen
SHARE SALE DEED                                         & Hemsley

SCHEDULE 7

ACCOUNTING PRINCIPLES
                          BANKERS TRUST AUSTRALIA GROUP
                              ACCOUNTING PRINCIPLES
                    AND BASIS OF PREPARATION OF THE ACCOUNTS
                          AND THE COMPLETION STATEMENT

1.      PREPARATION OF ACCOUNTS AND COMPLETION STATEMENT

The Accounts have been prepared to represent the aggregate balance sheet
position of the Group and the Offshore FM Businesses. In preparing the Accounts,
information has been extracted from the audited statutory accounts and general
ledgers of Group Members and other entities involved in carrying on the Business
as at 31 December 1998.

In respect of legal entities which form part of the Group, the trial balances
representing the legal entity (which form the basis of the audited accounts of
the entity) have been used in preparing the Accounts. Where the businesses being
sold represent management units within legal entities which are not part of the
Group, then the trial balances included in the Accounts for these businesses
have been derived from profit centre trial balances extracted from BTC's
consolidation system, IDB. The profit centre to be extracted is 213021 (BTFM
Int. Europe).

2.      ACCOUNTING PRINCIPLES APPLICABLE TO THE ACCOUNTS AND THE COMPLETION
        STATEMENT

The Accounts have been and the Completion Statement will be drawn up in
accordance with the detailed accounting procedures applied in the preparation of
the Statutory Accounts and the accounts of the other entities which conduct the
Business as set forth in the Disclosure Material and in accordance with the
accounting principles adopted in preparing the trial balances for each of those
entities and businesses subject to the Share Sale Deed. In all cases the
underlying principles are those considered to be Generally Accepted Accounting
Principles in Australia (GAAP), consistent with those applied in preparing the
most recent statutory accounts of the relevant legal entities. Where a company
is wholly owned by Bankers Trust Australia Limited (BTAL) its accounts are
prepared on the same basis as BTAL accounts.

Any balances not recorded in Australian dollars will be translated into the
Australian dollar equivalent at the foreign exchange rate prevailing as at the
close of business in Sydney on the balance date in each case.

The following specific adjustments have (on a tax free basis) been made in
preparing the Accounts, and will be made in preparing the Completion Statement,
being a divergence from the generally accepted accounting principles applied in
preparing

                                                                          Page 2
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                                                      Allen Allen
SHARE SALE DEED                                       & Hemsley

the most recent financial statements of the relevant entities. In preparing the
Completion Statement, the adjustments will be tax effected where appropriate on
the basis as set out in 3.2 below.

2.1     LIFE COMPANY ACCOUNTING

        The available surplus in BT Life Statutory Funds recognised in the
        Completion Statement shall be determined on a basis consistent with that
        used to determine the available surplus in the Accounts.

2.2     CHANGE OF CONTROL PAYMENTS

        When the 1998 statutory accounts were drawn up, the certainty of the
        merger of Deutsche Bank AG and Bankers Trust Corporation was not
        sufficient to require the raising of an accrual to reflect the Group's
        liability to employees under various outstanding deferred compensation
        schemes. Given that the merger has been effected prior to the date of
        the Share Sale Deed, the Accounts have been, and the Completion
        Statement will be, adjusted to reflect the totality of the Group's
        liability to employees in respect of deferred compensation schemes.

        The 1999 bonus pool (an element of which is due upon Change of Control),
        will be accrued for on a straight line basis in the Group's accounts
        during the course of 1999 and, accordingly, the appropriate pro-rata
        accrual or expense will be recognised in the Completion Statement. The
        remaining bonus pool attributable to the balance of 1999 beyond the
        Completion Date will not be recognised in the Completion Statement but
        will be subsequently accrued over the remainder of 1999 after the
        Completion Date.

2.3     EMPLOYEE ENTITLEMENTS

        The Group has offered certain retention incentives to key employees.
        These incentives, which are in addition to normal bonus participation
        and are referred to in staff retention letters as having a bullet
        vesting at future dates, are not included as an adjustment to the
        Accounts and no liability will be recognised in the Completion Statement
        for these retention incentives.

        Employee incentives in the form of guaranteed bonus payments, where the
        guarantee is expected to be a normal bonus payment for conducting
        current employment duties, are to be expensed over the period to which
        the guarantee relates.

2.4     DEFERRED TAXATION BALANCES

        The recognition of Future Income Tax Benefits (FITB's) and deferred tax
        liabilities are accounted for in accordance with the year end statutory
        accounts on the basis of an overall net deferred tax liability. In the
        Completion Statement, FITB's will in the first instance be fully
        recognised by netting against deferred tax liabilities, such netting to
        be within a legal entity basis, and thereafter FITB's will be recognised
        in accordance with GAAP.

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                                                      ALLEN ALLEN
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2.5     GENERAL PROVISION

        The Statutory Accounts included a general provision of $38 million. No
        general provision has been recognised in the Accounts and no general
        provision will be recognised in the Completion Statement.

3.      ADDITIONAL ADJUSTMENTS TO BE MADE IN PREPARING THE COMPLETION STATEMENT

        The following items are not included as adjustments to the Accounts. It
        is intended that these items will be reflected in the Completion
        Statement:

3.1    YEAR-TO-DATE RESULTS

        The Net Assets in the Completion Statement will incorporate the net
        profit after tax of the Group (calculated under GAAP) for the period
        from 1 January 1999 to the Completion Date.

3.2    INCOME TAX

        For the purpose of the Completion Statement, all current and deferred
        income tax balances will be calculated as if the income tax laws
        applicable at the date of signing this Share Sale Deed applied
        irrespective of any change of tax laws occurring between the signing
        date and the Completion Date.

3.3    REDUNDANCY PROVISIONS

        A provision for redundancy costs will only be made or recognised in the
        Completion Statement to the extent that the Warrantor, the Vendors or
        BTAG, at the request of the Warrantor or Vendors, has:
        (a)    terminated an Employee without cause within the meaning of the
               Plans (as defined in Clause 4(d)); or

        (b)    terminated an Employee's employment on the ground of Redundancy
               within the meaning of the Policies (as defined in Clause 4(d)) or
               the BTAL Redundancy Policy for Commission Employees,

        but only to the extent that any relevant payments have not been made
        before the Completion Date and excluding the instances where such action
        has been taken at the request of or with the consent of the Purchaser to
        accommodate the Purchaser's plans for the Business,

3.4    DIVIDEND PAYMENTS

        It is currently anticipated that, prior to the Completion Date, the
        Vendors will require dividend payments to be paid or declared by the
        Group. Any such dividends will be reflected in the Net Assets of the
        Group in the Completion Statement.

3.5    CAPITAL INJECTION

        The Net Assets in the Completion Statement will incorporate any capital
        injection made prior to the Completion Date.

3.6    NET ASSETS OF FM BUSINESSES

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        In the preparation of the Completion Statement, the short term
        borrowings of BTAL which are allocated to the FM Businesses as at the
        Completion Date shall be such that the Net Assets of the FM Businesses
        as at the Completion Date will be $95.5 million.

3.7    SALE OF IB BUSINESSES

        In the preparation of the Completion Statement, there shall be
disregarded:

        (a)     the sale of all or any part of the IB Businesses, wherever
                occurring; and

        (b)    entry into or performance of the IB Deed or any agreement entered
               into pursuant to the IB Deed.

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                                                      ALLEN ALLEN
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SCHEDULE 8

AGREEMENTS TO BE CANCELLED AT COMPLETION

1.      Service agreement between BTI and BTAL dated 1 January 1997 relating to
        the Metals and Mining business and London debt markets desk.

2.      Service agreements between BTC and BTAL dated 23 January 1998 and 25
        February 1998 relating to the Soft Commodities business.

3.      Service agreement between BTI and BTAL dated 2 September 1998 relating
        to the London SYCOM terminal.

4.      Service agreement between BT Alex. Brown Inc and BT Alex. Brown
        Australia Limited (BTABAL) dated 11 January 1999 relating to the New
        York equities desk.

5.      Service agreement (undated) between BTABAL and BTC, Singapore Branch
        relating to the Singapore equities desk.

6.      Service agreement between BTC and BTAL dated 17 February 1995 relating
        to FX business.

7.      Indemnification agreement between BTC and BTAL dated 1 June 1992
        relating to BTAL's exposure to non-bank, non-governmental
        counterparties.

8.      Standby facility letter dated 30 June 1998 from BTC to BTAL providing
        standby facility to BTAL.

9.      Agency agreement between BTI and BTAL dated 29 April 1988 relating to
        dealings in Australian fixed interest securities.

10.     Service agreement between BTC and BTAL dated 18 December 1996 relating
        to the management of the Hong Kong swaps book.

11.     Service agreement between BTC and BTAL dated 25 October 1996.

12.     Letter of credit from BTAL to Sydney Futures Exchange Clearing House Pty
        Limited on account of BT Futures New Zealand Limited dated 26 November
        1998.

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                                                      ALLEN ALLEN
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SCHEDULE 9

RELATED PARTY DEBT TO BE RE-FINANCED AT COMPLETION

The $800 million facility provided by BTC to BTAL. The parties acknowledge that
BTC shall set off or apply the corresponding amount on deposit with BTC from
BTAL in full and final settlement of the amount owing to BTC by BTAL under this
facility.

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SCHEDULE 10

GROUP MEMBERS TO CHANGE NAMES

1.      BT Investments (Australia) Limited

2.      BT IB Holdings Pty Limited

3.      Bankers Trust Australia Limited

4.      BT Alex. Brown Australia Limited

5.      BT Australia (H.K.) Financial Services Limited

6.      BT Australia (HK) Limited

7.      BT Pacific Management Limited

8.      BT Australia Securities Limited

9.      BT Capital Markets Nominees Pty Limited

10.     BT Corporate Finance Limited

11.     BT Finance Pty Limited

12.     BT IB Limited

13.     BT Infrastructure Pty Limited

14.     BT Lease Management Pty Limited

15.     BT Management Services Pty Limited

16.     BT Properties Pty Limited

17.     BT Risk Management Advisory Pty Limited

18.     BT Science Holdings Pty Limited

19.     BT Computer Leasing Pty Limited

20.     BT Project Finance Pty Limited

21.     BT R&D No. 1 Pty Limited

22.     BT R&D No. 7 Pty Limited

23.     BT Securitisation Management Pty Limited

24.     BT Structured Equities Pty Limited

25.     BT Technology Pty Limited

26.     BT Australia Corporate Services Pty Limited

27.     BT Nominees Limited

28.     BT Funds Management Asia Limited

29.     BT Funds Management (Singapore) Limited

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Any other Group Member or any entity licensed by a Group Member which has as
part of its name an Excluded Name.

                                                                          Page 2
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                                                        Allen Allen
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SCHEDULE 11

BUSINESS NAMES TO BE RELINQUISHED

KEY:
+      BTAB = BT Alex. Brown Australia Limited
+      BTCF = BT Corporate Finance Limited

   BUSINESS           BUSINESS       REGISTRATION    RENEWAL DATE     REGISTERED
   NAMES              NAME ACT            NO.                         PROPRIETOR

Bankers Trust           NSW           U9289638       5/8/2001           BTAL
                        ACT           F00089272      29/5/2001          BTAL
                        VIC           1386302A       11/6/2001          BTAL
                        SA            0429278K       5/6/2001           BTAL
                        WA            0237654A       11/6/2001          BTAL
                        QLD           BN6913787      10/6/1999          BTAL

Bankers Trust           NSW           T9531527       2/4/2000           BTAL
Australia

Bankers Trust           NSW           T6482527       16/10/1999         BTAL
Research                ACT           F00089776      17/7/2001          BTAL
                        VIC           B1398956D      21/8/2001          BTAL
                        SA            0430759M       8/7/2001           BTAL
                        WA            0240590H       15/7/2001          BTAL
                        QLD           BN7009458      27/8/1999          BTAL

BT Alex. Brown          NSW           U7814026       28/5/2001          BTAL/BTAB
                        ACT           F00089273      29/5/2001          BTAL/BTAB
                        VIC           1384733U       l/6/2001           BTAL/BTAB
                        SA            0428956W       29/5/2001          BTAL/BTAB
                        WA            0236973N       3/6/2001           BTAL/BTAB
                        QLD           BN6905160      2/6/1999           BTAL/BTAB

BT Alex. Brown          NSW           U8339414       23/6/2001          BTAB
Research                ACT           F00089563      26/6/2001          BTAB
                        VIC           B1394215V      30/7/2001          BTAB

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                                                        Allen Allen
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    BUSINESS       BUSINESS    REGISTRATION   RENEWAL DATE      REGISTERED
     NAMES         NAME ACT         NO.                         PROPRIETOR

                    SA          0430407W        l/7/2001          BTAB
                    WA          0238874A        25/6/2001         BTAB
                    QLD         BN6936660       26/6/1999         BTAB

BT Wolfensohn       NSW         U7814418        28/05/2O0l        BTAL/BTCF
                    ACT         F00089274       29/05/2001        BTAL/BTCF
                    VIC         1384736A        01/06/2001        BTAL/BTCF
                    SA          0428957R        29/05/2001        BTAL/BTCF
                    WA          0236971J        03/06/2001        BTAL/BTCF
                    QLD         BN6904683       29/05/1999        BTAL/BTCF

BT Capital          NSW         U3929320        3/11/2000         BTAL
Partners,           ACT         F00087153       10/11/2000        BTAL
Australia           VIC         1358076V        19/11/2000        BTAL
                    SA          0421427P        6/ll/2000         BTAL
                    WA          0223053Y        25/11/2000        BTAL
                    NT          68866B          23/2/2001         BTAL
                    QLD         BN6704797       11/11/1999        BTAL
                                                                  BTAL

BT Instalments      NSW         T9746547        14/4/2000         BTAL
                    ACT         F00089564       26/6/2001         BTAL
                    VIC         B1394218B       30/7/2001         BTAL
                    SA          0430406A        l/7/2001          BTAL
                    WA          0238876E        25/6/2001         BTAL
                    QLD         BN6936647       26/6/1999         BTAL

BT Instalment       NSW         U0587830        27/5/2000         BTAL
Warrants            ACT         F00089565       26/6/2001         BTAL
                    VIC         B1394222S       30/7/2001         BTAL
                    SA          0430403P        l/7/2001          BTAL
                    WA          0238873Y        25/6/2001         BTAL
                    QLD         BN6936623       26/6/1999         BTAL

BT Investor         NSW         T29805332       23/4/1999         BTAB
Services

                                                                          Page 2
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                                                        Allen Allen
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    BUSINESS       BUSINESS       REGISTRATION       RENEWAL DATE       REGISTERED
     NAMES         NAME ACT           NO.                               PROPRIETOR

BT Private           NSW           UO854248            10/6/2000           BTAB
Stockbroking         ACT           F00089567           26/6/2001           BTAB
                     VIC           B1394228E           30/7/2001           BTAB
                     SA            0430402T            l/7/2001            BTAB
                     WA            0238903F            25/6/2001           BTAB
                     QLD           BN6936593           26/6/1999           BTAB

BT Stockwatch        NSW           T3925731            07/06/1999          BTAB

BT Warrants          NSW           T3916144            6/6/1999            BTAL
                     ACT           F00089568           26/6/2001           BTAL
                     VIC           B1394229G           30/7/2001           BTAL
                     SA            0430408R            l/7/2001            BTAL
                     WA            0238906M            25/6/2001           BTAL
                     QLD           BN6936611           26/6/1999           BTAL

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- --------------------------------------------------------------------------------
SCHEDULE 12

REAL PROPERTY
- --------------------------------------------------------------------------------
PART I - LEASEHOLD

     PROPERTY LEASED                   LESSOR                                 LESSEE        COMMENCING DATE      TERMINATING DATE
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                     
 Chifley Tower                Mid Sydney Pry Limited                          BTAL          23 March 1993         13 March 2006
 (Level 2-10,13-16)

 Level 13,14,15 & 16          Perpetual Trustee Company Limited               BTAL          13 October 1997       12 October 2002
 Colonial Centre, 52
 Martin Place, Sydney

 Levels 5 & 6                 Advance Bank Australia Limited                  BTAL           1 March 1995         30 June 2006
 33 & 35 Pitt Street,
 Sydney

 Ground Floor,                The University of Sydney                        BTAL           6 September 1993      5 September 1999
 Challis House, 4
 Martin Place, Sydney

 Ground Floor, The            The Colonial Mutual Life                        BTAL           8 September 1998      7 September 2003
 Colonial Mutual              Assurance Society Limited
 Building, 55 St
 George's Terrace,
 Perth, WA

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- --------------------------------------------------------------------------------
SCHEDULE 12

REAL PROPERTY
- --------------------------------------------------------------------------------
PART I - LEASEHOLD

     PROPERTY LEASED                   LESSOR                     LESSEE                COMMENCING DATE      TERMINATING DATE
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
Level 23 & 24,367             Commonwealth Bank of Australia      BTAL                   7 October 1991       31 March 2004
Collins Street
Melbourne

The Land and the              Martin Joseph Glynn and Anne        BTAL                  14 July 1995          13 July 2005
building at 340 Queens        Glynn
Street, Brisbane
formerly known as the
Piccadilly Arcade

Level 3, 178 Pacific          Wylde Investments Pty. Limited      BTAL                   1 May 1995           29 April 2000
HWY, St Leonards

Suite 1, Level 3,             BTAL                                Sydney Futures         1 May 1995           29 April 2000
178 Pacific HWY,                                                  Exchange
St Leonards

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- --------------------------------------------------------------------------------
SCHEDULE 12

REAL PROPERTY
- --------------------------------------------------------------------------------
PART I - LEASEHOLD

     PROPERTY LEASED                   LESSOR                     LESSEE                COMMENCING DATE      TERMINATING DATE
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
455 Bourke Street,            ANZ Staff Superannuation            BTAL                  1 June 1991          31 May 2001
Melbourne, Ground             (Australia) Pty Ltd
Floor

Level 16, 215 Adelaide        BT Custodial Services               BTAL                   Month to Month       Month to Month
Street, Brisbane

Laffer Drive                  Industrial and Commercial           BTAL                   26 May 1997          Maximum term of
Bedford Park                  Premises Corporation of Adelaide    (Note: see Part                             11 years.
SA 5042                                                           II of this
                                                                  Schedule 12)                                BTAL has agreed to
                                                                                                              purchase the land and
                                                                                                              buildings over a
                                                                                                              maximum term of 11
                                                                                                              years following
                                                                                                              completion of
                                                                                                              construction. BTAL
                                                                                                              has an option to
                                                                                                              repay early.

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- --------------------------------------------------------------------------------
SCHEDULE 12

REAL PROPERTY
- --------------------------------------------------------------------------------
PART I - LEASEHOLD

     PROPERTY LEASED                   LESSOR                     LESSEE                COMMENCING DATE      TERMINATING DATE
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
75 Hindmarsh Square           Underlessor                            Underlessee         1 July 1998          20 May 2000
Adelaide 5000                 Price Waterhouse Properties            BTAL
                              Limited

                              Headlessor

                              Mancorp Investments Pty Ltd

Ground and first              Perpetual Trustee Company Ltd          BTAL                 1 May 1994          30 April 2001
Floors plaza building         & Kent Street Pty Ltd
321 Kent Street
Sydney

6 Temasek Boulevard           Suntec City Development Pte Ltd       Bankers Trust Funds   15 December 1997    14 December 2000
#23-03, Suntec Tower                                                Management                                (with an option for
Four Singapore                                                      (Singapore) Limited                       one further three
                                                                                                              year term)

Suite 5 2nd Floor             Regent Building Limited               BT Funds              1 January 1999      31 March 2001 (with
Regent Building, 33                                                 Management (NZ)                           an option for a
Cathedral Square,                                                   Ltd                                       further two year term)
Christchurch

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- --------------------------------------------------------------------------------
SCHEDULE 12

REAL PROPERTY
- --------------------------------------------------------------------------------
PART I - LEASEHOLD

     PROPERTY LEASED                   LESSOR                     LESSEE                COMMENCING DATE      TERMINATING DATE
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
Level 7, Barclays             The New Zealand Guardian            National Registry      1 November 1997      31 October 1999
House, 70 Shortland           Trust Company Limited               Services Pty Limited
Street, Auckland

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- --------------------------------------------------------------------------------
FREEHOLD

PART II - FREEHOLD

                  DESCRIPTION/                ACQUISITION DATE               PURCHASE PRICE                      TOTAL AREA
                    LOCATION                                                                                          M2
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Properties Owned by BTAL

Laffer Drive                                       1.7.97                    Balance of purchase price to be        6,670m(2)
Hugh Cairns Ave                                                              paid on 30 June 1999               Includes Childcare
Bedford Park, SA 5042                                                                                            and plant room

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                                                                     Allen Allen
SHARE SALE DEED                                                     & Hemsley

SCHEDULE 13

TRUSTS

1.      DOMESTIC AS AT 15 JUNE 1999

1.1      WHOLESALE

                    ROLE                               TRUST/FUNDS
- -------------------------------------------------------------------------------------------
                                               
BT Custodial Services Pty Limited ("BTCS") -       BT Asian Growth Fund
- - Trustee

BT Funds Management Limited ("BTFM") -
Manager

BTFM - Trustee & Manager                           BT Australia Charities Trust

BTCS - Trustee                                     BT Australian Bond Fund
BTFM - Manager

BTCS - Trustee                                     BT Australian Corporate Securities Fund
BTFM - Manager

BTCS - Trustee                                     BT Australian Equity Fund
BTFM - Manager

BTFM - Trustee & Manager                           BT Australian Small Companies Fund

BTCS - Trustee                                     BT Emerging Markets Fund
BTFM - Manager

BTCS - Trustee                                     BT Exempt Retirement Fund
BTFM - Manager

BTCS - Trustee                                     BT Exempt Stable Capital Fund
BTFM - Manager

BTCS - Trustee                                     BT Global Small Companies Fund

                                                                          Page 1
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                                                                     Allen Allen
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                    ROLE                               TRUST/FUNDS
- ----------------------------------------------------------------------------------
                                             
BTFM - Manager

BTCS - Trustee                                   BT Hedged International Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT Indexed Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT Interactive Income Fund
BTFM - Manager

BTCS - Trustee                                   BT Intermediate Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT International Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT International Equity Fund
BTFM - Manager

BTCS - Trustee                                   BT Pan Indexed Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT Pan Intermediate Bond Fund
BTFM - Manager

BTCS - Trustee                                   BT Pan Latin American Fund
BTFM - Manager

BTCS - Trustee                                   BT Pan Stable Capital Fund
BTFM - Manager

Buttonwood Nominees Pty Limited
appointed as custodian for
the business of

                                                                          Page 2

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

              ROLE                                      TRUST/FUNDS

conducting securities borrowing.
Performance of custodian function
guaranteed by BTAL.

BTCS -- Trustee                              BT Property Investment Fund
BTFM -- Manager

BTFM -- Manager                              BT Financial Markets Trust Deed
BTCS -- Trustee                              BT Money Market Trust
                                             BT Cash Plus Fund

BT Finance & Investments Pty Limited --      BTF&I Cash Management Trusts
Trustee
                                             BTF&I Pendal Cash Management Fund

1.2  RETAIL

              ROLE                                      TRUST/FUNDS

BTFM -- Responsible Entity                   BT Select Bond Trust
BTCS -- Custodian                            -- Australasian Bond Fund
                                             -- Global Bond Fund

BTFM -- Responsible Entity                   BT Split Trust
BTCS -- Custodian                            BT Split Growth Fund
                                             BT Split Income Fund

BTFM -- Responsible Entity                   BT Wholesale Fund
BTCS -- Custodian                            -- BT Wholesale Managed (NTP) Fund
                                             -- BT Wholesale Conservative
                                                Outlook (NTP) Fund
                                             BT Wholesale Asian Share Fund
                                             BT Wholesale Australian Share Fund
                                             -- BT Wholesale International Share
                                                Fund

- --------------------------------------------------------------------------------
                                                                          Page 3
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- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

                                             -- BT Wholesale Property Securities
                                                Fund
                                             BT Wholesale Future Goals Fund
                                             BT Wholesale Split Growth Fund
                                             BT Wholesale European Share Fund
                                             BT Wholesale American Share Fund
                                             BT Wholesale Diversified Fixed
                                             Interest Fund

BTFM -- Manager                              BT Inter-Fund Trust
                                             Australian Fixed Interest Fund
                                             Eastern European Fund

BTFM -- Responsible Entity                   BT Cash Management Trust
BTCS -- Custodian

BTFM -- Responsible Entity                   BT Lifetime Trust
BTCS -- Custodian                            BT Balanced Returns Fund
                                             BT Future Bonds Fund
                                             BT Income Plus Fund
                                             BT Monthly Income Fund
                                             BT Balanced Deeming Fund

BTFM -- Manager                              BT Private Investment Fund
                                             -- BT Private Investment
                                                International Fund
                                             -- BT Private Investment Asset
                                                Selection Fund
                                             -- BT Private Investment
                                                Emerging Markets Fund
                                             -- BT Private Investment
                                                Australian Share Fund

BTFM -- Responsible Entity                   BT Select Markets Trust

- --------------------------------------------------------------------------------
                                                                          Page 4
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- --------------------------------------------------------------------------------
              ROLE                                TRUST/FUNDS
- --------------------------------------------------------------------------------
BTCS - Custodian                             BT Equity Imputation Fund
                                             BT American Growth Fund
                                             BT European Growth Fund
                                             BT Pacific Basin Fund
                                             BT International Fund
                                             BT Global Energy and Resources Fund
                                             BT Global Bond Fund
                                             BT South Korean Fund
                                             BT Australian Bond Fund
                                             BT Property Securities Fund

- --------------------------------------------------------------------------------
Parties to the Deed are BT Securities        The 1990 FFC Film Fund - 07.05.90
Limited and Permanent Trustee Company
Limited

- --------------------------------------------------------------------------------
Parties to the Deed are BT Securities        The Vietnam Film Fund
Limited, Rycop Pty Limited, Permanent
Trustee Nominees (Canberra) Limited and
Permanent Trustee Company Limited

- --------------------------------------------------------------------------------
Parties to the Deed are BT Securities        Dead Calm Film Fund
Limited, Kennedy Miller Productions Pty
Limited, Permanent Trustee Nominees
(Canberra) Limited and Permanent Trustee
Company Limited

- --------------------------------------------------------------------------------
BTFM - Manager                               BT Infrastructure Funds

- --------------------------------------------------------------------------------
BTFM - Manager                               BT Airport Sub-trust

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

1.3   SUPERANNUATION & LIFE

- --------------------------------------------------------------------------------
              ROLE                                TRUST/FUNDS
- --------------------------------------------------------------------------------
BTFM - Manager & Trustee                     BT Ansett Pooled Superannuation
BTCS - Custodian                             Trust (formerly The BTA Ansett
BT Portfolio Services Limited ("BTPS")       Pooled Superannuation Trust)
- --------------------------------------------------------------------------------

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

              ROLE                                      TRUST/FUNDS

provides the administrative functions for    (Classification -- PST --
BTFM under a formal agreement.               Wholesale)

BT Tactical Asset Management Pty Limited     BT Asset Allocation Trust
("BTTAM") -- Manager & Trustee
                                             (Classification -- PST --
                                             Wholesale)

BTFM is appointed to manage a portfolio
of physical assets, cash and derivatives
corresponding with the benchmark of the
Trust's portfolio under an individually
managed client agreement.

BTTAM -- Manager & Trustee                   BT Asset Allocation Passive Sector
                                             Trust
BTFM -- Manager (Australian Equity)
BTCo -- Manager (International Equity
and Bond Exposure)

BTFM -- Manager & Trustee                    BT Choices Pooled Superannuation
                                             Trust
                                             -- Australian Equities Portfolio
                                             -- International Equities Portfolio
                                             -- Property Securities
                                             Australian Bonds
                                             International Bonds
                                             Capital Secure Portfolio
                                             Capital Stable Portfolio
                                             Balanced

BTFM -- Manager & Trustee                    BT Global Small Companies Pooled
                                             Superannuation Trust
BTCS -- Custodian

BTFM -- Manager & Trustee                    BT Pan International Equity
                                             (Balanced)
                                             Pooled Superannuation Trust
BTCS -- Custodian

BTFM -- Manager & Trustee                    BT Retirement Fund

- --------------------------------------------------------------------------------
                                                                          Page 6
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- --------------------------------------------------------------------------------

              ROLE                                 TRUST/FUNDS
- --------------------------------------------------------------------------------

BTCS -- Custodian

BTFM -- Manager & Trustee               BT Select
BTCS -- Custodian                       -- Australian Equity Portfolio
                                        -- International Equity Portfolio
                                        -- Property Securities Portfolio
                                        -- Australian Bond Portfolio
                                        -- Stable Capital Portfolio
                                        -- Balanced Portfolio
                                        Diversified Fixed Interest Portfolio
                                        BTAP/BTAP3

BTFM -- Manager & Trustee               BT Stable Capital Fund
BTCS -- Custodian

BTFM -- Manager & Trustee               BT Stable Growth Fund
BTCS -- Custodian

BTFM -- Manager & Trustee               BT Conservative Outlook Fund
                                        Tax Paid Portfolio
                                        Pension Fund Portfolio

BTFM -- Trustee                         BT Lifetime Super Employer Plan ("ESF")
                                        -- Cash Portfolio
                                        -- Conservative Outlook Portfolio
                                        Future Goals Portfolio
                                        -- Managed Portfolio
                                        -- Australasian Bond Portfolio
                                        -- Global Bond Portfolio
                                        -- Australian Share Portfolio
                                        -- International Share Portfolio

- --------------------------------------------------------------------------------
                                                                          Page 7
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- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

                                             -- Property Securities Portfolio
                                             -- Member Protected Portfolio (for
                                                small balances)
                                             External Managed -- Managed
                                               Portfolio
                                             External Managed -- Conservative
                                               Portfolio
                                             External Managed -- Australian
                                               Share Portfolio
                                             External Managed -- International
                                               Share Portfolio

BTFM -- Trustee                              BT Fixed Rate Pension (FRP)
                                             -- 2 Year Fixed Rate Option
                                             -- 3 Year Fixed Rate Option

BTFM -- Trustee                              BT Fixed Rate Rollover Fund
                                             2 Year Fixed Rate Option
                                             3 Year Fixed Rate Option

BTFM -- Manager & Trustee                    BT Lifetime Super Personal Plan
BTCS -- Custodian under formal               --  Managed Portfolio
agreement
BT Custodians Limited -- Sub-Custodian       Future Goals Portfolio
under formal agreement
                                             -- Conservative Outlook Portfolio
                                             -- Property Securities Portfolio
                                             -- Cash Portfolio
                                             -- Australasian Bond Portfolio
                                             -- Global Bond Portfolio
                                             -- Australian Share Portfolio
                                             -- International Share Portfolio

BTFM -- Manager & Trustee                    BT Managed Fund
                                             Tax Paid Portfolio
                                             Pension Fund Portfolio

- --------------------------------------------------------------------------------
                                                                          Page 8
   126
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

BTFM -- Trustee                              BT Retirement Selection --
                                             BT Retirement Pension Plan
                                             Personal Superannuation Plan
                                             -- Cash Portfolio
                                             -- Conservative Outlook Portfolio
                                             Future Goals Portfolio
                                             -- Managed Portfolio
                                             -- Australasian Bond Portfolio
                                             -- Global Bond Portfolio
                                             -- Australian Share Portfolio
                                             -- International Share Portfolio
                                             -- Property Securities Portfolio

BTFM -- Manager & Trustee                    BT Specialist PST
                                             -- Australian Share Portfolio
                                             -- International Share Portfolio

BTFM -- Manager & Trustee                    BT Super Trust
                                             Conservative Outlook Fund
                                             Investment Fund

BTTAM -- Trustee                             SuperWrap
BTCS -- Custodian                            Conservative Outlook Fund
                                             Investment Fund

Bankers Trust Life Limited -- Issuer         Personal Super Plan Policy
of the life policy

Bankers Trust Life Limited is the            Employer Superannuation Policy
issuer of the life Policy

- --------------------------------------------------------------------------------
                                                                          Page 9

   127
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

Bankers Trust Life Limited is the            Retirement Pension Plan Policy
issuer of the life Policy

Bankers Trust Life Limited is the            Bankers Trust Life Wholesale Funds
issuer of the life Policy                    Management Policy
                                             -- Cash Portfolio
                                             -- Capital Stable Portfolio
                                             -- Managed Portfolio

Bankers Trust Life Limited is the            BT Investment Management Policy
issuer of the life Policy

Bankers Trust Life Limited is the            BT Fixed Rate Pension Policy
issuer of the life policy
                                             -- 2 Year Fixed Rate Option
                                             -- 3 Year Fixed Rate Option

Bankers Trust Life Limited is the            BT Complying Income Plan
issuer of the life policy
                                             Fixed return option
                                             CPI linked option

- --------------------------------------------------------------------------------
                                                                         Page 10
   128
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

2.   INTERNATIONAL -- AS AT 15 JUNE 1999

2.1  NEW ZEALAND

              ROLE                                      TRUST/FUNDS

BT Funds Management (NZ) Limited --          BT New Zealand Investment Selection
Manager                                      (Retail Unit Trust)
                                             -- Managed Growth Fund
                                             -- Income Plus Fund
                                             -- International Share Fund
                                             -- New Zealand Share Fund
                                             -- Australian Share Fund
                                             -- Pacific Basin Share Fund
                                             -- Property Fund
                                             -- Global Bond Fund

BT Funds Management (NZ) Limited --          BT Private Selection (Mezzanine
Manager                                      Unit Trust)
                                             -- Managed Growth Fund
                                             -- International Share Fund
                                             -- New Zealand Share Fund
                                             -- European Share Fund
                                             -- Asian Share Fund
                                             -- Global Bond Fund
                                             -- New Zealand Bond Fund
                                             -- Property Fund
                                             -- Cash Fund

BT Funds Management (NZ) Limited --          BT Lifetime Plan (Retail
Manager and Trustee                          Superannuation)
                                             -- Managed Growth Fund
                                             -- Income Plus Fund

- --------------------------------------------------------------------------------
                                                                         Page 11
   129
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

                                             -- International Share Fund
                                             -- New Zealand Share Fund
                                             -- Pacific Basin Share Fund
                                             -- New Zealand Bond Fund
                                             -- Global Bond Fund
                                             -- Cash Deposit Fund

BT Funds Management (NZ) Limited --          BT New Zealand Investment Series
Manager and Trustee                          (Wholesale Superannuation)
                                             -- Balanced Fund
                                             -- New Zealand Share Fund
                                             -- International Share Fund
                                             -- New Zealand Bond Fund
                                             -- Global Bond Fund
                                             -- Property Fund
                                             -- Cash Fund

2.2  DUBLIN

              ROLE                                      TRUST/FUNDS

BT Funds Management (International)          BTIIS
Limited -- investment adviser.
                                             -- Asian Equity Fund
                                             -- European Equity Fund
                                             -- International Equity Fund
                                             -- Japanese Equity Fund
                                             -- American Equity Fund
                                             -- Emerging Markets Equity Fund
                                             -- Global Smaller Companies Fund
                                             BTGAF
                                             -- Latin American Equity Fund

- --------------------------------------------------------------------------------
                                                                         Page 12
   130
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

2.3  SINGAPORE

              ROLE                                      TRUST/FUNDS

BT Funds Management (Singapore)              BT Select Investment Series
Limited -- Manager
                                             Global Equity Fund

- --------------------------------------------------------------------------------
                                                                         Page 13
   131
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

3.   PROPERTY -- AS AT 15 JUNE 1999

3.1  LISTED PROPERTY TRUSTS

              ROLE                                      TRUST/FUNDS

BTFM -- Manager                              BT Office Trust

                                             BT Office Sub-trusts:

BTFM -- Manager                              Grosvenor Sub-Property Trust

BTFM -- Manager                              Macquarie Street Trust
(Project Ben Pty Ltd is the current
trustee -- to be transferred from
PTAL to BTFM on MIA transition)

BTFM -- Manager                              Macquarie Street Sub-Trust
(Northern Site Pty Ltd is the current
trustee -- to be transferred from
PTAL to BTFM on MIA transition)

BTFM -- Manager                              Philip Street Trust
(Project Ben Pty Ltd is the current
trustee -- to be transferred from
PTAL to BTFM on MIA transition)

BTFM -- Manager                              Philip Street Sub-trust
(Southern Site Pty Ltd is the current
trustee -- to be transferred from
PTAL to BTFM on MIA transition)

BTFM -- Manager                              BT Sydney Development Trust
(Perpetual Trustee is the current
trustee)

BTFM -- Manager                              BT Sydney Development Sub-trust

BTFM -- Manager                              BT Property Trust

                                             BT Property Sub-trusts:

BTFM -- Manager                              Marketown Holdings Trust
(Project Marketown Pty Ltd is the
current trustee -- to be transferred
from PTAL to BTFM on MIA transition

BTFM -- Manager                              Mt Druitt Shopping Centre Trust

BTFM -- Manager                              BT Hotel Trust

- --------------------------------------------------------------------------------
                                                                         Page 14
   132
SHARE SALE DEED                                            Allen Allen & Hemsley
- --------------------------------------------------------------------------------

              ROLE                                      TRUST/FUNDS

                                             BT Hotel Trust sub-trusts:

BTFM -- Manager                              National Convention Trust
(National Convention Corporation Pty
Ltd is the current trustee -- to be
transferred from PTAL to BTFM on MIA
transition)

BTFM -- Manager                              Convention Centre Hotel Trust
(Convention Centre Hotel Pty Ltd is
the current trustee -- to be transferred
from PTAL to BTFM on MIA transition)

3.2  UNLISTED WHOLESALE PROPERTY TRUSTS

              ROLE                                      TRUST/FUNDS

BTFM -- Trustee                              BTA Property Trust (BTAP)

Detawind Pty Ltd, Cynwest Pty Ltd and
Westatop Pty Ltd are the registered
owners of Maritime Trade Towers and are
wholly owned by BTFM on behalf of BTAP.

                                             BTAP sub-trusts:

(Dellarak Pty Ltd -- Trustee)                Office Building No 4 Trust

(QV1 Pty Ltd -- Trustee)                     QV1 Trust

BTCS -- Trustee)                             BT Shopping Centre Trust

BTFM -- Trustee                              BTA Property Trust No 3 (BTAP#3)

                                             BTAP#3 sub-trusts:

BTA  -- Trustee                              BT Brisbane Development Trust
BTFM -- Manager

BTCS -- Trustee                              BT Brisbane Development Sub-trust
BTFM -- Manager

Farwell Investments Pty Ltd -- Trustee       Heritage Floor space trust

BTFM -- Manager                              Floor space trust

- --------------------------------------------------------------------------------
                                                                         Page 15
   133
                                                                     ALLEN ALLEN
SHARE SALE DEED                                                      & HEMSLEY
- --------------------------------------------------------------------------------

SCHEDULE 14

PARENT SUPPORT OBLIGATIONS
- --------------------------------------------------------------------------------

1.    Guarantee dated 30 April 1997 from BTNZ in favour of each person who
      enters into an investment management agreement or is a unitholder in the
      BT New Zealand Wholesale Superannuation Scheme or BT Balanced Fund (under
      the BT New Zealand Unit Trust) guaranteeing the due performance of any
      obligation of BTNZl as manager or trustee and of BTNZ2 as custodian.

2.    Guarantee dated 1996 from BTNZ in favour of each person who enters into an
      investment management agreement guaranteeing the due performance of any
      obligation of BT Funds Management (NZ) Limited as manager and of BTNZ2 as
      custodian.

3.    Guarantee Letter of Comfort given to Comalco (New Zealand) Staff
      Superannuation Fund by BTNZ dated 7 April 1995.

4.    Guarantee Letter of Comfort given to Marsh & McClennan (New Zealand)
      Superannuation Scheme by BTNZ dated 9 June 1995.

5.    Guarantee Letter of Comfort given to Mobil Employee Retirement & Benefits
      Plan by BTNZ dated 22 July 1996.
   134
                                                                     ALLEN ALLEN
SHARE SALE DEED                                                      & HEMSLEY
- --------------------------------------------------------------------------------

EXECUTED AND DELIVERED AS A DEED.

Each attorney executing this Deed states that he or she has not received notice
of the revocation or suspension of the power of attorney under which he does so.

THE VENDORS

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT FOREIGN INVESTMENT               )
CORPORATION by its                  )
Attorney in the presence of:        )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT INVESTMENTS (AUSTRALIA)          )
LLC                                 )
by its attorney in the presence of: )
                                    )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name
   135
                                                                     ALLEN ALLEN
SHARE SALE DEED                                                      & HEMSLEY
- --------------------------------------------------------------------------------

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT NEW ZEALAND                      )
LIMITED by its attorney             )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT INTERNATIONAL                    )
(DELAWARE) INC.                     )
LIMITED by its attorney             )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT NOMINEES (H.K) LIMITED           )
by its attorney                     )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name
   136
                                                                     ALLEN ALLEN
SHARE SALE DEED                                                      & HEMSLEY
- --------------------------------------------------------------------------------

THE VENDORS' GUARANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BANKERS TRUST CORPORATION           )
by its attorney                     )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name

THE WARRANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
DEUTSCHE BANK AG                    )
by its attorney                     )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name
   137
                                                                     ALLEN ALLEN
SHARE SALE DEED                                                      & HEMSLEY
- --------------------------------------------------------------------------------

THE PURCHASER

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
PRINCIPAL FINANCIAL GROUP           )
(AUSTRALIA) PTY LTD                 )
by its attorney                     )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name

THE PURCHASER'S GUARANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
PRINCIPAL FINANCIAL                 )
SERVICES, INC.                      )
by its authorised representatives   )
in the presence of:                 )
                                            ------------------------------------
                                            Signature

- ------------------------------------        ------------------------------------
Witness                                     Print name

- ------------------------------------
Print name
                                            ------------------------------------
                                            Signature

                                            ------------------------------------
                                            Print name
   1
                                                                     Exhibit 2.3

DEED OF AMENDMENT
- --------------------------------------------------------------------------------

BT Investments (Australia) LLC

BT Foreign Investment Corporation

BT New Zealand Limited

BT International (Delaware), Inc.

BT Nominees (H.K.) Limited

Deutsche Bank AG

Bankers Trust Corporation

Principal Financial Group (Australia) Pty Limited

Principal Financial Services, Inc.

Deed to amend the Share Sale Deed

Allen Allen & Hemsley
The Chifley Tower
2 Chifley Square
Sydney NSW 2000
Australia
Tel 61 2 9230 4000
Fax 61 2 9230 5333

(C) Copyright Allen Allen & Hemsley
   2
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------
DATE                            31  August  1999

PARTIES

      1.    BT INVESTMENTS (AUSTRALIA) LLC c/o Corporation Trust Company, 1209
            Orange Street, Wilmington, Delaware 19801, United States of America
            (BTLLC);

            BT FOREIGN INVESTMENT CORPORATION c/o Corporation Trust Company,
            1209 Orange Street, Wilmington, Delaware 19801, United States of
            America (BTFIC);

            BT NEW ZEALAND LIMITED of Level 7, Price Waterhouse Centre, 66
            Wyndham Street, Auckland, New Zealand (BTNZ);

            BT INTERNATIONAL (DELAWARE), INC. c/o U.S. Corporation Company 1013
            Centre Road, Wilmington, Delaware 19805, United States of America
            (BTID); and

            BT NOMINEES (H.K.) LIMITED of 36TH Floor, Two Pacific Place, 88
            Queensway, Hong Kong (BTNHK),
            (each a Vendor).

      2.    DEUTSCHE BANK AG (ARBN 064 165 162) of Level 28, 31 West 52nd
            Street, New York, New York 10005, United States of America (the
            Warrantor).

      3.    BANKERS TRUST CORPORATION of BT Plaza, 130 Liberty Street, New
            York, New York 10005, United States of America (the Vendors'
            Guarantor).

      4.    PRINCIPAL FINANCIAL GROUP (AUSTRALIA) PTY LIMITED (ACN 087 480
            3l3) (formerly of Level 17,201 Miller Street, North Sydney 2060) now
            of Level 27,530 Collins Street, Melbourne, Victoria 3000, Australia
            (the Purchaser).

      5.    PRINCIPAL FINANCIAL SERVICES, INC. of 711 High Street, Des Moines,
            IA 50392-0300, United States of America (the Purchaser's Guarantor).

RECITALS

         A. The parties are parties to a share sale deed dated 17 June 1999
            under which each Vendor agreed to sell the Sale Shares held by it
            and the Purchaser agreed to purchase all of the Sale Shares on the
            terms and subject to the conditions of that deed (the Share Sale
            Deed).

                                                                          Page 1
   3
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

      B     The parties wish to amend the Share Sale Deed in the manner set out
            in this Deed.
- --------------------------------------------------------------------------------

IT IS AGREED as follows.

1.    DEFINITIONS AND INTERPRETATION
- --------------------------------------------------------------------------------

1.1   DEFINITIONS

      Bankers Trust Names means a name that is or includes the word Bankers
      Trust or any word substantially or deceptively similar to those words.

1.2   INTERPRETATION

      Clause 1.2 of the Share Sale Deed applies as if incorporated in this Deed.

1.3   DEFINITIONS IN SHARE SALE DEED APPLY

      Definitions in the Share Sale Deed apply in this Deed unless the context
      requires otherwise or the relevant term is defined in this Deed.

2.    AMENDMENTS
- --------------------------------------------------------------------------------

2.1   AMENDMENTS

      The Share Sale Deed is amended as set out in the remainder of this clause
      2.

2.2   SHARE CAPITAL DETAILS

      (a)   (Schedule 1) Replace Part 1 of Schedule 1 with Schedule 1 of this
            deed.

      (b)   (Schedule 2) In Part 1 of Schedule 2:

            (i)     in item 2(a), replace NZ$14,488,336 with NZ$7,988,336 and
                    14,488,336 ordinary shares with 8,971,733 ordinary shares;

            (ii)    in item 2(b), replace 14,488,336 with 8,971,733;

            (iii)   in item 2(c), replace 14,488,336 with 8,971,733;

            (iv)    in item 4(a), replace $10,006,334 with $3,506,344 and
                    10,006,334 ordinary shares with 3,506,344 ordinary shares;

            (v)     In item 4(b), replace 10,006,334 with 3,506,344;

            (vi)    In item 4(c), replace 10,006,334 with 3,506,344;

            (vii)   in item 5(a), replace US$350,000 with US$700,000;

            (viii)  in item 6(b):

                    (A)   replace in the third line:

                               Class A Common            100

                                                                          Page 2
   4
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

                                        with
                                   Ordinary          2,600,000; and
                    (B)   delete the fourth line being:
                          BTFIC       Class B Common       160;

            (ix)    in item 6(c):

                    (A)   replace in the third line:
                              Class A Common               100
                              with
                              Ordinary                     2,600,000; and

                    (B)   delete the fourth line being:
                          BTFIC       Class B Common       160

2.3   EMPLOYEES

      (a)   (Definitions) In clause 1.1:

            (i)     insert the following new definitions after the definition
                    of Corporate Services:

                    DNZ means Deutsche New Zealand Limited (formerly Bankers
                    Trust New Zealand Limited) of level 7, Price Waterhouse
                    Centre, 66 Wyndham Street, Auckland, New Zealand.

                    DNZ FM Employees means employees of DNZ engaged, on the date
                    of this Deed, in the FM Businesses (excluding any Shared
                    Employees not notified by the Purchaser under Clause 3.6);
                    and

            (ii)    in the third line of the definition of Employees, insert
                    after Offshore FM Businesses, the words and includes DNZ FM
                    Employees.

      (b)   (Clause 4(f)(ii)) In clause 4(f)(ii), insert in the second line
            between the Group and or the, the words, Principal Financial Group
            (NZ) Limited.

      (c)  (New Clauses 4(k) and (l)) Insert the following new subclauses after
           clause 4(j):

            (k)     (NZ Re-employment) The parties acknowledge that the DNZ FM
                    Employees were offered employment on or before the
                    Completion Date by Principal Financial Group (NZ) Limited
                    (the NZ Re-employment).

            (l)     (No claim) The Purchaser will make no claim for breach of
                    Warranty in relation to:

                    (i)  the DNZ FM Employees not being employees of a Group
                         Member at the date of this Deed; or

                    (ii) the NZ Re-employment.

- --------------------------------------------------------------------------------
                                                                          Page 3
   5
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

2.4   PARENT SUPPORT OBLIGATIONS

      (a)   (Clause 6.10(b)) In the first line of clause 6.10(b), replace the
            Vendors, the Warrantor and the Vendor's Guarantor with any member
            of the Vendors' Group that has given a Parent Support Obligation

      (b)   (SCHEDULE 14) In Schedule 14, replace BTNZ with DNZ in:

            (i)   the first line of item 1;

            (ii)  the first line of item 2;

            (iii) the second line of item 3;

            (iv)  the second line of item 4; and

            (v)   the second line of item 5.

      (c)   (SCHEDULE 14) In Schedule 14:

            (i)   replace BTNZ1 in the fifth line of item 1 with BT Funds
                  Management(NZ) Limited; and

            (ii)  replace BTNZ2 in the fifth line of item 1 and the fourth
                  line of item 2 with BT New Zealand Nominees Limited

2.5   APPLICATION FOR REGISTRATION OF TRADE MARKS

      Delete clause 13.2(b). This deletion does not limit or otherwise
      affect clause 13.10.

2.6   OFFSHORE FM BUSINESSES - IRELAND AND UK

      In clause 1.1, replace the definition of Drop Dead Date with the
      following:

      Drop Dead Date means:

      (a)   in respect of clauses 6.8(a) and (b), 31 January 2000; and

      (b)   in any other case, 30 November 1999,

      or such other dates agreed by the parties.

2.7   GROUP RESTRUCTURING

      In clause 1.1, insert in the definition of Group Restructuring, or as
      otherwise agreed in writing between the Warrantor and the Purchaser's
      Guarantor after the words Schedule 3.

2.8.  ELECTION UNDER SECTION 338(h)(10) OF THE INTERNAL REVENUE CODE

      In Part IV of Schedule 4, in clauses 6(b) and (c), replace at the
      Completion Date in the first line with within the time required under
      the Internal Revenue Code.

3.    BANKERS TRUST NAME
- -------------------------------------------------------------------------------

      (a)   Notwithstanding Clause 13.8 of the Share Sale Deed, the Purchaser is
            not required to procure, until the Transition Date, that:

- -------------------------------------------------------------------------------
                                                                         Page 4
   6
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

            (i)   Bankers Trust Australia Limited or Bankers Trust Life
                  Limited each change its company name to one that does
                  not include an Excluded Name or BT Name;

            (ii)  each Group Member which has registered the business names
                  Bankers Trust or Bankers Trust Australia under each
                  relevant Business Names Act furnishes Cessation of
                  Business under Business Name forms for those business
                  names to the Warrantor; or

            (iii) each Group Member listed in Schedule 10 of the Share Sale
                  Deed destroys all unused stationery and other items which
                  bear any words or marks that include a Bankers Trust Name
                  or the Pyramid Device, and if the Warrantor so specifies,
                  confirm to it in writing the destruction of all unused
                  stationery and other items in the possession of any Group
                  Member being such words or marks.

      (b)   The Warrantor, the Vendors and the Vendors' Guarantor
            acknowledge that the Purchaser is only obliged to comply with
            clauses 13.8(a) to (c) of the Share Sale Deed in respect of the
            Group Members listed in Part IIC of Schedule 2 to the Share
            Sale Deed.

      (c)   The Purchaser and the Purchaser's Guarantor acknowledge that the
            Warrantor's rights under clause 4 of the IB Deed includes the
            power to carry out any matters contemplated under clauses
            13.8(a) to (c) of the Share Sale Deed in respect of the Group
            Members listed in Part IIB of Schedule 2 to the Share Sale
            Deed.

4.    GOVERNING LAW AND JURISDICTION
- --------------------------------------------------------------------------------

      This Deed is governed by the laws of New South Wales. The parties
      submit to the non-exclusive jurisdiction of courts exercising
      jurisdiction there.

5.    COUNTERPARTS
- -------------------------------------------------------------------------------

      This Deed may be executed in any number of counterparts. All
      counterparts together will be taken to constitute one instrument.
- -------------------------------------------------------------------------------

                                                                         Page 5
   7
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

SCHEDULE 1

SHARES AND BUSINESSES
PART I

   Column 1:       Column 2:             Column 3:                  Column 4:               Column 5:

    Vendor        Company in            No. of Sale               Purchase Price           Percentage of
                  which Sale              Shares                                          issued capital
                 Shares are
                    held
- --------------------------------------------------------------------------------------------------------------
                                                                              
BTLLC           BT Investments             1,108                    $1,994,713,987                 100%
                (Australia)           ordinary shares
                Limited
                (BTIA)

BTNZ            BT Funds                  8,971,733                 $   89,839,683                 100%
                Management            ordinary shares
                (NZ) Limited

BTNZ            BT New                      212,643                 $      160,317                 100%
                Zealand                ordinary shares
                Nominees
                Limited

BTNZ            BT Portfolio                3,506,344               $    8,628,389                 100%
                Services (NZ)          Ordinary Shares
                Limited

BTID            BT Funds                     349,999                $    4,834,695             99.9999%
                Management                common shares
                Asia Limited
                (BTFMA)

BTNHK           BTFMA                        1 common               $            1              0.0001%
                                               share

BTFIC           BT Funds                     2,600,000              $    1,822,924                 100%
                Management                ordinary shares
                (Singapore)
                Limited
                (BTFMS)

                                                                         Page 6
   8
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------
EXECUTED and DELIVERED as a Deed.

Each attorney executing this Deed states that he or she has no notice of
revocation or suspension of his or her power of attorney.

THE VENDORS

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT FOREIGN INVESTMENT               )
CORPORATION by its                  )
Attorney in the presence of:        )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT INVESTMENTS (AUSTRALIA)          )
LLC                                 )
by its attorney in the presence of: )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT NEW ZEALAND                      )
LIMITED by its attorney             )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

                                                                         Page 7
   9
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT NOMINEES (H.K.) LIMITED          )
by its attorney                     )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Mark Cerche                           Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Mark Cerche
- --------------------------------
Print name

THE VENDORS' GUARANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BANKERS TRUST CORPORATION           )
by its attorney                     )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Mark Cerche                           Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Mark Cerche
- --------------------------------
Print name

THE WARRANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
DEUTSCHE BANK AG                    )
by its attorney                     )
in the presence of:                 )     /s/ Troland S. Link
                                          --------------------------------
                                          Signature

/s/ Mark Grolman                          Troland S. Link
- --------------------------------          --------------------------------
Witness                                   Print name

Mark Grolman
- --------------------------------
Print name

THE PURCHASER

                                                                        Page 8
   10
DEED OF AMENDMENT                                         ALLEN ALLEN & HEMSLEY
- --------------------------------------------------------------------------------

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT INTERNATIONAL                    )
(DELAWARE) INC.                     )
LIMITED by its attorney             )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BT NOMINEES (H.K.) LIMITED          )
by its attorney                     )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

THE VENDORS' GUARANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
BANKERS TRUST CORPORATION           )
by its attorney                     )
in the presence of:                 )     /s/ Mark Grolman
                                          --------------------------------
                                          Signature

/s/ Abigail B. Young                      Mark Grolman
- --------------------------------          --------------------------------
Witness                                   Print name

Abigail B. Young
- --------------------------------
Print name

                                                                         Page 8
   11
DEED OF AMENDMENT                                          ALLEN ALLEN & HEMSLEY

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
PRINCIPAL FINANCIAL GROUP           )
(AUSTRALIA) PTY LTD                 )
by its attorney                     )            /s/ Karen E. Shaff
in the presence of:                 )            -------------------------------
                                                 Signature
/s/ Xavier P. Grappotte
- -------------------------------                  Karen E. Shaff
Witness                                          -------------------------------
                                                 Print name

Xavier P. Grappotte
- -------------------------------
Print name

THE PURCHASER'S GUARANTOR

SIGNED SEALED AND                   )
DELIVERED on behalf of              )
PRINCIPAL FINANCIAL                 )
SERVICES, INC.                      )            /s/ Karen E. Shaff
by its authorised representatives   )            -------------------------------
in the presence of:                 )            Signature

/s/ Xavier P. Grappotte                          Karen E. Shaff
- -------------------------------                  -------------------------------
Witness                                          Print name

Xavier P. Grappotte
- -------------------------------
Print name
   1
                                                                     EXHIBIT 2.4

                       SECOND AMENDMENT TO SHARE SALE DEED

DATE 14 March 2001

PARTIES

1.       BT INVESTMENTS (AUSTRALIA) LLC c/o Corporation Trust Company, 1209
         Orange Street, Wilmington, Delaware 19801, United States of America;

         B.T. FOREIGN INVESTMENT CORPORATION c/o Corporation Trust Company, 1209
         Orange Street, Wilmington, Delaware 19801, United States of America;

         DEUTSCHE NEW ZEALAND LIMITED (formerly called BT New Zealand Limited)
         of Level 7, Price Waterhouse Centre, 66 Wyndham Street, Auckland, New
         Zealand;

         B.T. INTERNATIONAL (DELAWARE), INC. c/o U.S. Corporation Company 1013
         Centre Road, Wilmington, Delaware 19805, United States of America;

         DB NOMINEES (HONG KONG) LIMITED (formerly called BT Nominees (H.K.)
         Limited) of 36th Floor, Two Pacific Place, 88 Queensway, Hong Kong,

         ("each a VENDOR")

2.       DEUTSCHE BANK AG (ARBN 064 165 162) of Level 28, 31 West 52nd Street,
         New York, New York 10005, United States of America (the "WARRANTOR").

3.       BANKERS TRUST CORPORATION of BT Plaza, 130 Liberty Street, New York,
         New York 10005, United States of America (the "VENDORS' GUARANTOR").

4.       PRINCIPAL FINANCIAL GROUP (AUSTRALIA) PTY LIMITED (ACN 087 480 313)
         (formerly of Level 17, 201 Miller Street, North Sydney, New South
         Wales, 2060, Australia and of Level 27, 530 Collins Street, Melbourne,
         Victoria, 3000, Australia) now of Level 15, The Chifley Tower, 2
         Chifley Square, Sydney, New South Wales, Australia (the "PURCHASER").

5.       PRINCIPAL FINANCIAL SERVICES, INC. of 711 High Street, Des Moines, IA
         50392-0300, United States of America (the "PURCHASER'S GUARANTOR").

RECITALS

A.       The parties are parties to a Share Sale Deed dated 17 June 1999 which
         was amended by a Deed of Amendment dated 31 August 1999 (the Share Sale
         Deed as so amended being hereinafter called "SHARE SALE DEED").

B.       Clause 8 of the Share Sale Deed is unclear in its operation as Clause
         8.1 contains representations, warranties and indemnities by the
         Warrantor only whereas the remaining provisions of Clause 8 contain
         references to the Warrantor and Vendors in circumstances consistent
         with the Clause 8.1 representations, warranties and indemnities being
         given by the Warrantor and the Vendors. The parties have agreed to
         clarify this in the manner set out in this Deed.
   2
C.       The parties wish to amend the Share Sale Deed and to record certain
         other matters relating to the transactions provided for in the Share
         Sale Deed.

IT IS AGREED AS FOLLOWS

1.       DEFINITIONS AND INTERPRETATION

1.1      DEFINITIONS

         Unless the context requires otherwise, terms which are defined in the
         Share Sale Deed shall have the same meaning in this Deed.

1.2      INTERPRETATION

         Clause 1.2 of the Share Sale Deed shall apply to this Deed to the same
         extent as if set out in full in this Deed.

2.       ADDITION OF VENDORS AS CO-WARRANTORS AND INDEMNITORS

2.1      REPLACEMENT OF CLAUSE 8.1 OF SHARE SALE DEED

         Clause 8.1 of the Share Sale Deed is replaced with the following:

         "8.1     WARRANTIES AND INDEMNITY BY THE WARRANTOR AND THE VENDORS

                  (a)      The Warrantor and each of the Vendors jointly and
                           severally represents and warrants to the Purchaser,
                           the Purchasers Guarantor and the Purchaser Entities
                           in the terms set out in Parts I and II of Schedule 4
                           and make no other warranties.

                  (b)      Subject to the other provisions of this Clause 8, the
                           Warrantor and each of the Vendors jointly and
                           severally indemnifies the Purchaser against any Claim
                           which is incurred or suffered by or brought or made
                           or recovered against any Group Member or in respect
                           of any Offshore FM Business and which constitutes a
                           breach of the Warranties."

2.2      CONSEQUENTIAL AMENDMENTS TO CLAUSE 8 AND SCHEDULE 4

         (a)      In line 5 of Clause 8.6(e) after "Warrantor" insert "or the
                  relevant Vendor (as applicable)".

         (b)      In line 1 of Clause 8.6(l) after "Warrantor" insert "or a
                  Vendor".

         (c)      In line 2 of Clause 8.8 after "Warrantor" insert "and the
                  Vendors".

         (d)      In line 2 of Clause 8.11 after "Warrantor" insert "and/or a
                  Vendor".

         (e)      In line 1 of Clause 8.13(e) after "Warrantor" insert "or the
                  Purchaser".

         (f)      In line 1 of Clause 8.14(b) after "Warrantor" insert "or a
                  Vendor".

         (g)      In line 2 of Clause 8.14(c) after "Warrantor" insert "or a
                  Vendor".
   3
         (h)      In the heading of Part 1 of Schedule 4 after "Warrantor's"
                  insert "and Vendors'".

         (i)      In line 2 of Clause 2.4 of Part 1 of Schedule 4 replace "is"
                  with "and the Vendors are".

         (j)      In line 1 of Clause 6.3 of Part 1 of Schedule 4 replace "does"
                  with "and the Vendors do".

         (k)      In line 5 of Clause 10.5 of Part 1 of Schedule 4 replace "is"
                  with "and the Vendors are".

         (l)      In line 1 of Clause 10.6 of Part 1 of Schedule 4 replace
                  "does" with "and the Vendors do".

         (m)      In line 1 of Clause 12.6 of Part II of Schedule 4 after
                  "Warrantor" insert ", the Vendors".

         (n)      In line 1 of Clause 12.7 of Part II of Schedule 4 replace "is"
                  with "and the Vendors are".

         (o)      In line 1 of Clause 12.8 of Part II of Schedule 4 replace "is"
                  with "and the Vendors are".

2.3      Amendment of Clause 32 of Share Sale Deed

         Clause 32 of the Share Sale Deed is amended as follows:

(a)      in Clause 32(b):

         (i)      in line 1 after "Warrantor" insert "and each of Vendors
                  jointly and severally";

         (ii)     in line 6 of Clause 32(b)(ii)(A) after "Warrantor" insert "or
                  a Vendor"; and

         (iii)    in line 1 of Clause 32(b)(ii)(E) after "Warrantor" insert
                  ", each Vendor";

(b)      in line 1 of Clause 32(c)(i) after "Warrantor" insert "and each
         Vendor";

(c)      in Clause 32(d):

         (i)      in line 1 after "Warrantor" insert "and/or the relevant
                  Vendor"; and

         (ii)     in line 5 after "Warrantor" insert "or the relevant Vendor (as
                  the case may be)".

2.4      Ratification and confirmation

         In all other respects the parties ratify and confirm their obligations
         under the Share Sale Deed.

3.       INDEMNITY IN RESPECT OF CERTAIN CLAIMS BY EMPLOYEES AND EX-EMPLOYEES OF
         THE FM BUSINESSES

3.1      Indemnity

         The Warrantor and each of the Vendors jointly and severally indemnifies
         the Purchaser and each Purchaser Entity against any Claim which is
         incurred or suffered by or brought or made or recovered against any
         Group Member to the extent to which the Claim relates to a claim by an
         employee or ex-employee of the Group who is or was employed primarily
         in the conduct of the FM Businesses that he or she is entitled to have
         his or her entitlement to annual leave or long service leave calculated
         by reference to his or her total remuneration (i.e. salary plus bonus)
         for any year up to and including 30 June 2000 rather than by reference
         to his or her salary
   4
         only for any such year PROVIDED THAT this indemnity shall not indemnify
         the Purchaser for any amount which would have been included in an
         employee's or ex-employee's annual leave or long service leave
         entitlements if such entitlements had been calculated by reference to
         the employee's or ex-employee's salary only in any such year.

3.2      Limitation on liability and threshold

         The maximum aggregate liability of the Warrantor and the Vendors under
         Clause 3.1 and under the Warranties for Claims of the type referred to
         in Clause 3.1 shall be $8,000,000 and the Warrantor and the Vendors
         will not be liable to the Purchaser under Clause 3.1 or under the
         Warranties for Claims of the type referred to in Clause 3.1 unless the
         amount of the Claim suffered or incurred by the Purchaser or the Group
         Members either alone or when aggregated with the amount of any other
         such Claims properly made against the Warrantor and/or the Vendors
         exceeds $1,000,000 and only to the extent of such excess up to the
         maximum aggregate liability of the Warrantor and the Vendors of
         $8,000,000.

3.3      Application of certain provisions of Clause 8 of Share Sale Deed

         Clauses 8.6, (d), (e), (h)(i), (i), 8.10, 8.12, 8.13 and 8.14 of the
         Share Sale Deed shall apply (mutatis mutandis) to the indemnity set out
         in Clause 3.1.

4.       CONFIRMATION OF APPLICATION OF CLAUSE 32 OF SHARE SALE DEED

4.1      Confirmation of Application of indemnity

         Without any limitation whatsoever to the indemnity set out in Clause 32
         of the Share Sale Deed the Warrantor and each of the Vendors confirms
         that to the extent that BTIA suffers or incurs any Claim in respect of
         matters which occurred or transactions which were entered into prior to
         Completion which were not specifically related to the FM Businesses
         that Claim will fall within the indemnity set out in Clause 32 of the
         Share Sale Deed and be subject to and governed by that Clause.

4.2      Acknowledgement

         The Warrantor and each of the Vendors acknowledges that the Purchaser
         has agreed not to do detailed due diligence as part of the Completion
         Statement process in respect of the matters and transactions referred
         to in Clause 4.1 in reliance on the confirmation set out in that
         Clause.

5.       COMPLETION STATEMENT

         (a)      With the exception of the matter raised in paragraph (b):

                  (i)      all issues relating to the preparation of the
                           Completion Statement have been agreed; and

                  (ii)     the final Completion Statement is annexed hereto and
                           marked "A" ("the Completion Statement") which
                           includes a provision for interest amounting to
                           $717,341 in respect to late lodgement, and payment of
                           estimated income tax in respect to the 1999 income
                           tax returns.

         (b)      The Completion Statement includes the following income tax
                  return adjustments:

                  (i)      BT Australia Holdings $28,943,924 adjustment to
                           taxable income, (tax effect $10,419,812) in respect
                           of thin capitalisation matters; and
   5
                  (ii)     BT Australia $29,682,608 adjustment to taxable
                           income, (tax effect $10,685,739) in respect of cost
                           base matters.

                  The Purchaser has agreed to procure that the relevant Group
                  Member(s) lodge a ruling request with the Australian Taxation
                  Office ("ATO") in respect of both of these adjustments. The
                  Purchaser agrees that the Warrantor shall have carriage of
                  such ruling request and shall grant the Warrantor access to
                  such records of such Group Member(s) as shall be necessary to
                  lodge the ruling request and shall provide such other
                  assistance as the Warrantor may reasonably require in respect
                  of the ruling request. The Purchaser will have the right to
                  attend meetings and participate in discussions in respect of
                  the ruling request. The Purchaser agrees to not unreasonably
                  withhold consent to lodge the ruling request and to lodge the
                  ruling request promptly after it has been prepared and that
                  any monies that are refunded by the ATO in relation to the
                  adjustments will be paid to the Warrantor forthwith upon
                  receipt.

                  The Warrantor and each of the Vendors agree with the
                  Purchaser, that any additional income tax interest or
                  penalties as noted in paragraph 5 (a) (ii) above will be paid
                  by the Warrantor, and any monies refunded by the ATO in
                  relation to the adjustments will be paid to the Warrantor in a
                  manner that any such adjustments do not adversely affect the
                  Purchaser or any Group Member.

6.       PATRICKS INFRASTRUCTURE BONDS ("PATRICKS")

         The parties acknowledge that the Patricks transaction (including
         without limitation, all agreements, arrangements, documents and
         understandings relating to or connected with Patricks) represent part
         of the IB Businesses as defined in the Share Sale Deed.
   6
EXECUTED AND DELIVERED AS A DEED

Each Attorney executing this Deed states that he or she has not received notice
of the revocation or suspension of the power of attorney under which he or she
does so.

SIGNED SEALED AND DELIVERED             )
for and on behalf of                    )    /s/ Robert Pride
                                             ----------------------------------
BT INVESTMENTS (AUSTRALIA) LLC          )    Signature
BT FOREIGN INVESTMENT CORPORATION       )
DEUTSCHE NEW ZEALAND LIMITED            )    Robert Pride
                                             ----------------------------------
BT INTERNATIONAL (DELAWARE) INC         )    Print Name
DB NOMINEES (HONG KONG) LIMITED         )
BANKERS TRUST CORPORATION and           )    New York
                                             ----------------------------------
DEUTSCHE BANK AG by its attorney        )    Print place of execution
in the presence of:                     )

/s/ T.S. Link

SIGNED SEALED AND DELIVERED             )
for and on behalf of                    )    /s/ Karen E. Shaff
                                             ----------------------------------
PRINCIPAL FINANCIAL GROUP               )    Signature
(AUSTRALIA) PTY LIMITED and             )
PRINCIPAL FINANCIAL SERVICES, INC       )    Karen E. Shaff
                                             ----------------------------------
by its attorney in the presence of:     )    Print Name

                                             Des Moines, Iowa U.S.A.
                                             ----------------------------------
                                             Print place of execution

   1
                                                                     EXHIBIT 4.2

                                RIGHTS AGREEMENT

     This Rights Agreement, dated as of ________ ____, 2001 (the "AGREEMENT"),
between Principal Financial Group, Inc., a Delaware corporation (the
"CORPORATION"), and ___________, a ________ corporation (the "RIGHTS AGENT"),

                                   WITNESSETH:

     WHEREAS, the Board of Directors of the Corporation has authorized the
issuance of one Right (as hereinafter defined) (subject to adjustment) with
respect to each share of Common Stock (as hereinafter defined) of the
Corporation issued between ________ ____, 2001 (the "RECORD DATE") (whether
originally issued or delivered from the Corporation's treasury) and the earlier
of the Distribution Date (as hereinafter defined) or the Expiration Date (as
hereinafter defined) and, to the extent provided in Section 22 hereof, with
respect to each such share issued after the Distribution Date and prior to the
Expiration Date, each Right initially representing the right to purchase one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
without par value, of the Corporation having the rights and preferences set
forth in the Certificate of Designation attached hereto as Exhibit A, upon the
terms and subject to the conditions hereinafter set forth (the "RIGHTS");

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:

     Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:

     (a) "ACQUIRING PERSON" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
10% or more of the shares of Common Stock of the Corporation then outstanding,
but shall not include any Exempt Person. Notwithstanding the foregoing:

          (i) no Person shall become an "ACQUIRING PERSON" as the result of an
     acquisition of shares of Common Stock by the Corporation which, by reducing
     the number of shares of Common Stock outstanding, increases the
     proportionate number of shares Beneficially Owned by such Person to 10% or
     more of the shares of Common Stock of the Corporation then outstanding,
     provided, however, that if a Person shall become the Beneficial Owner of
     10% or more of the shares of Common Stock of the Corporation by reason of
     share purchases by the Corporation and shall, after such share purchases by
     the Corporation, become the Beneficial Owner of any additional shares of
     Common Stock of the Corporation (other than from the Corporation pursuant
     to a stock dividend or stock split), then such Person shall be deemed to be
     an "ACQUIRING PERSON" unless, upon becoming

   2

     the Beneficial Owner of such additional shares of Common Stock of the
     Corporation, such Person is not then the Beneficial Owner of 10% or more of
     the shares of Common Stock of the Corporation then outstanding;

          (ii) if the Board of Directors of the Corporation determines in good
     faith that a Person who would otherwise be an "ACQUIRING PERSON" has become
     such inadvertently (including, without limitation, because (A) such Person
     was unaware that he or it Beneficially Owned a percentage of Common Stock
     that would otherwise cause such Person to be an "ACQUIRING PERSON" or (B)
     such Person was aware of the extent of his or its Beneficial Ownership but
     had no actual knowledge of the consequences of such Beneficial Ownership
     under this Agreement) and without any intention of changing or influencing
     control of the Corporation, and if such Person as promptly as practicable
     has divested or divests himself or itself of Beneficial Ownership of a
     sufficient number of shares of Common Stock so that such Person would no
     longer be an "ACQUIRING PERSON," then such Person shall not be deemed to be
     or to have become an "ACQUIRING PERSON" for any purposes of this Agreement;
     and

          (iii) no Person shall become an "ACQUIRING PERSON" by virtue of
     beneficial ownership of Common Stock of the Corporation by any Affiliate
     and/or Associate of such Person, which Affiliate and/or Associate is deemed
     to be an Affiliate and/or Associate of such Person solely by reason of such
     Affiliate and/or Associate being a director or officer of the Corporation.

     (b) "ACT" shall have the meaning set forth in Section 9(b) hereof.

     (c) "ADJUSTMENT SHARES" shall have the meaning set forth in Section
11(a)(ii) hereof.

     (d) "AFFILIATE" and "ASSOCIATE," when used with reference to any Person,
shall have the respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), as in effect on the date of this Agreement.

     (e) "AGREEMENT" shall have the meaning set forth in the first paragraph
hereof.

     (f) A Person shall be deemed the "BENEFICIAL OWNER" of and shall be deemed
to "BENEFICIALLY OWN" any securities:

          (i) which such Person or any of such Person's Affiliates or
     Associates, directly or indirectly, has the right to acquire (whether such
     right is exercisable immediately or only after the passage of time)
     pursuant to any agreement, arrangement or understanding (whether or not in
     writing), or upon the

                                       2
   3

     exercise of conversion rights, exchange rights, rights, warrants or
     options, or otherwise; provided, however, that a Person shall not be deemed
     the "BENEFICIAL OWNER" of, or to "BENEFICIALLY OWN," (A) securities
     tendered pursuant to a tender or exchange offer made by or on behalf of
     such Person or any of such Person's Affiliates or Associates until such
     tendered securities are accepted for payment or exchange, or (B) securities
     issuable upon exercise of Rights at any time prior to the occurrence of a
     Section 11(a)(ii) Event or a Section 13 Event, or (C) securities issuable
     upon exercise of Rights from and after the occurrence of a Section
     11(a)(ii) Event or a Section 13 Event, which Rights were acquired by such
     Person or any of such Person's Affiliates or Associates prior to the
     Distribution Date or pursuant to Section 3(a) or Section 22 hereof
     ("ORIGINAL RIGHTS") or pursuant to Section 11(i) hereof in connection with
     an adjustment made with respect to any Original Rights;

          (ii) which such Person or any of such Person's Affiliates or
     Associates, directly or indirectly, has or shares the right to vote or
     dispose of, including pursuant to any agreement, arrangement or
     understanding (whether or not in writing); provided, however, that a Person
     shall not be deemed the "BENEFICIAL OWNER" of, or to "BENEFICIALLY OWN,"
     any security if the agreement, arrangement or understanding to vote such
     security (A) arises solely from a revocable proxy or consent given in
     response to a public proxy or consent solicitation made pursuant to, and in
     accordance with, the Exchange Act and the applicable rules and regulations
     thereunder and (B) is not also then reportable by such Person on Schedule
     13D under the Exchange Act (or any comparable or successor report); or

          (iii) which are beneficially owned, directly or indirectly, by any
     other Person and with respect to which such Person or any of such Person's
     Affiliates or Associates has any agreement, arrangement or understanding
     (whether or not in writing) for the purpose of acquiring, holding, voting
     (except pursuant to a revocable proxy or consent as described in the
     proviso to subparagraph (ii) of this paragraph (f)) or disposing of such
     securities of the Corporation; provided, however, that nothing in this
     paragraph (f) shall cause a person engaged in business as an underwriter of
     securities to be the "BENEFICIAL OWNER" of, or to "BENEFICIALLY OWN," any
     securities acquired through such person's participation in good faith in a
     firm commitment underwriting until the expiration of forty days after the
     date of such acquisition.

     (g) "BOOK-ENTRY" shall mean an uncertificated book entry for the
Corporation's Common Stock.

     (h) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or day
on which the Rights Agent is authorized or obligated by law or executive order
to close.

                                       3
   4

     (i) "CERTIFICATE OF DESIGNATION" shall mean the Certificate of Designation
of Series A Junior Participating Preferred Stock setting forth the powers,
preferences, rights, qualifications, limitations and restrictions of such series
of preferred stock of the Corporation, a copy of which is attached hereto as
Exhibit A.

     (j) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M., [ ___ ]
time, on such date; provided, however, that if such date is not a Business Day,
it shall mean 5:00 P.M., [ ___ ] time, on the next succeeding Business Day.

     (k) "COMMON STOCK" when used with reference to the Corporation shall mean
the Common Stock, par value $0.01 per share, of the Corporation. "COMMON STOCK"
when used with reference to any Person other than the Corporation which is
organized in corporate form shall mean the capital stock with the greatest
voting power, or the equity securities or other equity interest having power to
control or direct the management, of such Person or, if such Person is a
Subsidiary of another Person, the Person which ultimately controls such
first-mentioned Person and which has issued any such outstanding capital stock,
equity securities or equity interests. "COMMON STOCK" when used with reference
to any Person which is not organized in corporate form shall mean units of
beneficial interest which (i) shall represent the right to participate generally
in the profits and losses of such Person (including, without limitation, any
flow-through tax benefits resulting from an ownership interest in such Person)
and which (ii) shall be entitled to exercise the greatest voting power of such
Person or, in the case of a limited partnership, shall have the power to remove
the general partner or partners.

     (l) "COMMON STOCK EQUIVALENTS" shall have the meaning set forth in Section
11(a)(iii) hereof.

     (m) "CORPORATION" shall have the meaning set forth in the first paragraph
of this Agreement.

     (n) "CURRENT MARKET PRICE" shall have the meaning set forth in Section
11(d) hereof.

     (o) "CURRENT VALUE" shall have the meaning set forth in Section 11(a)(iii)
hereof.

     (p) "DISTRIBUTION DATE" shall have the meaning specified in Section 3(a)
hereof.

     (q) "EQUIVALENT PREFERENCE STOCK" shall have the meaning set forth in
Section 11(b) hereof.

     (r) "EXCHANGE ACT" shall have the meaning specified in Section 1(d) hereof.

                                       4
   5

     (s) "EXEMPT PERSON" means the Corporation, any Subsidiary of the
Corporation, any employee benefit plan of the Corporation or any Subsidiary of
the Corporation, or any Person organized, appointed or established by the
Corporation or such Subsidiary as a fiduciary for or pursuant to the terms of
any such employee benefit plan or for the purpose of funding any such plan or
funding other employee benefits for employees of the Corporation or of any
Subsidiary of the Corporation.

     (t) "EXPIRATION DATE" shall have the meaning specified in Section 7(a)
hereof.

     (u) "FINAL EXPIRATION DATE" shall have the meaning specified in Section
7(a) hereof.

     (v) "NASDAQ" shall have the meaning set forth in Section 11(d)(i) hereof.

     (w) "ORIGINAL RIGHTS" shall have the meaning specified in Section 1(f)(i)
hereof.

     (x) "PERSON" shall mean any individual, firm, corporation, partnership,
trust or other entity and shall include any successor (by merger or otherwise)
of such entity.

     (y) "PREFERRED STOCK" shall mean shares of Series A Junior Participating
Preferred Stock, par value $1.00 per share, of the Corporation, having the
rights, preferences and limitations set forth in the Certificate of Designation,
and, to the extent there are not a sufficient number of shares of Series A
Junior Participating Preferred Stock authorized to permit the full exercise of
the then outstanding Rights, any other series of preferred stock of the
Corporation designated for such purpose by the Board of Directors of the
Corporation containing terms substantially similar to the terms of the Series A
Junior Participating Preferred Stock.

     (z) "PRINCIPAL PARTY" shall have the meaning set forth in Section 13(b)
hereof.

     (aa) "PURCHASE PRICE" shall have the meaning set forth in Section 4 hereof.

     (bb) "RECORD DATE" shall have the meaning set forth in the WHEREAS clause
at the beginning of this Agreement.

     (cc) "REDEMPTION PRICE" shall have the meaning set forth in Section 23(a)
hereof.

     (dd) "RIGHT CERTIFICATE" shall have the meaning set forth in Section 3(a)
hereof.

                                       5
   6

     (ee) "RIGHTS" shall have the meaning set forth in the WHEREAS clause at the
beginning of this Agreement.

     (ff) "RIGHTS AGENT" shall have the meaning set forth in the first paragraph
of this Agreement.

     (gg) "SECTION 11(a)(ii) EVENT" shall have the meaning set forth in Section
11(a)(ii) hereof.

     (hh) "SECTION 13 EVENT" shall have the meaning set forth in Section 13(a)
hereof.

     (ii) "SPREAD" shall have the meaning set forth in Section 11(a)(iii)
hereof.

     (jj) "STOCK ACQUISITION TIME" shall mean the time of occurrence of
whichever of the following first occurs: (i) the first public announcement
(which, for purposes of this definition, shall include, without limitation, a
report filed pursuant to Section 13(d) of the Exchange Act) by the Corporation
or an Acquiring Person that an Acquiring Person has become such or (ii) the
communication to the Corporation (including, without limitation, to the
directors of the Corporation) of any notice (including, without limitation, any
written consent or notice related thereto) from the Acquiring Person indicating
or reflecting that the Acquiring Person has become such.

     (kk) "SUBSIDIARY" shall mean, with respect to any Person, any corporation
or other entity of which securities or other ownership interests having ordinary
voting power sufficient, in the absence of contingencies, to elect a majority of
the board of directors or other persons performing similar functions are at the
time beneficially owned, directly or indirectly, by such Person, or otherwise
controlled by such Person.

     (ll) "SUBSTITUTION PERIOD" shall have the meaning set forth in Section
11(a)(iii) hereof.

     (mm) "TRADING DAY" shall have the meaning set forth in Section 11(d)(i)
hereof.

     (nn) "VOTING STOCK" shall mean (i) the shares of Common Stock of the
Corporation and (ii) any other shares of capital stock of the Corporation
entitled to vote generally in the election of directors or entitled to vote
together with the shares of Common Stock in respect of any merger,
consolidation, sale of all or substantially all of the Corporation's assets,
liquidation, dissolution or winding up.

     Section 2. Appointment of Rights Agent. The Corporation hereby appoints the
Rights Agent to act as agent for the Corporation and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Stock of the Corporation) in accordance with
the terms and conditions

                                       6
   7

hereof, and the Rights Agent hereby accepts such appointment. The Corporation
may from time to time act as co-Rights Agent or appoint such co-Rights Agents as
it may deem necessary or desirable, upon 10 days' prior written notice to the
Rights Agent. The Rights Agent shall have no duty to supervise, and shall in no
event be liable for, the acts or omissions of any such co-Rights Agent. Any
actions which may be taken by the Rights Agent pursuant to the terms of this
Agreement may be taken by any such co-Rights Agent.

     Section 3. Issue of Right Certificates.

     (a) Until the earlier of the Close of Business on (i) the tenth day after
the date on which the Stock Acquisition Time occurs, or (ii) the tenth Business
Day (or such specified or unspecified later date on or after the Record Date as
may be determined by action of the Board of Directors of the Corporation prior
to such time as any Person becomes an Acquiring Person) after the commencement
by any Person (other than an Exempt Person) of, or the first public announcement
of the intention of any Person (other than an Exempt Person) to commence, a
tender or exchange offer for an amount of Common Stock of the Corporation which,
together with the shares of such stock already owned by such Person, constitutes
10% or more of the outstanding Common Stock of the Corporation (including any
such date which is after the date of this Agreement and prior to the issuance of
the Rights) (the earlier of (i) and (ii) being herein referred to as the
"DISTRIBUTION DATE"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the Book-Entries, or
certificates, for shares of Common Stock of the Corporation registered in the
names of the holders of Common Stock of the Corporation (which Book-Entries, or
certificates, for Common Stock of the Corporation shall be deemed also to be
certificates for Rights) and not by separate Book Entries, or Right
Certificates, and (y) the Rights will be transferable only in connection with
the transfer of the underlying Common Stock. As soon as practicable after the
Distribution Date, the Rights Agent will send, by first-class, insured,
postage-prepaid mail, to each record holder of Common Stock of the Corporation
as of the Close of Business on the Distribution Date, at the address of such
holder shown on the records of the Corporation, a Right Certificate, in
substantially the form of Exhibit B hereto (a "RIGHT CERTIFICATE"), evidencing
one Right for each share of Common Stock of the Corporation so held, subject to
adjustment and to the provisions of Section 14(a) hereof. As of the Close of
Business on the Distribution Date, the Rights will be evidenced solely by such
Right Certificates.

     (b) On the Record Date or as soon as practicable thereafter, the
Corporation will send a copy of a Summary of Rights to Purchase Preferred Stock,
in substantially the form attached hereto as Exhibit C, by first-class,
postage-prepaid mail, to each record holder of its Common Stock as of the Close
of Business on the Record Date, at the address of such holder shown on the
records of the Corporation. With respect to Book-Entries or certificates for
Common Stock of the Corporation outstanding as of the Record

                                       7
   8

Date, until the earlier of the Distribution Date or the Expiration Date, the
Rights will be evidenced by such Book-Entries or certificates for Common Stock
together with the Summary of Rights. Until the earlier of the Distribution Date
or the Expiration Date, the transfer of any Common Stock represented by a
Book-Entry or the surrender for transfer of any certificate for Common Stock of
the Corporation outstanding on the Record Date, with or without a copy of the
Summary of Rights, shall also constitute the transfer of the Rights associated
with the Common Stock represented by such Book-Entry or certificate.

     (c) Certificates issued by the Corporation for Common Stock (whether upon
transfer of outstanding Common Stock, original issuance or disposition from the
Corporation's treasury) after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date shall also be deemed to be certificates
for the Rights and shall have impressed on, printed on, written on or otherwise
affixed to them the following legend:

     This certificate also evidences and entitles the holder hereof to certain
     Rights as set forth in a Rights Agreement between the Corporation and
     ____________, as it may be amended from time to time (the "Rights
     Agreement"), the terms of which are hereby incorporated herein by reference
     and a copy of which is on file at the principal executive offices of the
     Corporation. Under certain circumstances, as set forth in the Rights
     Agreement, such Rights will be evidenced by separate certificates and will
     no longer be evidenced by this certificate. The Corporation will mail to
     the holder of this certificate a copy of the Rights Agreement (as in effect
     on the date of mailing) without charge promptly after receipt of a written
     request therefor. Under certain circumstances set forth in the Rights
     Agreement, Rights beneficially owned by an Acquiring Person, or any
     Associate or Affiliate thereof (as such terms are defined in the Rights
     Agreement), whether currently held by or on behalf of such Person or by any
     subsequent holder, may become null and void.

With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock of the Corporation represented by such
certificates shall be evidenced by such certificates alone and registered
holders of Common Stock of the Corporation shall also be the registered holders
of the associated Rights, and the surrender for transfer of any of such
certificates shall also constitute the transfer of the Rights associated with
the Common Stock of the Corporation represented by such certificates.

     Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase, certification and assignment to be printed on the
reverse thereof) shall each be substantially in the form set forth in Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Corporation may deem
appropriate and as are not inconsistent with

                                       8
   9

the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Sections 11
and 22 hereof, the Right Certificates, whenever distributed, shall be dated as
of the Record Date and on their face shall entitle the holders thereof to
purchase such number of one one-thousandths of a share of Preferred Stock as
shall be set forth therein at the price per one one-thousandths of a share of
Preferred Stock set forth therein (the "PURCHASE PRICE"), but the amount and
type of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided in this Agreement.

     Section 5. Countersignature and Registration.

     (a) The Right Certificates shall be executed on behalf of the Corporation
manually or by facsimile by the Chief Financial Officer, the Treasurer, the
Chief Executive Officer, the President or the Senior Vice President and General
Counsel and also by the Chief Financial Officer, the Treasurer, the Secretary or
any Assistant Secretary. The Right Certificates shall be countersigned by the
Rights Agent manually and shall not be valid for any purpose unless so
countersigned. In case any officer of the Corporation who shall have signed any
of the Right Certificates shall cease to be such officer of the Corporation
before countersignature by the Rights Agent and issuance and delivery by the
Corporation, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent, and issued and delivered by the Corporation with the same force
and effect as though the person who signed such Right Certificates had not
ceased to be such officer of the Corporation; and any Right Certificate may be
signed on behalf of the Corporation by any person who, at the actual date of the
execution of such Right Certificate, shall be a proper officer of the
Corporation to sign such Right Certificate, although at the date of the
execution of this Rights Agreement any such person was not such an officer.

     (b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office in [City], [State], books in any form or medium
(including electronic media) for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Right Certificates, the number of Rights evidenced
by each of the Right Certificates on its face and the date and certificate
number of each of the Right Certificates.

     Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.

     (a) Subject to the provisions of Sections 7(e) and 14 hereof, at any time
after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the Expiration Date, any Right Certificate or Right
Certificates may be transferred, split

                                       9
   10

up, combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of shares of Preferred
Stock (or other securities, cash or assets, as the case may be) as the Right
Certificate or Right Certificates surrendered then entitled such holder (or
former holder in the case of a transfer) to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Right Certificate or
Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent in [City], [State]. Neither the Rights Agent nor the Corporation
shall be obligated to take any action whatsoever with respect to the transfer of
any such surrendered Right Certificate or Right Certificates until the
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Right Certificate or Right
Certificates and shall have provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Corporation shall reasonably request. Thereupon the Rights Agent
shall, subject to Sections 7(e) and 14 hereof, countersign and deliver to the
Person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Corporation may require payment from the holders of
Right Certificates of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer, split up, combination or
exchange of such Right Certificates.

     (b) Upon receipt by the Corporation and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a valid Right Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to the
Corporation and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Right Certificate
if mutilated, the Corporation will execute and deliver a new Right Certificate
of like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.

     Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.

     (a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Sections 9(c), 11(a)(iii) and 23(a) hereof) in whole
or in part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase and certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
of the Rights Agent in [City], [State], together with payment of the Purchase
Price for each one one-thousandth of a share of Preferred Stock as to which the
Rights are exercised, at or prior to the earliest of (i) the Close of Business
on _________ ____, 2011

                                       10
   11

[10 years after Record Date] (the "FINAL EXPIRATION DATE"), (ii) the time at
which the Rights are redeemed as provided in Section 23 or (iii) the time at
which the Rights are exchanged as provided in Section 24 (the earliest of (i),
(ii) and (iii) being herein referred to as the "EXPIRATION DATE").

     (b) The Purchase Price for each one one-thousandth of a share of Preferred
Stock issued pursuant to the exercise of a Right shall initially be $_________,
shall be subject to adjustment from time to time as provided in Sections 11 and
13 hereof and shall be payable in lawful money of the United States of America
in accordance with paragraph (c) below.

     (c) Except as otherwise provided herein, upon receipt of a Right
Certificate representing exercisable Rights, with the form of election to
purchase and certificate duly executed, accompanied by payment (in cash, or by
certified bank check or money order payable to the order of the Corporation) of
the Purchase Price for the Preferred Stock (or other shares, securities, cash or
other assets, as the case may be) to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of the Rights pursuant
hereto in cash, or by certified bank check or money order payable to the order
of the Corporation, the Rights Agent shall, subject to Section 20(k) hereof, (i)
(A) promptly requisition from any transfer agent of the Preferred Stock (or make
available, if the Rights Agent is the transfer agent for such shares)
certificates for the number of shares of Preferred Stock to be purchased (and
the Corporation hereby irrevocably authorizes its transfer agent to comply with
all such requests), or (B) if the Corporation shall have elected to deposit the
total number of shares of Preferred Stock issuable upon exercise of the Rights
hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing interests in such number of one one-thousandths
of a share of Preferred Stock as are to be purchased (in which case certificates
for the shares of Preferred Stock represented by such receipts shall be
deposited by the transfer agent with the depositary agent) and the Corporation
hereby directs the depositary agent to comply with such request, (ii) when
appropriate, requisition from the Corporation the amount of cash to be paid in
lieu of issuance of fractional shares in accordance with Section 14 hereof,
(iii) promptly after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by such
holder, and (iv) when appropriate, after receipt, promptly deliver such cash in
lieu of fractional shares to or upon the order of the registered holder of such
Right Certificate.

     (d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder, subject to the provisions of Section 14 hereof.

                                       11
   12

     (e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or any Affiliate or Associate of an Acquiring
Person, (ii) a transferee of any such Acquiring Person (or of any such Affiliate
or Associate) who becomes a transferee after such Acquiring Person becomes such
or (iii) a transferee of any such Acquiring Person (or of any such Affiliate or
Associate) who becomes a transferee prior to or concurrently with such Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from such Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Corporation has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall become null and void without any further action, and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The
Corporation shall use all reasonable efforts to ensure that the provisions of
this Section 7(e) are complied with, but shall have no liability to any holder
of Right Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or any of its Affiliates,
Associates or transferees hereunder.

     (f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Corporation shall be obligated to undertake any action with
respect to a registered holder of any Right Certificate upon the occurrence of
any purported transfer or exercise as set forth in this Section 7 unless such
registered holder shall have (i) completed and signed the certificate following
the form of assignment or election to purchase set forth on the reverse side of
the Right Certificate surrendered for such assignment or exercise and (ii)
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Corporation
shall reasonably request.

     Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Corporation or to any of
its agents, be delivered to the Rights Agent for cancellation or in canceled
form, or, if surrendered to the Rights Agent, shall be canceled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Agreement. The Corporation shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Corporation otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Right Certificates to the Corporation, or shall, at the
written request of the Corporation, destroy such canceled Right Certificates and
in such case shall deliver a certificate of destruction thereof to the
Corporation.

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   13

     Section 9. Reservation and Availability of Capital Stock.

     (a) The Corporation covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Section 11(a)(ii) Event or a Section 13
Event, out of its authorized and unissued shares of Common Stock or other
securities or out of its authorized and issued shares held in its treasury), the
number of shares of Preferred Stock (and, following the occurrence of a Section
11(a)(ii) Event or a Section 13 Event, Common Stock of the Corporation or other
securities) that, as provided in this Agreement, will be sufficient to permit
the exercise in full of all outstanding Rights.

     (b) So long as the Preferred Stock (and, following the occurrence of a
Section 11(a)(ii) Event or a Section 13 Event, Common Stock of the Corporation
or other securities) issuable upon the exercise of Rights may be listed on any
national securities exchange, the Corporation shall use its best efforts to
cause, from and after such time as the Rights become exercisable, all shares
reserved for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.

     (c) The Corporation shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event or a Section 13 Event in which the consideration to be delivered
by the Corporation upon exercise of the Rights has been determined in accordance
with this Agreement, or as soon as is required by law following the Distribution
Date, as the case may be, a registration statement under the Securities Act of
1933, as amended (the "ACT"), with respect to the securities purchasable upon
exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing and (iii)
cause such registration statement to remain effective (with a prospectus at all
times meeting the requirements of the Act) until the earlier of (A) the date as
of which the Rights are no longer exercisable for such securities and (B) the
Expiration Date. The Corporation will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Corporation may, acting by resolution of its Board of Directors, temporarily
suspend, for a period of time not to exceed 90 days after the date set forth in
clause (i) of the first sentence of this Section 9(c), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to
become effective. Upon any such suspension, the Corporation shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualifications in such jurisdiction shall not have been obtained.

                                       13
   14

     (d) The Corporation covenants and agrees that it will take all such action
as may be necessary to ensure that all one one-thousandths of a share of
Preferred Stock (and, following the occurrence of a Section 11(a)(ii) Event or a
Section 13 Event, Common Stock of the Corporation or other securities) delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable.

     (e) The Corporation further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Right Certificates or
of any shares of Preferred Stock (or shares of Common Stock of the Corporation
or other securities, as the case may be) upon the exercise of Rights. The
Corporation shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Right Certificates to a Person
other than, or the issuance or delivery of certificates or depositary receipts
for shares of Preferred Stock (or shares of Common Stock of the Corporation or
other securities, as the case may be) in a name other than that of, the
registered holder of the Right Certificate evidencing Rights surrendered for
exercise or to issue or deliver any certificates for shares of Preferred Stock
(or Common Stock of the Corporation or other securities, as the case may be) or
depositary receipts for Preferred Stock upon the exercise of any Rights until
any such tax shall have been paid (any such tax being payable by the holder of
such Right Certificate at the time of surrender) or until it has been
established to the Corporation's satisfaction that no such tax is due.

     Section 10. Preferred Stock Record Date. Each person in whose name any
certificate for a number of one one-thousandths of a share of Preferred Stock
(or shares of Common Stock of the Corporation or other securities, as the case
may be) is issued upon the exercise of Rights shall for all purposes be deemed
to have become the holder of record of shares of Preferred Stock (or shares of
Common Stock of the Corporation or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Right Certificate evidencing such Rights was duly surrendered and payment of
the Purchase Price (and any applicable transfer taxes) was made; provided,
however, that if the date of such surrender and payment is a date upon which the
Corporation's transfer books for the Preferred Stock (or Common Stock or other
securities, as the case may be) are closed, such Person shall be deemed to have
become the record holder of such shares (fractional and otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the
Corporation's transfer books for the Preferred Stock (or Common Stock or other
securities, as the case may be) are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Right Certificate shall not be entitled to
any rights of a stockholder of the Corporation with respect to shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any

                                       14
   15

preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Corporation, except as provided herein.

     Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares, or
fractions thereof, covered by each Right and the number of Rights outstanding
are subject to adjustment from time to time as provided in this Section 11.

     (a) (i) In the event the Corporation shall at any time after the date of
this Agreement (A) declare or pay a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock into a
greater number of shares, (C) combine or consolidate the outstanding Preferred
Stock into a smaller number of shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which the
Corporation is the continuing or surviving corporation), except as otherwise
provided in Section 7(e) and this Section 11(a), the Purchase Price in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of Preferred Stock or capital stock, as the case may be, issuable on such date,
shall be proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the Purchase Price
then in effect, the aggregate number and kind of shares of Preferred Stock or
capital stock, as the case may be, which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Stock or capital
stock, as the case may be, transfer books of the Corporation were open, he would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification. If an event occurs which
would require an adjustment under both Section 11(a)(i) and Section 11(a)(ii)
hereof, the adjustment provided for in this Section 11(a)(i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.

     (ii) In the event (a "SECTION 11(a)(ii) EVENT") that any Person, alone or
together with its Affiliates and Associates, shall become an Acquiring Person,
then each holder of a Right, except as provided below and in Section 7(e)
hereof, shall thereafter have the right to receive, upon exercise thereof at the
then current Purchase Price in accordance with the terms of this Agreement, in
lieu of a number of one one-thousandths of a share of Preferred Stock, such
number of shares of Common Stock of the Corporation as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of one
one-thousandths of a share of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of such Section 11(a)(ii) Event,
whether or not such Right was then exercisable, and (y) dividing that product
(which, following such first occurrence, shall thereafter be adjusted as
appropriate in accordance with Section 11(f) hereof and, as so adjusted, shall
be referred to as the "PURCHASE PRICE" for each Right and for all purposes of
this Agreement) by

                                       15
   16

50% of the Current Market Price per share of the Common Stock of the Corporation
on the date of such first occurrence (such number of shares being hereinafter
referred to as the "ADJUSTMENT SHARES"). The Corporation shall notify the Rights
Agent as to any Persons who are deemed by the Corporation to be Acquiring
Persons or Associates, Affiliates or transferees (as described in subparagraphs
(ii) and (iii) of Section 7(e) hereof) of such Persons and shall identify any
Rights pertaining thereto.

     (iii) In lieu of issuing shares of Common Stock of the Corporation in
accordance with Section 11(a)(ii) hereof, the Corporation, acting by resolution
of its Board of Directors, may, and, in the event that the number of shares of
Common Stock which are authorized by the Corporation's Certificate of
Incorporation but not outstanding or reserved for issuance for purposes other
than upon exercise of the Rights are not sufficient to permit exercise in full
of the Rights in accordance with Section 11(a)(ii) hereof, the Corporation,
acting by resolution of its Board of Directors, shall (A) determine the excess
of (1) the value of the Adjustment Shares issuable upon the exercise of a Right
(the "CURRENT VALUE"), over (2) the Purchase Price attributable to each Right
(such excess, the "SPREAD") and (B) with respect to each Right (subject to
Section 7(e) hereof), make adequate provision to substitute for all or any part
of the Adjustment Shares, upon payment of the applicable Purchase Price, (1)
cash, (2) a reduction in the Purchase Price, (3) Preferred Stock or other equity
securities of the Corporation (including, without limitation, shares, or units
of shares, of preferred stock which the Board of Directors of the Corporation
has deemed to have the same value as shares of Common Stock of the Corporation
(such Preferred Stock or shares or units of preferred stock hereinafter called
"COMMON STOCK EQUIVALENTS")), (4) debt securities of the Corporation, (5) other
assets or (6) any combination of the foregoing, which, when combined with the
Adjustment Shares (if any) to be issued, has an aggregate value equal to the
Current Value, where such aggregate value has been determined by action of the
Board of Directors of the Corporation based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of the
Corporation; provided, however, if the Corporation shall not have made adequate
provision to deliver value pursuant to clause (B) above within 30 days following
the first occurrence of a Section 11(a)(ii) Event, then the Corporation shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock of the
Corporation (to the extent available) and then, if necessary, cash, which shares
or cash have an aggregate value equal to the Spread. If, after the occurrence of
a Section 11(a)(ii) Event, the number of shares of Common Stock that are
authorized by the Corporation's certificate of incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit exercise in full of the Rights in accordance with
Section 11(a)(ii) hereof and the Corporation, acting by resolution of its Board
of Directors, shall determine in good faith that it is likely that sufficient
additional shares of its Common Stock could be authorized for issuance upon
exercise in full of the Rights, the 30 day period set forth above may be
extended to the extent necessary, but not more than 90 days after the

                                       16
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occurrence of such Section 11(a)(ii) Event, in order that the Corporation may
seek stockholder approval for the authorization of such additional shares (such
period as it may be extended, the "SUBSTITUTION PERIOD"). To the extent that the
Corporation determines that some action is to be taken pursuant to the terms of
this Section 11(a)(iii), the Corporation (x) shall provide, subject to Section
7(e) hereof, that such action shall apply uniformly to all outstanding Rights
and (y) may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek such stockholder approval for the
authorization of additional shares or to decide the appropriate form of
distribution to be made pursuant to the first sentence of this Section
11(a)(iii) and to determine the value thereof. In the event of any such
suspension, the Corporation shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this Section 11(a)(iii), the value of the Common Stock of the Corporation
shall be the Current Market Price per share of the Common Stock of the
Corporation on the date of the first occurrence of the Section 11(a)(ii) Event,
and the per share or per unit value of any Common Stock Equivalents shall be
deemed to equal the Current Market Price per share of the Common Stock of the
Corporation on such date.

     (b) In the event that the Corporation shall fix a record date for the
issuance of rights, options or warrants to all holders of shares of Preferred
Stock entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Preferred Stock (or shares having the
same rights, privileges and preferences as the shares of Preferred Stock
("EQUIVALENT PREFERENCE STOCK")) or securities convertible into shares of
Preferred Stock or Equivalent Preference Stock at a price per share of Preferred
Stock or Equivalent Preference Stock (or having a conversion price per share, if
a security convertible into shares of Preferred Stock or Equivalent Preference
Stock) less than the Current Market Price per share of the Preferred Stock (as
defined in Section 11(d)) on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date plus the number of additional shares of Preferred Stock
and/or Equivalent Preference Stock which the aggregate offering price of the
total number of shares so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Current Market Price, and the denominator of which shall be the number of shares
of Preferred Stock outstanding on such record date plus the number of additional
shares of Preferred Stock or Equivalent Preference Stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Corporation, whose determination shall be described in a
statement filed with the Rights Agent. Such adjustment shall be made
successively

                                       17
   18

whenever such a record date is fixed; and in the event that such rights, options
or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.

     (c) In case the Corporation shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Corporation is
the continuing or surviving corporation) of evidences of indebtedness or assets
(other than a regular periodic cash dividend or a dividend payable in Preferred
Stock, but including any dividend payable in stock other than Preferred Stock)
or subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Market
Price per share of Preferred Stock on such record date, less the fair market
value (as determined in good faith by the Board of Directors of the Corporation,
whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to one share
of Preferred Stock, and the denominator of which shall be such Current Market
Price per share of Preferred Stock. Such adjustments shall be made successively
whenever such a record date is fixed, and in the event that such distribution is
not so made, the Purchase Price shall again be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.

     (d) (i) For the purpose of any computation hereunder, the "CURRENT MARKET
PRICE" per share of Common Stock of the Corporation on any date shall be deemed
to be the average of the daily closing prices per share of such Common Stock of
the Corporation for the 30 consecutive Trading Days immediately prior to such
date; provided, however, that in the event that the Current Market Price per
share of Common Stock of the Corporation is determined during a period following
the announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into such Common Stock (other than the Rights) or (B) any
subdivision, combination or reclassification of such Common Stock, and prior to
the expiration of the 30 Trading Days after the ex-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, as the case may be, then, and in each such case, the
Current Market Price shall be appropriately adjusted to take into account the
ex-dividend trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the shares of Common Stock of the Corporation are not listed or admitted to
trading on the New York Stock Exchange, as reported in the

                                       18
   19

principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Common Stock of the Corporation are listed or admitted to trading or, if the
shares of Common Stock of the Corporation are not listed or admitted to trading
on any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or such other system then in use, or, if on any such
date the shares of Common Stock of the Corporation are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in shares of Common Stock of the
Corporation selected by the Corporation, acting by resolution of the Board of
Directors of the Corporation, or, if on any such date no market maker is making
a market in shares of Common Stock of the Corporation, the fair value of such
shares on such date as determined in good faith by the Corporation, acting by
resolution of the Board of Directors of the Corporation (which determination
shall be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes). The term "TRADING DAY" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
of the Corporation are listed or admitted to trading is open for the transaction
of business or, if the shares of Common Stock of the Corporation are not listed
or admitted to trading on any national securities exchange, a Business Day.

     (ii) For the purpose of any computation hereunder, the "CURRENT MARKET
PRICE" per share of Preferred Stock shall be determined in the same manner as
set forth for the Common Stock of the Corporation in Section 11(d)(i) hereof
(other than the last clause of the second sentence thereof). If the Current
Market Price per share of Preferred Stock cannot be determined in the manner
provided above or if the Preferred Stock is not publicly held or listed or
traded in a manner described in Section 11(d)(i) hereof, the Current Market
Price per share of Preferred Stock shall be conclusively deemed to be an amount
equal to 1000 (as such number may be appropriately adjusted for such events as
stock splits, stock dividends and recapitalizations with respect to the Common
Stock of the Corporation occurring after the date of this Agreement) multiplied
by the Current Market Price per share of the Common Stock of the Corporation. If
neither the Common Stock of the Corporation nor the Preferred Stock is publicly
held or so listed or traded, the Current Market Price per share of Preferred
Stock shall mean the fair value per share as determined in good faith by the
Corporation, acting by resolution of its Board of Directors, whose determination
shall be described in a statement filed with Rights Agent and shall be
conclusive for all purposes. For all purposes of this Agreement, the Current
Market Price of one one-thousandth of a share of Preferred Stock shall be equal
to the Current Market Price of one share of Preferred Stock divided by 1000.

     (e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in such price; provided, however, that any
adjustments which by

                                       19
   20

reason of this Section 11(e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 11 shall be made to the nearest cent or to the nearest
ten-thousandth of a share of Common Stock or other share or the nearest
one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three years from the
date of the transaction which mandates such adjustment or (ii) the Expiration
Date.

     (f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Corporation other than
Preferred Stock, thereafter the Purchase Price and the number of such other
shares so receivable upon exercise of any Right shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Preferred Stock contained in Sections
11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m) inclusive, and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares; provided, however, that the
Corporation shall not be liable for its inability to reserve and keep available
for issuance upon exercise of the Rights pursuant to Section 11(a)(ii) a number
of shares of its Common Stock greater than the number then authorized by the
Certificate of Incorporation of the Corporation but not outstanding or reserved
for any other purpose.

     (g) All Rights originally issued by the Corporation subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.

     (h) Unless the Corporation shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Section 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a share of Preferred Stock (calculated to the nearest one-millionth of a share
of Preferred Stock) obtained by (i) multiplying (A) the number of one
one-thousandths of a share covered by a Right immediately prior to such
adjustment of the Purchase Price by (B) the Purchase Price in effect immediately
prior to such adjustment of the Purchase Price and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.

     (i) The Corporation may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-thousandths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number

                                       20
   21

of Rights shall be exercisable for the number of one one-thousandths of a share
of Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest
one-hundred-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Corporation shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the
Corporation shall, as promptly as practicable, cause to be distributed to
holders of record of Right Certificates on such record date Right Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Corporation, shall cause to be distributed to such holders of record in
substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Corporation, new Right Certificates evidencing all the Rights to which such
holders shall be entitled after such adjustment. Right Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Corporation, the adjusted
Purchase Price) and shall be registered in the names of the holders of record of
Right Certificates on the record date specified in the public announcement.

     (j) Irrespective of any adjustment or change in the Purchase Price or the
number of shares of Preferred Stock, or fraction thereof, issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price per one one-thousandth of a share and
the number of shares which were expressed in the initial Right Certificates
issued hereunder.

     (k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then par value, if any, of the one one-thousandth of a
share of Preferred Stock issuable upon exercise of the Rights, the Corporation
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue fully paid
and nonassessable shares of Preferred Stock at such adjusted Purchase Price.

     (l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Corporation may elect to defer until the occurrence of such event the
issuing to the holder of any Right exercised after such record date the
Preferred Stock, or a fraction thereof,

                                       21
   22

and other capital stock or securities of the Corporation, if any, issuable upon
such exercise over and above the Preferred Stock and other capital stock or
securities of the Corporation, if any, issuable upon such exercise on the basis
of the Purchase Price in effect prior to such adjustment; provided, however,
that the Corporation shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.

     (m) Anything in this Section 11 to the contrary notwithstanding, the
Corporation, acting by resolution of its Board of Directors shall be entitled to
make such reductions in the Purchase Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that it in its sole
discretion shall determine to be advisable in order that any consolidation or
subdivision of the Preferred Stock, issuance wholly for cash of any Preferred
Stock at less than the Current Market Price, issuance wholly for cash of
Preferred Stock or securities which by their terms are convertible into or
exchangeable for Preferred Stock, stock dividends or issuance of rights, options
or warrants referred to hereinabove in this Section 11, hereafter made by the
Corporation to holders of its Preferred Stock shall not be taxable to such
stockholders.

     (n) The Corporation covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Corporation in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Corporation in a transaction which complies with Section 11(o) hereof) or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction or a series of related transactions, assets, cash flow or earning
power aggregating more than 50% of the assets, cash flow or earning power of the
Corporation and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Corporation or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof) if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in
effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the stockholders of the
Person who constitutes, or would constitute, the "PRINCIPAL PARTY" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates.

     (o) The Corporation covenants and agrees that, after the Distribution Date,
it will not, except as permitted by Section 23, Section 24 or Section 27 hereof,
take (or permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish substantially
or eliminate the benefits intended to be afforded by the Rights.

                                       22
   23

     (p) Anything in this Agreement to the contrary notwithstanding, in the
event the Corporation shall at any time after the date of this Agreement and
prior to the Distribution Date (i) declare or pay any dividend on its Common
Stock payable in Common Stock of the Corporation or (ii) subdivide its
outstanding Common Stock into a greater number of shares (by reclassification or
otherwise than by payment of dividends in Common Stock) or (iii) combine or
consolidate its outstanding Common Stock into a smaller number of shares, then
in any such case, (x) the number of one one-thousandths of a share of Preferred
Stock purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-thousandths of a share of
Preferred Stock so purchasable immediately prior to such event by a fraction,
the numerator of which is the number of shares of Common Stock of the
Corporation outstanding immediately before such event and the denominator of
which is the number of shares of such Common Stock outstanding immediately after
such event and (y) action shall be taken such that each share of Common Stock of
the Corporation outstanding immediately after such event shall have issued with
respect to it that number of Rights which each share of Common Stock of the
Corporation outstanding immediately prior to such event had issued with respect
to it. The adjustments provided for in this Section 11(p) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected. If an event occurs which would require
an adjustment under Section 11(a)(ii) and this Section 11(p), the adjustments
provided for in this Section 11(p) shall be in addition and prior to any
adjustment required pursuant to Section 11(a)(ii).

     Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13, the
Corporation shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for its
Common Stock and Preferred Stock a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate (or if prior to the
Distribution Date, to each holder of a certificate representing shares of its
Common Stock) in accordance with Section 26 of this Agreement. Notwithstanding
the foregoing sentence, the failure of the Corporation to make such certificates
or give such notice shall not affect the validity or the force or effect of the
requirement for such adjustment. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained. Any
adjustment to be made pursuant to Sections 11 and 13 shall be effective as of
the date of the event giving rise to such adjustment.

     Section 13. Consolidation, Merger or Sale or Transfer of Assets, Cash Flow
or Earning Power.

     (a) In the event (a "SECTION 13 EVENT") that, following the Stock
Acquisition Time, directly or indirectly, (x) the Corporation shall consolidate
or otherwise combine

                                       23
   24

with or merge with or into, any other Person (other than a wholly owned
Subsidiary of the Corporation in a transaction which complies with Section 11(o)
hereof) and the Corporation shall not be the surviving or continuing corporation
of such consolidation, combination or merger, (y) any Person (other than a
wholly owned Subsidiary of the Corporation in a transaction which complies with
Section 11(o) hereof) shall consolidate or otherwise combine with or merge with
or into the Corporation and the Corporation shall be the surviving or continuing
corporation of such consolidation, combination or merger and, in connection
therewith, all or part of the Common Stock of the Corporation shall be changed
into or exchanged for stock or other securities of the Corporation or any other
Person or cash or any other property or (z) the Corporation shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets, cash flow or earning power
aggregating more than 50% of the assets, cash flow or earning power of the
Corporation and its Subsidiaries (taken as a whole and calculated on the basis
of the Corporation's most recent regularly prepared financial statement) to any
other Person or Persons (other than the Corporation or any wholly owned
Subsidiary of the Corporation in one or more transactions each of which complies
with Section 11(o) hereof), then, and in each such case (except as provided in
Section 13(d) hereof), proper provision shall be made so that (i) each holder of
a Right (except as provided in Section 7(e) hereof) shall thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price
in accordance with the terms of this Agreement, such number of validly
authorized and issued, fully paid, nonassessable and freely tradable shares of
Common Stock of the Principal Party (as hereinafter defined), not subject to any
liens, encumbrances, rights of call, rights of first refusal or other adverse
claims, as shall be equal to the result obtained by dividing the then current
Purchase Price by 50% of the Current Market Price per share of Common Stock of
such Principal Party on the date of consummation of such merger, consolidation,
sale or transfer (provided that the Purchase Price and the number of shares of
Common Stock of such Principal Party so receivable upon exercise of a Right
shall, from and after such Section 13 Event, be subject to further adjustment in
accordance with Section 11(f) hereof to reflect any events occurring in respect
of the Common Stock of such Principal Party after the occurrence of such Section
13 Event); (ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties of
the Corporation pursuant to this Agreement; (iii) the term "CORPORATION" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13 Event; (iv) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock in accordance
with Section 9 hereof) in connection with such consummation as may be necessary
to assure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be possible, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first occurrence
of any Section 13 Event.

                                       24
   25

     (b) "PRINCIPAL PARTY" shall mean:

          (i) in the case of any transaction described in clause (x) or (y) of
     the first sentence of Section 13(a) hereof: (A) the Person that is the
     issuer of any securities into which shares of Common Stock of the
     Corporation are converted in such merger or consolidation, or (B) if no
     securities are so issued, (x) the Person that is the other party to such
     merger, if such Person survives such merger, or (y) if the Person that is
     the other party to the merger does not survive the merger, the Person that
     does survive the merger (including the Corporation if it survives) or (z)
     the Person resulting from the consolidation; and

          (ii) in the case of any transaction described in clause (z) of the
     first sentence of Section 13(a) hereof, the Person that is the party
     receiving the greatest portion of the assets, cash flow or earning power
     transferred pursuant to such transaction or transactions;

provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding 12 month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the Common Stock of which is and
has been so registered, "PRINCIPAL PARTY" shall refer to such other Person; and
(2) in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Stocks of two or more of which are and have been so
registered, "PRINCIPAL PARTY" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.

     (c) The Corporation shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized shares of its
Common Stock which have not been issued or reserved for issuance to permit the
exercise in full of the Rights in accordance with this Section 13 and unless
prior thereto the Corporation and such issuer shall have executed and delivered
to the Rights Agent a supplemental agreement containing the provisions set forth
in paragraphs (a) and (b) of this Section 13 and further providing that, as soon
as practicable after the date of any such Section 13 Event, the Principal Party
will:

          (i) prepare and file a registration statement under the Act with
     respect to the Rights and the securities purchasable upon exercise of the
     Rights on an appropriate form and will use its best efforts to cause such
     registration statement to (A) become effective as soon as practicable after
     such filing and (B) remain effective (with a prospectus at all times
     meeting the requirements of the Act) until the Expiration Date; and

                                       25
   26

          (ii) deliver to holders of the Rights historical financial statements
     for the Principal Party and each of its Affiliates which comply in all
     respects with the requirements for registration on Form 10 under the
     Exchange Act.

The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights which have not theretofore been exercised shall thereafter, subject to
Section 7(e) hereof, become exercisable in the manner described in Section 13(a)
hereof.

     (d) The Corporation covenants and agrees that it will not, after the
occurrence of a Section 11(a)(ii) Event, engage in any Section 13 Event if at
the time of or after such event there are any charter or by-law provisions or
any rights, warrants or other instruments outstanding or any other action taken
which would diminish or otherwise eliminate the benefits intended to be afforded
by the Rights.

     Section 14. Fractional Rights and Fractional Shares.

     (a) The Corporation shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractions of Rights would otherwise
be issuable an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price of the Rights for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or, if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use, or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
(selected by the Corporation, acting by resolution of its Board of Directors).
If on any such date no such market maker is making a market in the Rights, the
fair value of the Rights on such date as determined in good faith by the
Corporation, acting by resolution of its Board of Directors shall be used.

                                       26
   27

          (b) The Corporation shall not be required to issue fractions of shares
of Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares (other than fractions
which are integral multiples of one one-thousandth of a share of Preferred
Stock). Fractions of Preferred Stock in integral multiples of one one-thousandth
of a share of Preferred Stock may, at the election of the Corporation, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Corporation and a depositary selected by it, provided that such agreement
shall provide that the holders of depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Stock. In lieu of fractional shares which are not integral
multiples of one one-thousandth of a share of Preferred Stock, the Corporation
shall pay to the registered holders of Right Certificates at the time such Right
Certificates are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one share of Preferred Stock. For
purposes of this Section 14(b), the current market value of a share of Preferred
Stock shall be the closing price of a share of Preferred Stock (as determined
pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately prior to
the date of such exercise.

     (b) Following the occurrence of a Section 11(a)(ii) Event or a Section 13
Event, the Corporation shall not be required to issue fractions of shares of its
Common Stock upon exercise of the Rights or to distribute certificates or
Book-Entries which evidence fractional shares of its Common Stock. In lieu of
fractional shares of its Common Stock, the Corporation may pay to the registered
holders of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one share of its Common Stock. For purposes of this Section 14(c), the
current market value of one share of Common Stock of the Corporation shall be
the closing price of one share of Common Stock of the Corporation (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.

     (c) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right except as permitted by this Section 14.

     Section 15. Rights of Action. All rights of action in respect of this
Agreement, except the rights of action vested in the Rights Agent pursuant to
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
Common Stock of the Corporation); and any registered holder of any Right
Certificate (or, prior to the Distribution Date, of Common Stock of the
Corporation), without the consent of the Rights Agent or of any holder of any
other Right Certificate (or, prior to the Distribution Date, of Common Stock of
the Corporation) may, in his own behalf and for his own benefit, enforce, and
may institute

                                       27
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and maintain any suit, action or proceeding against the Corporation to enforce,
or otherwise act in respect of, his right to exercise the Rights evidenced by
such Right Certificate in the manner provided in such Right Certificate and in
this Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to this Agreement.

     Section 16. Agreement of Right Holders. Every holder of a Right by
accepting such Right consents and agrees with the Corporation and the Rights
Agent and with every other holder of a Right that:

     (a) prior to the Close of Business on the earlier of the Distribution Date
or the Expiration Date, the Rights shall be evidenced by the Book-Entries or
certificates for shares of Common Stock of the Corporation registered in the
name of the holders of such shares (which Book-Entries or certificates for
shares of Common Stock of the Corporation shall also constitute certificates for
Rights) and each Right will be transferable only in connection with the transfer
of Common Stock of the Corporation;

     (b) after the Distribution Date, the Right Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office of the Rights Agent, duly endorsed or accompanied by a proper instrument
of transfer;

     (c) the Corporation and the Rights Agent may deem and treat the Person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Stock Book-Entry or certificate) is registered as the absolute
owner thereof and of the Rights evidenced thereby (notwithstanding any notations
of ownership or writing on the Right Certificate or the associated Common Stock
certificate made by anyone other than the Corporation or the Rights Agent) for
all purposes whatsoever, and neither the Corporation nor the Rights Agent shall
be affected by any notice to the contrary; and

     (d) notwithstanding anything in this Agreement to the contrary, neither the
Corporation nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Corporation must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.

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     Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Right or Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
one-thousandths of a share of Preferred Stock or any other securities of the
Corporation which may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Right
Certificate be construed to confer upon the holder of any Right or Right
Certificate, as such, any of the rights of a stockholder of the Corporation or
any right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.

Section 18. Concerning the Rights Agent.

     (a) The Corporation agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The
Corporation also agrees to indemnify the Rights Agent for, and to hold it
harmless against, any loss, liability or expense, incurred without gross
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises.

     (b) The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection with its
administration of this Agreement in reliance upon any Right Certificate or
certificate for Preferred Stock or Common Stock of the Corporation or for other
securities of the Corporation, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged by the
proper Person or Persons.

     Section 19. Merger or Consolidation or Change of Name of Rights Agent.

     (a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust or stock transfer business of the Rights Agent or any successor
Rights Agent, shall be the

                                       29
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successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto;
provided, however, that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. The purchase
of all or substantially all of the Rights Agent's assets employed in the
performance of transfer agent activities shall be deemed a merger or
consolidation for purposes of this Section 19. In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement,
any of the Right Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.

     (b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.

     Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Corporation and the holders of Right
Certificates, by their acceptance thereof, shall be bound:

     (a) The Rights Agent may consult with legal counsel selected by it (which
may be legal counsel for the Corporation), and the opinion of such counsel shall
be full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such opinion.

     (b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of an Acquiring Person and the
determination of the Current Market Price per share of Preferred Stock and
Common Stock) be proved or established by the Corporation prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the Chairman of
the Board, the Chief Executive Officer, the President (if any) or the Senior
Vice President and General Counsel and by the Treasurer or the Secretary of the

                                       30
   31

Corporation and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.

     (c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.

     (d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Corporation only.

     (e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Corporation of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it be
responsible for any determination by the Board of Directors of the Corporation
of the Current Market Price of the Preferred Stock or Common Stock of the
Corporation; nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common Stock of the Corporation or Preferred Stock or other securities to be
issued pursuant to this Agreement or any Right Certificate or as to whether any
shares of Preferred Stock or Common Stock of the Corporation or other securities
will, when issued, be validly authorized and issued, fully paid and
nonassessable.

     (f) The Corporation agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.

     (g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the Chief Executive Officer, the President (if any), the
Senior Vice President and General Counsel, the Secretary or the Treasurer of the
Corporation, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any

                                       31
   32

action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer.

     (h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Corporation or become pecuniarily interested in any transaction in which
the Corporation may be interested, or contract with or lend money to the
Corporation or otherwise act as fully and freely as though it were not Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Corporation or for any other legal entity.

     (i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, omission, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Corporation or to holders of the
Rights resulting from any such act, omission, default, neglect or misconduct,
provided reasonable care was exercised in the selection and continued employment
thereof.

     (j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured for it.

     (k) If, with respect to any Right Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Corporation.

     Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Corporation and to each transfer
agent of the Common Stock of the Corporation and Preferred Stock by registered
or certified mail, and to the holders of the Right Certificates by first-class
mail. The Corporation may remove the Rights Agent or any successor Rights Agent
upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Stock of the
Corporation and Preferred Stock by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. If the Rights Agent shall
resign or be removed or shall otherwise become incapable of acting, the
Corporation shall appoint a successor to the Rights Agent. If the Corporation
shall

                                       32
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fail to make such appointment within a period of 30 days after giving notice of
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (who shall, with such notice, submit his Right Certificate for
inspection by the Corporation), then the registered holder of any Right
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Corporation or by such a court, shall be a corporation organized and doing
business under the laws of the United States or of the State of _______ (or of
any other state of the United States so long as such corporation is authorized
to do business as a banking institution in the State of _______), in good
standing, having a principal office in the State of ________, which is
authorized under such laws to exercise corporate trust or stock transfer powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50 million. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Corporation shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of its Common Stock and Preferred Stock, and mail a notice thereof in
writing to the registered holders of the Right Certificates. Failure to give any
notice provided for in this Section 21, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.

     Section 22. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Corporation
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by resolution of its Board of Directors, to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares of stock or other securities or property purchasable under the Right
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of its Common Stock
following the Distribution Date (other than upon exercise of a Right) and prior
to the Expiration Date, the Corporation (a) shall, with respect to shares of
Common Stock so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, or upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Corporation, and (b)
may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Corporation, issue Right Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Right Certificate shall be issued if and to the extent
that the Corporation shall be advised by counsel that such issuance would create
a significant risk of material adverse tax consequences to the Corporation or

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the Person to whom such Right Certificate would be issued and (ii) no such Right
Certificate shall be issued if and to the extent that appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.

     Section 23. Redemption.

     (a) The Corporation may, by resolution of its Board of Directors, at its
option, at any time prior to the earlier of (x) the Stock Acquisition Time or
(y) the Close of Business on the Final Expiration Date, redeem all but not less
than all of the then outstanding Rights at a redemption price of $.001 per Right
(payable in cash, shares of Common Stock (based on the Current Market Price of
the Common Stock at the time of redemption) or any other form of consideration
deemed appropriate by the Board of Directors of the Corporation), appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "REDEMPTION PRICE").

     (b) Immediately upon the action of the Board of Directors of the
Corporation ordering the redemption of the Rights (or at such time subsequent to
such action as the Board of Directors may determine), and without any further
action and without any notice, the right to exercise the Rights will terminate
and the only right thereafter of the holders of Rights shall be to receive the
Redemption Price. Within 10 days after the action of the Board of Directors
ordering the redemption of the Rights, the Corporation shall give notice of such
redemption to the holders of the then outstanding Rights by mailing such notice
to all such holders at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Stock of the Corporation. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made. Neither
the Corporation nor any of its Affiliates or Associates may redeem, acquire or
purchase any Rights at any time in any manner other than that specifically set
forth in this Section 23 or Section 24 hereof and other than in connection with
the repurchase of Common Stock of the Corporation prior to the Distribution
Date.

     Section 24. Exchange.

     (a) The Board of Directors of the Corporation may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
have become void pursuant to the provisions of Section 7(e) hereof) for shares
of Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "EXCHANGE RATIO"). Notwithstanding

                                       34
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the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than an Exempt Person), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the shares of Common Stock then outstanding.

     (b) Immediately upon the action of the Board of Directors of the
Corporation ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common Stock
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Corporation shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Corporation promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the shares of Common Stock for Rights
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void pursuant to
the provisions of Section 7(e) hereof) held by each holder of Rights.

     (c) In any exchange pursuant to this Section 24, the Corporation, at its
option, may substitute shares of Preferred Stock (or any other series of
preferred stock of the Corporation containing terms substantially similar to the
terms of the Preferred Stock) for some or all of the shares of Common Stock
exchangeable for Rights, at the initial rate of one one-thousandth of a share of
Preferred Stock (or of such other series of preferred stock of the Corporation)
for each share of Common Stock, as appropriately adjusted to reflect adjustments
in the voting rights of the Preferred Stock pursuant to the terms thereof, so
that the fraction of a share of Preferred Stock (or of such other series of
preferred stock of the Corporation) delivered in lieu of each share of Common
Stock shall have the same voting rights as one share of Common Stock.

     (d) In the event that there shall not be sufficient shares of Common Stock
or Preferred Stock (or any other series of preferred stock of the Corporation
containing terms substantially similar to the terms of the Preferred Stock)
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Corporation shall
take all such action as may be necessary to authorize additional shares of
Common Stock or Preferred Stock (or such other series of preferred stock of the
Corporation) for issuance upon exchange of the Rights.

                                       35
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     (e) The Corporation shall not be required to issue fractions of shares of
Common Stock or to distribute Book-Entries or certificates which evidence
fractional shares of Common Stock. In lieu of such fractional shares, the
Corporation shall pay to the registered holders of the Right Certificates with
regard to which such fractional shares would otherwise be issuable an amount in
cash equal to the same fraction of the current market value of a whole share of
Common Stock. For the purposes of this paragraph (d), the current market value
of a whole share of Common Stock shall be the closing price of a share of Common
Stock (as determined pursuant to the second sentence of Section 11(d) hereof)
for the Trading Day immediately prior to the date of exchange pursuant to this
Section 24.

     Section 25. Notice of Certain Events.

     (a) In case the Corporation shall at any time after the earlier of the
Distribution Date or the Stock Acquisition Time propose (i) to pay any dividend
payable in stock of any class to the holders of its Preferred Stock or to make
any other distribution to the holders of its Preferred Stock (other than a
regular periodic dividend out of earnings or retained earnings of the
Corporation), or (ii) to offer to the holders of Preferred Stock options, rights
or warrants to subscribe for or to purchase any additional Preferred Stock or
shares of stock of any class or any other securities, rights or options, or
(iii) to effect any reclassification of the Preferred Stock (other than a
reclassification involving only the subdivision of outstanding shares of
Preferred Stock), or (iv) to effect any merger, consolidation or other
combination into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of more than 50% of the assets, cash flow or earning power of
the Corporation and its Subsidiaries (taken as a whole) to, any other Person, or
(v) to effect the liquidation, dissolution or winding up of the Corporation,
then, in each such case, the Corporation shall give to each holder of a Right,
in accordance with Section 26 hereof, a notice of such proposed action, which
shall specify the record date for the purposes of such stock dividend or
distribution of rights or warrants, or the date on which such reclassification,
merger, consolidation, combination, sale, transfer, liquidation, dissolution or
winding up is to take place and the date of participation therein by the holders
of Common Stock of the Corporation or Preferred Stock, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered by
clause (i) or (ii) above at least twenty days prior to the record date for
determining holders of Preferred Stock for purposes of such action, and in the
case of any such other action, at least twenty days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of Common Stock of the Corporation or Preferred Stock, whichever shall
be the earlier. The failure to give notice required by this Section 25 or any
defect therein shall not affect the legality or validity of the action taken by
the Corporation or the vote upon any such action.

                                       36
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     (b) In case any of the events set forth in Section 11(a)(ii) or Section
13(a) of this Agreement shall occur, then, in any such case, (i) the Corporation
shall as soon as practicable thereafter give to each holder of a Right, to the
extent feasible and in accordance with Section 26, a notice of the occurrence of
such event, which shall specify the event and the consequences of the event to
holders of Rights under Section 11(a)(ii) or Section 13(a) hereof, and (ii) all
references in Section 25(a) hereof to Preferred Stock shall be deemed thereafter
to refer also to Common Stock or other securities issuable in respect of the
Rights.

     Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Corporation shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:

     Principal Financial Group, Inc.
     711 High Street
     Des Moines, Iowa  50932
     Attention:  Corporate Secretary

Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Corporation or by the holder of any Right
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Corporation) as follows:

     [Rights Agent]
     [Suite #]
     [Address]
     [City, State  Zip]
     Attention:  [ ____________ ]

Notices or demands authorized by this Agreement to be given or made by the
Corporation or the Rights Agent to the holder of any Right Certificate (or if
prior to the Distribution Date to each holder of a certificate representing
shares of Common Stock of the Corporation) shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed to such Right holder (or
if prior to the Distribution Date to such holder of Common Stock of the
Corporation) at the address of such holder as shown on the registry books of the
Corporation.

     Section 27. Supplements and Amendments. Prior to the Stock Acquisition Time
and subject to the penultimate sentence of this Section 27, the Corporation may,
by resolution of its Board of Directors, and the Rights Agent shall, if the
Corporation so

                                       37
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directs, supplement or amend any provision of this Agreement in any respect
whatsoever (including, without limitation, any extension of the period in which
the Rights may be redeemed) without the approval of any holders of certificates
representing shares of Common Stock of the Corporation. From and after the Stock
Acquisition Time and subject to the penultimate sentence of this Section 27,
without the approval of any holders of certificates representing shares of
Common Stock of the Corporation or of Right Certificates, the Corporation may,
by resolution of its Board of Directors, and the Rights Agent shall, if the
Corporation so directs, supplement or amend this Agreement in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
to shorten or lengthen any time period hereunder or (iv) to change or supplement
or make any other provisions in any manner which the Corporation may deem
necessary or desirable, which shall not adversely affect the interests of, or
diminish substantially or eliminate the benefits intended to be afforded by the
Rights to, the holders of Right Certificates (other than an Acquiring Person or
an Affiliate or Associate of any such Person); provided, however, that this
Agreement may not be supplemented or amended to lengthen, pursuant to clause
(iii) of this sentence, (A) a time period relating to when the Rights may be
redeemed or to modify the ability (or inability) of the Board of Directors of
the Corporation to redeem the Rights, in either case at such time as the Rights
are not then redeemable or (B) any other time period unless such lengthening is
for the purpose of protecting, enhancing or clarifying the rights of or the
benefits to the holders of Rights (other than an Acquiring Person or an
Affiliate or Associate of any such Person). Upon the delivery of a certificate
from an appropriate officer of the Corporation which states that the proposed
supplement or amendment is in compliance with the terms of this Section 27, the
Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary, no supplement or amendment
shall be made which changes the Redemption Price or the Final Expiration Date.
Prior to the Distribution Date, the interests of the holders of Rights shall be
deemed coincident with the interests of the holders of Common Stock.

     Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Corporation or the Rights Agent shall bind and
inure to the benefit of their respective successors and assigns hereunder.

     Section 29. Determinations and Actions by the Board of Directors, etc.

     (a) For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act. The Board of Directors of the
Corporation shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically

                                       38
   39

granted to such Board of Directors, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including, without limitation, a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
of Directors of the Corporation or the Corporation in good faith, (x) shall be
final, conclusive and binding on the Corporation, the Rights Agent, the holders
of the Right Certificates and all other parties and (y) shall not subject the
Board of Directors of the Corporation to any liability to the holders of the
Rights and Right Certificates.

     (b) Nothing contained in this Agreement shall be deemed to be in derogation
of the obligation of the Board of Directors of the Corporation to exercise its
fiduciary duty. Without limiting the foregoing, nothing contained in this
Agreement shall be construed to suggest or imply that the Board of Directors of
the Corporation shall not be entitled to reject any tender offer, or to take any
other action (including, without limitation, the commencement, prosecution,
defense or settlement of any litigation and the submission of additional or
alternative offers or other proposals) with respect to any tender offer that the
Board of Directors believes is necessary or appropriate in the exercise of such
fiduciary duty.

     Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Corporation, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock of the Corporation) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Corporation, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock of the Corporation).

     Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Corporation determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire

                                       39
   40

until the Close of Business on the tenth Business Day following the date of such
determination by the Board of Directors.

     Section 32. Governing Law. This Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State.

     Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.

     Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

                                       40
   41

                                    SIGNATURE

         IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.

Attest:                                 PRINCIPAL FINANCIAL GROUP, INC.

By                                      By
     ----------------------------             ----------------------------------
     Name:                                    Name:
     Title:                                   Title:

Attest:                                 [RIGHTS AGENT]

By                                      By
     ----------------------------             ----------------------------------
     Name:                                    Name:
     Title:                                   Title:

                                       41
   42

                                                                       EXHIBIT A

                         PRINCIPAL FINANCIAL GROUP, INC.

                           Certificate of Designation,
                             Preferences and Rights
                             Pursuant to Section 151
                         of the General Corporation Law
                            of the State of Delaware

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

                           Certificate of Designation,
                             Preferences and Rights
                                       of
                  Series A Junior Participating Preferred Stock

     I, [officer], being the [title] of Principal Financial Group, Inc., a
corporation organized and existing under the General Corporation Law of Delaware
(the "CORPORATION"), do hereby certify:

     FIRST: That, pursuant to authority expressly vested in the Board of
Directors of the Corporation by the provisions of its Certificate of
Incorporation, the Board of Directors on ___________, __________ duly adopted
the following resolution:

     RESOLVED that a Series A Junior Participating Preferred Stock, par value
$1.00 per share, be, and it hereby is, created by this Board of Directors,
pursuant to authority expressly vested in it by the provisions of the
Certificate of Incorporation of the Corporation, and that the designation,
relative powers, preferences and rights, and the qualifications, limitations or
restrictions thereof are as follows:

     Section 1. Designation and Number of Shares. ___________ shares of the
Preferred Stock of the Corporation shall constitute a series of Preferred Stock
designated as Series A Junior Participating Preferred Stock (hereinafter
referred to as the "SERIES A PREFERRED STOCK"). Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.

   43

     Section 2. Dividends and Distributions.

     (A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, par value $0.01
of the Corporation (the "COMMON STOCK") and of any other junior stock which may
be outstanding, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, annual
dividends payable in cash on the fifteenth day of December in each year (each
such date being referred to herein as a "DIVIDEND PAYMENT DATE"), commencing on
the first Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $10.00 per share, or (b) subject to
the provision for adjustment hereinafter set forth, 1000 times the aggregate per
share amount of all cash dividends, and 1000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Dividend Payment Date, or,
with respect to the first Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

     (B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Dividend Payment Date and the next subsequent Dividend
Payment Date, a dividend of $10.00 per share on the Series A Preferred Stock
shall nevertheless be payable on such subsequent Dividend Payment Date.

     (C) Dividends shall begin to accrue and be cumulative on outstanding shares
or Series A Preferred Stock from the Dividend Payment Date next preceding the
date of issue of such shares of Series A Preferred Stock, unless the date of
issue of such shares is prior to the record date for the first Dividend Payment
Date, in which case dividends on

                                       2
   44

such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Dividend Payment Date. Accrued but unpaid dividends shall
accumulate but shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.

     Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:

     (A) Subject to the provisions for adjustment as hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes
(and each one one-thousandth of a share of Series A Preferred Stock shall
entitle the holder thereof to one vote) on all matters submitted to a vote of
the stockholders of the Corporation. In the event the Corporation shall at any
time declare or pay any dividend on Common Stock payable in shares of Common
Stock or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in each such
case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

     (B) Except as otherwise provided herein, in the Certificate of
Incorporation, in any other certificate of designation creating a series of
preferred stock or any similar stock, or by law, the holders of shares of Series
A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.

     (C) Except as provided herein, in Section 10 or by applicable law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be

                                       3
   45

required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for authorizing or taking any corporate action.

     Section 4. Certain Restrictions.

     (A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:

          (i) declare or pay dividends on, make any other distributions on any
     shares or stock ranking junior (either as to dividends or upon liquidation,
     dissolution or winding-up) to the Series A Preferred Stock;

          (ii) declare or pay dividends, or make any other distributions, on any
     shares of stock ranking on a parity (either as to dividends or upon
     liquidation, dissolution or winding up) with the Series A Preferred Stock
     except dividends paid ratably on the Series A Preferred Stock, and all such
     parity stock on which dividends are payable or in arrears in proportion to
     the total amounts to which the holders of all such shares are then
     entitled;

          (iii) redeem or purchase or otherwise acquire for consideration shares
     of any stock ranking junior (either as to dividends or upon liquidation,
     dissolution or winding-up) to the Series A Preferred Stock, provided that
     the Corporation may at any time redeem, purchase or otherwise acquire
     shares of any such junior stock in exchange for shares of any stock of the
     Corporation ranking junior (either as to dividends or upon dissolution,
     liquidation or winding up) to the Series A Preferred Stock; or

          (iv) purchase or otherwise acquire for consideration any shares of
     Series A Preferred Stock, or any shares of stock ranking on a parity
     (either as to dividends or upon liquidation, dissolution or winding-up)
     with the Series A Preferred Stock, except in accordance with a purchase
     offer made in writing or by publication (as determined by the Board of
     Directors) to all holders of such shares upon such terms as the Board of
     Directors, after consideration of the respective annual dividend rates and
     other relative rights and preferences of the respective series and classes,
     shall determine in good faith will result in fair and equitable treatment
     among the respective series or classes.

          (v) The Corporation shall not permit any subsidiary of the Corporation
     to purchase or otherwise acquire for consideration any shares of stock of
     the

                                       4
   46

     Corporation unless the Corporation could, under paragraph (A) of this
     Section 4, purchase or otherwise acquire such shares at such time and in
     such manner.

     Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever,
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock, without designation as to series, and may be reissued as part
of a new series of preferred stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein, in the Restated Certificate of Incorporation, in any other
certificate of designation creating a series of preferred stock or any similar
stock or as otherwise required by law.

     Section 6. Liquidation, Dissolution or Winding-Up. Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, no
distribution shall be made (A) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding-up) to the
Series A Preferred Stock unless prior thereto, the holders of shares of Series A
Preferred Stock shall have received the higher of (i) $1000 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, or (ii) an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of Common
Stock; nor shall any distribution be made (B) to the holders of stock ranking on
a parity (either as to dividends or upon liquidation, dissolution or winding-up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all other such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding-up. In the event the Corporation shall at
any time declare or pay any dividend on Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the provision in clause (A) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.

     Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, or otherwise changed, then in any
such case each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount

                                       5
   47

per share (subject to the provision for adjustment hereinafter set forth) equal
to 1000 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.

     Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.

     Section 9. Rank. Unless otherwise provided in the Restated Certificate of
Incorporation of the Corporation or a Certificate of Designation relating to a
subsequent series of preferred stock of the Corporation, the Series A Preferred
Stock shall rank junior to all other series of the Corporation's preferred stock
as to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding-up, and senior to the Common Stock of this Corporation.

     Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation, as amended, shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single series.

     Section 11. Fractional Shares. Series A Preferred Stock may be issued in
fractions of a share (in one one-thousandths of a share and integral multiples
thereof) which shall entitle the holder, in proportion to such holder's
fractional shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series A
Preferred Stock.

                                       6
   48

     IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its [title] and attested by its Secretary this    th day
of           ,  .

                                                 -------------------------------
                                                 Name:  [officer]
                                                 Title: [title]

ATTEST:

- -----------------------------
Name:
Title: Secretary

                                       7
   49
                                                                       EXHIBIT B

                           [Form of Right Certificate]

Certificate No. R-                                                 ______ Rights

NOT EXERCISABLE AFTER __________ ____, 2011 OR EARLIER IF THE BOARD OF DIRECTORS
ORDERS THE REDEMPTION OR EXCHANGE OF THE RIGHTS. THE RIGHTS ARE SUBJECT TO
REDEMPTION AT $.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME
NULL AND VOID. THE RIGHTS SHALL NOT BE EXERCISABLE, AND SHALL BE VOID SO LONG AS
HELD, BY A HOLDER IN ANY JURISDICTION WHERE THE REQUISITE QUALIFICATION TO THE
ISSUANCE TO SUCH HOLDER, OR THE EXERCISE BY SUCH HOLDER, OF THE RIGHTS IN SUCH
JURISDICTION SHALL NOT HAVE BEEN OBTAINED OR BE OBTAINABLE.

                               Rights Certificate

                         PRINCIPAL FINANCIAL GROUP, INC.

     This certifies that __________, or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of _______ ____, 2001, as the same may be amended from time
to time (the "RIGHTS AGREEMENT"), between Principal Financial Group, Inc., a
Delaware corporation (the "CORPORATION"), and ______________, a ________
corporation (the "RIGHTS AGENT"), to purchase from the Corporation at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M. ([ ____ ] time) on_________ ____, 2011, at the principal
office of the Rights Agent, or its successors as Rights Agent, one
one-thousandth of a fully paid nonassessable share of Series A Junior
Participating Preferred Stock, par value $1.00 per share (the "PREFERRED
STOCK"), of the Corporation, at a purchase price of $______ per one
one-thousandth of a share of Preferred Stock (the "PURCHASE PRICE"), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase and the Certificate contained therein duly executed. The number of
Rights evidenced by this Right Certificate (and the number of one one-thousands
of a share of Preferred Stock which may be purchased upon exercise thereof) set
forth above, and the Purchase Price per one one-thousandth of a share of
Preferred

   50

Stock set forth above, are the number and Purchase Price as of        ,   ,
based on the shares of Preferred Stock as constituted at such date.

     From and after the first occurrence of a Section 11(a)(ii) Event (as
defined in the Rights Agreement), if the Rights evidenced by this Right
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement), (ii) a
transferee of any such Acquiring Person (or of any Associate or Affiliate
thereof) who becomes a transferee after such Acquiring Person (or any Associate
or Affiliate thereof) becomes such or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of such Acquiring Person (or of
any Associate or Affiliate thereof) who becomes a transferee prior to or
concurrently with such Acquiring Person becoming such, such Rights shall become
null and void and no holder hereof shall have any right with respect to such
Rights from and after the occurrence of such Section 11(a)(ii) Event.

     The Rights evidenced by this Right Certificate shall not be exercisable,
and shall be void so long as held, by a holder in any jurisdiction where the
requisite qualification to the issuance to such holder, or the exercise by such
holder, of the Rights in such jurisdiction shall not have been obtained or be
obtainable.

     As provided in the Rights Agreement, the Purchase Price and the number of
one one-thousandths of a share of Preferred Stock or the number and kind of
other securities which may be purchased upon the exercise of the Rights
evidenced by this Right Certificate are subject to modification and adjustment
upon the happening of certain events, including Section 11(a)(ii) Events and
Section 13 Events (as defined in the Rights Agreement).

     This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, as it may be amended from time to time,
which terms, provisions and conditions are hereby incorporated herein by
reference and made a part hereof and to which Rights Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Rights Agent, the
Corporation and the holders of the Right Certificates, which limitations of
rights include the temporary suspension of the exercisability of such Rights
under the specific circumstances set forth in the Rights Agreement. Copies of
the Rights Agreement are on file at the principal executive offices of the
Corporation and the above-mentioned office of the Rights Agent and are also
available upon written request to the Rights Agent.

     This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
one one-thousandths of a share of Preferred Stock as the Rights evidenced by the
Right Certificate or Right Certificates surrendered shall have

                                       2
   51

entitled such holder to purchase. If this Right Certificate shall be exercised
in part, the holder shall be entitled to receive upon surrender hereof another
Right Certificate or Right Certificates for the number of whole Rights not
exercised.

     Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Right Certificate may be redeemed by the Corporation at a redemption price
of $.001 per Right at any time prior to the earlier of (i) the Stock Acquisition
Time (as defined in the Rights Agreement) and (ii) the close of business on the
Expiration Date (as defined in the Rights Agreement). Subject to the provisions
of the Rights Agreement, the rights evidenced by this Right Certificate may be
exchanged in whole or part for shares of Common Stock or fractional shares of
Preferred Stock (or any other substantially similar series of preferred stock of
the Corporation).

     No fractional shares of Preferred Stock will be issued upon the exercise of
any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at the
election of the Corporation, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.

     Other than those provisions relating to the redemption price of the Rights
and the Expiration Date, any of the provisions of the Rights Agreement may be
amended by the Board of Directors of the Corporation in any respect whatsoever
up until the Stock Acquisition Time and thereafter in certain respects which do
not adversely affect the interests of holders of Right Certificates (other than
an Acquiring Person or the Affiliates or Associates thereof).

     No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of shares of Preferred Stock
or of any other securities of the Corporation which may at any time be issuable
on the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Corporation or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.

     This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.

                                       3
   52
     WITNESS the facsimile signature of the proper officers of the Corporation
and its corporate seal. Dated as of ______ _____, _____.

     ATTEST:                                PRINCIPAL FINANCIAL GROUP, INC.

                                            By
     -----------------------------             ---------------------------------
              Secretary                     Title:

     Countersigned:
     [RIGHTS AGENT]

     By
        --------------------------
     Authorized Signature

                                       4
   53

                   [Form of Reverse Side of Right Certificate]

                               FORM OF ASSIGNMENT

                (To be executed by the registered holder if such

               holder desires to transfer the Right Certificate.)

     FOR VALUE RECEIVED ____________________________ hereby sells, assigns and
transfers unto

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

- --------------------------------------------------------------------------------
                  (Please print name and address of transferee)

this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _____________________ Attorney,
to transfer the within Right Certificate on the books of the within named
Corporation, with full power of substitution.

Dated:_____________, ____
                                             -----------------------------------
                                             Signature

Signatures Guaranteed:

     The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement); and (2)
after due inquiry and to the best

   54

knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights
evidenced by this Right Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate thereof.

                                            ------------------------------------
                                            Signature

                                       2
   55

                                     NOTICE

     The signature to the foregoing Assignment must correspond to the name as
written upon the face of this Right Certificate in every particular, without
alteration or enlargement or any change whatsoever.

   56

                          FORM OF ELECTION TO PURCHASE

                      (To be executed if holder desires to
                        exercise the Right Certificate.)

To Principal Financial Group, Inc.:

     The undersigned hereby irrevocably elects to exercise _______________
Rights represented by this Right Certificate to purchase the shares of Preferred
Stock issuable upon the exercise of such Rights (or such other securities of the
Corporation or of any other Person which may be issuable upon the exercise of
the Rights) and requests that certificates for such shares be issued in the name
of:

Please insert social security
or other identifying number

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

- --------------------------------------------------------------------------------
                         (Please print name and address)

If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:

Please insert social security or other identifying number

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

- --------------------------------------------------------------------------------
                         (Please print name and address)

Dated:__________________, ____

   57

                   [Form of Election to Purchase -- continued]

                                                     --------------------------
                                                     Signature

                                                     (Signature must conform in
                                                     all respects to name of
                                                     holder as specified on the
                                                     face of this Right
                                                     Certificate.)
Signature Guaranteed:

- --------------------------------------------------------------------------------
                         (To be completed if applicable)

The undersigned hereby certifies that (1) the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement); (2) after due inquiry
and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the
Rights evidenced by this Right Certificate from any Person who is, was or
subsequently became an Acquiring Person of an Affiliate or Associate thereof.

                                                     --------------------------
                                                     Signature

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

                                     NOTICE

     In the event the certification set forth above in the Forms of Assignment
and Election is not completed, the Corporation will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and, in the
case of an Assignment, will affix a legend to that effect on any Right
Certificates issued in exchange for this Rights Certificate.

                                       2
   58

                                                                       EXHIBIT C

UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR
AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.

                         PRINCIPAL FINANCIAL GROUP, INC.

                          SUMMARY OF RIGHTS TO PURCHASE
                                 PREFERRED STOCK

     The Board of Directors of Principal Financial Group, Inc. (the
"CORPORATION") has authorized the issuance of one Preferred Share Purchase Right
(a "RIGHT") for each outstanding share of Common Stock, par value $0.01 per
share, of the Corporation (the "COMMON STOCK"). The following is a summary of
the terms of the Rights.

     Each Right entitles the registered holder to purchase from the Corporation
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $1.00 per share, of the Corporation (the "PREFERRED STOCK") at a price
of $______ per one one-thousandth of a share of Preferred Stock, subject to
adjustment (the "PURCHASE PRICE"). The description and terms of the Rights are
set forth in a Rights Agreement, dated as of ___________ ____, 2001(the Rights
Agreement, as it may be amended from time to time, is hereinafter referred to as
the "RIGHTS AGREEMENT") between the Corporation and ___________________, as
Rights Agent (the "RIGHTS AGENT").

     Initially, the Rights will be attached to all Common Stock book-entries or
certificates representing shares then outstanding, and no separate book-entries
or certificates representing the Rights ("RIGHT CERTIFICATES") will be
distributed. The Rights will separate from the Common Stock and a "DISTRIBUTION
DATE" will occur upon the earlier to occur of (i) ten days following the time
(the "STOCK ACQUISITION TIME") of a public announcement or notice to the
Corporation that a person or group of affiliated or associated persons (an
"ACQUIRING PERSON") acquired, or obtained the right to acquire, beneficial
ownership of 10% or more of the outstanding Common Stock of the Corporation, and
(ii) ten business days (or, if determined by the Board of Directors, a specified
or unspecified later date) following the commencement or announcement of an
intention to make a tender offer or exchange offer which, if successful, would
cause the bidder to own 10% of more of the outstanding Common Stock.

   59

     The Rights Agreement provides that, until the Distribution Date, (i) the
Rights will be transferred with and only with the Common Stock, (ii) new Common
Stock certificates issued after __________ ____, 2001, upon transfer, new
issuance or reissuance of the Common Stock, will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any of the Common Stock book-entries or certificates outstanding
will also constitute the transfer of the Rights associated with the shares of
Common Stock represented by such certificate or book-entry. As soon as
practicable following the Distribution Date, separate Right Certificates will be
mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date and such separate Right Certificates alone will evidence
the Rights. Except in connection with issuance of Common Stock pursuant to
employee stock plans, options and certain convertible securities, and except as
otherwise determined by the Board of Directors, only shares of Common Stock
issued prior to the Distribution Date will be issued with Rights.

     The Rights are not exercisable until the Distribution Date. The Rights will
expire on __________ ____, 2011, unless earlier redeemed or exchanged by the
Corporation as described below.

     In the event that, after the Stock Acquisition Time, the Corporation is
acquired in a merger or other business combination transaction (except certain
transactions with a person who became an Acquiring Person as a result of a
tender offer described in the next succeeding paragraph) or 50% or more of its
assets, cash flow or earning power is sold, proper provision shall be made so
that each holder of a Right shall thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring corporation which at the time of such
transaction would have a market value (as defined in the Rights Agreement) of
two times the Purchase Price of the Right. In the event that, after the Stock
Acquisition Time, the Corporation were the surviving corporation of a merger and
its Common Stock were changed or exchanged, proper provision shall be made so
that each holder of a Right will thereafter have the right to receive upon
exercise that number of shares of common stock of the Corporation having a
market value of two times the exercise price of the Right.

     In the event that a person or group becomes an Acquiring Person, each
holder of a Right (other than the Acquiring Person) will thereafter have the
right to receive upon exercise that number of shares of Common Stock (or, in
certain circumstances, cash, a reduction in the Purchase Price, Preferred Stock,
other equity securities of the Corporation, debt securities of the Corporation,
other property or a combination thereof) having a market value (as defined in
the Rights Agreement) of two times the Purchase Price of the Right.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person (or an affiliate, associate or transferee thereof) will be null
and void. A

                                       2
   60

person will not be an Acquiring Person if the Board of Directors of the
Corporation determines that such person or group became an Acquiring Person
inadvertently and such person or group promptly divests itself of a sufficient
number of shares of Common Stock so that such person or group is no longer an
Acquiring Person.

     The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) upon the grant to holders of Preferred Stock of certain rights or
warrants to subscribe for Preferred Stock or convertible securities at less than
the current market price of Preferred Stock or (iii) upon the distribution to
holders of Preferred Stock of evidences of indebtedness or assets (excluding
regular periodic cash dividends or dividends payable in Preferred Stock) or of
subscription rights or warrants (other than those referred to above). The number
of Rights and number of shares of Preferred Stock issuable upon the exercise of
each Right are also subject to adjustment in the event of a stock split,
combination or stock dividend on the Common Stock.

     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock will be issued
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock which may, upon the election of the Corporation, be
evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash
will be made based on the market price of the Preferred Stock on the last
trading date prior to the date of exercise.

     At any time prior to the earlier of the Stock Acquisition Time and the
Expiration Date (as defined in the Rights Agreement), the Board of Directors may
redeem the Rights in whole, but not in part, at a price of $.001 per Right (the
"REDEMPTION PRICE"). Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.

     At any time after a person becomes an Acquiring Person and prior to the
acquisition by such Person of 50% or more of the outstanding shares of Common
Stock, the Board of Directors of the Corporation may exchange the Rights (other
than Rights beneficially owned by such Person which have become void), in whole
or part, at an exchange ratio of one share of Common Stock per Right (subject to
adjustment). The Corporation, at its option, may substitute one-thousandth
(subject to adjustment) of a share of Preferred Stock (or other series of
substantially similar preferred stock of the Corporation) for each share of
Common Stock to be exchanged.

                                       3
   61

     Each share of Preferred Stock purchasable upon exercise of the Rights will
have a minimum preferential dividend of $10 per year, but will be entitled to
receive, in the aggregate, a dividend of 1000 times the dividend declared on the
shares of Common Stock. In the event of liquidation, the holders of the shares
of Preferred Stock will be entitled to receive a minimum liquidation payment of
$1000 per share, but will be entitled to receive an aggregate liquidation
payment equal to 1000 times the payment made per share of Common Stock. Each
share of Preferred Stock will have one thousand votes, voting together with the
shares of Common Stock. In the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of
Preferred Stock will be entitled to receive 1000 times the amount and type of
consideration received per share of Common Stock. The rights of the shares of
Preferred Stock as to dividends and liquidation, and in the event of mergers and
consolidations, are protected by anti-dilution provisions.

     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Corporation, other than rights resulting from
such holder's ownership of shares of Common Stock, including, without
limitation, the right to vote or to receive dividends. While the distribution of
the Rights will not be taxable to stockholders or to the Corporation,
stockholders may, depending upon the circumstances, recognize taxable income in
the event that the Rights become exercisable for Common Stock (or other
consideration) of the Corporation or for common stock of the acquiring
corporation as set forth above.

     Other than those provisions relating to the Redemption Price and expiration
date of the Rights, any of the provisions of the Rights Agreement may be amended
by the Board of Directors prior to the Stock Acquisition Time. After such time,
the provisions of the Rights Agreement may be amended by the Board of Directors
in order to cure any ambiguity, to correct or supplement defective or
inconsistent provisions, to shorten or lengthen any time period under the Rights
Agreement, to make changes which do not adversely affect the interests of the
holders of Rights (excluding the interests of any Acquiring Person) or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable.

     The term "VOTING STOCK" means (i) the shares of Common Stock of the
Corporation and (ii) any other shares of capital stock of the Corporation
entitled to vote generally in the election of directors or entitled to vote
together with the shares of Common Stock in respect of any merger,
consolidation, sale of all or substantially all of the Corporation's assets,
liquidation, dissolution or winding up.

     A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to the Corporation's Registration Statement on
Form S-1 dated ___________ ____, 2001. Copies of the Rights Agreement are
available free of charge

                                       4
   62

from the Corporation. This summary description of the Rights does not purport to
be complete and is qualified in its entirety by reference to the Rights
Agreement, as it may be amended from time to time, which is hereby incorporated
herein by reference.

                                       5
   63

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

                         PRINCIPAL FINANCIAL GROUP, INC.

                                       and

                                 [RIGHTS AGENT]

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

                                RIGHTS AGREEMENT

                       Dated as of ___________ ____, 2001

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

   64

                                TABLE OF CONTENTS

                                                                                                      Page
                                                                                                      ----
                                                                                                
Section 1.      Certain Definitions......................................................................1

Section 2.      Appointment of Rights Agent..............................................................6

Section 3.      Issue of Right Certificates..............................................................7

Section 4.      Form of Right Certificates...............................................................8

Section 5.      Countersignature and Registration........................................................9

Section 6.      Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed,
                Lost or Stolen Right Certificates........................................................9

Section 7.      Exercise of Rights; Purchase Price; Expiration Date of Rights...........................10

Section 8.      Cancellation and Destruction of Right Certificates......................................12

Section 9.      Reservation and Availability of Capital Stock...........................................13

Section 10.     Preferred Stock Record Date.............................................................14

Section 11.     Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights.............15

Section 12.     Certificate of Adjusted Purchase Price or Number of Shares..............................23

Section 13.     Consolidation, Merger or Sale or Transfer of Assets, Cash Flow or Earning Power.........23

Section 14.     Fractional Rights and Fractional Shares.................................................26

Section 15.     Rights of Action........................................................................27

Section 16.     Agreement of Right Holders..............................................................28

Section 17.     Right Certificate Holder Not Deemed a Stockholder.......................................29

Section 18.     Concerning the Rights Agent.............................................................29

Section 19.     Merger or Consolidation or Change of Name of Rights Agent...............................29

                                       i
   65

                                                                                                  
Section 20.     Duties of Rights Agent..................................................................30

Section 21.     Change of Rights Agent..................................................................32

Section 22.     Issuance of New Right Certificates......................................................33

Section 23.     Redemption..............................................................................34

Section 24.     Exchange................................................................................34

Section 25.     Notice of Certain Events................................................................36

Section 26.     Notices.................................................................................37

Section 27.     Supplements and Amendments..............................................................37

Section 28.     Successors..............................................................................38

Section 29.     Determinations and Actions by the Board of Directors, etc...............................38

Section 30.     Benefits of this Agreement..............................................................39

Section 31.     Severability............................................................................39

Section 32.     Governing Law...........................................................................40

Section 33.     Counterparts............................................................................40

Section 34.     Descriptive Headings....................................................................40

Exhibit A - Form of Certificate of Designation

Exhibit B - Form of Right Certificate

Exhibit C - Summary of Rights to Purchase Preferred Stock

                                       ii
   1

                                                                    EXHIBIT 10.1

                         PRINCIPAL FINANCIAL GROUP, INC.
                              STOCK INCENTIVE PLAN

                                   SECTION 1.
                                     PURPOSE

     The purpose of the "PRINCIPAL FINANCIAL GROUP, INC. STOCK INCENTIVE PLAN"
(the "Plan") is to foster and promote the long-term financial success of the
Company and its subsidiaries and materially increase shareholder value by (a)
motivating superior performance by means of performance-related incentives, (b)
encouraging and providing for the acquisition of an ownership interest in the
Company by the Company's and its Subsidiaries' employees and agents, and (c)
enabling the Company to attract and retain the services of outstanding employees
upon whose judgment, interest, and special effort the successful conduct of its
operations is largely dependent.

                                   SECTION 2.
                                   DEFINITIONS

     (a)  Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below:

          (1)  "Act" means the Securities Exchange Act of 1934, as amended.

          (2)  "Agent" means each insurance agent (whether or not a statutory
     employee) and each other individual providing personal service to the
     Company or any Subsidiary who, in either case, is not an Employee.

          (3)  "Agents Savings Plan" means The Principal Select Savings Plan
     for Individual Field.

          (4)  "Approved Retirement" means termination of a Participant's
     employment or service (i) on or after the normal retirement date or any
     early retirement date established under any defined benefit pension plan
     maintained by the Company or a Subsidiary and in which the Participant
     participates or (ii) with the approval of the Committee (which may be given
     at or after grant), on or after attaining age 50 and completing such period
     of service as the Committee shall determine from time to time.

          (5)  "Award" means an Option, SAR, award of Restricted Stock or an
     award of Restricted Stock Units.

          (6)  "Beneficial Owner" means such term as defined in Rule 13d-3
     under the Exchange Act.

          (7)  "Board" means the Board of Directors of the Company.

                                        1
   2

          (8)  "Cause" means (i) dishonesty, fraud or misrepresentation, (ii)
     the Participant's engaging in conduct that is injurious to the Company or
     any Subsidiary in any way, including, but not limited to, by way of damage
     to its reputation or standing in the industry, (iii) the Participant's
     having been convicted of, or entered a plea of nolo contendere to, a crime
     that constitutes a felony; (iv) the breach by the Participant of any
     written covenant or agreement with the Company or any Subsidiary not to
     disclose or misuse any information pertaining to, or misuse any property
     of, the Company or any Subsidiary or not to compete or interfere with the
     Company or any Subsidiary or (v) a violation by the Participant of any
     policy of the Company or any Subsidiary.

          (9)  "Change of Control" means the occurrence of any one or more of
     the following:

               (i)  any SEC Person becomes the Beneficial Owner of 25% or more
          of the Common Stock or of Voting Securities representing 25% or more
          of the combined voting power of all Voting Securities of the Company
          (such an SEC Person, a "25% Owner"); or

               (ii) the Incumbent Directors cease for any reason to constitute
          at least a majority of the Board (other than in connection with a
          Merger of Equals); or

               (iii) consummation of a merger, reorganization, consolidation, or
          similar transaction (any of the foregoing, a "Reorganization
          Transaction") other than a Reorganization Transaction (x) following
          which the Continuity of Ownership is more than 60% or (y) which is
          (and continues to qualify as) a Merger of Equals; or

               (iv) approval by the stockholders of the Company of a plan or
          agreement for the sale or other disposition of all or substantially
          all of the consolidated assets of the Company or a plan of liquidation
          of the Company; or

               (v)  any other event or circumstance (or series of events or
          circumstances) that the Board shall determine to constitute a Change
          of Control.

     Notwithstanding the foregoing, a Change of Control shall not occur merely
     as a result of (i) the conversion of Mutual from a mutual insurance holding
     company to a stock company or (ii) an underwritten initial public offering
     of the Common Stock, unless, immediately following such conversion or such
     initial public offering, any SEC Person is a 25% Owner.

                                     2
   3

          (10) "Change of Control Price" means the highest price per share of
     Common Stock offered in conjunction with any transaction resulting in a
     Change of Control (as determined in good faith by the Committee if any part
     of the offered price is payable other than in cash) or, in the case of a
     Change of Control occurring solely by reason of a change in the composition
     of the Board, the highest Fair Market Value of the Common Stock on any of
     the 30 trading days immediately preceding the date on which a Change of
     Control occurs.

          (11) "Code" means the Internal Revenue Code of 1986, as amended.

          (12) "Committee" means the Human Resources Committee of the Board or
     such other committee of the Board as the Board shall designate from time to
     time, which committee shall consist of two or more Non-Employee Directors
     (within the meaning of Rule 16b-3 as promulgated under the Exchange Act).

          (13) "Common Stock" means the common stock of the Company, par value
     $0.01 per share.

          (14) "Company" means Principal Financial Group, Inc., a Delaware
     corporation, and any successor thereto.

          (15) "Company Stock Plan" means any stock option plan, stock incentive
     plan, stock purchase plan and share ownership plans related to the Common
     Stock that are customary for publicly traded companies, and shall include
     the Directors Stock Plan, the Long-Term Plan, the Plan, the Savings Plans
     and the Stock Purchase Plan.

          (16) "Continuity of Ownership" of a stated percentage means that the
     SEC Persons who were the direct or indirect owners of the outstanding
     Common Stock and Voting Securities of the Company immediately before such
     Reorganization Transaction became, immediately after the consummation of
     such Reorganization Transaction, the direct or indirect owners of both the
     stated percentage of the then-outstanding common stock of the Surviving
     Corporation and Voting Securities representing the stated percentage of the
     combined voting power of the then-outstanding Voting Securities of the
     Surviving Corporation, in substantially the same respective proportions as
     such Persons' ownership of the Common Stock and Voting Securities of the
     Company immediately before such Reorganization Transaction.

          (17) "Directors Stock Plan" means the Principal Financial Group, Inc.
     Directors Stock Plan.

                                     3
   4

          (18) "Disability" means, with respect to any Participant, long-term
     disability as defined under any long-term disability plan maintained by the
     Company or a Subsidiary in which the Participant participates. In the event
     of any question as to whether a Participant has a Disability, the plan
     administrator of the relevant long-term disability plan shall determine
     whether a disability exists, in accordance with such plan.

          (19) "Domestic Partner" means any person qualifying to be treated as a
     domestic partner of a Participant under the applicable policies, if any, of
     the Company or Subsidiary which employs the Participant.

          (20) "Employee" means any employee (including each officer) of the
     Company or any Subsidiary.

          (21) "Employees Savings Plan" means the Principal Select Savings
     Plan for Employees.

          (22) "Excess Plan" means the Principal Select Savings Excess Plan and
     the Non-Qualified Defined Contribution Plan for Designated Participants.

          (23) "Exchange Act" means the Securities Exchange Act of 1934, as
     amended.

          (24) "Executive Officer" means any officer of the Company or any
     Subsidiary who is subject to the reporting requirements under Section 16(b)
     of the Exchange Act.

          (25) "Fair Market Value" means, on any date, the price of the last
     trade, regular way, in the Common Stock on such date on the New York Stock
     Exchange or, if at the relevant time, the Common Stock is not listed to
     trade on the New York Stock Exchange, on such other recognized quotation
     system on which the trading prices of the Common Stock are then quoted (the
     "applicable exchange"); provided, however, that the Fair Market Value of
     the Common Stock on the first date that the Common Stock is offered for
     sale to the public through an underwritten public offering shall be the
     price at which the Common Stock is sold in such offering. In the event that
     (i) there are no Common Stock transactions on the applicable exchange on
     any relevant date, Fair Market Value for such date shall mean the closing
     price on the immediately preceding date on which Common Stock transactions
     were so reported and (ii) the applicable exchange adopts a trading policy
     permitting trades after 5 P.M. Eastern Standard Time ("EST"), Fair Market
     Value shall mean the last trade, regular way, reported on or before 5 P.M.
     EST (or such earlier or later time as the Committee may establish from time
     to time).

                                     4
   5

          (26) "Family Member" means, as to a Participant, any (i) child,
     stepchild, grandchild, parent, stepparent, grandparent, spouse,
     mother-in-law, father-in-law, son-in-law or daughter-in-law (including
     adoptive relationships), or Domestic Partner of such Participant, (ii)
     trusts for the exclusive benefit of one or more such persons and/or the
     Participant and (iii) other entity owned solely by one or more such persons
     and/or the Participant.

          (27) "Imminent Control Change Period" means the period commencing on
     the date any one or more of the following events occurs (or the first of
     such events in a series of such events) and ending on the date on which a
     Change of Control or a Merger of Equals occurs:

               (i) The Company enters into an agreement the consummation of
          which would constitute a Change of Control;

               (ii) Any SEC Person attempts to become a 25% Owner, as evidenced
          by filing or other certification of notice of such intent with any
          state's governmental agency established to regulate the insurance
          industry, which, if consummated, would constitute a Change of Control;

               (iii) Any SEC Person commences a "tender offer" (as such term is
          used in Section 14(d) of the Exchange Act) or exchange offer, which,
          if consummated, would result in a Change of Control; or

               (iv) Any SEC Person files with the SEC a preliminary or
          definitive proxy solicitation or election contest to elect or remove
          one or more members of the Board, which, if consummated or effected,
          would result in a Change of Control;

     provided, however, that an Imminent Control Change Period will lapse upon
     the occurrence of any of the following:

               a) With respect to an event described in clause (i) of this
               definition, the date such agreement is terminated, cancelled or
               expires without a Change of Control or Merger of Equals
               occurring;

               b) With respect to an event described in clause (ii) of this
               definition, the date such filing or other certification is
               withdrawn, expires or is denied or otherwise rejected by the
               relevant state regulators without a Change of Control or Merger
               of Equals occurring;

               c) With respect to an event described in clause (iii) of this
               definition, the date such tender offer or exchange offer is
               withdrawn or terminates without a Change of Control or Merger of
               Equals occurring;

                                     5
   6

               d) With respect to an event described in clause (iv) of this
               definition, (1) the date the validity of such proxy solicitation
               or election contest expires under relevant state corporate law,
               or (2) the date such proxy solicitation or election contest
               culminates in a stockholder vote, in either case without a Change
               of Control or Merger of Equals occurring; or

               e) The date a majority of the Incumbent Directors makes a good
               faith determination that any event or condition described in
               clause (i), (ii), (iii) or (iv) of this definition is no longer
               likely to result in a Change of Control, provided that such
               determination may not be made prior to the six (6) month
               anniversary of the occurrence of such event.

     Notwithstanding the foregoing, an Imminent Control Change Period shall not
     commence merely as a result of (A) planning, or filing or certifying an
     intent with any state's governmental agency established to regulate the
     insurance industry of a plan of reorganization of Mutual, or (B) the
     planned underwritten initial public offering of Common Stock, so long as
     such initial public offering is not expected to result in any SEC Person
     becoming a 25% Owner.

          (28) "Incentive Stock Option" (ISO) means an option within the meaning
     of Section 422 of the Code.

          (29) "Incumbent Directors" means, as of any date, the individuals then
     serving as members of the Board who were also members of the Board as of
     the date two years prior to the date of determination; provided that any
     member appointed or elected as a member of the Board after such prior date,
     but whose election, or nomination for election, was approved by a vote or
     written consent of at least a majority of the directors then comprising the
     Incumbent Directors shall also be considered an Incumbent Director unless
     such person's election, or nominated for election, to the Board was as a
     result of, or in connection with, a proxy contest or a Reorganization
     Transaction.

          (30) "Initial Public Offering" means the first underwritten offering
     of Common Stock to the public.

          (31) "Long-Term Plan" means the Principal Financial Group Long- Term
     Performance Plan.

          (32) "Merger of Equals" means the occurrence of a Reorganization
     Transaction that satisfies all of the following:

               (i) the consummation of such Reorganization Transaction results
          in Continuity of Ownership of at least 40%, but not more than 60%; and

                                     6
   7

               (ii) an SEC Person does not become a 25% Owner as a result of
          such Reorganization Transaction; and

               (iii) throughout the period beginning on the effective date of
          the event and ending on the second anniversary of such effective date,
          the Incumbent Directors continue to constitute not less than

               a) a majority of the Board, if subclause (i) of this definition
               is satisfied because the Reorganization Transaction resulted in
               Continuity of Ownership of at least 50%, but not more than 60%;
               or

               b) one (1) member less than a majority of the Board, if subclause
               (i) of this definition is satisfied because the Reorganization
               Transaction resulted in Continuity of Ownership of at least 40%,
               but less than 50%; and

               (iv) the person who was the Chief Executive Officer of the
          Company immediately prior to the first to occur of (x) the day prior
          to the beginning of the Imminent Control Change Period or (y) the day
          prior to the effective date of the Reorganization Transaction shall
          serve as the Chief Executive Officer of the Surviving Corporation at
          all times during the period commencing on the effective date of the
          Reorganization Transaction and ending on the first anniversary
          thereof, provided that this condition shall not fail to be satisfied
          due to the death or Disability of the Chief Executive Officer;

     provided, however, that a Reorganization Transaction shall cease to be
     considered a Merger of Equals (and shall instead be treated as a Change of
     Control) from and after the first date:

               a) during the two year period following the date as of which such
               Reorganization Transaction occurs that any of the conditions of
               any of clause (b), (c) or (d) of this definition shall not be
               satisfied; or

               b) prior to the first anniversary of the effective date of the
               Reorganization Transaction, the Company shall make a filing with
               the Securities and Exchange Commission, issue a press release, or
               make a public announcement to the effect that the Surviving
               Corporation is seeking or intends to seek a replacement for its
               Chief Executive Officer (other than due to the death or
               Disability of such person), whether such replacement is to become
               effective before or after such first anniversary.

          (33) "Mutual" means Principal Mutual Holding Company, an Iowa mutual
     insurance holding company and any successor thereto.

                                     7
   8

          (34) "Nonstatutory Stock Option" (NSO) means an option which is not an
     Incentive Stock Option within the meaning of Section 422 of the Code.

          (35) "Option" means the right to purchase Common Stock at a stated
     price for a specified period of time. For purposes of the Plan, an Option
     may be either (i) an "Incentive Stock Option" (ISO) within the meaning of
     Section 422 of the Code or (ii) an option which is not an Incentive Stock
     Option (a "Nonstatutory Stock Option" (NSO)).

          (36) "Participant" means any Employee or Agent designated by the
     affirmative action of the Committee (or its delegate) to participate in the
     Plan.

          (37) "Period of Restriction" means the period specified by the
     Committee or established pursuant to the Plan during which a Restricted
     Stock award is subject to forfeiture.

          (38) "Plan of Conversion" means the Plan of Conversion of Mutual.

          (39) "Reorganization Transaction" shall have the meaning ascribed
     thereto in the definition of Change of Control.

          (40) "Restricted Stock" means an award of Stock made pursuant to
     Section 6 that is forfeitable by the Participant until the completion of a
     specified period of future service, the achievement of pre-established
     performance objectives or until otherwise determined by the Committee or in
     accordance with the terms of the Plan.

          (41) "Restricted Stock Unit" means a contractual right awarded
     pursuant to Section 6 that entitled the holder to receive shares of Common
     Stock (or the value thereof in cash) upon the completion of a specified
     period of future service or the achievement of pre-established performance
     objectives or at such other time or times determined by the Committee or in
     accordance with the terms of the Plan.

          (42) "SAR" means a stock appreciation right granted under Section 7 of
     the Plan in respect of one or more shares of Common Stock that entitles the
     holder thereof to receive, in cash or Common Stock, at the discretion of
     the Committee (which discretion may be exercised at or after grant,
     including after exercise of the SAR), an amount per share of Common Stock
     equal to the excess, if any, of the Fair Market Value on the date the SAR
     is exercised over the Fair Market Value on the date the SAR is granted.

          (43) "Savings Plans" means the Employees Savings Plan, the Agents
     Savings Plan and the Excess Plan.

                                     8
   9

          (44) "SEC Person" means any person (as such term is defined in
     Section 3(a)(9) of the Exchange Act) or group (as such term is used in Rule
     13d-5 under the Exchange Act), other than an affiliate or any employee
     benefit plan (or any related trust) of the Company or any of its
     affiliates.

          (45) "Stock Purchase Plan" means the Principal Financial Group, Inc.
     Employee Stock Purchase Plan.

          (46) "Subsidiary" means (i) any corporation in which the Company owns,
     directly or indirectly, at least 50% of the total combined voting power of
     all classes of stock of such corporation, (ii) any partnership or limited
     liability company in which the Company owns, directly or indirectly, at
     least 50% of the capital interests or profits interest of such partnership
     or limited liability company and (iii) any other business entity in which
     the Company owns at least 50% of the equity interests thereof, provided
     that, in any such case, the Company is in effective control of such
     corporation, partnership, limited liability company or other entity.

          (47) "Surviving Corporation" means the corporation resulting from a
     Reorganization Transaction or, if securities representing at least 50% of
     the aggregate voting power of such resulting corporation are directly or
     indirectly owned by another corporation, such other corporation.

          (48) "25% Owner" shall have the meaning ascribed thereto in the
     definition of Change of Control.

          (49) "Voting Securities" means, with respect to any corporation,
     securities of such corporation that are entitled to vote generally in the
     election of directors of such corporation.

                                   SECTION 3.
                           POWERS OF THE COMMITTEE

     (a) Power to Grant. The Committee shall determine those Employees and/or
Agents to whom an Award shall be granted and the terms and conditions of any and
all such Awards. The Committee may establish different terms and conditions for
different Awards and different Participants and for the same Participant for
each Award such Participant may receive, whether or not granted at different
times.

     (b) Administration.

          (1)  Rules, Interpretations and Determinations. The Plan shall be
     administered by the Committee. The Committee shall have full authority to
     interpret and administer the Plan, to establish, amend, and rescind rules
     and regulations relating to the Plan, to provide for conditions deemed
     necessary or advisable to protect the interests of the Company, to construe
     the respective Award agreements and to make all other determinations
     necessary or advisable for the administration and interpretation of the
     Plan in order to carry out its

                                        9
   10

     provisions and purposes. Determinations, interpretations, or other actions
     made or taken by the Committee shall be final, binding, and conclusive for
     all purposes and upon all persons.

          (2) Agents and Expenses. The Committee may appoint agents (who may be
     officers or employees of the Company) to assist in the administration of
     the Plan and may grant authority to such persons to execute agreements or
     other documents on its behalf. All expenses incurred in the administration
     of the Plan, including, without limitation, for the engagement of any
     counsel, consultant or agent, shall be paid by the Company.

          (3) Delegation of Authority. The Committee may delegate to the
     Company's Chief Executive Officer the power and authority to make and/or
     administer Awards under the Plan with respect to individuals who are below
     the position of Senior Vice President (or any analogous title), pursuant to
     such conditions and limitations as the Committee may establish; provided
     that only the Committee or the Board may select, and grant Awards to,
     Executive Officers or exercise any other discretionary authority under the
     Plan in respect of Awards granted to such Executive Officers.

     (c)  Certain Rules Relating to Grants and Actions.

          (1)  Maximum Individual Grants. During any three year period, no
     individual Participant may be granted Awards in respect of more than 10% of
     the total shares available under the Plan; provided that, to the extent
     that SARs are granted in tandem with an Option, so that only one may be
     exercised with the other terminating upon such exercise, the number of
     shares of Common Stock subject to such tandem Option and SAR award shall
     only be taken into account once (and not as to both awards) for purposes of
     this limit.

          (2)  Broad Based Grants. Notwithstanding anything else to the contrary
     contained herein, the Committee may authorize the grant of Nonstatutory
     Stock Options to a broad based group of Employees and/or Agents, including
     all Employees and/or Agents or all Employees and/or Agents in one or more
     classes (any such broad based grant of Nonstatutory Stock Options, a "Broad
     Based Grant"). Unless the Committee shall otherwise determine, any such
     Broad Based Grant shall be made on terms and conditions that are
     substantially the same for all Employees and/or Agents (or all Employees or
     Agents in a specified classification of Employees or Agents) receiving such
     grant.

          (3) Limitations in Plan of Conversion. Notwithstanding anything else
     contained in the Plan to the contrary, no action shall be taken, and no
     Award or distribution shall be made, under the Plan which contains any term
     or condition that would violate any provision of the Plan of Conversion.

                                    10
   11

                                   SECTION 4.
                        COMMON STOCK SUBJECT TO PLAN

     (a) Number. Subject to Section 4(c) below, during the five year period
immediately following the effective date of the Plan of Conversion (or such
longer period as the shares initially authorized for issuance hereunder remain
available for grants hereunder), unless the shareholders of the Company approve
an increase in such number by a shareholder vote, the maximum number of shares
of Common Stock that may be made issuable or distributable under all Company
Stock Plans (including, without limitation, the Plan) other than the Employees
Savings Plan, the Agents Savings Plan and the Stock Purchase Plan is 6% of the
number of shares outstanding immediately following the effective date of the
Plan of Conversion. Without limiting the generality of the foregoing, the
maximum number of shares as to which Incentive Stock Options may be granted
shall not exceed 10 million shares. When a SAR is granted in tandem with an
Option, so that only one may be exercised with the other terminating upon such
exercise, the number of shares of Common Stock subject to the tandem Option and
SAR award shall only be taken into account once (and not as to both awards) for
purposes of this limit (and for purposes of the provisions of Section 4(b)
below). The shares to be delivered under the Plan may consist, in whole or in
part, of treasury Common Stock or authorized but unissued Common Stock, not
reserved for any other purpose.

     (b) Canceled or Terminated Awards. Any shares of Common Stock subject to an
Award which for any reason expires without having been exercised, is canceled or
terminated or otherwise is settled without the issuance of any Common Stock
(including, but not limited to, shares tendered to exercise outstanding Options
or shares tendered or withheld for taxes) shall again be available for grant
under the Plan. Notwithstanding the foregoing, in the event that any SARs are
paid out in shares of Common Stock, the number of shares of Common Stock as to
which such SARs have been exercised (and not just the number of shares actually
issued) shall be deemed issued for purposes of determining the limit under
Section 4(a) above and shall not again be available for issuance pursuant to
this Section 4(b).

     (c) Adjustment Due to Change in Capitalization. In the event of any Common
Stock dividend or Common Stock split, recapitalization (including, but not
limited, to the payment of an extraordinary dividend to the stockholders of the
Company), merger, consolidation, combination, spin-off, distribution of assets
to stockholders (other than ordinary cash dividends), exchange of shares, or
other similar corporate change, the aggregate number of shares of Common Stock
available for grant under Section 4(a) or subject to outstanding Awards and the
respective exercise prices or base prices, if any, applicable to outstanding
Awards may be appropriately adjusted by the Committee, in its discretion, and
the Committee's determination shall be conclusive.

                                   SECTION 5.
                                  STOCK OPTIONS

     (a)  Grant of Options. Subject to the provisions of Section 3(c) and
Section 4 above, Options may be granted to Participants at such time or times as
shall be

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determined by the Committee. Options granted under the Plan may be of two types:
(i) Incentive Stock Options and (ii) Nonstatutory Stock Options. Except as
otherwise provided herein, the Committee shall have complete discretion in
determining the number of Options, if any, to be granted to a Participant,
except that Incentive Stock Options may only be granted to Employees. Each
Option grant shall be evidenced by an Option agreement that shall specify the
type of Option granted, the exercise price, the duration of the Option, the
number of shares of Common Stock to which the Option pertains, and such other
terms and conditions as the Committee shall determine which are not inconsistent
with the provisions of the Plan.

     (b)  Exercise Price. Nonstatutory Stock Options and Incentive Stock Options
granted pursuant to the Plan shall have an exercise price no less than the Fair
Market Value of a share of Common Stock on the date on which the Option is
granted, except that the exercise price of any Option granted to take effect at
the time of an underwritten public offering of the Common Stock shall be the
price at which such shares are offered for sale thereunder.

     (c)  Exercise of Options. Unless the Committee shall impose a different
schedule requiring a longer or shorter period of service to exercise in full any
Option granted hereunder and subject to Section 3(c)(3) hereof, one-third of
each Nonstatutory Stock Option or Incentive Stock Option granted pursuant to the
Plan shall become exercisable on each of the first three (3) anniversaries of
the date such Option is granted; provided, however, that each Nonstatutory Stock
Option granted pursuant to the Plan in a Broad Based Grant shall become
exercisable on the third (3(rd)) anniversary of the date such Option is granted
and not before such time; and provided further that the Committee may establish
performance-based criteria for exercisability that can accelerate the
exercisability of all or any portion of any Option. Subject to the provisions of
this Section 5, once any portion of any Option has become exercisable it shall
remain exercisable for its full term. The Committee shall determine the term of
each Nonstatutory Stock Option or Incentive Stock Option granted, but, except as
expressly provided below, in no event shall any such Option be exercisable for
more than ten (10) years after the date on which it is granted.

     (d)  Payment. The Committee shall establish procedures governing the
exercise of Options. No shares shall be delivered pursuant to any exercise of an
Option unless arrangements satisfactory to the Committee have been made to
assure full payment of the exercise price therefor. Without limiting the
generality of the foregoing, payment of the exercise price may be made (i) in
cash or its equivalent, (ii) by exchanging shares of Common Stock (which are not
the subject of any pledge or other security interest) which have been owned by
the person exercising the Option for at least six (6) months at the time of
exercise, (iii) by any combination of the foregoing; provided that the combined
value of all cash and cash equivalents paid and the Fair Market Value of any
such Common Stock so tendered to the Company, valued as of the date of such
tender, is at least equal to such exercise price or (iv) through an arrangement
with a broker approved by the Company whereby payment of the exercise price is
accomplished with the proceeds of the sale of Common Stock.

                                       12
   13

     (e)  Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, no Option that is intended to be an Incentive Stock Option may be
granted after the tenth (10th) anniversary of the effective date of the Plan and
no term of this Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of any Participant affected thereby, to disqualify any
Incentive Stock Option under such Section 422.

     (f)  Termination of Employment or Service.

          (1) Due to Death. In the event a Participant's employment or service
     terminates by reason of death, any Options granted to such Participant
     shall become immediately exercisable in full and may be exercised by the
     Participant's designated beneficiary or, if none is named, by the person
     determined in accordance with Section 10(b) below, at any time prior to the
     earlier to occur of (i) the expiration of the term of the Options or (ii)
     the third (3rd) anniversary (or such earlier date as the Committee shall
     determine at the time of grant) of the Participant's death.

          (2) Due to Disability. In the event a Participant's employment or
     service is terminated by reason of Disability, any Options granted to such
     Participant shall become immediately exercisable in full and may be
     exercised by the Participant (or, in the event of the Participant's death
     after termination of employment or service when the Option is exercisable
     pursuant to its terms, by the Participant's designated beneficiary or, if
     none is named, by the person determined in accordance with Section 10(b)
     below), at any time prior to the earlier to occur of (i) the expiration of
     the term of the Options or (ii) the third (3rd) anniversary (or such
     earlier date as the Committee shall determine at the time of grant) of the
     Participant's termination of employment or service.

          (3) Approved Retirement. In the event a Participant's employment or
     service terminates by reason of Approved Retirement, any Options granted to
     such Participant shall become immediately exercisable in full and may be
     exercised by the Participant (or, in the event of the Participant's death
     after termination of employment or service when the Option is exercisable
     pursuant to its terms, by the Participant's designated beneficiary or, if
     none is named, by the person determined in accordance with Section 10(b)
     below), at any time prior to the expiration date of the term of the Options
     or within three (3) years (or such shorter period as the Committee shall
     determine at the time of grant) following the Participant's Approved
     Retirement, whichever period is shorter.

          (4) Termination of Employment For Cause or Resignation. In the event a
     Participant's employment or service is terminated by the Company or any
     Subsidiary for Cause or by the Participant other than due to the
     Participant's death, Disability or Approved Retirement, any Options granted
     to such Participant that have not yet been exercised shall expire at the
     time of such termination and shall not be exercisable thereafter.

                                       13
   14

          (5) Termination of Employment for Any Other Reason. Unless otherwise
     determined by the Committee at or following the time of grant, in the event
     the employment or service of the Participant shall terminate for any reason
     other than one described in Section 5(f)(1), (2), (3), or (4) above, any
     Options granted to such Participant which are exercisable at the date of
     the Participant's termination of employment or service may be exercised by
     the Participant (or, in the event of the Participant's death after
     termination of employment or service when the Option is exercisable
     pursuant to its terms, by the Participant's designated beneficiary, or, if
     none is named, by the person determined in accordance with Section 10(b)),
     at any time prior to the expiration of the term of the Options or the
     ninetieth (90th) day following the Participant's termination of employment
     or service, whichever period is shorter, and any Options that are not
     exercisable at the time of termination of employment or service shall
     expire at the time of such termination and shall not be exercisable
     thereafter.

     (g) Restrictive Covenants and Other Conditions. Without limiting the
generality of the foregoing, the Committee may condition the grant of any Option
under the Plan upon the Employee or Agent to whom such Option would be granted
agreeing in writing to certain conditions in addition to the provisions
regarding exercisability of the Option (such as restrictions on the ability to
transfer the underlying shares of Common Stock) or covenants in favor of the
Company and/or one or more Subsidiaries (including, without limitation,
covenants not to compete, not to solicit employees and customers and not to
disclose confidential information, that may have effect following the
termination of the Employee's employment or the Agent's service with the Company
and its Subsidiaries and after the Option has been exercised, including, without
limitation, the requirement that the Employee or Agent disgorge any profit, gain
or other benefit received in respect of the exercise of the Option prior to any
breach of any such covenant by the Employee or Agent). Notwithstanding the
foregoing, no grant of any Options in a Broad Based Grant shall contain any such
restrictions or covenants.

                                   SECTION 6.
                                RESTRICTED STOCK

     (a) Grant of Restricted Stock. The Committee may grant Restricted Stock or
Restricted Stock Units to Participants at such times and in such amounts, and
subject to such other terms and conditions not inconsistent with the Plan
(including, without limitation, Section 3(c)(3)) as it shall determine. The
Committee shall require that the stock certificates evidencing any Restricted
Stock be held in the custody of the Secretary of the Company until the Period of
Restriction lapses, and that, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such award. Each grant of Restricted Stock or
Restricted Stock Units shall be evidenced by a written agreement setting forth
the terms of such Award.

     (b) Restrictions on Transferability. Except as provided in Section 10(a),
no Restricted Stock may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the lapse of the Period of Restriction. Unless
otherwise determined by

                                       14
   15

the Committee, the Period of Restriction shall last for four years in total, but
shall lapse as to one quarter of the related shares of Restricted Stock on each
of the first four anniversaries of the date of grant.

     (c) Rights as a Shareholder. Unless otherwise determined by the Committee
at the time of grant and subject to Section 6(d), Participants holding shares of
Restricted Stock may exercise full voting rights and other rights as a
shareholder with respect to those shares during the Period of Restriction.

     (d) Dividends and Other Distributions. Unless otherwise determined by the
Committee at the time of grant, Participants holding outstanding shares of
Restricted Stock shall be entitled to receive all dividends and other
distributions paid with respect to those shares, provided that if any such
dividends or distributions are paid in shares of Common Stock, such shares shall
be subject to the same forfeiture restrictions and restrictions on
transferability as apply to the Restricted Stock with respect to which they were
paid. Notwithstanding the foregoing, the Committee may specify at the date of
grant that any cash dividends on shares of Restricted Stock not be paid
currently, but rather be credited to an account established for the Participant
and invested in shares of Common Stock on the distribution date of such
dividend. Any additional shares credited in respect of dividends shall become
vested and nonforfeitable, if at all, on the same terms and conditions as are
applicable in respect of the Restricted Stock with respect to which such
dividends were payable.

     (e) Termination of Employment Due to Approved Retirement or Death. Unless
otherwise determined by the Committee at the time of grant or otherwise required
pursuant to Section 3(c)(3), in the event a Participant's employment or service
terminates by reason of Approved Retirement, Disability or death, a pro rata
portion of any shares related to Restricted Stock held by such Participant shall
become non-forfeitable, based upon that portion of the Period of Restriction
which expired prior to the Participant's Approved Retirement or death and, where
vesting of such an award is otherwise contingent on the achievement of
performance objectives, the extent to which such performance objectives are
achieved.

     (f) Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at or after the time of grant, in the event the
employment or service of the Participant shall terminate for any reason other
than one described in Section 6(e), any Restricted Stock awarded to such
Participant as to which the Period of Restriction has not lapsed shall be
forfeited.

     (g) Restricted Stock Units. The Committee may elect to grant any
Participant a contractual right to receive shares of Common Stock (or, if so
elected by the Committee at the time of grant, the cash value of shares of
Common Stock) in the future, after the satisfaction of specified vesting
conditions. Any such contractual right shall be intended to be the economic
equivalent of an award of Restricted Stock. Any such award of contractual rights
shall be in substantially the same terms as an award of Restricted Stock, except
that a Participant receiving such award shall not have any rights as a
shareholder prior to the actual issuance of such Common Stock (although the
Committee

                                       15
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may authorize, in the applicable award agreement, the payment of dividend
equivalents on such rights equal to the dividends that would have been payable
(or accumulated, pursuant to Section 6(d)) had the corresponding equity rights
been actual shares of Restricted Stock).

                                   SECTION 7.
                          STOCK APPRECIATION RIGHTS

     (a) Grant of SARs. SARs may be granted to any Participants, all
Participants or any class of Participants at such time or times as shall be
determined by the Committee. SARs may be granted in tandem with an Option, or
may granted on a freestanding basis, not related to any Option. A grant of a SAR
shall be evidenced in writing, whether as part of the agreement governing the
terms of the Option, if any, to which such SARs relate or pursuant to a separate
written agreement with respect to freestanding SARs, in each case containing
such provisions not inconsistent with the Plan as the Committee shall approve.

     (b) Terms and Conditions of SARs. Unless the Committee shall otherwise
determine, the terms and conditions (including, without limitation, the exercise
period of the SAR, the vesting schedule applicable thereto and the impact of any
termination of service on the Participant's rights with respect to the SAR)
applicable with respect to (i) SARs granted in tandem with an Option shall be
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
applicable to the tandem Options and (ii) freestanding SARs shall be
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
that would have been applicable under Section 5 above were the grant of the SARs
a grant of an Option.

     (c) Exercise of Tandem SARs. SARs which are granted in tandem with an
Option may only be exercised upon the surrender of the right to exercise such
Option for an equivalent number of shares and may be exercised only with respect
to the shares of Common Stock for which the related Option is then exercisable.

     (d) Payment of SAR Amount. Upon exercise of a SAR, the holder shall be
entitled to receive payment, in cash, in shares of Common Stock or in a
combination thereof, as determined by the Committee, of an amount determined by
multiplying:

          (1) the excess, if any, of the Fair Market Value of a share of Common
     Stock at the date of exercise over the Fair Market Value of a share of
     Common Stock on the date of grant, by

          (2) the number of shares of Common Stock with respect to which the
     SARs are then being exercised.

                                       16
   17

                                   SECTION 8.
                                CHANGE OF CONTROL

     (a) Accelerated Vesting and Payment. Subject to Section 3(c)(3) herein and
the provisions of Section 8(b) below, in the event of a Change of Control each
Option and SAR then outstanding shall be fully exercisable regardless of the
exercise schedule otherwise applicable to such Option and/or SAR , the Period of
Restriction shall lapse as to each share of Restricted Stock then outstanding,
each outstanding Restricted Stock

     Unit shall become fully vested and payable and, in connection with such a
Change of Control, the Committee may, in its discretion, provide that each
Option and/or SAR shall, upon the occurrence of such Change of Control, be
canceled in exchange for a payment per share (the "Settlement Payment") in an
amount equal to the excess, if any, of the Change of Control Price over the
exercise price for such Option or the base price of such SAR. Such Settlement
Payment shall be in the form of cash, unless the transaction which constitutes
the Change of Control is intended to qualify for treatment as a "Pooling of
Interests" under APB No. 16 (or any successor thereto), in which case such
Settlement Payment shall be in registered stock of the same class as is
otherwise provided to the shareholders of the Company.

     (b) Alternative Awards. Notwithstanding Section 8(a), no cancellation,
acceleration of exercisability, vesting, cash settlement or other payment shall
occur with respect to any Award if the Committee reasonably determines in good
faith prior to the occurrence of a Change of Control that such Award shall be
honored or assumed, or new rights substituted therefor (such honored, assumed or
substituted award hereinafter called an "Alternative Award"), by a Participant's
employer (or the parent or an affiliate of such employer) immediately following
the Change of Control; provided that any such Alternative Award must:

          (1) be based on stock which is traded on an established securities
     market;

          (2) provide such Participant with rights and entitlements
     substantially equivalent to or better than the rights, terms and conditions
     applicable under such Award, including, but not limited to, an identical or
     better exercise or vesting schedule and identical or better timing and
     methods of payment;

          (3) have substantially equivalent economic value to such Award
     (determined at the time of the Change in Control); and

          (4) have terms and conditions which provide that in the event that the
     Participant's employment or service is involuntarily terminated for any
     reason (including, but not limited to a termination due to death,
     Disability or for Cause) or Constructively Terminated (as defined below),
     all of such Participant's Option and/or SARs shall be deemed immediately
     and fully exercisable, the Period of Restriction shall lapse as to each of
     the Participant's outstanding Restricted Stock awards, each of the
     Participant's outstanding Restricted Stock Unit awards shall

                                       17
   18

     be payable in full and each such Alternative Award shall be settled for a
     payment per each share of stock subject to the Alternative Award in cash,
     in immediately transferable, publicly traded securities or in a combination
     thereof, in an amount equal to, in the case of an Option or SAR, the excess
     of the Fair Market Value of such stock on the date of the Participant's
     termination over the corresponding exercise or base price per share and, in
     the case of any Restricted Stock or Restricted Stock Unit award, the Fair
     Market Value of the number of shares of Common Stock subject or related
     thereto.

For this purpose, participant's employment or service shall be deemed to have
been Constructively Terminated if, without the Participant's written consent,
the Participant terminates employment or service within 120 days following
either (x) a material reduction in the Participant's base salary or a
Participant's incentive compensation opportunity, or (y) the relocation of the
Participant's principal place of employment or service to a location more than
35 miles away from the Participant's prior principal place of employment or
service.

     (c) Accounting Issues. In applying the provisions of this Section 8 to a
Pooling of Interests, the provisions related to business combinations under FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" (including any
interpretations and modifications thereof) shall be taken into account.

                                   SECTION 9.
         AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN

     The Board may, at any time and from time to time amend, modify, suspend, or
terminate this Plan, in whole or in part, without notice to or the consent of
any Participant, Employee or Agent; provided, however, that any amendment which
would (i) increase the number of shares available for issuance under the Plan,
(ii) lower the minimum exercise price at which an Option (or the base price at
which a SAR) may be granted or (iii) extend the maximum term for Options or SARs
granted hereunder shall be subject to the approval of the Company's
shareholders. No amendment, modification, or termination of the Plan shall in
any manner adversely affect any Award theretofore granted under the Plan,
without the consent of the Participant.

                                   SECTION 10.
                           MISCELLANEOUS PROVISIONS

     (a) Transferability. No Award granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than in accordance with Section 10(b) below, by will or by the laws of descent
and distribution; provided that the Committee may, in the appropriate award
agreement or otherwise, permit transfers of Nonstatutory Stock Options with or
without tandem SARs, freestanding SARs and Restricted Stock or Restricted Stock
Units to Family Members (including, without limitation, transfers effected by a
domestic relations order) subject to such terms and conditions as the Committee
shall determine.

                                       18
   19

     (b) Beneficiary Designation. Each Participant under the Plan may from time
to time name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid or by whom any
right under the Plan is to be exercised in case of the Participant's death;
provided that, if the Participant shall not have designated any beneficiary
under this Plan, the Participant's beneficiary shall be deemed to be the person
designated by the Participant under the group life insurance plan of the Company
or a Subsidiary in which such Participant participates (unless such designated
beneficiary is not a Family Member). Each designation made hereunder will revoke
all prior designations by the same Participant with respect to all Awards
previously granted (including, solely for purposes of this Plan, any deemed
designation), shall be in a form prescribed by the Committee, and will be
effective only when received by the Committee in writing during the
Participant's lifetime. In the absence of any such effective designation
(including a deemed designation), benefits remaining unpaid at the Participant's
death shall be paid to or exercised by the Participant's surviving spouse, if
any, or otherwise to or by the Participant's estate. Except as otherwise
expressly provided herein, nothing in this Plan is intended or may be construed
to give any person other than Participants any rights or remedies under this
Plan.

     (c) Deferral of Payment. The Committee may, in the Award agreement or
otherwise, permit a Participant to elect, upon such terms and conditions as the
Committee may establish, to defer receipt of shares of Common Stock that would
otherwise be issued in connection with an Award.

     (d) No Guarantee of Employment or Participation. The existence of this
Plan, as in effect at any time or from time to time, or any grant of Award under
the Plan shall not interfere with or limit in any way the rights of the Company
or any Subsidiary to terminate any Participant's employment or other service
provider relationship at any time, nor confer upon any Participant any rights to
continue in the employ or service of the Company or any Subsidiary or any other
affiliate of the Company. Except to the extent expressly selected by the
Committee to be a Participant, no person (whether or not an Employee, an Agent
or a Participant) shall at anytime have a right to be selected for participation
in the Plan or, having been selected as a Participant, to receive any additional
awards hereunder, despite having previously participated in an incentive or
bonus plan of the Company or an affiliate. The existence of the Plan shall not
be deemed to constitute a contract of employment between the Company or any
affiliate and any Employee, Agent or Participant, nor shall it constitute a
right to remain in the employ or service of the Company or any affiliate. Except
as may be provided in a separate written agreement, employment with or service
for the Company or any affiliate is at-will and either party may terminate the
participant's employment or other service provider relationship at any time, for
any reason, with or without cause or notice.

     (e) Tax Withholding. The Company or an affiliate shall have the right to
deduct from all payments or distributions hereunder any federal, state, foreign
or local taxes or other obligations required by law to be withheld with respect
thereto. The Company may defer issuance of Common Stock upon the exercise of an
Option or a SAR until such requirements are satisfied. The Committee may, in its
discretion, permit a

                                       19
   20

Participant to elect, subject to such conditions as the Committee shall impose,
(i) to have shares of Common Stock otherwise to be issued under the Plan
withheld by the Company or (ii) to deliver to the Company previously acquired
shares of Common Stock, in either case for the greatest number of whole shares
having a Fair Market Value on the date immediately preceding the date of
exercise not in excess of the minimum amount required to satisfy the statutory
withholding tax obligations upon the corresponding exercise of an Option or a
SAR settled in Common Stock.

     (f) No Limitation on Compensation; Scope of Liabilities. Nothing in the
Plan shall be construed to limit the right of the Company to establish other
plans if and to the extent permitted by applicable law. The liability of the
Company or any affiliate under this Plan is limited to the obligations expressly
set forth in the Plan, and no term or provision of this Plan may be construed to
impose any further or additional duties, obligations, or costs on the Company or
any affiliate thereof or the Committee not expressly set forth in the Plan.

     (g) Requirements of Law. The granting of Awards and the issuance of shares
of Common Stock shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.

     (h) Term of Plan. The Plan shall be effective upon its adoption by the
Board. The Plan shall continue in effect, unless sooner terminated pursuant to
Section 9 above, until no more shares are available for issuance under the Plan.

     (i) Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Iowa,
without regard to principles of conflict of laws.

     (j) No Impact On Benefits. Except as may otherwise be specifically stated
under any employee benefit plan, policy or program, Awards shall not be treated
as compensation for purposes of calculating an Employee's or Agent's right or
benefits under any such plan, policy or program.

     (k) No Constraint on Corporate Action. Except as provided in Section 9
above, nothing contained in this Plan shall be construed to prevent the Company,
or any affiliate, from taking any corporate action (including, but not limited
to, the Company's right or power to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, or to merge or
consolidate, or dissolve, liquidate, sell, or transfer all or any part of its
business or assets) which is deemed by it to be appropriate, or in its best
interest, whether or not such action would have an adverse effect on this Plan,
or any awards made under this Plan. No director, beneficiary, or other person
shall have any claim against the Company, or any of its affiliates, as a result
of any such action.

     (l) Indemnification. Each member of the Board and each member of the
Committee shall be indemnified and held harmless by the Company and each
Employer

                                       20
   21

against and from any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by such member of the Board or Committee in connection
with or resulting from any claim, action, suit, or proceeding to which such
member may be made a party or in which such member may be involved by reason of
any action taken or failure to act under the Plan (in the absence of bad faith)
and against and from any and all amounts paid by such member in settlement
thereof, with the Company's approval, or paid by such member in satisfaction of
any judgment in any such action, suit, or proceeding against such member,
provided that such member shall give the Company an opportunity, at its own
expense, to handle and defend the same before such member undertakes to handle
and defend it individually. The foregoing right of indemnification shall not be
exclusive and shall be independent of any other rights of indemnification to
which any such person may be entitled under the Company's Certificate of
Incorporation or By-Laws, by contract, as a matter of law, or otherwise.

     (m) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to any shares of Common Stock covered by any Award
until the Participant shall have become the holder of record of such shares.

     (n) Captions. The headings and captions appearing herein are inserted only
as a matter of convenience. They do not define, limit, construe, or describe the
scope or intent of the provisions of the Plan.

                                       21
   22

            GUIDELINES FOR THE OPERATION OF THE STOCK INCENTIVE PLAN

     Section 3(a). Notwithstanding anything in the Stock Incentive Plan to the
contrary, in no event shall the number of shares of Common Stock that may be
made issuable or distributable under all Company Stock Plans (including, without
limitation, the Stock Incentive Plan) other than the Employees Savings Plan, the
Agents Savings Plan and the Stock Purchase Plan within 18 months of the
effective date of the Plan of Conversion exceed 40% of the total number of
shares available for grant under Section 4(a).

     Section 3(b)(3). Notwithstanding anything in the Stock Incentive Plan to
the contrary, in no event shall the number of shares of Common Stock awarded by
the Chief Executive Officer pursuant to Section 3(b)(3) within 18 months of the
effective date of the Plan of Conversion exceed 5% of the total number of shares
available for grant under Section 4(a).

On behalf of the Board of Directors of the Company, this Stock Incentive Plan
has been executed this day of June, 2001.

By:
   ---------------------------------
C. Daniel Gelatt, Jr.

                                       22

   1
                                                                    EXHIBIT 10.2

                            PRINCIPAL FINANCIAL GROUP
                           LONG-TERM PERFORMANCE PLAN

                 (As Amended and Restated as of January 1, 2001)

                                    ARTICLE I

                                PURPOSE; HISTORY

1.1    Purpose. The purpose of the Plan is to provide incentives to key
employees of the Principal Financial Group(R) that would reward them for
increasing the success of the business over the long-term.

1.2    History. The Plan was originally adopted by Principal Life Insurance
Company of Des Moines, Iowa in November 1986, and has since been amended from
time to time. Prior to the date of this amendment and restatement, the Plan was
amended and restated in November, 1999 ("Prior Plan"). This amended and restated
version of the Plan is essentially the same as the Prior Plan, as in effect on
December 1, 1999, but has been adopted and assumed by the Company with respect
to Performance Periods commencing on or after January 1, 2001, and revised in
terms of its administration and presentation in light of the anticipated public
market for the Common Stock as a result of the proposed demutualization of the
Company. Awards made in respect of Performance Periods commencing prior to
January 1, 2001 shall be governed under the terms of the Prior Plan, unless
specifically provided otherwise in the Plan.

                                   ARTICLE II

                                   DEFINITIONS

       For the purposes of this Plan, the following terms shall have the
meanings indicated, unless the context clearly indicates otherwise:

       "Account" means the records that will be established to record amounts
deferred by a Participant under the Plan.

       "Adjusted Consolidated GAAP Equity" for any period means the equity of
the Company and its consolidated subsidiaries, taken as a whole, as determined
in accordance with GAAP, adjusted for accumulated other comprehensive income or
loss, as defined by GAAP, unless otherwise determined by the Committee.

       "Agents Savings Plan" means The Principal Select Savings Plan for
Individual Field.

   2

       "Three-Year Average ROE" means, with respect to any three-year period,
the sum of the ROE identified separately for each of the three years in the
period, divided by three.

       "Beneficiary" or "Beneficiaries" means the person, persons or entity
entitled under Article VI to receive any Plan benefits payable after a
Participant's death.

       "Board" means the Board of Directors of the Company, or the successor
thereto.

         "Cause" means any one or more of the following:

               (i)    a Participant's commission of a felony or other crime
                      involving fraud, dishonesty or moral turpitude;

               (ii)   a Participant's willful or reckless material misconduct in
                      the performance of the Participant's duties;

               (iii)  a Participant's habitual neglect of duties; or

               (iv)   a Participant's willful or intentional breach of
                      obligations to an Employer, provided that, if such breach
                      involved an act, or a failure to act, which was done, or
                      omitted to be done, by a Participant in good faith and
                      with a reasonable belief that a Participant's act, or
                      failure to act, was in the best interests of the Company
                      or was required by applicable law or administrative
                      regulation, such breach shall not constitute Cause, if,
                      within 30 days after a Participant is given written notice
                      of such breach that specifically refers to this
                      definition, a Participant cures such breach to the fullest
                      extent that it is curable;

       provided, however, that Cause shall not include any one or more of the
following:

               (1)    a Participant's negligence, other than a Participant's
                      habitual neglect of duties or gross negligence; or

               (2)    any act of omission believed by a Participant in good
                      faith to have been in or not opposed to the interest of
                      the Company (without intent of the Participant to gain,
                      directly or indirectly, a profit to which the Participant
                      was not legally entitled).

       "Committee" means the Human Resources Committee of the Board or such
other committee of the Board as the Board shall designate from time to time,
which committee shall be composed of two or more outside directors.

                                       2
   3

       "Common Stock" means the common stock, par value $0.01 per share. of
Principal Financial Group, Inc., a Delaware corporation, and any successor
thereto.

       "Company" means Principal Mutual Holding Company and its successors and
assigns and any company which shall acquire substantially all of its assets.

       "Company Stock Plan" means any stock option plan, stock incentive plan,
stock purchase plan and share ownership plans related to the Common Stock that
are customary for publicly traded companies, and shall include the Directors
Stock Plan, the Plan, the Savings Plans, the Stock Incentive Plan and the Stock
Purchase Plan.

       "Directors Stock Plan" means the Principal Financial Group, Inc.
Directors Stock Plan.

       "Disability" or "Disabled" means becoming eligible to receive long-term
disability benefits under a plan, policy or program sponsored or maintained by
the Company or a Subsidiary.

       "Employees Savings Plan" means the Principal Select Savings Plan for
Employees.

       "Employer" means the Company and any Subsidiary whose employees are
designated as Participants under the Plan.

       "End Imputed Value" will be determined by the average closing stock price
of the Common Stock for the last 20 trading days of a Performance Period, after
any Initial Public Offering. Prior to any Initial Public Offering, End Imputed
Value will be based on the following quotient:

         (i)    the product of

               (A)    10 times

               (B)    the Three-Year Average ROE for the three year period ended
                      on the last day of the calendar year ended coincident with
                      the end of the Performance Period times

               (C)    the Adjusted Consolidated GAAP Equity as of the last day
                      of the calendar year ended coincident with the end of the
                      Performance Period, divided by

         (ii)   the total number of Initial Performance Units established for
                the Performance Period (regardless of whether awarded to
                Participants).

                                        3
   4

Notwithstanding the foregoing, if an Initial Public Offering occurs during a
Performance Period under the Plan or a performance period under the Prior Plan,
the Committee may determine End Imputed Value based on the above quotient or the
stock price, as it deems advisable. Further, pursuant to Section 3.2(d), in
determining the number and value of Final Performance Units to be awarded with
respect to a Transition Period as defined therein, the Committee may make any
adjustment, change or conversion as it deems necessary or advisable to achieve
an appropriate assessment of, and compensation for, performance during such
Transition Period.

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

       "Excess Plan" means the Principal Select Savings Excess Plan and the Non-
Qualified Defined Contribution Plan for Designated Participants.

       "Final Performance Units" with respect to a Performance Period means the
number of Performance Units resulting following the adjustment to the number of
Initial Performance Units awarded for such Performance Period pursuant to
Section 3.2(b).

       "GAAP" means generally accepted accounting principles, consistently
applied.

       "Initial Performance Units" means the Performance Units initially
established by the Committee with respect to any given Performance Period.

       "Initial Public Offering" means the first underwritten offering of Common
Stock to the public.

       "Operating Earnings" means operating earnings of the Company and its
consolidated subsidiaries, consistent with GAAP principles, unless otherwise
determined by the Committee.

       "Participant" with respect to a Performance Period means an employee who
has been granted an award of Initial Performance Units for such Performance
Period. For the purposes of Article V, "Participant" shall include only an
employee who was employed by an Employer on or before the date of the applicable
Change of Control.

       "Performance Factor" means a multiplier, stated as a percentage,
determined based on the Performance Matrix established for the Performance
Period, that shall serve to increase or decrease the number of Initial
Performance Units based on the performance of the Company and its consolidated
subsidiaries during the Performance Period.

       "Performance Matrix" means a matrix established by the Committee not
later than March 15 of the relevant Performance Period that will establish the
multiplier which will apply to each Participant's Initial Performance Units
based on the actual performance of

                                        4
   5

the Company and its consolidated subsidiaries against the Performance Objectives
for the relevant Performance Period, subject to any actions by the Committee
pursuant to Section 3.2(c).

       "Performance Objectives" means one or more pre-established performance
measures established by the Committee with respect to a Performance Period. The
Committee may establish several levels of achievement for each Performance
Objective established, to reflect the level of recognition to be afforded to
partial achievement of, or to surpassing, the level of achievement targeted for
such objective for such Performance Period. The measures of performance shall be
selected by the Committee from such measures as the Committee shall deem
appropriate, including, without limitation, ROE, Operating Earnings, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), and total
shareholder return.

       "Performance Period" means each three calendar year period beginning
during the term of the Plan.

       "Performance Units" means Initial Performance Units and Final Performance
Units.

       "Plan" means the Principal Financial Group Long-Term Performance Plan, as
currently in effect and as the same may be amended from time to time.

       "Plan of Conversion" means the Plan of Conversion of Principal Mutual
Holding Company.

       "Plan Administrator" means the Corporate Management Committee of the
Company, as provided in Section 7.1, or such other committee or persons approved
by the Board.

       "Retirement" means a termination of a Participant's employment for any
reason other than death, Disability or Cause and qualifying to retire under the
terms of any pension plan maintained by the Company or a Subsidiary.

       "ROE" means, with respect to any calendar year, Operating Earnings
divided by the average Adjusted Consolidated GAAP Equity for the year (prior
12-month period ending Adjusted Consolidated GAAP Equity plus end of 12-month
period Adjusted Consolidated GAAP Equity, divided by two) unless otherwise
determined by the Committee.

       "Savings Plans" means the Employees Savings Plan, the Agents Savings Plan
and the Excess Plan.

                                        5
   6

       "Start Imputed Value" will be determined by the average closing stock
price of the Common Stock for the last 20 trading days of the prior Performance
Period, after any Initial Public Offering. Prior to an Initial Public offering,
Start Imputed Value will be based on the following quotient:

         (i)    the product of

               (A)    10 times

               (B)    the Three-Year Average ROE for the three year period ended
                      on the last day of the last calendar year ended prior to
                      the commencement of the Performance Period times

               (C)    the Adjusted Consolidated GAAP Equity as of the last day
                      of the last calendar year ended prior to the commencement
                      of the Performance Period, divided by

         (ii)   the total number of Initial Performance Units established for
                the Performance Period (regardless of whether awarded to
                Participants).

       "Stock Incentive Plan" means the Principal Financial Group, Inc Stock
Incentive Plan.

       "Subsidiary" means (1) any entity in which the Company, directly or
indirectly, owns at least 50% of the outstanding equity interests and over which
the Company has effective control, or (2) any other entity or joint venture,
domestic or non-domestic, in which the Company, directly or indirectly, owns an
interest and that is designated a "Subsidiary" by the Plan Administrator for
purposes of this Plan.

       "Threshold Objectives" means one or more minimal performance objectives
established hereunder and communicated to Participants at the time an Initial
Performance Unit award is communicated that must be achieved in order for any
payment to be made in respect of Performance Units awarded for such Performance
Period. Such Threshold Objectives may be any measure of performance that the
Committee shall deem appropriate, provided that, for the Performance Period
commencing in 2001 and, unless otherwise specified by the Committee by March 15
of the relevant Performance Period, the Threshold Objectives shall be:

         (1)   Adjusted Consolidated GAAP Equity for the year ending
               simultaneously with the end of the Performance Period, stated as
               a percentage of the general account assets of Principal Life
               Insurance Company, must be at least 6%; and

                                        6
   7

         (2)   Principal Life Insurance Company must have a Risk Based Capital
               ratio (as defined by the National Association of Insurance
               Commissioners) of at least 150%; and

         (3)   ROE for the last calendar year in the Performance Period must
               exceed a minimum level established for such Performance Period in
               the Performance Matrix; and

         (4)   Operating Earnings for the Performance Period must exceed a
               minimum level established for such Performance Period in the
               Performance Matrix.

                                   ARTICLE III

       ELIGIBILITY, PARTICIPATION AND VESTING UNDER THE PLAN

3.1    Eligibility. Eligibility to participate in the Plan shall be limited to a
select group of management who are key contributors to the success of the
Company and the Subsidiaries and designated by the Committee or Chief Executive
Officer as Participants in the Plan.

3.2    Awards of Performance Units.

       (i)     Grants. The Committee shall establish the number of Initial
               Performance Units that shall be deemed outstanding with respect
               to any Performance Period. Each Participant in a Performance
               Period shall be awarded the number of Initial Performance Units
               as the Committee shall determine; provided that, the Committee
               may delegate to the Chief Executive Officer the authority to
               award Initial Performance Units to officers holding titles below
               Senior Vice President who are not reporting officers under
               Section 16(a) of the Securities Exchange Act of 1934. The
               Committee and the Chief Executive Officer shall not be required
               to award all of the Initial Performance Units to Participants in
               respect of any Performance Period. Each Initial Performance Unit
               shall have a Start Imputed Value. The Company shall communicate
               to each Participant the number of Initial Performance Units
               awarded, and the Start Imputed Value thereof, not later than
               March 31 in the relevant Performance Period unless the
               Participant first receives Initial Performance Units for such
               Performance Period at a later time.

       (ii)    Adjustment to Number of Initial Performance Units. The number of
               Performance Units allocated to each Participant for a Performance
               Period shall be adjusted at the end of such Performance Period by
               multiplying that number by the Performance Factor. The resulting
               number of Performance Units shall be referred to as the Final
               Performance Units.

                                        7
   8

       (iii)   Impact of Extraordinary Items. In comparing actual performance
               against the Performance Objectives, the Committee may exclude
               from such comparisons any extraordinary gains, losses, charges,
               or credits which appear on the Company's books and records as it
               deems appropriate. An extraordinary item may include, without
               limiting the generality of the foregoing, an item in the
               Company's financial statements reflecting an accounting rule, tax
               law, or major legislative change not taken into consideration in
               the establishment of the Performance Objectives. In addition, the
               impact of a material disruption in the U. S. economy or a
               substantive change in the Principal Financial Group's business
               plans also may be deemed to be such an extraordinary item.

       (d) Transition Period. In order to assure that the objectives of the Plan
are met for any Performance Period under the Plan or performance period under
the Prior Plan in which an Initial Public Offering occurs (a "Transition
Period"), the Committee may establish a formula for conversion of existing
Performance Units into Performance Units based on the value of the publicly
issued and outstanding Common Stock, including with respect to Final Performance
Units that have been deferred pursuant to Section 4.9 and under the Prior Plan,
and the Committee may make such other changes, adjustments and determinations
with respect to the Performance Factor, Performance Matrix and Performance
Objectives for such Transition Period as it shall deem necessary or advisable to
achieve an appropriate assessment of, and compensation for, performance during
such Transition Period.

3.3    Vesting. Except as otherwise provided in Article IV and Article V, a
Participant's right to receive a payment in respect of an award of any
Performance Units shall only become vested and shall cease to be subject to
forfeiture if the Participant has been continuously employed by the Company or a
Subsidiary throughout the entire Performance Period.

                                   ARTICLE IV

                                  DISTRIBUTIONS

4.1    Distributions in Respect of Performance Units. Except as otherwise
provided in this Article IV or Article V, payment shall be made as soon as
practical after the end of a Performance Period to each Participant who has been
continuously employed by the Company or a Subsidiary for the entire Performance
Period. The amount payable to each Participant shall be equal to the product of
the number of Final Performance Units held by the Participant and the End
Imputed Value. Unless the Committee shall otherwise determine, payment of such
amount may be made in (i) cash, if at the time of payment an Initial Public
Offering has not occurred or (ii) cash, shares of Common Stock, or any
combination of cash and shares of Common Stock, if at the time of payment an
Initial

                                        8
   9

Public Offering has occurred. Payment in Common Stock shall be based on the
average closing stock price of the Common Stock for the last 20 days of the
prior Performance Period.

4.2    Threshold Performance. Notwithstanding anything else contained in this
Plan to the contrary, no payment shall be made to any Participant in respect of
any Performance Period if the Threshold Objectives with respect to such
Performance Period are not satisfied. Moreover, in no event shall the sum of all
awards for a three-year award cycle, whether paid or deferred, under the Plan
for all of the Principal Financial Group exceed 5% of pre-tax GAAP operating
earnings for the third year of a performance cycle (disregarding awards deferred
from any prior three-year award cycle for payout in the year in question). If
the awards calculated for this year (disregarding awards deferred from prior
award cycles) would exceed such 5% pre-tax GAAP operating earnings, all
calculated awards, whether paid or deferred, under the plan shall be
proportionately reduced so that the awards in the aggregate equal 5% of pre-tax
GAAP operating earnings.

4.3    Distributions on the Participant's Death. If a Participant dies prior to
the end of any Performance Period that commenced at least one year prior to the
Participant's death, the Participant's Beneficiary (or, if none is named, the
Participant's estate) shall receive a distribution at the same time and in the
same amount as though the Participant remained employed through the end of the
Performance Period, unless payment at an earlier date is otherwise authorized by
the Plan Administrator. If a Participant dies prior to the end of a Performance
Period that commenced less than one year prior to the Participant's death, the
Participant's Beneficiary (or, if none is named, the Participant's estate) shall
receive a distribution at the same time as other Participants receive their
distributions under the Plan, unless payment at an earlier date is otherwise
authorized by the Plan Administrator, but the amount payable shall be equal to
the amount that would have been payable had the Participant been employed for
the entire Performance Period, multiplied by a fraction, the numerator of which
is the number of days in the Performance Period elapsed prior to the
Participant's death and the denominator of which is 365.

4.4    Distributions on the Participant's Disability. If a Participant becomes
Disabled, prior to the end of any Performance Period that commenced at least one
year prior to the Participant's date of Disability, the Participant shall
receive a distribution at the same time and in the same amount as though the
Participant remained actively employed through the end of the Performance
Period. If a Participant becomes Disabled prior to the end of a Performance
Period that commenced less than one year prior to the Participant's date of
Disability, the Participant shall receive a distribution at the same time as
other Participants receive their distributions under the Plan, but the amount
payable shall be equal to the amount that would have been payable had the
Participant been actively employed for the entire Performance Period, multiplied
by a fraction, the numerator of which is the number of days in the Performance
Period elapsed prior to the Participant's

                                        9
   10

Disability and the denominator of which is 365. Notwithstanding the foregoing,
if prior to the first anniversary of the date of the Participant's date of
Disability, the Participant accepts employment with any entity that is in the
financial services industry and is unrelated to the Company or a Subsidiary, the
Participant shall cease to be eligible to receive any further payments under the
Plan in respect of Performance Periods that had not ended prior to the date of
the Participant's Disability.

4.5    Distribution on the Participant's Retirement. If a Participant's
employment is terminated by reason of Retirement prior to the end of any
Performance Period that commenced at least one year prior to the Participant's
Retirement, the Participant shall receive a distribution at the same time and in
the same amount as though the Participant remained employed through the end of
the Performance Period. If a Participant's employment is terminated by reason of
Retirement prior to the end of a Performance Period that commenced less than one
year prior to the Participant's Retirement, the Participant shall receive a
distribution at the same time as other Participants receive their distributions
under the Plan, but the amount payable shall be equal to the amount that would
have been payable had the Participant been employed for the entire Performance
Period, multiplied by a fraction, the numerator of which is the number of days
in the Performance Period elapsed prior to the Participant's Retirement and the
denominator of which is 365. Notwithstanding the foregoing, if prior to the
first anniversary of the date of the Participant's termination of employment, a
Participant accepts employment with any entity that is in the financial services
industry and is unrelated to the Company or a Subsidiary, the Participant shall
cease to be eligible to receive any further payments under the Plan in respect
of any Performance Period that had not ended prior to the date of the
Participant's termination of employment.

4.6    Distributions on the Participant's Discharge for Cause. If a
Participant's employment is terminated for Cause, as determined by the Company,
the Participant shall not be entitled to receive any further payments under the
Plan with respect to any Performance Period (including any Performance Period
ended prior to such termination, but for which distributions have not yet been
made under Section 4.1), except such amounts as were deferred pursuant to
Section 4.9 or pursuant to the Prior Plan.

4.7    Distribution on Other Termination of Employment. If a Participant's
employment is terminated for any other reason other than those otherwise
outlined above, the Participant shall not be entitled to receive any payment in
respect of any Performance Period that had not ended prior to the date of the
Participant's termination of employment.

4.8    Distribution on the Participant's Transfer. Unless otherwise determined
by the Committee, if a Participant is transferred to a position which is not
eligible to participate in the Plan or to employment with a subsidiary which
does not participate in the Plan, service in the new position shall count as
continued employment for purposes of

                                       10
   11

determining the Participant's vested interest in any Performance Units awarded
for Performance Periods then in progress. In such circumstances, the Participant
will continue to participate in the Plan with respect to such Performance
Periods until the earlier of (i) the end of such Performance Period or (ii) the
termination of the Participant's employment with the Company and each Subsidiary
by which the Participant was employed, in which case, such Participant's rights
under the Plan shall be determined under this Article IV, based on the reason
for such termination of employment.

4.9    Deferral Election.

       (a) Voluntary Deferral. A Participant may elect to defer payment of all
or a portion of the amount otherwise payable to the Participant pursuant to the
terms of the Plan in respect of Final Performance Units. Such deferral may
permit payment to be delayed until the earlier to occur of (i) the end of any
calendar year ending not later than the fifth anniversary of the Performance
Period for which such amount is payable and (ii) the termination of the
Participant's employment for any reason, unless the Participant's employment
terminated due to Retirement or the Participant becomes Disabled. Any such
election shall be in writing, on a form prescribed for such purpose by the Plan
Administrator, and delivered to the Plan Administrator or its designee prior to
the first day of the final year of a Performance Period for which such amount is
payable. With respect to any Performance Periods under the Plan or performance
periods under the Prior Plan for which the Committee has not determined, prior
to the start of the last year of such period, whether the award will be paid in
cash, Common Stock, or a combination thereof, a Participant may make a deferral
election contingent on the form of payment. In addition, if the Committee so
allows, a Participant may specify in such deferral election the form of payment
to be deferred whether or not the Committee has determined, prior to the start
of the last year of such period, the form of award payment for such period.

       (b) Earnings on Deferrals. Any amount deferred by the Participant
pursuant to the preceding paragraph shall be credited to an Account established
for the Participant. The amount held in such Account shall be deemed to continue
to be invested in the same Final Performance Units that relate to such
Performance Period, but the value thereof shall be adjusted as provided in
Section 4.9(c) below.

       (c) Distribution of Deferral Account. Final Performance Units deferred
that were payable in Common Stock shall be distributed in Common Stock. The
number of shares distributed shall be equal to the number of shares that would
have originally been distributed in the absence of deferral, adjusted for stock
splits, stock dividends and reinvestment of cash dividends between the end of
the Performance Period for which the Final Performance Units were granted and
the date the deferred amounts are actually distributed. Final Performance Units
deferred that were payable in cash shall be distributed in cash. The amount
distributed shall be based on the End Imputed Value for

                                       11
   12

the last Performance Period ended prior to the distribution. If the End Imputed
Value is calculated based on the quotient set forth in Article II, then End
Imputed Value shall be adjusted, if necessary, to make the denominator equal to
the number of Initial Performance Units established for the Performance Period
for which the Final Performance Units were granted. If the End Imputed Value is
based on the price of Common Stock, adjustments set forth in Section 3.2(d)
shall be made, if necessary.

                                    ARTICLE V

                                CHANGE OF CONTROL

       Capitalized words used in this Article V have the meaning ascribed to
them under The Principal Severance Pay Plan for Senior Executives as amended
from time to time, unless the context clearly indicates otherwise.
Notwithstanding the foregoing, the following terms shall have the meanings
ascribed to them in Article II hereof: Board, Company, Disability, Employer,
Participant, Plan.

5.1    Change of Control Payments. Within ten (10) days following the later
of a Change of Control Date or Merger of Equals Cessation Date ("Trigger Date"),
the Company shall pay each Participant the sum of (a) the Pro-Rata LTIP Bonus
and (b) the amount of all LTIP Bonuses earned but either deferred or not yet
paid as of the date of the Trigger Date, in satisfaction of the Company's
obligations under the LTIP for periods prior to the Trigger Date.

5.2    Termination during the Post-Change Period. If, during the Post-Change
Period (other than during a Post-Merger of Equals Period) a Participant's
employment is terminated other than for Cause or Disability, or a Participant
terminates employment for Good Reason, the Company shall pay the Participant the
Participant's Pro-rata LTIP Bonus reduced (but not below zero) by the amount of
any LTIP Bonus previously paid to Participant with respect to any Performance
Period that had not ended prior to the date of the Participant's termination of
employment.

                                   ARTICLE VI

                             BENEFICIARY DESIGNATION

6.1    Beneficiary Designation. A Participant shall have the right, at any
time, to designate one (1) or more persons or an entity as the Participant's
Beneficiary (both primary as well as secondary) to whom benefits under this Plan
shall be paid in the event of Participant's death. Each Beneficiary designation
shall be in a written form and shall be filed with the Plan Administrator during
the Participant's lifetime. If a Participant fails to designate a Beneficiary or
if a Beneficiary does not survive the Participant, payment will be made to the
Participant's estate in the event of the Participant's death.

                                       12
   13

6.2    Beneficiary. A Participant may change his/her Beneficiary at any time
by completing a new beneficiary designation form. The change will take effect
only after it is received by the Plan Administrator and determined to be in good
order. Any previous Beneficiary's interest under the Plan will end as of the
date the request is received (so long as it is thereafter determined to be in
good order).

                                   ARTICLE VII

                                 ADMINISTRATION

7.1    Administration of the Plan. The Plan Administrator shall be the
Corporate Management Committee of the Company or such other committee, entity or
persons approved by the Board. The Plan Administrator shall maintain such
procedures and records as will enable the Plan Administrator to determine the
Participants and their Beneficiaries who are entitled to receive benefits under
the Plan and the amounts thereof.

7.2    General Powers of Administration. The Committee shall have the
exclusive right, power, and authority, in its sole, full and absolute
discretion, to interpret any and all of the provisions of the Plan, to supervise
the administration and operation of the Plan, and to consider and decide
conclusively any questions (whether of fact or otherwise) arising in connection
with the administration of the Plan or any claim for benefits arising under the
Plan. Any decision or action of the Committee or the Plan Administrator shall be
conclusive and binding on all parties, including the Participants. The Committee
and the Plan Administrator shall also have the discretion and authority to adopt
and revise rules and procedures relating to the Plan, to correct any defect or
omission or reconcile any inconsistency in this Plan or any payment hereunder,
and to make any other determinations that they believe necessary or advisable in
the administration of the Plan.

7.3    Limitations in Plan of Conversion. Notwithstanding anything else
contained in the Plan to the contrary, no portion of any Participant's Account
may be deemed invested in Common Stock until the six month anniversary of the
effective date of the Plan of Conversion. No action shall be taken, and no award
or distribution shall be made, under the Plan, which contains any term or
condition that would violate any provision of the Plan of Conversion. To the
extent that shares of Common Stock are made available for distribution
hereunder, the number of such shares distributed hereunder shall count against
(i) the limit of 6% of the number of shares of Common Stock outstanding
immediately following the effective date of the Plan of Conversion that may be
made issuable or distributable under all Company Stock Plans (including, without
limitation, the Plan) other than the Employees Savings Plan, the Agents Savings
Plan and the Stock Purchase Plan, and (ii) the operational guideline established
pursuant to the Stock Incentive Plan limiting the maximum number of shares of
Common Stock that may be awarded or issued within 18 months of the effective
date of the Plan of Conversion to 40% of the limit set forth in subclause (i).

                                       13
   14

                                  ARTICLE VIII

                   AMENDMENT AND TERMINATION OF PLAN

8.1    Amendment of the Plan. The Committee shall have the authority to
amend the Plan at any time and from time to time. Any such amendments must be
made by written instrument, and notice of such amendment shall be provided to
Participants as soon as practicable after adoption.

8.2    Termination of the Plan. The Company reserves the right to terminate
the Plan in any respect and at any time and may do so at any time pursuant to a
written resolution of the Committee.

8.3    Limitations on Amendment or Termination of the Plan. Notwithstanding
anything else to the contrary set forth in the Plan, any amendment or
termination of the Plan may not adversely affect the rights of any Participant
or Beneficiary in respect of Performance Units previously awarded.

                                   ARTICLE IX

                                  MISCELLANEOUS

9.1    Unfunded / Participant's Rights Unsecured and Unfunded. This Plan is
unfunded and therefore is exempt from the provisions of Parts 2, 3 and 4 of
Title I of ERISA. Accordingly, no assets of the Company or any Subsidiary shall
be segregated or earmarked to represent the liability for accrued benefits under
the Plan. The right of a Participant (or any Beneficiary) to receive a payment
hereunder shall be an unsecured claim against the general assets of the Company
or any Subsidiary. All payments under the Plan shall be made from the general
funds of the Company or the applicable Subsidiary. The Company and Subsidiaries
are not required to set aside money or any other property to fund obligations
under the Plan, and all amounts that may be set aside by the Company or
Subsidiary prior to the distribution thereof under the terms of the Plan remain
the property of the Company. The liability of the Company or any affiliate under
this Plan is limited to the obligations expressly set forth in the Plan, and no
term or provision of this Plan may be construed to impose any further or
additional duties, obligations, or costs on the Company, any Subsidiary or the
Committee not expressly set forth in the Plan.

9.2    No Right to Participate. No Participant or other employee shall at
any time have a right to be selected for participation in the Plan, despite
having previously participated in the Plan or any other incentive or bonus plan
of the Company or any affiliate.

9.3    Plan is Not a Contract of Employment. The existence of this Plan, as
in effect at any time or from time to time, or participation under the Plan,
shall not be deemed to

                                       14
   15

constitute a contract of employment between the Company or any affiliate and any
employee or Participant, nor shall it constitute a right to remain in the employ
of the Company or a Subsidiary.

9.4    Parachute Cap. Unless the Participant has an agreement with the Company
or a Subsidiary specifically providing otherwise:

       (a) If it is reasonably determined by the computation of the independent
auditors of the Company or a Subsidiary that any amount payable or deemed
payable to such Participant under this Plan or otherwise (collectively, the
"Payments") is or will become subject to any excise tax under Section 4999 of
the Internal Revenue Code of 1986, as amended, or any similar tax payable under
any United States federal, state, local or other law ("Excise Taxes") or will
fail to be deductible by the Company or a Subsidiary by reason of Section 280G
of the Internal Revenue Code of 1986, then the amount paid to such Participant
under the Plan shall be reduced to the largest amount that may be paid without
causing any portion of such payment to be subject to Excise Taxes or to not be
deductible by the Company or a Subsidiary.

       (9)     If, after the receipt by a Participant of any payment hereunder,
               such Payment (or any portion thereof) shall become subject to any
               Excise Taxes or shall become nondeductible by the Company or a
               Subsidiary, the Participant shall repay to the Company or
               Subsidiary the amount that exceeds the greatest amount that could
               be paid to the Participant hereunder without causing the
               Participant to become liable for any Excise Taxes or without
               causing any of the Payments to become nondeductible by the
               Company.

9.5    Notice. Any notice required or permitted under the Plan shall be
sufficient if in writing and hand delivered, sent by first class, registered or
certified mail, or by such other means as the Committee, in its sole discretion,
may deem appropriate. Such notice shall be deemed as given as of the date of
delivery or, if delivery is made by mail, as of the date shown on the postmark
or on the receipt for registration or certification. Mailed notice to the
Committee shall be directed to the Company's address, c/o the Corporate
Management Committee. Mailed notice to a Participant or Beneficiary shall be
directed to the individual's last known home address in the Participant's
Employer's records.

9.6    No Guarantee of Benefits or Participation. Nothing contained in the
Plan shall constitute a guaranty by any Employer or any other person or entity
that the assets of such entity will be sufficient to pay any benefit hereunder.

9.7    Non-Alienation Provision. Subject to the provisions of applicable law, no
interest of any person or entity in any Performance Unit (or, if applicable, any
Account), or any right to receive any distribution or other benefit under the
Plan, shall be subject in any

                                       15
   16

manner to sale, transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind; nor may such interest in any Performance
Unit (or, if applicable, any Account), or right to receive any distribution or
any benefit under the Plan, be taken, either voluntarily or involuntarily, for
the satisfaction of the debts of, or other obligations or claims against, such
person or entity, including (but not limited to) claims for alimony, support,
separate maintenance and claims in bankruptcy proceedings.

9.8    Applicable Law. The Plan shall be construed and administered under the
laws of the State of Delaware, except to the extent that such laws are preempted
by ERISA.

9.9    Taxes. The Company or a Subsidiary shall have the right to deduct, from
amounts payable pursuant to the Plan or from other amounts payable to the
Participant (or payable to the Beneficiary of the Participant, if the
Participant is deceased), any taxes required by law to be withheld from such
awards.

9.10   No Impact on Other Benefits. Amounts accrued and awards paid under the
Plan will not be included in the definition of pay for the purposes of
calculating benefits under the Company's or any Subsidiary's employee benefit
plan nor considered base salary for the purpose of any incentive compensation
plan.

9.11   Usage of Headings. Any headings are included for ease of reference only,
and are not to be construed to alter the terms of the Plan.

9.12   No Limitation on Corporate Action. Nothing contained in this Plan shall
be construed to prevent the Company, or a Subsidiary, from taking any corporate
action which is deemed by it to be appropriate, or in its best interest, whether
or not such action would have an adverse effect on this Plan, or any awards made
under this Plan. No employee, beneficiary, or other person shall have any claim
against the Company, or any Subsidiary, as a result of any such action.

9.13   Parties. Nothing express or implied in this Plan is intended or may be
construed to give any person other than Participants and Beneficiaries any
rights or remedies under this Plan.

9.14   Missing Participants. A recipient of any payment under this Plan who is
not a current employee of the Company or a Subsidiary, shall have the obligation
to inform the Company of his or her current address, or other location to which
payments are to be sent. Neither the Company nor any Subsidiary shall have any
liability to such recipient, or any other person, for any failure of such
recipient, or person, to receive any payment if it sends such payment to the
address provided by such recipient by first class mail, postage paid, or other
comparable delivery method. Notwithstanding anything else in this Plan to the
contrary, if a recipient of any payment cannot be located within 120 days
following the date on which such payment is due after reasonable efforts by the
Company

                                       16
   17

or a Subsidiary, such payments and all future payments owing to such recipient
shall be forfeited without notice to such recipient. If, within two years (or
such longer period as management, in its sole discretion, may determine), after
the date as of which payment was forfeited (or, if later, is first due), the
recipient, by written notice to the Company, requests that such payment and all
future payments owing to such recipient be reinstated and provides satisfactory
proof of their identity, such payments shall be promptly reinstated. To the
extent the due date of any reinstated payment occurred prior to such
reinstatement, such payment shall be made to the recipient (without any interest
from its original due date) within 90 days after such reinstatement.

On behalf of the Human Resources Committee of the Board of Directors of the
Company, this Amended and Restated Long-Term Performance Plan has been executed
this      day of June, 2001.
    ------
By:
   -------------------------
C. Daniel Gelatt, Jr., Chair

                                       17

   1
                                                                    EXHIBIT 10.3

             PRINCIPAL FINANCIAL GROUP INCENTIVE PAY PLAN (PRINPAY)
                  AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2001

                       SECTION 1. INTRODUCTION AND PURPOSE

The Principal Financial Group Incentive Pay Plan (the "Plan") is designed to
motivate employees who work for the Principal Financial Group(R) to perform at
levels which will ensure the success of the Company. The Plan is intended to pay
financial rewards based on performance. The Plan was originally adopted by
Principal Life Insurance Company of Des Moines, Iowa on January 1, 1995 and has
since been amended from time to time. Prior to the date of this restatement, the
Plan was amended and restated on January 1, 1999. This amended and restated
version of the Plan has been adopted and assumed by the Company as of January
1, 2001 The Plan remains in effect until amended, suspended or terminated.

                              SECTION 2. PLAN YEAR

The Plan Year is the calendar year beginning on January 1 and ending on December
31.

                             SECTION 3. DEFINITIONS

For the purposes of this Plan, the following terms shall have the meanings
indicated, unless the context clearly indicates otherwise:

"Adjusted Consolidated GAAP Equity" for any period means the ending equity of
the Company and its consolidated subsidiaries, taken as a whole, as determined
in accordance with GAAP, adjusted for accumulated other comprehensive income or
loss, as defined by GAAP, unless otherwise determined by the Committee.

"Award Component" means one of the following: corporate, business unit or
individual performance weighted for a Participant.

"Award Opportunity" means the percentage of a Participant's Fixed Salary
earnable under the Plan if target performance for the Plan Year is met.

"Award Opportunity Scale" means the percentage of the Award Opportunity earnable
under the Plan if minimum, maximum or any other scale factors that have been
identified are met. The Award Opportunity Scale is a percentage of the Award
Opportunity. The Award Opportunity Scale may be any that the Committee shall
deem appropriate, provided that, for the Plan Year commencing in 2001 and,
unless otherwise specified by the Committee by March 15 of the relevant Plan
Year, the Award Opportunity scale shall be 0%, 50%, 100%, 150% and 200%
(maximum) of the Award Opportunity.

"Beneficiary" or "Beneficiaries" means the person, persons or entity entitled
under Section 7 to receive any Plan benefits payable after a Participant's
death, If a Participant dies before receiving an award to which he or she is
entitled, the award will be paid to the person(s) or entity designated as the
beneficiary for the Participant's life insurance benefit through The Principal
Trust for Life Insurance Benefits for Employees.

                                       1

Amended and Restated as of January 1, 2001.
   2
"Board" means the Board of Directors of the Company, or the successor thereto.

"Cause" shall mean any one or more of the following:

     (i)   a Participant's commission of a felony or other crime involving
           fraud, dishonesty or moral turpitude;

     (ii)  a Participant's willful or reckless material misconduct in the
           performance of the Participant's duties;

     (iii) A Participant's habitual neglect of duties; or

     (iv)  A Participant's willful or intentional breach of obligations to an
           Employer, provided that, if such breach involved an act, or failure
           to act, which was done, or omitted to be done, by a Participant in
           good faith and with a reasonable belief that a Participant's act, or
           failure to act, was in the best interest of the Company or was
           required by applicable law or administrative regulation, such breach
           shall not constitute Cause, if, within 30 days after a Participant is
           given written notice of such breach that specifically refers to this
           definition, a Participant cures such breach to the fullest extent
           that it is curable;

provided, however, that Cause shall not include any one or more of the
following:

     (i)   a Participant's negligence, other than a Participant's habitual
           neglect of duties or gross negligence; or

     (ii)  any act or omission believed by a Participant in good faith to have
           been in or not opposed to the interest of the Company (without intent
           of the Participant to gain, directly or indirectly, a profit to which
           the Participant was not legally entitled).

"Committee" means the Human Resources Committee of the Board or such other
committee of the Board as the Board shall designate from time to time, which
committee shall be composed of two or more outside directors.

"Company" means Principal Mutual Holding Company and its successors and assigns
and any company which shall acquire substantially all of its assets.

"Disability" means, with respect to any Participant, long-term disability as
defined under any long-term disability plan maintained by the Company or a
Subsidiary in which the Participant participates. In the event of any question
as to whether a Participant has a Disability, the plan administrator of the
relevant long-term disability plan shall determine whether a disability exists,
in accordance with such plan.

"Employer" means the Company and any Subsidiary whose employees are designated
as Participants under the Plan.

"Exempt" means an employee who is not subject to the minimum wage and overtime
pay provisions of the Fair Labor Standards Act. These employees include
executives, administrative employees, professional employees and those engaged
in outside sales.

"Fair Labor Standards Act" means 29 U.S.C. Section 201 et seq.

                                        2

Amended and Restated as of January 1, 2001.

   3
"Final Warning" means a disciplinary action designated to be a final warning.

"Fixed Salary" means the gross amount of earnings received for base salary, lump
sum merit, Personal Time Off, shift differential, on-call pay, holiday pay,
overtime and short-term disability coverage during the Plan Year. Fixed Salary
does not include the award earned under this Plan or any other bonus, incentive
or commission and paid in the current Plan Year.

"GAAP" means generally accepted accounting principles, consistently applied.

"Individual Goals" means one or more financial or non-financial measure
established for the Plan Year between the Participant and the Participant's
leader, at 100% performance, which may also have written Award Opportunity
Scales.

"Job Level" means an Employer's internal hierarchical level of a job that is
used to determine eligibility and participation in corporate programs and
amenities.

"Non-exempt" means an employee who is subject to the minimum wage and overtime
pay provisions of the Fair Labor Standards Act.

"Operating Earnings" means operating earnings of the Company and its
consolidated subsidiaries, consistent with GAAP principles, unless otherwise
determined by the Committee.

"Participant" means an employee who has met the eligibility requirements for the
Plan Year. For the purposes of Section 8, "Participant" shall include only an
employee who was employed by an Employer before the date of the applicable
Change of Control.

For purposes of Section 8 "Executive Participant" means an employee at the level
of vice president or equivalent and above who has met the eligibility
requirements for the Plan Year. For the purposes of Section 8, "Executive
Participant" shall include only an employee who was employed by an Employer
before the date of the applicable Change of Control.

"Performance Measures" means one or more financial or non-financial measures
established for the Plan Year. The Committee shall establish performance levels
of achievement for the Award Opportunity Scale, in order to reflect the level of
recognition to be afforded to partial achievement of, or to surpassing, the
level of achievement targeted for such objective for such Plan Year. The
corporate and business unit Performance Measures shall be selected from such
measures as the Committee or Plan Administrator shall deem appropriate,
including, without limitation, ROE, Operating Earnings, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), budget, customer
satisfaction and total shareholder return.

"Plan" means the Principal Financial Group Incentive Pay Plan, as currently in
effect and as the same may be amended from time to time,

"Plan Administrator" means the committee, committees or persons in Section 9,
that have been designated by the Chief Executive Officer and approved by the
Committee.

                                        3

Amended and Restated as of January 1, 2001.

   4
"Retirement" means a termination of a Participant's employment for any reason
other than death, Disability or Cause and qualifying to retire under the terms
of any pension plan maintained by the Company or a Subsidiary.

"ROE" means, with respect to any calendar year, Operating Earnings divided by
the average Adjusted Consolidated GAAP Equity for the year (prior 12-month
period ending Adjusted Consolidated GAAP Equity plus end of 12-month period
Adjusted Consolidated GAAP Equity, divided by two) unless otherwise determined
by the Committee.

"Pro-Ration Factor" means the number of days as a Participant under the Plan
divided by 365 days.

"Subsidiary" means (1) any corporation in which the Company owns, directly or
indirectly, at least 50% of the outstanding equity interests and over which the
Company has effective control, or (2) any other entity or joint venture,
domestic or non-domestic, in which the Company, directly or indirectly, owns an
interest and that is designated in writing as a "Subsidiary" by the Plan
Administrator for purposes of this Plan.

"Threshold Objectives" means one or more minimal performance objectives
established hereunder that must be achieved in order for any payment to be made
for the Plan Year. Such Threshold Objectives may be any measure of performance
that the Committee shall deem appropriate, provided that, for the Plan Year
commencing in 2001 and, unless otherwise specified by the Committee by March 15
of the relevant Plan Year, the Threshold Objectives shall be:

     (1)   The Principal must maintain the minimum claims paying/financial
           strength rating from 2 of the 3 rating agencies: Fitch AA-, Moody's
           Aa3 and Standard & Poors AA-; and

     (2)   Adjusted Consolidated GAAP Equity for the end of the Plan Year,
           stated as a percentage of the general account assets of Principal
           Life Insurance Company, must be at least 6%; and

     (3)   Principal Life Insurance Company must have a Risk Based Capital Ratio
           (as defined by the National Association of Insurance Commissioners)
           of at least 150%.

                             SECTION 4. ELIGIBILITY

Exempt employees of an Employer are Participants in the Plan on their date of
hire. Non-exempt employees of an Employer are eligible to participate in the
Plan if they work at least 20 hours per week on a regularly scheduled basis and
become a Participant after completing six months of employment.

Unless pre-approved by the Plan Administrator in writing, an employee who is a
Participant in the Plan is not eligible to participate in any other Company or
Subsidiary annual incentive, bonus or commission plan. Unless pre-approved by
the Plan Administrator in writing, employees who are participants in other
annual incentives, bonus or commission plans are not eligible to be Participants
in the Plan.

                                        4

Amended and Restated as of January 1, 2001.

   5
      SECTION 5. TARGET AWARD OPPORTUNITY, PERFORMANCE MEASURES AND SCALES

Participants will be assigned an Award Opportunity based on their job or Job
Level with an Employer . The Award Opportunity will be paid if stated target
Performance Measures are achieved. The Plan Administrator will approve the Award
Opportunity and Award Opportunity Scale for Participants at and below the Vice
President level. The Committee will approve the Award Opportunity and Award
Opportunity Scale for Participants at the Senior Vice President level or above.

Each Participant's Award Opportunity and Award Opportunity Scale will be
segmented into one or more of the following Award Components: corporate,
business unit and/or individual, as determined by the Plan Administrator for
Participants at and below the Vice President Level, and by the Committee for
Participants at the Senior Vice President level or above. The weighting of these
components will be determined by the Plan Administrator or the Committee as the
case may be. One component's performance will not directly affect the portion of
the Award Opportunity earnable from another component except as it relates to
the Threshold Objectives.

At the start of each Plan Year, Performance Measures that correspond to the
Award Opportunity Scale will also be determined. Corporate Performance Measures
will be approved by the Committee. Business Unit Performance Measures will be
approved by the Plan Administrator. Individual Goals will be set jointly between
the Participant and the Participant's leader. The Individual Goals for the Chief
Executive Officer of The Principal shall be established by the Committee. The
Individual Goals can vary from year to year, from one position to another, and
from one incumbent to another. Where the development of appropriate Individual
Goals for a partial year would be impractical, eligibility for the individual
component may be delayed until the following Plan Year or paid at the Award
Opportunity level with approval by the leader.

                         SECTION 6. AWARD DETERMINATION

Unless otherwise determined by the Plan Administrator in writing, the
Participant's Award Opportunity for calculation of the annual award is
determined by the Participant's job or Job Level and business unit with an
Employer held on the last day of the Plan Year and will be applied for the
entire Plan Year.

Unless otherwise determined by the Plan Administrator, Pro-Ration Factor will be
applied to a Participant's award if the Participant transfers to or from a
ineligible position within the Plan Year.

When needed, interpolated performance levels for Corporate Performance Measures,
Business Unit Performance Measures, and where appropriate, Individual Goals will
be established on a straight-line basis in the Award Opportunity Scale. If
actual performance falls below the minimum Performance Measure set forth for a
particular Award Component, that Award Component will be zero, If actual
performance is above the maximum Performance Measure for a particular Award
Component, that Award Component will be the maximum determined by the Committee.

Notwithstanding anything else contained in this Plan to the contrary, all
Threshold Objectives with respect to such Plan Year must be met in order for any
award to be made under this Plan.

The Committee approves corporate and business unit Performance Measure results.
Leaders approve Individual Goal results.

                                        5

Amended and Restated as of January 1, 2001.

   6
At the end of the Plan Year the value of the actual awards is calculated by
completing the following steps. Step 1: Determination of the Component Score.
The Component Score is the corporate, business unit or individual component
percentage that is the weighted average of the scores of the Performance
Measures for one or more Performance Measures and Individual Goals established
for each component. Step 2: Determination of Award Score. The Award Score is the
weighted average of Component Scores for the appropriate components (corporate,
business unit, individual). Step 3: Determination of Participant award. The
annual award paid to each will be calculated by multiplying, 1) the
Participant's Fixed Salary earnings received during the Plan Year; by 2) the
Award Opportunity, by (3) Award Score, and by (4) the Pro-Ration Factor.

In comparing actual performance against the Performance Measures, the Committee,
by recommendation of the Chief Executive Officer may exclude from such
comparison any extraordinary gains, losses, charges, or credits which appear on
the Company's books and records as it deems appropriate. An extraordinary item
may include, without limiting the generality of the foregoing, an item in the
Company's financial statements reflecting an accounting rule, tax law, or major
legislative change not taken into consideration in the establishment of the
Performance Measures. In addition, the impact of a material disruption in the
U.S. economy or a substantive change in the Company's business plans also may be
deemed to be such an extraordinary item.

In no event will the sum of all annual awards paid to Participants under the
Plan exceed 6% of pre-tax GAAP operating earnings of the Company for the Plan
Year. If the awards calculated for the year would so exceed 6% of operating
earnings, all calculated awards under the plan shall be proportionately reduced
so the awards aggregate to no more than 6% of operating earnings.

                            SECTION 7. DISTRIBUTIONS

No payment shall be made to any Participant who is on Final Warning any time
during the Plan Year.

Award payments shall be made following the release of audited results after the
end of the Plan Year in which they are earned, but no later than March 15.

Upon a Participant's death prior to the end of the Plan Year, the Participant's
Beneficiary (or, if none is named, the Participant's estate) shall receive an
early distribution based on the Fixed Salary received during the Plan Year,
multiplied by the Award Opportunity. Upon a Participant's death following the
close of the Plan Year, but prior to an Award payment, the Participant's
Beneficiary (or, if none is named, the Participant's estate) shall receive a
distribution at the same times as other Participants and the amount payable
shall be calculated according to Section 6.

Unless otherwise determined by the Plan Administrator in writing, upon a
Participant's Disability, Retirement, or involuntary termination due to office
closing, downsizing or outsourcing, the Participant shall receive a distribution
at the same time as other Participants and the amount payable shall be
calculated according to Section 6.

If a Participant terminates and is rehired during a Plan Year, the Participant's
eligibility will be restored as if they had not terminated and there will be no
Pro-Ration Factor of the award payable to the Participant. Non-exempt employees
who have not completed the 6-month employment period to be a

                                        6

Amended and Restated as of January 1, 2001.

   7
Participant in the Plan will use the adjusted service date to determine when
they are eligible to be a Participant in the Plan.

If a Participant is separated from employment for Cause, as determined by the
Company, the Participant shall not be entitled to receive any further payment
under the Plan with respect to any Plan Year.

Except as provided in Section 8, if a Participant's employment is terminated for
any other reason other than those otherwise outlined above, the Participant
shall not be entitled to receive any payment in respect to any Plan Year that
had not ended prior to the date of the Participant's termination of employment.

                          SECTION 8. CHANGE OF CONTROL

Capitalized words used in this Section 8 have the meaning ascribed to them under
the Principal Severance Pay Plan for Senior Executives as amended from time to
time, unless the context clearly indicates otherwise. Notwithstanding the
foregoing, the following terms shall have the meanings ascribed to them in
Section 3 hereof: Board, Company, Disability, Employer, Executive Participant,
Participant, Plan.

Within ten (10) days following the later of a Change Date or Merger of Equals
Cessation Date ("Trigger Date"), the Company shall pay each Executive
Participant an amount equal to the Executive Participant's Target Annual Bonus
for the year in which the Trigger Date occurs multiplied by fraction, the
numerator of which is the number of days elapsed in the year up to and including
the Trigger Date, and the denominator of which is 365, in satisfaction of the
Company's obligations under the Plan for the period prior to the Trigger Date,

If, during the Post-Change Period (other than during a Post-Merger of Equals
Period) an Executive Participant's employment is terminated other than for Cause
or Disability, or an Executive Participant terminates employment for Good
Reason, the Company shall pay the Executive Participant the Executive
Participant's Target Annual Bonus for the year in which such termination occurs
multiplied by a fraction, the numerator of which is the number of days elapsed
in the year up to and including the Termination Date, and the denominator of
which is 365, in satisfaction of the Company's obligations under the Plan for
the period prior to the Termination Date, Any amounts payable under this
paragraph shall be reduced (but not below zero) by the amount of any annual
bonus paid to the Executive Participant with respect to the Employer's fiscal
year in which the Termination Date occurs. If an Executive Participant receives
a payment pursuant to this third paragraph of this Section 8, the Executive
Participant may not also receive payment pursuant to the fourth paragraph of
this Section 8.

If the Plan is terminated on or after the Trigger Date, within the same Plan
year as the Trigger Date, or any amendment to the Plan is adopted that adversely
affects the rights of any Participant or Beneficiary, the Company shall pay the
Participant the Participant's Target Annual Bonus for the year in which such
amendment or Plan termination occurs multiplied by a fraction, the numerator of
which is the number of days elapsed in the year up to and including the
amendment or Plan termination, and the denominator of which is 365, in
satisfaction of the Company's obligations under the Plan for the period prior to
the amendment or Plan termination. Any amounts payable under this paragraph
shall be reduced (but not below zero) by the amount of any annual bonus paid to
an Executive Participant with

                                        7

Amended and Restated as of January 1, 2001.

   8
respect to the Employer's fiscal year in which the Trigger Date occurs. If an
Executive Participant receives a payment pursuant to this fourth paragraph of
this Section 8, the Executive Participant may not also receive payment pursuant
to the third,paragraph of this Section 8.

Any amounts payable under this Section 8 shall be reduced (but not below zero)
by the amount of any annual bonus paid to an Executive Participant with respect
to the Employer's fiscal year in which the Trigger Date occurs.

                            SECTION 9. ADMINISTRATION

The Plan Administrator shall maintain such procedures and records as will enable
the Plan Administrator to determine the Participants and their Beneficiaries who
are entitled to receive benefits under the Plan and the amounts thereof.

The Plan Administrator shall have the exclusive right, power, and authority, in
its sole, full and absolute discretion, to interpret any and all of the
provisions of the Plan, to supervise the administration and operation of the
Plan, and to consider and decide conclusively any questions (whether fact or
otherwise) arising in connection with the administration of the Plan or any
claim for benefits arising under the Plan. Any decision or action of the Plan
Administrator shall be conclusive and binding on all parties, including the
Participants. The Plan Administrator shall also have the discretion and
authority to adopt and revise rules and procedures relating to the Plan, to
correct any defect or omission or reconcile any inconsistency in this Plan or
any payment hereunder, and to make any other determinations that it believes
necessary or advisable in the administration of the Plan.

                  SECTION 10. AMENDMENT AND TERMINATION OF PLAN

The Committee shall have the authority to amend the Plan at any time and from
time to time. Any such amendments must be made by written instrument, and notice
of such amendment shall be provided to Participants as soon as practical after
adoption.

The Company reserves the right to terminate the Plan in any respect and at any
time and may do so at any time pursuant to a written resolution of the
Committee.

Notwithstanding anything else to the contrary set forth in the Plan, no
amendment or termination of the Plan may adversely affect the rights of any
Participant or Beneficiary in respect to an award determined or earned with
respect to a Plan Year.

                            SECTION 11. MISCELLANEOUS

No Participant or other employee shall at any time have a right to be selected
for participation in the Plan, despite having previously participated in the
Plan or any other incentive or bonus plan of the Company or any of it
affiliates.

                                       8

Amended and Restated as of January 1, 2001.

   9
The existence of this Plan, as in effect at any time or from time to time, or
participation under the Plan, shall not be deemed to constitute a contract of
employment between the Company or any Subsidiary and any employee or
Participant, nor shall it constitute a right to remain in the employ of the
Company or it's Subsidiary.

Any notice required or permitted under the Plan shall be sufficient if in
writing and hand delivered, sent by first class, registered or certified mail,
or by such other means as the Committee, in its sole discretion, may deem
appropriate. Such notice shall be deemed as given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark or on the
receipt for registration or certification. Mailed notice to the Committee shall
be directed to the Company's address, c/o the Plan Administrator. Mailed notice
to a Participant or Beneficiary shall be directed to the individual's last known
home address in the Participant's Employer's records.

Nothing contained in the Plan shall constitute a guaranty by any Employer or any
other person or entity that the assets of such entity will be sufficient to pay
any benefit hereunder.

Subject to the provisions of applicable law, no interest of any person or entity
in any award, or any right to receive any distribution or other benefit under
the Plan, shall be subject in any manner to sale, transfer, assignment, pledge,
attachment, or other alienation or encumbrance of any kind; nor may such
interest in any award, or right to receive any distribution or any benefit under
the Plan, be taken, either voluntarily or involuntarily, for the satisfaction of
the debts of, or other obligations or claims against, such person or entity,
including (but not limited to) claims for separate maintenance and claims in
bankruptcy proceedings.

The Plan shall be construed and administered under the laws of the State of
Iowa.

The Employer shall have the right to deduct, from amounts payable pursuant to
the Plan or from amounts otherwise payable to the Participant (or payable to the
beneficiary of the Participant, if the Participant is deceased), any taxes
required by law to be withheld from such awards.

Nothing contained in this Plan shall be construed to prevent the Company, or any
Subsidiary, from taking any corporate action which is deemed by it to be
appropriate, or in its best interest, whether or not such action would have an
adverse effect on this Plan, or any awards made under this Plan. No employee,
beneficiary, or other person shall have any claim against the Company, or a
Subsidiary, as a result of any such action.

Nothing express or implied in this Plan is intended or may be construed to give
any person other than Participants and Beneficiaries any rights or remedies
under this Plan.

A recipient of any payment under this Plan who is not a current employee of an
Employer, shall have the obligation to inform the Company of his or her current
address, or other location to which payments are to be sent. Neither the Company
nor any Subsidiary shall have any liability to such recipient, or any other
person, for any failure of such recipient, or person, to receive any payment if
it sends such payment to the address provided by such recipient by first class
mail, postage paid, or other comparable delivery method. Notwithstanding
anything else in this Plan to the contrary, if a recipient of any payment cannot
be located within 120 days following the date on which such payment is due after
reasonable efforts by the Company or a Subsidiary, such payments and all future
payments owing to

                                        9

Amended and Restated as of January 1, 2001.

   10
such recipient shall be forfeited without notice to such recipient. If, within
two years (or such longer period as management, in its sole discretion, may
determine), after the date as of which payment was forfeited (or, if later, is
first due), the recipient, by written notice to the Company, requests that such
payment and all future payments owing to such recipient be reinstated and
provides satisfactory proof of their identity, such payments shall be promptly
reinstated. To the extent the due date of any reinstated payment occurred prior
to such reinstatement, such payment shall be made to the recipient (without any
interest from its original due date) within 90 days after such reinstatement.

On behalf of the Human Resources Committee of the Board of Directors of the
Company, this Amended and Restated Incentive Pay Plan has been executed this
_______ day of _____________, 2001.

By:
   -----------------------------
C. Daniel Gelatt, Jr., Chair

                                       10

Amended and Restated as of January 1, 2001.

   1
                                                                    EXHIBIT 10.4

                         PRINCIPAL FINANCIAL GROUP, INC.
                              DIRECTORS STOCK PLAN

                                   ARTICLE I.
                                     PURPOSE

          The purposes of the "PRINCIPAL FINANCIAL GROUP, INC. DIRECTORS STOCK
PLAN" (the "Plan") are to enable the Company to attract, retain and motivate the
best qualified non-employee directors and to enhance a long-term aligning of
interests between the non-employee directors and stockholders of the Company by
granting equity-based awards as provided herein.

                                   ARTICLE II.
                                   DEFINITIONS

     2.1 Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below:

          a) "Agents Savings Plan" means The Principal Select Savings Plan for
     Individual Field.

          b) "Award" means an Option, award of Restricted Stock or an award of
     Restricted Stock Units.

          c) "Board" means the Board of Directors of the Company.

          d) "Code" means the Internal Revenue Code of 1986, as amended.

          e) "Common Stock" means the common stock of the Company, par value
     $0.01 per share.

          f) "Committee" means the Human Resources Committee of the Board or
     such other committee of the Board as the Board shall designate from time to
     time, which committee shall consist of two or more Non-Employee Directors
     (within the meaning of Rule 16b-3 as promulgated under the Securities
     Exchange Act of 1934, as amended).

          g) "Company" means Principal Financial Group, Inc., a Delaware
     corporation, and any successor thereto.

          h) "Company Stock Plan" means any stock option plan, stock incentive
     plan, stock purchase plan and share ownership plans related to the Common
     Stock that are customary for publicly traded companies, and shall include
     the Plan, the Long-Term Plan, the Savings Plans, the Stock Incentive Plan
     and the Stock Purchase Plan.

   2

          i) "Domestic Partner" means any person qualifying to be treated as a
     domestic partner of a Participant under the applicable policies, if any, of
     the Company.

          j) "Employees Savings Plan" means the Principal Select Savings Plan
     for Employees.

          k) "Excess Plan" means the Principal Select Savings Excess Plan and
     the Non-Qualified Defined Contribution Plan for Designated Participants.

          l) "Fair Market Value" means, on any date, the price of the last
     trade, regular way, in the Common Stock on such date on the New York Stock
     Exchange or, if at the relevant time, the Common Stock is not listed to
     trade on the New York Stock Exchange, on such other recognized quotation
     system on which the trading prices of the Common Stock are then quoted (the
     "applicable exchange"). In the event that (i) there are no Common Stock
     transactions on the applicable exchange on any relevant date, Fair Market
     Value for such date shall mean the closing price on the immediately
     preceding date on which Common Stock transactions were so reported and (ii)
     the applicable exchange adopts a trading policy permitting trades after 5
     P.M. Eastern Standard Time ("EST"), Fair Market Value shall mean the last
     trade, regular way, reported on or before 5 P.M. EST (or such earlier or
     later time as the Committee may establish from time to time) .

          m) "Family Member" means, as to a Participant, any (i) child,
     stepchild, grandchild, parent, stepparent, grandparent, spouse,
     mother-in-law, father-in-law, son-in-law or daughter-in-law (including
     adoptive relationships), or Domestic Partner of such Participant, (ii)
     trusts for the exclusive benefit of one or more such persons and/or the
     Participant and (iii) other entity owned solely by one or more such persons
     and/or the Participant.

          n) "Initial Public Offering" means the first underwritten offering of
     Common Stock to the public.

          o) "Long-Term Plan" means the Principal Financial Group Long-Term
     Performance Plan.

          p) "Option" means the right to purchase one share of Common Stock at a
     stated purchase price on the terms specified in Article V of the Plan. The
     Options are nonstatutory stock options not intended to qualify under
     Section 422 of the Code.

          q) "Participant" means a member of the Board who is not an officer or
     employee of the Company or any entity controlling, controlled by, or under
     common control with the Company, and is not the beneficial owner of a
     controlling interest in the voting stock of the Company or of any entity
     that holds a controlling interest in the Company's voting stock.

                                       2
   3

          r) "Period of Restriction" means the period specified by the Committee
     or established pursuant to the Plan during which a Restricted Stock or
     Restricted Stock Unit award is subject to forfeiture.

          s) "Plan" means the Principal Financial Group, Inc. Directors Stock
     Plan, as set forth herein and as amended from time to time.

          t) "Plan of Conversion" means the Plan of Conversion of Principal
     Mutual Holding Company.

          u) "Restricted Stock" means an award of Common Stock made pursuant to
     Article VI that is forfeitable by the Participant until the completion of a
     specified period of future service as a member of the Board or until
     otherwise determined by the Committee or in accordance with the terms of
     the Plan.

          v) "Restricted Stock Unit" means a contractual right awarded pursuant
     to Article VI that entitles the holder to receive shares of Common Stock
     (or the value thereof in cash) upon the completion of a specified period of
     future service as a member of the Board or at such other time or times
     determined by the Committee or in accordance with the terms of the Plan.

          w) "Savings Plans" means the Employees Savings Plan, the Agents
     Savings Plan and the Excess Plan.

          x) "Stock Incentive Plan" means the Principal Financial Group, Inc.
     Stock Incentive Plan.

          y) "Stock Purchase Plan" means the Principal Financial Group, Inc.
     Employee Stock Purchase Plan.

                                  ARTICLE III.
                                 ADMINISTRATION

     3.1 Rules, Interpretation and Determinations. The Plan shall be
administered by the Committee. The Committee shall have full authority to
interpret and administer the Plan, to establish, amend and rescind rules for
carrying out the Plan, to construe the respective option agreements and to make
all other determinations and to take all other actions that it deems necessary
or advisable for administering the Plan; provided that, no Committee member may
participate in any decision with respect to such member's benefits or
entitlements under the Plan, unless such decision applies generally to all non-
employee directors. Each determination, interpretation or other action made or
taken by the Committee shall be final and binding for all purposes and upon all
persons.

                                        3

   4

     3.2 Agents and Expenses. The Committee may appoint agents (who may be
officers or employees of the Company) to assist in the administration of the
Plan and may grant authority to such persons to execute agreements or other
documents on its behalf. The Committee may employ such legal counsel,
consultants and agents as it may deem desirable for the administration of the
Plan and may rely upon any opinion received from any such counsel or consultant
and any computation received from any such consultant or agent. All expenses
incurred in the administration of the Plan, including, without limitation, for
the engagement of any counsel, consultant or agent, shall be paid by the
Company.

     3.3 Limitations in Plan of Conversion. Notwithstanding anything else
contained in the Plan to the contrary, no action shall be taken, and no Award or
distribution shall be made, under the Plan, which contains any term or condition
that would violate any provision of the Plan of Conversion.

                                   ARTICLE IV.
                                 SHARES ISSUABLE

     4.1 Number of Shares. Subject to the provisions of Section 4.3 hereof, the
aggregate number of shares of Common Stock issuable under the Plan pursuant to
Awards shall not exceed 500,000 shares of Common Stock. The number of shares
granted as Awards hereunder shall count against (i) the limit of 6% of the
number of shares of Common Stock outstanding immediately following the effective
date of the Plan of Conversion that may be made issuable or distributable under
all Company Stock Plans (including, without limitation, the Plan) other than the
Employees Savings Plan, the Agents Savings Plan and the Stock Purchase Plan, and
(ii) the operational guideline established pursuant to the Stock Incentive Plan
limiting the maximum number of shares of Common Stock that may be awarded or
issued within 18 months of the effective date of the Plan of Conversion to 40%
of the limit set forth in subclause (i). Shares of Common Stock to be issued
under the Plan may consist, in whole or in part, of treasury shares or
authorized but unissued shares not reserved for any other purpose.

     4.2 Canceled, Terminated, or Forfeited Awards. Any shares of Common Stock
subject to an Award which for any reason is canceled or terminated or otherwise
is settled without the issuance of unrestricted shares of Common Stock
(including, but not limited to, shares tendered to exercise outstanding Options
or shares tendered or withheld for taxes) shall again be available for Awards
under the Plan.

     4.3 Adjustment Due to Change in Capitalization. In the event of any Common
Stock dividend or split, recapitalization (including, but not limited, to the
payment of an extraordinary dividend to the stockholders of the Company),
merger, consolidation, combination, spin-off, distribution of assets to
stockholders (other than ordinary cash dividends), exchange of shares, or other
similar corporate change, the aggregate number of shares of Common Stock
available for grant under Section 4.1 or subject to outstanding Awards and the
respective exercise prices, if any, applicable to outstanding Awards may be
appropriately adjusted by the Committee, in its discretion, and the Committee's
determination shall be conclusive.

                                        4

   5

                                   ARTICLE V.
                           AWARDS AND TERMS OF OPTIONS

     5.1 Automatic Grants of Options. Unless the Committee otherwise determines,
each Participant who is then in office on (i) the six month anniversary of the
Initial Public Offering or (ii) the date of each annual meeting of the Company's
stockholders occurring after the six month anniversary of the Initial Public
Offering shall be granted Options to purchase 2,000 shares of Common Stock. In
addition, unless the Committee otherwise determines to make no grant or a
different grant, each Participant first elected to the Board after the first
grant of options pursuant to the preceding sentence shall automatically be
granted Options to purchase a number of shares of Common Stock equal to the
number of shares of Common Stock awarded to directors in office at the
immediately preceding annual meeting, multiplied by a fraction, the numerator of
which is the number of calendar months commencing after the Participant is
elected to the Board and before the date the next annual meeting of stockholders
is scheduled to occur and the denominator of which is the number of whole and
partial calendar months from the last annual meeting to the scheduled date of
the next following annual meeting.

     5.2 Discretionary Grants of Options. The Committee shall also have the
power to grant to any Participant or all Participants additional Options to
purchase such number of shares of Common Stock, and on such terms and
conditions, as it shall determine. The Committee may adopt different terms and
conditions for each Option granted under this Section 5.2 to any Participant.
Notwithstanding any other contrary provision in the Plan, (i) no Options shall
be granted prior to the six month anniversary of the Initial Public Offering and
(ii) during the 18 month period following the effective date of the Plan of
Conversion, the number of shares granted, in the aggregate, pursuant to this
Section 5.2 shall not exceed 20,000 shares of Common Stock.

     5.3 Exercise Price. The exercise price for any share of Common Stock
subject to an Option shall be not less than the Fair Market Value on the date
such Option is granted.

     5.4 Period of Exercisability. Unless otherwise determined by the Committee
at or after grant or as otherwise required to satisfy the conditions set forth
in Section 8.1 of the Plan of Conversion, the shares of Common Stock subject to
Options granted under Section 5.1 shall become exercisable in four approximately
equal installments on the three, six, nine and twelve month anniversaries of the
date on which such Options were granted. Subject to compliance with the
requirements of Section 8.1 of the Plan of Conversion, the Committee shall
determine the date or dates at which Options granted under Section 5.2 shall
become exercisable. Each Option shall, if not previously exercised in accordance
with the terms of the Plan, in all events expire upon the tenth (10th)
anniversary of the date of the grant thereof. If a Participant shall cease to
provide services to the Company, such Participant or, in the case of death, the
Participant's estate or beneficiary, may exercise any Option exercisable by the
Participant at the date his or her service terminates until the earlier of (A)
three (3) years from the date the Participant ceased to provide services to the
Company and (B) the tenth (10th) anniversary of the date the Option was granted.

                                        5

   6

     5.5 Procedure for Exercise. A Participant electing to exercise one or more
Options shall give written notice to the Secretary of the Company of such
election and of the number of shares of Common Stock the Participant has elected
to purchase. No shares shall be delivered pursuant to any exercise of any
Options unless arrangements satisfactory to the Committee have been made to
assure full payment of the exercise price therefor. Without limiting the
generality of the foregoing, payment of the exercise price may be made (i) in
cash or its equivalent, (ii) by exchanging shares of Common Stock owned by the
optionee (which are not the subject of any pledge or other security interest),
(iii) through an arrangement with a broker approved by the Company whereby
payment of the exercise price is accomplished with the proceeds of the sale of
Common Stock or (iv) by any combination of the foregoing; provided that the
combined value of all cash and cash equivalents paid and the Fair Market Value
of any such Common Stock so tendered to the Company, valued as of the date of
such tender, is at least equal to such option exercise price. The Company may
not make a loan to a Participant to facilitate such Participant's exercise of
any of his or her Options.

                                   ARTICLE VI.
                                RESTRICTED STOCK

     6.1 Standard Grants of Restricted Stock Units. Unless otherwise determined
by the Committee, there shall be awarded

          (i) at the six month anniversary of the Initial Public Offering, to
     each Participant then in office that number of Restricted Stock Units equal
     to the product of 1,500, multiplied by a fraction, the numerator of which
     is the number of months remaining in the term of the class of directors in
     which the Participant serves (the "Participant's Term") and the denominator
     of which is the number of months remaining in the term of that class of
     directors having the longest remaining term at the date of grant (the
     "Longest Term"),

          (ii) on the date of such Participant's election to the Board, to each
     Participant first elected to the Board after the six month anniversary of
     the Initial Public Offering that number of Restricted Stock Units equal to
     the product of 1,500, multiplied by a fraction, the numerator of which is
     the number of months remaining in the Participant's Term and the
     denominator of which is the number of months remaining in the Longest Term;
     and

          (iii) on the effective date of the re-election of any Participant to
     continued membership on the Board, 1,500 Restricted Stock Units.

                                        6

   7

     6.2 Discretionary Grants of Restricted Stock or Restricted Stock Units.
Without limiting the generality of Section 6.1, the Committee may also grant
Restricted Stock or Restricted Stock Units to any Participant or all
Participants at such times, with respect to such number of shares of Common
Stock and on such terms and conditions (including, in the case of any grant made
in exchange for foregoing the receipt of fees otherwise payable in cash, a
discount in the value of the Common Stock subject to the award to reflect the
applicable restrictions on the Award) as the Committee shall determine.
Notwithstanding any other contrary provision in the Plan, (i) no Restricted
Stock or Restricted Stock Units shall be granted prior to the six month
anniversary of the Initial Public Offering and (ii) during the 18 month period
following the effective date of the Plan of Conversion, the number of shares
granted, in the aggregate, pursuant to this Section 6.2 shall not exceed 15,000
shares of Common Stock.

     6.3 Agreements; Restrictions on Certificates. Each grant of Restricted
Stock or Restricted Stock Units shall be evidenced by a written agreement
setting forth the terms of such Award. The Committee shall require that the
stock certificates evidencing any Restricted Stock granted under Section 6.2 be
held in the custody of the Secretary of the Company until the Period of
Restriction lapses, and that, as a condition of any Restricted Stock award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such award.

     6.4 Restrictions on Transferability. Except as provided in Section 8.2, no
shares of Restricted Stock or Restricted Stock Units may be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated until the lapse of the
Period of Restriction. Subject to compliance with the requirements of Section
8.1 of the Plan of Conversion, the Committee shall establish the Period of
Restriction and the date or dates at which such Period of Restriction shall
lapse, in whole or in part, with respect to any award made pursuant to Section
6.2. Unless otherwise determined by the Committee at the time of grant or to
comply with the requirements of Section 8.1 of the Plan of Conversion, the
Period of Restriction with respect to any award of Restricted Stock Units
granted under Section 6.1 shall lapse in that number of installments determined
by dividing (i) the number of whole and partial months occurring (x) from and
after the date of grant and (y) on or prior to the date that the then current
term of office of the Participant's class of directors expires by (ii) three,
with any resulting period of less than three months being treated as the last
installment, which ends at the date that such term of office expires.
Notwithstanding the foregoing, unless otherwise determined by the Committee, the
Period of Restriction applicable to any Restricted Stock or Restricted Stock
Units shall not lapse, in whole or in part, at any time after the Participant
has ceased to provide service to the Company.

                                        7

   8

     6.5 Rights as a Shareholder. Unless otherwise determined by the Committee
at the time of grant and subject to Section 6.6, Participants holding shares of
Restricted Stock may exercise full voting rights and other rights as a
shareholder with respect to those shares during the Period of Restriction. A
Participant receiving Restricted Stock Units shall not have any rights as a
shareholder prior to the actual issuance of such Common Stock, except that the
Participant shall be entitled to payment of dividend equivalents on such rights
equal to the dividends that would have been payable (or accumulated, pursuant to
Section 6.6) had the corresponding equity rights been actual shares of
Restricted Stock.

     6.6 Dividends and Other Distributions. Unless otherwise determined by the
Committee at the time of grant, Participants holding outstanding shares of
Restricted Stock shall be entitled to receive all dividends and other
distributions paid with respect to those shares, provided that if any such
dividends or distributions are paid in shares of Common Stock, such shares shall
be subject to the same forfeiture restrictions and restrictions on
transferability as apply to the Restricted Stock with respect to which they were
paid. Notwithstanding the foregoing, the Committee may specify at the date of
grant that any cash dividends on shares of Restricted Stock not be paid
currently, but rather be credited to an account established for the Participant
and invested in shares of Common Stock on the distribution date of such
dividend. Any additional shares credited in respect of dividends shall become
vested and nonforfeitable, if at all, on the same terms and conditions as are
applicable in respect of the Restricted Stock with respect to which such
dividends were payable.

     6.7 Termination of Service. Unless otherwise determined by the Committee at
or after the time of grant, in the event the service of the Participant as
member of the Board shall terminate for any reason, any Restricted Stock or
Restricted Stock Units awarded to such Participant as to which the Period of
Restriction has not lapsed shall be forfeited.

                                  ARTICLE VII.
                     TERMINATION, MODIFICATION AND AMENDMENT

     The Board at any time may terminate the Plan, and, subject to Section 3.3
herein, from time to time may amend or modify the Plan; provided, however, that
any amendment which would (i) increase the number of shares available for
issuance under the Plan, (ii) lower the minimum exercise price at which an
Option may be granted or (iii) extend the maximum term for Options granted
hereunder shall be subject to the approval of the Company's shareholders. No
amendment, modification, or termination of the Plan shall in any manner
adversely affect any Option theretofore granted under the Plan, without the
consent of the Participant.

                                        8

   9

                                  ARTICLE VIII.
                               GENERAL PROVISIONS

     8.1 No Right to Remain as a Director. The Plan shall not impose any
obligations on the Company to retain any Participant as a Director nor shall it
impose any obligation on the part of any Participant to remain in service to the
Company.

     8.2 Transferability. No Awards granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than in accordance with Section 8.3 below, by will or by the laws of descent and
distribution; provided that the Committee may, in the appropriate award
agreement or otherwise, permit transfers of Awards to Family Members (including,
without limitation, transfers effected by a domestic relations order) subject to
such terms and conditions as the Committee shall determine.

     8.3 Beneficiary Designation. Each Participant under the Plan may from time
to time name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid or by whom any
right under the Plan is to be exercised in case of the Participant's death. Each
designation will revoke all prior designations by the same Participant with
respect to all Awards previously granted, shall be in a form prescribed by the
Committee, and will be effective only when received by the Committee in writing
during the Participant's lifetime. In the absence of any such effective
designation, benefits remaining unpaid at the Participant's death shall be paid
to or exercised by the Participant's surviving spouse, if any, or otherwise to
or by the Participant's estate. Except as otherwise expressly provided herein,
nothing in this Plan is intended or may be construed to give any person other
than Participants any rights or remedies under this Plan.

     8.4 Rights as a Stockholder. No Participant nor any beneficiary thereof
shall have any rights as a stockholder with respect to any shares of Common
Stock covered by any Award until such person shall have become the holder of
record of such shares.

     8.5 Requirements of Law. The granting of Awards and the issuance of shares
of Common Stock shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.

     8.6 Term of Plan. The Plan shall be effective upon its adoption by the
Board. The Plan shall continue in effect, unless sooner terminated pursuant to
Article VII above, until no more shares of Common Stock are available for
issuance under the Plan.

     8.7 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware,
without regard to principles of conflict of laws.

                                        9

   10

     8.8 No Constraint on Corporate Action. Except as provided in Article VII
above, nothing contained in this Plan shall be construed to prevent the Company,
or any affiliate, from taking any corporate action (including, but not limited
to, the Company's right or power to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, or to merge or
consolidate, or dissolve, liquidate, sell, or transfer all or any part of its
business or assets) which is deemed by it to be appropriate, or in its best
interest, whether or not such action would have an adverse effect on this Plan,
or any awards made under this Plan. No director, beneficiary, or other person
shall have any claim against the Company, or any of its affiliates, as a result
of any such action.

     8.9 Indemnification. Each member of the Board and the Committee shall be
indemnified and held harmless by the Company (or, if applicable, any affiliate
of the Company) against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by such member of the Board or the
Committee in connection with or resulting from any claim, action, suit, or
proceeding to which such member may be made a party or in which such member may
be involved by reason of any action taken or failure to act under the Plan (in
the absence of bad faith) and against and from any and all amounts paid by such
member in settlement thereof, with the Company's (or, if appropriate, an
affiliate's) approval, or paid by such member in satisfaction of any judgment in
any such action, suit, or proceeding against such member, provided that such
member shall give the Company (or, if applicable, an affiliate) an opportunity,
at its own expense, to handle and defend the same before such member undertakes
to handle and defend it individually. The foregoing right of indemnification
shall not be exclusive and shall be independent of any other rights of
indemnification to which any such person may be entitled under the Company's
Certificate of Incorporation or By-Laws, by contract, as a matter of law, or
otherwise.

     8.10 Deferral of Payment. The Committee may, in the Award agreement or
otherwise, permit a Participant to elect, upon such terms and conditions as the
Committee may establish, to defer receipt of shares of Common Stock that would
otherwise be issued in connection with an Award.

     8.11 Headings and Captions. The headings and captions herein are provided
for reference and convenience only, shall not be considered part of the Plan,
and shall not be employed in the construction of the Plan.

On behalf of the Board of Directors of the Company, this Directors Stock Plan
has been executed this day of June, 2001.

By:
   -------------------------------
C. Daniel Gelatt, Jr.

                                       10

   1
                                                                    EXHIBIT 10.5

                                 AMENDMENT NO. 5

                     THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

The Plan named above gives the Company the right to amend it at any time.
According to that right, the Plan is amended as follows:

Effective July 1, 1998,

By striking the paragraph in the DEATH BENEFITS SECTION of Article V and
substituting the following:

     If a Participant dies before his Retirement Date, his Vested Account shall
     be distributed to his Beneficiary in a single sum.

By striking subsections (a) and (b) of the OPTIONAL FORMS OF DISTRIBUTION
SECTION of Article VI and substituting the following:

     The optional forms of retirement benefit shall be the following: a single
     life annuity with a certain period of ten years; a single life annuity with
     installment refund; survivorship life annuity with installment refund and a
     survivorship percentage of 50; and a 120-month fixed period annuity. An
     election under this paragraph may be delayed until the Participant reaches
     his required beginning date under the Associated Plan

     The following optional forms of retirement benefit are also available: a
     single sum payment; an annual distribution equal to any fixed whole
     percentage, not less than 10% and not more than 13% of his Vested Account,
     as elected by the Participant. Such amount shall be payable annually until
     his vested Account is exhausted. Once elected, the percentage will
     not, change. An election under this paragraph may be delayed until the
     Participant reaches his required beginning date under the Associated Plan.

     A form of distribution for retirement benefits shall be available to a
     Participant only if the annual distribution under such form is at least
     equal to the quotient of the Participant's Vested Account as of the date
     distribution is to begin, divided by the life expectancy of the
     Participant, Beneficiary or joint and last survivor expectancy of the
     Participant and Beneficiary, as appropriate. If distribution is in a form
     other than a life annuity, the life expectancy of the Participant may be
     recalculated after the distribution begins, but no more frequently than
     annually. In the case of a Beneficiary who is not the Participant's spouse,
     life expectancy shall be calculated when benefits start and minimum
     payments for any 12-consecutive month period will be based on such life
     expectancy minus the number of whole years since the distribution first
     began. The life expectancy or joint and last survivor expectancy shall be
     computed by use of the return multiples contained in Section 1.72-9 of the
     regulations under the Code.

By striking the first sentence of the first paragraph in the ELECTION PROCEDURES
SECTION of Article VI and substituting the following:

    The Participant shall make any election under this section in the form or
    manner provided for that purpose.

By striking subsections (a) and (b) in the ELECTION PROCEDURES SECTION of
Article VI and substituting the following:

                                       1
   2

     A Participant may elect his Beneficiary and may elect to have retirement
     benefits distributed under any of the optional forms of retirement benefit
     described in the OPTIONAL FORMS OF DISTRIBUTION SECTION of this article.

Effective January 1, 2000,

By striking the following from the Table of Contents:

     Section 9.09 ---- Small Amounts

By striking the AGENT definition in the DEFINITIONS SECTION of Article I and
substituting the following:

     AGENT means an individual who holds a current DD 713 contract or any
     successor full-time contract with the Company and he is one of the
     following:

     -    an agent;

     -    a sales supervisor;

     -    a special marketing developer;

     -    a special brokerage developer;

     -    a special agency assistant; or

     -    an informal agency assistant.

By striking the AGENT'S CONTRACT, GENERAL MANAGER and MANAGEMENT ASSISTANT
definitions from the DEFINITIONS SECTION of Article I.

By striking the second paragraph of the COMPENSATION definition in the
DEFINITIONS SECTION of Article I and substituting the following:

     "Earnings" in this definition means earnings as defined in the definition
     of Compensation or Earnings in the Savings Plan. In determining
     eligibility, Earnings will also include an Eligible Employee's compensation
     with a prior employer if it is earned within the calendar year in which he
     is hired or his contract first becomes effective.

By striking the ELIGIBLE EMPLOYEE definition in the DEFINITIONS SECTION of
Article I and substituting the following:

     ELIGIBLE EMPLOYEE means any Employee, Agent or Field Manager.

By adding the following to the DEFINITIONS SECTION of Article I:

     FIELD MANAGER means:

     (a)  An individual who holds a current DD 713 contract or any successor
          full-time contract with the Company; and

     (b)  Such individual is in one of the following full-time field management
          positions:

          -    management assistant;

          -    management associate;

          -    manager;

          -    co-manager;

          -    assistant general manager;

                                       2
   3

          -    associate general manager;

          -    co-general manager;

          -    general manager;

          -    brokerage manager;

          -    brokerage sales manager; or

          -    brokerage director;

By striking the PAY PERIOD definition from the DEFINITIONS SECTION of Article I.

By striking the first sentence of the first paragraph in subsection (a) of the
COMPANY CONTRIBUTIONS SECTION of Article Ill and substituting the following:

     (a)  Elective Deferral Contributions. The amount of each Elective Deferral
          Contribution for a Participant shall be equal to any percentage (not
          less than 6% nor more than 8%) of his Compensation for the pay period
          (as established by the Company) as elected in his salary deferral
          agreement.

By striking the second paragraph in subsection (a) of the COMPANY CONTRIBUTIONS
SECTION of Article Ill and substituting the following:

     The salary deferral agreement must be effective before the beginning of the
     pay period (as established by the Company) in which Elective Deferral
     Contributions are to start or stop.

By striking the first paragraph in subsection (b) of the COMPANY CONTRIBUTIONS
SECTION of Article Ill and substituting the following:

     (b)  Matching Contributions. The amount of each Matching Contribution made
          by the Company for a Participant shall be equal to 50% of the
          Participant's Elective Deferral Contributions for the pay period (as
          established by the Company). The amount of Matching Contribution made
          by the Company for a Participant shall not exceed 3% of his
          Compensation for such pay period.

By striking the words "and the SMALL AMOUNTS SECTION of Article IX," from the
DEATH BENEFITS SECTION of Article V.

By striking the first sentence of the DISABILITY BENEFITS SECTION of Article V
and substituting the following:

     If a Participant becomes totally and permanently disabled, as defined in
     the Savings Plan, his Vested Account shall be distributed to him in a
     single sum payment.

By adding the following sentence to the end of the first paragraph in Article
VIII:

     Benefits under this Plan will be paid only if the Plan Administrator
     decides, in his discretion, that the applicant is entitled to them.

By striking the SMALL AMOUNTS SECTION of Article IX in its entirety.

                                       3
   4

Effective January 1, 2001:

By striking the SAVINGS PLAN definition in the DEFINITIONS SECTION of Article I
and substituting the following:

     SAVINGS PLAN means the qualified plan(s) as follows:

          The Principal Select Savings Plan for Employees The Principal Select
          Savings Plan for Individual Field

This amendment is made an integral part of the aforesaid Plan and is controlling
over the terms of said Plan with respect to the particular items addressed
expressly herein. All other provisions of the Plan remain unchanged and
controlling.

Unless otherwise stated on any page of this amendment, eligibility for benefits
and the amount of any benefits payable to or on behalf of an individual who is
an Inactive Participant on the effective date(s) stated above, shall be
determined according to the provisions of the aforesaid Plan as in effect on the
day before he became an Inactive Participant.

Signing this amendment, the Company, as plan sponsor, has made the decision to
adopt this plan amendment. The Company is acting in reliance on its own
discretion and on the legal and tax advice of its own advisors, and not that of
any member of the Principal Financial Group or any representative of a member
company of the Principal Financial Group.

Signed this 28th day of December, 2000.

                                             PRINCIPAL LIFE INSURANCE COMPANY

                                             By /s/ LYNN M. GRAVES
                                                --------------------------------

                                             2nd Vice President
                                             -----------------------------------
                                                            Title

                                       4
   5

                      PLAN PAGES AFFECTED BY THIS AMENDMENT

1.   Page 4 - Table of Contents, deleting Small Amounts section

2.   Page 6 - Change definition of Agent and Compensation. Delete def of Agents
     Contract.

3.   Page 7 - Delete def of General Manager; change eligible employee; add Field
     Manager; delete Pay Period.

4.   Page 8 - Delete def of Management Assistant; change def of Savings Plan.

5.   Page 12 - Change to elective deferral language and Company contributions.

6.   Page 34 - Changes to death benefits section and disability benefits
     section.

7.   Page 15 - Change to optional forms of distribution section.

8.   Page 16 - Change to election procedures section.

9.   Page 20 - Delete small amounts section

                                       5
   6

                                 AMENDMENT NO. 4

                    THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

     The Plan named above gives the Employer the right to amend it at any time.
According to that right, the Plan is amended as provided below:

Effective January 1, 2000,

     by striking the following:

          Page 7
          Page 12

     and substituting the following:

          Page 7
          Page 12

     The provisions and conditions set forth on any page of this amendment are a
part of the Plan as fully as if recited over the signature(s) below.

     Unless otherwise stated on any page of this amendment, eligibility for
benefits and the amount of such benefits payable to or on behalf of an
individual who is an inactive Participant on the effective date(s) stated above,
shall be determined according to the provisions of the Plan as in effect on the
day before he became an Inactive Participant.

     By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tax implications.

     Signed this 21st day of December 1999.

                                                PRINCIPAL LIFE INSURANCE

                                                By  /s/ MAY F. JOHNSON
                                                    ----------------------------

                                                Vice President - Human Resources
                                                --------------------------------
                                                             Title

   7

                                 AMENDMENT NO. 3

                    THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

     The Plan named above gives the Employer the right to amend it at any time.
According to that right, the Plan is amended as provided below:

Effective January 1, 1998,

     by striking the following:

          Page 3                 Page 8                 Page 16
          Page 6                 Page 9                 Page 20
          Page 7                 Page 14

     and substituting the following:

          Page 3                 Page 8                 Page 16
          Page 6                 Page 9                 Page 16a
          Page 7                 Page 14                Page 20

     by adding the following:

          Page 12a

Effective July 1, 1998,

     by striking the following

          Page 15

     and substituting the following:

          Page 15

     The provisions and conditions set forth on any page of this amendment are a
part of the Plan as fully as if recited over the signature(s) below.

     By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tax implications.

     Signed this 1st day of October, 1998.

     PRINCIPAL LIFE INSURANCE COMPANY          PRINCIPAL MUTUAL LIFE INSURANCE
                                               COMPANY

     By /s/ MAY F. JOHNSON                     By /s/ MAY F. JOHNSON
        ------------------------------            ------------------------------

        Vice President-Human Resources            Vice President-Human Resources
        ------------------------------            ------------------------------
                    Title                                      Title

   8

                                 AMENDMENT NO. 2

                    THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

     The Plan named above gives the Employer the right to amend it at any time.
According to that right, the Plan is amended as provided below:

Effective January 1, 1996,

     by striking the following:

          Page 4
          Page 14
          Page 20

     and substituting the following:

          Page 4
          Page 14
          Page 20

Effective July 1, 1997,

     by striking the following:

          Page 12

     and substituting the following:

          Page 12

     The provisions and conditions set forth on any page of this amendment are a
part of the Plan as fully as if recited over the signature(s) below.

     By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tax implications.

     Signed this 11th day of September, 1997.

                                            PRINCIPAL MUTUAL LIFE INSURANCE
                                            COMPANY

                                            By  /s/ MAY F. JOHNSON
                                                --------------------------------

                                                Vice President - Human Resources
                                                --------------------------------
                                                             Title

   9

                                 AMENDMENT NO. 1

                    THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

     The Plan named above gives the Employer the right to amend it at any time.
According to that right, the Plan is amended as provided below:

Effective January 1, 1996,

     by striking the following:

          Page 8
          Page 12
          Page 13
          Page 16

     and substituting the following:

          Page 8
          Page 12
          Page 13
          Page 16

     The provisions and conditions set forth on any page of this amendment are a
part of the Plan as fully as if recited over the signature(s) below.

     By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tap implications.

     Signed this 21st day of August 1996.

                                              PRINCIPAL MUTUAL LIFE INSURANCE
                                              COMPANY

                                              By /s/ MAY F. JOHNSON
                                                 -------------------------------

                                                            VP-HR
                                              ----------------------------------
                                                            Title

   10

                                  THE PRINCIPAL

                           SELECT SAVINGS EXCESS PLAN

Nonqualified Retirement Plan 7.5A

Restated January 1, 1994

   11

                          AMEND. NO. 3 PAGE DTD. l-l-98

                                TABLE OF CONTENTS

                              
INTRODUCTION

ARTICLE I                        DEFINITIONS

ARTICLE II                       PARTICIPATION

       Section 2.01    ----      Excess Plan Active Participant
       Section 2.02    ----      Inactive Participant
       Section 2.03    ----      Cessation of Participation

 ARTICLE Ill                     CONTRIBUTIONS

       Section 3.01    ----      Company Contributions
       Section 3.02    ----      Allocation
       Section 3.03    ----      Transfers

ARTICLE IV                       INVESTMENT OF CONTRIBUTIONS

ARTICLE V                        BENEFITS

      Section 5.01     ----      Retirement Benefits
      Section 5.02     ----      Death Benefits
      Section 5.03     ----      Termination Benefits
      Section 5.04     ----      Disability Benefits

ARTICLE VI                       DISTRIBUTION OF BENEFITS

      Section 6.01     ----      Automatic Forms of Distribution
      Section 6.02     ----      Optional Forms of Distribution
      Section 6.03     ----      Election Procedures
      Section 6.04     ----      Distributions Under Qualified Domestic
                                 Relations Orders

ARTICLE VII                      TERMINATION OF PLAN

ARTICLE VIII                     ADMINISTRATION OF PLAN

TABLE OF CONTENTS                      3
   12

                          AMEND. NO. 2 PAGE DTD, l-1-96

                              
ARTICLE IX                       GENERAL PROVISIONS

      Section 9.01     ----      Amendments
      Section 9.02     ----      Provisions Relating to the Insurer
                                 and Other Parties
      Section 9.03     ----      Employment Status
      Section 9.04     ----      Rights to Plan Assets
      Section 9.05     ----      Nonalienation of Benefits
      Section 9.06     ----      Construction
      Section 9.07     ----      Legal Actions
      Section 9.08     ----      Word Usage
      Section 9.09     ----      Small Amounts

PLAN EXECUTION

TABLE OF CONTENTS                      4
   13

                                  INTRODUCTION

     The Company established the nonqualified Excess Plan on September 1, 1988,
for a select group of management or highly compensated employees who, due to the
amount of their compensation from the Company, are unable to fully participate
in the Elective Deferral and Company Matching Contributions available to the
other eligible participants in the Savings Plan. The Excess Plan has been
designed as, and is intended to be, an unfunded plan for purposes of the
Employee Retirement Income Security Act of 1974, as amended, and a nonqualified
plan for purposes of ss. 401 of the Internal Revenue Code of 1986, as amended.

     The Company is of the opinion that the Excess Plan should be changed. It
believes that the best means to accomplish these changes is to completely
restate the plan's terms, provisions and conditions. The restatement, effective
January 1, 1994, is set forth in this document and is substituted in lieu of
the prior document.

     Any funds accumulated for purposes of providing benefits under this plan
are fully available to satisfy the claims of the Company's creditors.
Participants have no greater rights with regard to such fund than any other
general creditor of the Company.

INTRODUCTION                           5
   14

                                    ARTICLE I

                                   DEFINITIONS

ACCOUNT means, for a Participant, his share of the Investment Fund. Separate
accounting records are kept for those parts of his Account that result from:

(a)  Elective Deferral Contributions.

(b)  Matching Contributions.

(c)  Transfer Account Values

A Participant's Account shall be reduced by any distribution of his Account. A
Participant's Account will participate in the earnings credited, expenses
charged and any appreciation or depreciation of the Investment Fund. His Account
is subject to any minimum guarantees applicable under the Group Contract or
other investment arrangement.

AGENT means an individual who holds an unmodified Agent's Contract and who is
not a General Manager or Management Assistant. On and after August 1, 1998,
Agent also excludes an individual who is acting as a Brokerage General Agent.

AGENT'S CONTRACT means the DD713 contract between the Company and an Agent,
General Manager or Management Assistant. The term Agent's Contract shall also
include any successor full-time agent's contract substituted by the Company
between the Company and such individual and any predecessor full-time agent's
contract which the Company substituted with DO713 or any of its predecessors,

BENEFICIARY means the person or persons named by a Participant to receive any
benefits under this Plan upon the Participant's death. For purposes of this
Plan, Beneficiary is the same as designated by the Participant under the Savings
Plan.

BENEFIT DATE means, for a Participant, the first day of the first period for
which an amount of benefit is payable to him under this Plan. See Article V -
BENEFITS.

BROKERAGE GENERAL AGENT means an individual under the standard compensation plan
who holds an active DD714 Contract or any successor full-time contract with the
Company.

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

COMPANY means Principal Life Insurance Company (Principal Mutual Life Insurance
Company, before July 1, 1998).

COMPENSATION means the total earnings paid or made available to an Eligible
Employee by the Company during any specified period.

"Earnings" in this definition means earnings as defined in the definition of
Compensation or Earnings in the Savings Plan.

ARTICLE I                              6
   15

Earnings shall also include amounts which are contributed by the Company
according to a salary reduction agreement and which are not currently includable
in the Employee's gross income by reason of the application of Code Sections
125, 402(e)(3), 402(h)(l)(B) or 403(b), as well as Salary Deferral Contributions
under this Plan.

For the purpose of Elective Deferral and Matching Contributions, earnings means
only those amounts in excess of (1) or (2) below, whichever occurs first:

1)   $150,000, as indexed, or

2)   the Compensation determined by the maximum deferral contribution allowed
     under Code Section 402(g) to the Savings Plan divided by the maximum
     deferral percentage allowed by the outcome of the nondiscrimination test
     under the Savings Plan.

CONTRIBUTIONS means

     Elective Deferral Contributions
     Matching Contributions

as set out in Article III, unless the context clearly indicates otherwise.

ELECTIVE DEFERRAL CONTRIBUTIONS means contributions in accordance with a salary
deferral agreement as set out in Article Ill, unless the context clearly
indicates otherwise.

ELIGIBLE EMPLOYEE means any Employee, Agent, General Manager and Management
Assistant.

EMPLOYEE means an individual as defined in the Savings Plan, and will include an
individual employed by an adopting employer, as defined in the Savings Plan.

ENTRY DATE means the date an Eligible Employee first enters the Plan as an
Active Participant. See Article II - PARTICIPATION,

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

EXCESS PLAN means The Principal Select Savings Excess Plan set forth in this
document, including any later amendments to it.

FISCAL YEAR means the Company's taxable year. The last day of the Fiscal Year is
December 31.

GENERAL MANAGER means an individual who is so designated by the Company and who
holds an unmodified Agent's Contract. On and after August 1, 1998, General
Manager excludes an individual who is acting as a Brokerage General Agent.

GROUP CONTRACT means the group annuity contract or contracts into which the
Trustee enters with the Insurer for the investment of Contributions and the
payment of benefits under this Plan. The term Group Contract as it is used in
this Plan is deemed to include the plural unless the context clearly indicates
otherwise.

Any funds accumulated under the Group Contract are available to the general
creditors of the Company.

ARTICLE I                              7
   16

INSURER means Principal Life Insurance Company (Principal Mutual Life Insurance
Company before July 1, 1998), and any other insurance company or companies named
by the Trustee or Company.

INVESTMENT FUND means the total assets held for the purpose of providing
benefits for Participants, These funds result from Contributions made under the
Plan.

The investment Fund is not held for the exclusive benefit of Participants or
their Beneficiaries.

MANAGEMENT ASSISTANT means an individual who is so designated by the Company and
who holds an unmodified Agent's Contract. On and after August 1, 1998,
Management Assistant excludes an individual who is acting as a Brokerage General
Agent.

MATCHING CONTRIBUTIONS means matching contributions as set out in Article III,
unless the context clearly indicates otherwise.

PARTICIPANT means an Eligible Employee who is actively participating in the
Plan.

PAY PERIOD means

(a)  For Agents, General Managers and Management Assistants, Pay Period as
     defined in The Principal Select Savings Plan for Agents, General Managers
     and Management Assistants.

(b)  For all other Employees, Pay Period as defined in The Principal Select
     Savings Plan for Employees.

PLAN ADMINISTRATOR means the person or persons who administer the Plan. The Plan
Administrator is the Company.

PLAN YEAR means a period beginning on a Yearly Date and ending on the day before
the next Yearly Date.

REENTRY DATE means the date a former Participant reenters the Plan. See Article
II - PARTICIPATION.

RETIREMENT DATE means the last day of the month in which a Participant's
Retirement Date occurs under the Savings Plan. This date shall be on or after
the earlier of (i) the date on which he ceases to be an Employee or (ii) the
date he becomes totally and permanently disabled as defined under the Savings
Plan.

SAVINGS PLAN means the qualified plan(s) as follows:

     The Principal Select Savings Plan for Agents, General Managers and
     Management Assistants.

     The Principal Select Savings Plan for Employees.

     TRANSFER ACCOUNT VALUE means for a Participant, the account values, if any,
     which, after a period of five years, automatically transfer to this Plan
     from the Nonqualified Defined Contribution Plan for Designated
     Participants.

     TRUST means an agreement of trust between the Company and Trustee
     established for the purpose of holding and distributing the Trust Fund
     under the provisions of the Excess Plan. The Trust may provide for the
     investment of all or any portion of the Trust Fund in the Group Contract or
     in any mutual fund arrangement available with the Insurer.

ARTICLE I                              8
   17

TRUST FUND means the total funds held under the Trust for the purpose of
providing benefits for Participants. These funds result from Contributions made
under the Excess Plan which are forwarded to the Trustee to be deposited in the
Trust Fund.

TRUSTEE means the trustee or trustees under the Trust. The term Trustee as it is
used in this Plan is deemed to include the plural unless the context clearly
indicates otherwise.

VESTED ACCOUNT means the part of a Participant's Account in which he has a
vested interest. The Participant's Vested Account is equal to his Account.

YEARLY DATE means September 1, 1988, and each following January 1.

ARTICLE I                              9
   18

                                   ARTICLE II

                                  PARTICIPATION

SECTION 2.01--EXCESS PLAN ACTIVE PARTICIPANT.

     A person shall first become a Participant (begin active participation in
the Excess Plan) on the earliest date on or after January 1, 1994, on which the
person is an Eligible Employee and has met the eligibility requirement(s) set
forth below. This date is his Entry Date.

     (1)  He is an active participant in the Savings Plan.

     (2)  He is deferring at least six percent (or the annually determined
          amount, if applicable) into the Savings Plan.

     (3)  He has the required earnings level as provided in the definition of
          Compensation in Article I.

     Each Eligible Employee who was a Participant under the Plan on December 31,
1993, shall continue to be a Participant if he is still an Eligible Employee on
January 1, 1994, and his Entry Date shall not change.

SECTION 2.02--INACTIVE PARTICIPANT.

     An Active Participant shall become an Inactive Participant (discontinue
accruing benefits under the Excess Plan) on the earliest of the following:

     (a)  The effective date of complete termination of the Excess Plan.

     (b)  The date of termination of his agent's contract DD713 (as such
          contract may be amended from time to time, or successor contracts to
          it).

     (c)  The date the Company sends written notice to the Participant of
          cancellation of his agent's contract DD713 (as such contract may be
          amended from time to time, or successor contracts to it).

     (d)  The date the Participant otherwise no longer meets the definition of
          Eligible Employee as set forth in the DEFINITIONS SECTION of Article
          I.

     (e)  The date the Participant no longer meets the terms and conditions set
          forth in the EXCESS PLAN ACTIVE PARTICIPANT SECTION of Article II.

     (f)  The date the Participant revokes his salary deferral agreement.

     A former Participant shall again become a Participant (resume active
participation in the Excess Plan) on the date he again performs an hour of
service as an Eligible Employee. This date is his Reentry Date.

ARTICLE II                             10
   19

SECTION 2.03--CESSATION OF PARTICIPATION.

        A Participant shall cease to be a Participant on the date he is no
longer an Eligible Employee and the value of his Account is zero.

ARTICLE II                             11
   20

                                   ARTICLE III

                                  CONTRIBUTIONS

SECTION 3.01--COMPANY CONTRIBUTIONS.

     Company Contributions for each Plan Year will be equal to the Company
     Contributions as described below.

     (a)  Elective Deferral Contributions. The amount of each Elective Deferral
          Contribution for a Participant shall be equal to any percentage (not
          less than 6% nor more than 8%) of his Compensation for the Pay Period
          as elected in his or her salary deferral agreement. This percentage
          will be adjusted at any time the elective deferral contribution
          percentage under the Savings Plan is increased or decreased. A person
          who is eligible to participate in the Excess Plan may file a salary
          deferral agreement with the Company. The salary deferral agreement to
          start Elective Deferral Contributions may be effective on a
          Participant's Entry Date (Reentry Date, if applicable) or any
          following date. The Participant shall make any change or terminate the
          salary deferral agreement by filing a new salary deferral agreement. A
          Participant's salary deferral agreement making a change may be
          effective on any date a salary deferral agreement to start Elective
          Deferral Contributions could be effective. A Participant's salary
          deferral agreement to stop Elective Deferral Contributions may be
          effective on any date.

          The salary deferral agreement must be effective before the beginning
          of the Pay Period in which Elective Deferral Contributions are to
          start or stop.

          Elective Deferral Contributions may include contributions the person
          would have made to the Savings Plan under its contribution formula but
          for the additional restrictions imposed by such plan to meet the
          qualification requirements of the Internal Revenue Code.

     (b)  Matching Contributions. The amount of each Matching Contribution made
          by the Company for a Participant shall be equal to 50% of the
          Participant's Elective Deferral Contributions for the Pay Period. The
          amount of Matching Contribution made by the Company for a Participant
          shall not exceed three percent of his Compensation for the Pay Period.

          Matching Contributions may include contributions the Company would
          have made to the Savings Plan under its contribution formula but for
          the additional restrictions imposed by such plan to meet the
          qualification requirements of the Internal Revenue Code.

SECTION 3.02--ALLOCATION.

     The following Contributions for each Plan Year shall be allocated to each
Participant for whom such Contributions were made under the COMPANY
CONTRIBUTIONS SECTION of Article III:

     Elective Deferral Contributions
     Matching  Contributions

These Contributions shall be allocated when made and credited to the
Participant's Account.

ARTICLE III                            12
   21

SECTION 3.03--TRANSFERS.

     Each Plan Year, Contributions made on behalf of a Participant due to his
participation in the Nonqualified Defined Contribution Plan for Designated
Participants may be automatically transferred from such other nonqualified plan
to this Plan. Any such transfer shall occur on or after the date which is five
years after the contribution was made to such other nonqualified plan.

     These contributions are allocated to the Participant upon transfer to this
Plan. This is his Transfer Account Value.

ARTICLE III                           12a
   22

                                   ARTICLE IV

                          INVESTMENT OF CONTRIBUTIONS

     Contributions made under the Excess Plan shall be deposited with the
Trustee to be invested in the Trust Fund. Investment of such Contributions will
be in accordance with the provisions of the Trust which will include, but not be
limited to, investments under the provisions of any applicable group contract or
any mutual fund I arrangement with the Insurer. The amounts in the Trust are
subject to the claims of the Company's creditors, in the event of the Company's
insolvency.

     To the extent permitted by the Trust, the Participant shall direct the
Contributions to any of the investments available under the Trust. If no
investment direction is given, Contributions will be invested according to the
provisions of any applicable group contract. (A change in investment direction
or a transfer to) or from an account of a Participant may be made at any time,
according to such terms and conditions as the Trustee may specify and subject to
the provisions of the investments available under the Trust.

ARTICLE IV                             13
   23

                                    ARTICLE V

                                    BENEFITS

SECTION 5.01--RETIREMENT BENEFITS.

     On a Participant's Retirement Date, his Vested Account shall be distributed
to him according to the distribution of benefits provisions of Article VI. I

SECTION 5.02--DEATH BENEFITS.

     If a Participant dies before his Retirement Date, his Vested Account shall
be distributed according to the distribution of benefits provisions of Article
VI and the SMALL AMOUNTS SECTION of Article IX.

SECTION 5.03--TERMINATION BENEFITS.

     A Participant will receive a distribution of his Vested Account if he
ceases to be an Eligible Employee before his Retirement Date, provided he has
not again become an Eligible Employee.

SECTION 5.04--DISABILITY BENEFITS.

     If a Participant becomes totally and permanently disabled, as defined in
the Associated Plan, his Vested Account shall be distributed to him in a single
sum payment. Such payment shall be made after the Participant has been totally
and permanently disabled for one year.

ARTICLE V                              14
   24

                                   ARTICLE VI

                            DISTRIBUTION OF BENEFITS

SECTION 6.01--AUTOMATIC FORMS OF DISTRIBUTION.

     The automatic form of benefit payable to or on behalf of a Participant is
determined as follows:

     (a)  The automatic form of retirement benefit shall be a single sum
          payment.

     (b)  The automatic form of death, disability and termination benefit shall
          be a single sum payment to the Participant or his Beneficiary.

SECTION 6.02--OPTIONAL FORMS OF DISTRIBUTION.

     An election of an optional form of benefit may be made by the Participant
(see the ELECTION PROCEDURES SECTION of Article VI).

     (a)  The optional forms of retirement benefit shall be the following:
          single life annuity with a certain period of ten years; a single life
          annuity with installment refund; survivorship life annuity with
          installment refund and a survivorship percentage of 50; and fixed
          period annuities for any period of whole months which is not less than
          120 and does not exceed the life expectancy of the Participant and the
          named Beneficiary.

          The following optional forms of retirement benefit are also available:
          a single sum payment; an annual distribution equal to any fixed whole
          percentage, not less than 10% and not more than 13%, as elected by the
          Participant, of his Vested Account. Such amount shall be payable
          annually until his Vested Account is exhausted. Once elected, the
          percentage will not change, An election under this paragraph may be
          delayed until the Participant reaches his required beginning date
          under the Associated Plan.

     If the Participant dies before beginning to receive a distribution of his
     retirement benefits, any form of distribution for a death benefit must meet
     the following limitations:

     (b)  If the Participant did not name an individual as his Beneficiary to
          receive any death benefit payable under the DEATH BENEFITS SECTION of
          Article V, such death benefit shall be distributed within five years
          of the Participant's death.

ARTICLE VI                             15
   25

          A form of distribution for retirement or death benefits shall be
          available to a Participant or Beneficiary only if the annual
          distribution under such form is at least equal to the quotient of the
          Participant's Vested Account as of the date distribution is to begin,
          divided by the life expectancy of the Participant, Beneficiary or
          joint and last survivor expectancy of the Participant and Beneficiary,
          as appropriate. If distribution is in a form other than a life
          annuity, the life expectancy of the Participant (and/or Beneficiary,
          if the spouse is the Beneficiary) may be recalculated after
          distribution begins, but no more frequently than annually. In the case
          of a Beneficiary who is not the Participant's spouse, life expectancy
          shall be calculated when benefits start and minimum payments for any
          12-consecutive month period will be based on such life expectancy
          minus the number of whole years since the distribution first began.
          The life expectancy or joint and last survivor expectancy shall be
          computed by use of the return multiplies contained in Section 1.72-9
          of the regulations under the Code.

SECTION 6.03--ELECTION PROCEDURES.

     The Participant or Beneficiary shall make any election under this section
in the form or manner provided for that purpose. The Plan Administrator may
require such individual to complete any necessary documents as to the provisions
to be made. Effective July 1, 1998, any election made as to a Participant whose
Retirement Date occurs on and after January 1, 1999, must be made no later than
the date one-year prior to his Retirement Date. In the absence of such election,
benefits shall be paid in a single sum payment.

     (a)  Retirement Benefits. A Participant may elect his Beneficiary and may
          elect to have retirement benefits distributed under any of the
          optional forms of retirement benefit described in the OPTIONAL FORMS
          OF DISTRIBUTION SECTION of Article VI.

     (b)  Death Benefits. A Participant may elect his Beneficiary and may elect
          to have death benefits distributed under any of the optional forms of
          death benefit described in the OPTIONAL FORMS OF DISTRIBUTION SECTION
          of Article VI.

          If the Participant has not elected an optional form of distribution
          for the death benefit payable to his Beneficiary, the Beneficiary may,
          for his own benefit, elect the form of distribution, in like manner as
          a Participant.

SECTION 6.04--DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS.

     The Plan specifically permits distributions to an alternate payee under a
qualified domestic relations order, as defined in Code Section 414(p), at any
time, irrespective of whether the Participant has attained his earliest
retirement age, as defined in Code Section 414(p), under the Plan. A
distribution to an alternate payee before the Participant's attainment of
earliest retirement age, as defined in Code Section 414(p), is available only
if:

     (a)  the order specifies distributions at that time or permits an agreement
          between the Plan and the alternate payee to authorize an earlier
          distribution; and

     (b)  if the present value of the alternate payee's benefits under the Plan
          exceeds $5,000, and the order requires, the alternate payee consents
          to any distribution occurring before the Participant's attainment of
          earliest retirement age, as defined in Code Section 414(p).

Nothing in this section shall permit a Participant a right to receive a
distribution at a time otherwise not permitted under the Plan nor shall it
permit the alternate payee to receive a form of payment not permitted under the
Plan.

ARTICLE VI                             16
   26

     The Plan Administrator shall establish reasonable procedures to determine
the qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Plan Administrator promptly shall notify the Participant
and an alternate payee named in the order, in writing, of the receipt of the
order and the Plan's procedures for determining the qualified status of the
order. Within a reasonable period of time after receiving the domestic relations
order, the Plan Administrator shall determine the qualified status of the order
and shall notify the Participant and each alternate payee, in writing, of its
determination. The Plan Administrator shall provide notice under this paragraph
by mailing to the individual's address specified in the domestic relations
order, or in a manner consistent with Department of Labor regulations. The Plan
Administrator may treat as qualified any domestic relations order entered before
January 1, 1985, irrespective of whether it satisfies all the requirements
described in Code Section 414(p).

     If any portion of the Participant's Account is payable during the period
the Plan Administrator is making its determination of the qualified status of
the domestic relations order, a separate accounting shall be made of the amount
payable. If the Plan Administrator determines the order is a qualified domestic
relations order within 18 months of the date amounts are first payable following
receipt of the order, the payable amounts shall be distributed in accordance
with the order, If the Plan Administrator does not make its determination of the
qualified status of the order within the 4 8 month determination period, the
payable amounts shall be distributed in the manner the Plan would distribute if
the order did not exist and the order shall apply prospectively if the Plan
Administrator later determines the order is a qualified domestic relations
order.

     The Plan shall make payments or distributions required under this section
by separate benefit checks or other separate distribution to the alternate
payee(s).

ARTICLE VI                            16a
   27

                                  ARTICLE VII

                               TERMINATION OF PLAN

     The Company expects to continue the Plan indefinitely but reserves the
right to terminate the Plan at any time upon giving written notice to all
parties concerned. Complete discontinuance of Contributions under the Plan
constitutes termination of the Plan.

     The Participant's Account shall continue to participate in the investment
earnings credited, expenses charged and any appreciation or depreciation of the
Investment Fund until the Account is distributed.

     A Participant's Account may be distributed to the Participant after the
effective date of the Plan termination.

     Upon termination of the Plan, no more Eligible Employees shall become
Participants and no more Contributions shall be made.

     Amounts in this Plan shall not be paid to the Company at any time, except
that, after the satisfaction of all liabilities under the Plan, any amounts
remaining may be paid to the Company. The payment may not be made if it would
contravene any provision of law.

ARTICLE VII                            17
   28

                                  ARTICLE VIII

                             ADMINISTRATION OF PLAN

       The administrative provisions contained in Article VIII of the Savings
Plan, except for Section 8.07, are hereby incorporated by reference into this
Plan.

ARTICLE VIII                           18
   29

                                   ARTICLE IX

                             GENERAL PROVISIONS

SECTION 9.01--AMENDMENTS.

     By resolution of its Management Resources Committee, the Company may amend
this Excess Plan at any time, including any remedial retroactive changes (within
the specified period of time as may be determined by Internal Revenue Service
regulations) to comply with the requirements of any law or regulation issued by
any governmental agency to which the Company is subject.

     Effective August 15, 1994, the Management Resources Committee is the
Corporate Management Committee.

SECTION 9.02--PROVISIONS RELATING TO THE INSURER AND OTHER PARTIES.

     The obligations of an Insurer shall be governed solely by the provisions of
the Group Contract. The Insurer shall not be required to perform any act not
provided in or contrary to the provisions of the Group Contract. See the
CONSTRUCTION SECTION of this article.

     Any issuer or distributor of investment contracts or securities is governed
solely by the terms of its policies, written investment contract, prospectuses,
security instruments, and any other written agreements entered into with the
Trustee.

     Such Insurer, issuer or distributor is not a party to the Excess Plan, nor
bound in any way by the Excess Plan provisions. Such parties shall not be
required to look to the terms of this Excess Plan, nor to determine whether the
Company, the Plan Administrator or the Trustee have the authority to act in any
particular manner or to make any contract or agreement.

     Until notice of any amendment or termination of this Excess Plan or a
change in Trustee has been received by the Insurer at its home office or an
issuer or distributor at their principal address, they are and shall be fully
protected in assuming that the Excess Plan has not been amended or terminated
and in dealing with any party acting as Trustee according to the latest
information which they have received at their home office or principal address.

SECTION 9.03.--EMPLOYMENT STATUS.

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

SECTION 9.04-RIGHTS TO PLAN ASSETS.

     No Eligible Employee shall have any right to or interest in any assets of
the Excess Plan upon termination of his employment or otherwise except as
specifically provided under this Excess Plan, and then only to the extent of the
benefits payable to such Eligible Employee in accordance with the Excess Plan
provisions.

ARTICLE IX                             19
   30

     Any final payment or distribution to a Participant or his legal
representative or to any Beneficiaries or spouse of such Participant under the
Excess Plan provisions shall be in full satisfaction of all claims against the
Excess Plan, the Plan Administrator, the Trustee, the Insurer, and the Company
arising under or by virtue of the Excess Plan.

SECTION 9.05--NONALIENATION OF BENEFITS.

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

SECTION 9.06--CONSTRUCTION.

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

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

SECTION 9.07--LEGAL ACTIONS.

     The Plan, the Plan Administrator and the Trustee are the necessary parties
to any action or proceeding involving the assets held with respect to the Plan
or administration of the Plan or Trust. No person employed by the Company, no
Participant, former Participant or their Beneficiaries or any other person
having or claiming to have an interest in the Plan is entitled to any notice of
process. A final judgment entered in any such action or proceeding shall be
binding and conclusive on all persons having or claiming to have an interest in
the Plan.

SECTION 9.08--WORD USAGE.

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

SECTION 9.09--SMALL AMOUNTS.

     If the Vested Account of a Participant does not exceed $5,000, the entire
Vested Account shall be payable in a single sum as of the earliest of his
Retirement Date, the date he dies, or the date he ceases to be an Employee. This
is a small amounts payment. If a small amount is payable as of the date the
Participant dies, the small amounts payment shall be made to the Participant's
Beneficiary. If a small amount is payable while the Participant is living, the
small amounts payment shall be made to the Participant. The small amounts
payment is in full settlement of all benefits otherwise payable.

     No other small amounts payments shall be made.

ARTICLE IX                             20
   31
     By executing this Plan, the Company acknowledges having counseled to the
extent necessary with selected legal and tax advisors regarding the Plan's
legal and tax implications.

     Executed this 6th day of November, 1995.
                   ---        --------    --

                                    PRINCIPAL MUTUAL LIFE INSURANCE COMPANY

                                    By: /s/ THOMAS J. GAARD
                                        -----------------------------------

                                        Sr. Vice President
                                        -----------------------------------
                                                       Title

PLAN EXECUTION                         21
   32
              AMENDMENT TO THE PRINCIPAL SELECT SAVINGS EXCESS PLAN

                                       AND

     THE NONQUALIFIED DEFINED CONTRIBUTION PLAN FOR DESIGNATED PARTICIPANTS

                    (Hereinafter referred to as the "Plans")

The Plans named above give the Company the right to amend them at any time.

WHEREAS, in furtherance of the proposed demutualization of Principal Mutual
Holding Company, the Board of Directors of Principal Mutual Holding Company, on
March 3 1,2001, adopted a Plan of Conversion which contains certain provisions
applicable to the above plans, collectively defined as the "Excess Plans" in
such Plan of Conversion; and

WHEREAS, in order to reflect the provisions of Section 8.1 of the Plan of
Conversion as they relate to the above Plans, the following definitions are
adopted for purposes of this Amendment which relates specifically to provisions
and limitations reflected in Section 8.1 of the Plan of Conversion and for no
other purpose.

NOW THEREFORE, effective as of the effective date of the Plan of Conversion of
Principal Mutual Holding Company, the Plans are hereby amended as follows:

By adding the following definitions, in correct alphabetical order, to Article I
of such Plans:

     "Agents Savings Plan" means The Principal Select Savings Plan for
     Individual Field.

     "Common Stock" means the common stock, par value $0.01 per share, of the
     Principal Financial Group, Inc., a Delaware corporation, and any successor
     thereto.

     "Company Stock Plan" means any stock option plan, stock incentive plan,
     stock purchase plan and share ownership plans related to the Common Stock
     that are customary for publicly traded companies, and shall include the
     Directors Stock Plan, the Long-Term Plan, the Plan, the Savings Plans, the
     Stock Incentive Plan and the Stock Purchase Plan.

     "Directors Stock Plan" means the Principal Financial Group, Inc. Directors
     Stock Plan.

     "Employees Savings Plan" means The Principal Select Savings Plan for
     Employees.

     "Excess Plan" for purposes of the Amendment to the Principal Select Savings
     Excess Plan and the Non-Qualified Defined Contribution Plan for Designated
     Participants relating to the Plan of Conversion, adopted as of May 21,2001,
     means the Principal Select Savings Excess Plan and the Non-Qualified
     Defined Contribution Plan for Designated Participants.

     "Long-Term Plan" means the Principal Financial Group Long-Term Performance
     Plan.

     "Plan of Conversion" means the Plan of Conversion of Principal Mutual
     Holding Company.

   33

     "Plans" for purposes of the Amendment to the Principal Select Savings
     Excess Plan and the Non- Qualified Defined Contribution Plan for Designated
     Participants relating to the Plan of Conversion, adopted as of May 21,2001,
     means the Principal Select Savings Excess Plan and the Non-Qualified
     Defined Contribution Plan for Designated Participants.

     "Savings Plans" for purposes of the Amendment to the Principal Select
     Savings Excess Plan and the Non-Qualified Defined Contribution Plan for
     Designated Participants relating to the Plan of Conversion, adopted as of
     May 2 1,2001, means the Employees Savings Plan, the Agents Savings Plan and
     the Excess Plan.

     "Stock Incentive Plan" means the Principal Financial Group, Inc. Stock
     Incentive Plan.

     "Stock Purchase Plan" means the Principal Financial Group, Inc. Employee
     Stock Purchase Plan.

By adding a new Section 9.09 to Article IX, to read as follows:

     Section 9.09. -- Limitations.

     Notwithstanding anything else contained in the Plans to the contrary, no
     action shall be taken, and no award or distribution shall be made, under
     the Plans, which contains any term or condition that would violate any
     provision of the Plan of Conversion. To the extent that shares of Common
     Stock are made available for distribution hereunder, the number of such
     shares distributed hereunder shall count against (i) the limit of 6% of the
     number of shares of Corm-non Stock outstanding immediately following the
     effective date of the Plan of Conversion that may be made issuable or
     distributable under all Company Stock Plans (including, without limitation,
     the Plans) other than the Employees Savings Plan, the Agents Savings Plan
     and the Stock Purchase Plan, and (ii) the guideline set forth in the Stock
     Incentive Plan limiting the maximum number of shares of Common Stock that
     may be awarded or issued within 18 months of the effective date of the Plan
     of Conversion to 40% of the limit set forth in subclause (i).

By signing this amendment, the Company, as plan sponsor, has made the decision
to adopt this plan amendment as of May 21, 2001.

Signed this    21    day of           May          , 2001.
            --------        -----------------------

                                        PRINCIPAL LIFE INSURANCE COMPANY

                                        By: /s/ Jim DeVries
                                            ------------------------

                                        Title: Vice President -- HR
                                            ------------------------

                                       2
   1
                                                                    EXHIBIT 10.6

                                   AMENDMENT NO. 3

              SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR EMPLOYEES

The Plan named above gives the Employer the right to amend it at any time.
According to that right, the Plan is amended as follows:

Effective December 31, 1998:

By striking the definition of ASSOCIATED PLAN in the DEFINITIONS SECTION of
Article I and substituting the following:

    ASSOCIATED PLAN means The Principal Pension Plan.

Effective January 1, 1999:

By striking the last two sentences of the first paragraph in the DISTRIBUTIONS
UNDER QUALIFIED DOMESTIC RELATIONS ORDERS SECTION of Article VI and substituting
the following:

    Nothing in this section shall permit a Participant a right to receive a
    distribution at a time otherwise not permitted under the Plan. Distribution
    to an alternate payee may be made in a single sum equal to the present value
    (as determined by actuarial valuations) of the benefit payable under the
    terms of the Qualified Domestic Relations Order. This single sum payment
    must be requested within 60 days after the date the Qualified Domestic
    Relations Order is approved by the Employer. With the exception of this
    single sum benefit, nothing in this section shall permit the alternate payee
    to receive any other form of payment not permitted under the Plan. in no
    event may a single sum distribution be made to an alternate payee after the
    date the Participant ceases to be an Employee due to retirement.

Effective March 1, 1999:

By striking the definition of ELIGIBLE EMPLOYEE in the DEFINITIONS SECTION of
Article I and substituting the following:

    ELIGIBLE EMPLOYEE means any Employee of the Employer (including individuals
    who were active participants under the Principal Health Care, Inc. Pension
    Plan on April 30, 1998) who is invited to participate. in the Plan and who
    represents a select group of highly-compensated or management Employees.

Effective January 1, 2000:

By striking entirely from the ACCRUED BENEFIT SECTION of Article IV the words
"However, Accrued Benefit is modified as follows:" and the immediately following
paragraph that begins with the words "The actual dollar amount...".

Effective January 1, 2001:

By adding the following as the last sentence in the first paragraph in the
ADMINISTRATION SECTION of Article VIII:

                                       1
   2

    Benefits under this Plan will be paid only if the Plan Administrator
    decides, in his discretion, that the applicant is entitled to them.

This amendment is made an integral part of the aforesaid Plan and is controlling
over the terms of said Plan with respect to the particular items addressed
expressly herein. All other provisions of the Plan remain unchanged and
controlling.

Unless otherwise stated on any page of this amendment, eligibility for benefits
and the amount of any benefits payable to or on behalf of an individual who is
an Inactive Participant on the effective date(s) stated above, shall be
determined according to the provisions of the aforesaid Plan as in effect on the
day before he became an Inactive Participant.

Signing this amendment, the Employer, as plan sponsor, has made the decision to
adopt this plan amendment. The Employer is acting in reliance on its own
discretion and on the legal and tax advice of its own advisors, and not that of
any member of the Principal Financial Group or any representative of a member
company of the Principal Financial Group.

Signed this 28th day of December, 2000.
            ----        --------  ----

                                             PRINCIPAL LIFE INSURANCE COMPANY

                                             By /s/ LYNN M GRAVES
                                                -----------------

                                             2ND VICE PRESIDENT
                                             --------------------
                                                    Title

                                       2
   3

                      PLAN PAGES AFFECTED BY THIS AMENDMENT

Page 12- removal of accrued benefit modification.

Page 17 - change in QDRO language, 1st paragraph

Page 19 - change to Section 8.01, 1st paragraph

                                       3
   4

                                 AMENDMENT NO. 2

              SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR EMPLOYEES

        The Plan named above gives the Employer the right to amend it at any
time. According to that right, the Plan is amended as provided below:

Effective January 1, 1998,

        by striking the following:

                Page 3                  Page 16
                Page 4                  Page 17
                Page 14                 Page 24
                Page 15

        and substituting the following:

                Page 3                  Page 16
                Page 4                  Page 17
                Page 14                 Page 17a
                Page 15                 Page 24

Effective July 3, 1998,

        by striking the following:

                Page 7                  Page 19

        and  substituting the following:

                Page 7                  Page 19

        The provisions and conditions set forth on any page of this amendment
are a part of the Plan as fully as if recited over the signature(s) below.

        By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tax implications.

        Signed this 1st day of October, 1998.
                    ---        -------

        PRINCIPAL LIFE INSURANCE COMPANY        PRINCIPAL MUTUAL LIFE INSURANCE
                                                COMPANY

        By /s/ MAX F. JOHNSON                   By /s/ MAX F. JOHNSON
           -----------------------------           -----------------------------

        Vice President - Human Resources        Vice President - Human Resources
        --------------------------------        --------------------------------
                     Title                                   Title

   5

                                 AMENDMENT NO. 1

              SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR EMPLOYEES

        The Plan named above gives the Employer the right to amend it at any
time. According to that right, the Plan is amended as provided below:

Effective January 1, 1997,

        by striking the following:

               Page 3
               Page 12

        and substituting the following:

               Page 3
               Page 12

        The provisions and conditions set forth on any page of this amendment
are a part of the Plan as fully as if recited over the signature(s) below.

        By signing this amendment, the Employer acknowledges having counseled to
the extent necessary with selected legal and tax advisors regarding the
amendment's legal and tax implications.

        Signed this 11th day of September, 1997.
                    ----        ---------
                                                PRINCIPAL MUTUAL LIFE INSURANCE
                                                COMPANY

                                                By /s/ MAX F. JOHNSON
                                                   -----------------------------

                                                Vice President - Human Resources
                                                --------------------------------
                                                             Title

   6

                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

                                  FOR EMPLOYEES

Restated January I, 1996

   7

                          AMEND. NO. 2 PAGE DTD. 1-1-98
                          -----------------------------

                                TABLE OF CONTENTS

INTRODUCTION

ARTICLE I               FORMAT AND DEFINITIONS

     Section 1.01 ----  Format
     Section 1.02 ----  Definitions

ARTICLE II              PARTICIPATION

     Section 2.01 ----  Active Participant
     Section 2.02 ----  Inactive Participant
     Section 2.03 ----  Cessation of Participation-

ARTICLE III             CONTRIBUTIONS

     Section 3.01 ----  Employer Contributions
     Section 3.02 ----  Investment of Contributions

ARTICLE IV              RETIREMENT BENEFITS

     Section 4.01 ----  Accrued Benefit
     Section 4.02 ----  Amount of Benefit at Retirement

ARTICLE V               OTHER BENEFITS

     Section 5.01 ----  Death Benefits
     Section 5.02 ----  Vested Benefits
     Section 5.03 ----  Cost of Living Adjustment
     Section 5.04 ----  Disability Benefits

ARTICLE VI              WHEN BENEFITS START AND DISTRIBUTION OF BENEFITS

     Section 6.01 ----  When Benefits Start
     Section 6.02 ----  Automatic Forms of Distribution
     Section 6.03 ----  Optional Forms of Distribution and Distribution
                        Requirements
     Section 6.04 ----  Distributions Under Qualified Domestic Relations Orders

ARTICLE VII             TERMINATION OF PLAN

TABLE OF CONTENTS                       3

   8

                          AMEND. NO. 2 PAGE DTD. l-l-98
                          -----------------------------

ARTICLE VIII            ADMINISTRATION OF PLAN

     Section 8.01 ----  Administration
     Section 8.02 ----  Benefit and Pension Committee
     Section 8.03 ----  Benefit Plan Investment Committee
     Section 8.04 ----  Records
     Section 8.05 ----  Information  Available
     Section 8.06 ----  Claim and Appeal Procedures
     Section 8.07 ----  Delegation of Authority

ARTICLE IX              GENERAL PROVISIONS

     Section 9.01 ----  Amendments
     Section 9.02 ----  Provisions Relating to the Insurer and Other Parties
     Section 9.03 ----  Employment Status
     Section 9.04 ----  Rights to Plan Assets
     Section 9.05 ----  Beneficiary
     Section 9.06 ----  Nonalienation of Benefits
     Section 9.07 ----  Construction
     Section 9.08 ----  Legal Actions
     Section 9.09 ----  Word Usage
     Section 9.10 ----  Small Amounts

PLAN EXECUTION

TABLE OF CONTENTS                       4

   9

                                  INTRODUCTION

          The Employer previously established a nonqualified deferred
compensation plan on January 1, 1982. The plan has been designed as, and is
intended to be, an unfunded plan for purposes of the Employee Retirement Income
Security Act of 1974, as amended, and a nonqualified plan under the internal
Revenue Code of 1986, including any later amendments to the Code. The plan is
designed to provide benefits for a select group of highly compensated or
management employees.

          The Employer is of the opinion that the plan should be changed. It
believes that the best means to accomplish these changes is to completely
restate the plan's terms, provisions and conditions. The restatement, effective
January 1, 1996, is set forth in this document and is substituted in lieu of the
prior document.

          Any funds accumulated for purposes of providing benefits under this
plan are fully available to satisfy the claims of the Employer's creditors.
Participants have no greater rights with regard to such fund than any other
general creditor of the Employer.

INTRODUCTION                           5

   10

                                    ARTICLE I

                             FORMAT AND DEFINITIONS

SECTION 1.Ol--FORMAT.

       Words and phrases defined in the DEFINITIONS SECTION of Article I shall
have that defined meaning when used in this Plan, unless the context clearly
indicates otherwise.

       These words and phrases will have an initial capital letter to aid in
identifying them as defined terms.

SECTION 1.02--DEFINITIONS.

       ACCRUAL SERVICE means, on any date for a Participant, his accrual service
       on such date under the Associated Plan.

       ACCRUED BENEFIT means the amount of monthly retirement benefit on the
       Normal Form accrued by an Active Participant under this Plan as of any
       date. See the ACCRUED BENEFIT SECTION of Article IV.

       ACCRUED BENEFIT ADJUSTMENT means an adjustment which shall be applied to
       determine a Participant's benefit, as defined under the Associated Plan.

       ACTIVE PARTICIPANT means an Eligible Employee who is actively
       participating in the Plan according to the provisions in the ACTIVE
       PARTICIPANT SECTION of Article II.

       ACTUARIAL EQUIVALENT means, for a benefit payable on an optional form,
       that the value of such benefit is actuarially equivalent to the benefit
       payable on the Normal Form. The amount of each payment under an optional
       form shall be determined pursuant to the definition of actuarial
       equivalent in the Associated Plan.

       ADJUSTED COMPENSATION BENEFIT means an amount of monthly retirement
       benefit, determined according to Section 4.01.

       ANNUITY STARTING DATE means, for a Participant, the first day of the
       first period for which an amount is payable as an annuity or any other
       form.

       ASSOCIATED PLAN means The Principal Pension Plan For Employees.

       AVERAGE COMPENSATION means, on any given date, an Employee's average
       compensation under the Associated Plan.

       BENEFICIARY means the person or persons named by a Participant to receive
       any benefits under this Plan upon the Participant's death. See the
       BENEFICIARY SECTION of Article IX.

       CLAIMANT means any person who has made a claim for benefits under this
       Plan. See the CLAIM AND APPEAL PROCEDURES SECTION of Article VIII.

ARTICLE I                               6

   11

                          AMEND. NO. 2 PAGE DTD. 7-l-98
                          -----------------------------

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

       COMPENSATION means compensation as defined under the Associated Plan.
       However, the $200,000 limit prior to January 1, 1994, and the $150,000
       limit on and after January 1, 1994, (as adjusted) on Compensation
       specified in such definition shall not apply for purposes of determining
       a Participant's Supplemental Benefit under this Plan.

       CONTINGENT ANNUITANT means an individual named by the Participant to
       receive a lifetime benefit after the Participant's death according to a
       survivorship life annuity form of distribution.

       CONTRIBUTIONS means Employer Contributions as set out in Article Ill.

       EARLY RETIREMENT DATE means the Participant's early retirement date under
       the Associated Plan.

       ELIGIBLE EMPLOYEE means any Employee of the Employer who is invited to
       participate in the Plan and who represents a select group of
       highly-compensated or management employees,

       EMPLOYEE means an individual who is employed by the Employer.

       EMPLOYER means Principal Life Insurance Company,

       EMPLOYER CONTRIBUTIONS means contributions made by the Employer to fund
       this Plan. See the EMPLOYER CONTRIBUTIONS SECTION of Article III.

       ENTRY DATE means the date an Employee first enters the Plan as an Active
       Participant. See the ACTIVE PARTICIPANT SECTION of Article II.

       EXCESS BENEFIT means an amount of monthly retirement benefit, determined
       according to Section 4.01.

       FISCAL YEAR means the Employer's taxable year. The last day of the Fiscal
       Year is December 31.

       GROUP CONTRACT means the group annuity contract or contracts into which
       the Trustee enters with the Insurer for the investment of Contributions
       and the payment of benefits under this Plan. The term Group Contract as
       it is used in this Plan is deemed to include the plural unless the
       context clearly indicates otherwise.

       Any funds accumulated under the Group Contract are available to the
       general creditors of the Employer.

       INACTIVE PARTICIPANT means a former Active Participant who has an Accrued
       Benefit. See the INACTIVE PARTICIPANT SECTION of Article II.

       INSURER means Principal Life Insurance Company and any other insurance
       company or companies named by the Trustee.

       INTEGRATION LEVEL means a Participant's integration level as defined
       under the Associated Plan.

       LATE RETIREMENT DATE means the late retirement date under the Associated
       Plan.

ARTICLE I                               7
   12

       NORMAL FORM means the Normal Form under the Associated Plan.

       NORMAL RETIREMENT AGE means a Participant's normal retirement age under
       the Associated Plan.

       NORMAL RETIREMENT DATE means a Participant's normal retirement date under
       the Associated Plan.

       PARTICIPANT means either an Active Participant or an Inactive
       Participant.

       PLAN means the deferred compensation plan of the Employer set forth in
       this document, including any later amendments to it.

       PLAN ADMINISTRATOR means the person or persons who administer the Plan.

       The Plan Administrator is the Employer.

       PLAN YEAR means a period beginning on a Yearly Date and ending on the day
       before the next Yearly Date.

       PRE-89 ACCRUED BENEFIT ADJUSTMENT means an adjustment which shall be
       applied to determine a Participant's benefit, as defined under the
       Associated Plan.

       PRESENT VALUE means the current value of a benefit payable on a specified
       form and on a specified date. Present Value is determined pursuant to the
       definition of present value under the Associated Plan.

       REENTRY DATE means the date a former Active Participant reenters the
       Plan. See the ACTIVE PARTICIPANT SECTION of Article II.

       RETIREMENT DATE means the date a retirement benefit will begin and is a
       Participant's Early, Normal or Late Retirement Date, as the case may be.

       SOCIAL SECURITY BENEFIT means the monthly payment of primary insurance
       benefits determined for a Participant.

       The benefits shall be determined by applying a salary scale, projected
       backwards, to the Participant's pay as of any date of determination. The
       salary scale used shall be the actual change in the average wages from
       year to year as determined by the Social Security Administration.

       SUPPLEMENTAL BENEFIT means an amount of monthly retirement benefit,
       determined according to Section 4.01.

       TRUST means an agreement of trust between the Employer and Trustee
       established for the purpose of holding and distributing the Trust Fund
       under the provisions of the Plan. The Trust wilt provide for the
       investment of all or any portion of the Trust Fund in the Group Contract.

       TRUST FUND means the total funds held under the Trust for the purpose of
       providing benefits for Participants. These funds result from
       Contributions made under the Plan which are forwarded to the Trustee to
       be deposited in the Trust Fund as provided in the INVESTMENT OF
       CONTRIBUTIONS SECTION of Article III. The Trust Fund shall be valued
       annually at current fair market value on the date used for

ARTICLE I                              8
   13

       computing plan costs for minimum funding purposes and, at the discretion
       of the Trustee, may be valued more frequently. The valuation shall take
       into consideration investment earnings credited, expenses charged,
       payments made and changes in the value of the assets held in the Trust
       Fund.

       TRUSTEE means the trustee or trustees under the Trust. The term Trustee
       as it is used in this Plan is deemed to include the plural unless the
       context clearly indicates otherwise.

       YEARLY DATE means January 1, 1982, and the same day of each following
       year.

ARTICLE I                              9
   14

                                   ARTICLE II

                                  PARTICIPATION

SECTION 2.01--ACTIVE PARTICIPANT.

     (a)  An Employee shall first become an Active Participant (begin active
          participation in the Plan) on the earliest date on or after January 1,
          1996, on which he is an Eligible Employee. This date is his Entry
          Date.

          Each Employee who was an Active Participant under the Plan on December
          31, 1995, shall continue to be an Active Participant if he is still an
          Eligible Employee on January 1, 1996, and his Entry Date shall not
          change.

     (b)  An Inactive Participant shall again become an Active Participant
          (resume active participation in the Plan) on the date he again
          performs an hour of service as an Eligible Employee. This date is his
          Reentry Date.

          Upon again becoming an Active Participant, he shall cease to be an
          Inactive Participant.

     (c)  A former Participant shall again become an Active Participant (resume
          active participation in the Plan) on the date he again performs an
          hour of service as an Eligible Employee. This date is his Reentry
          Date.

SECTION 2.02--INACTIVE PARTICIPANT.

     An Active Participant shall become an Inactive Participant (stop accruing
benefits under the Plan) on the earliest of the following:

     (a)  The date on which he ceases to be an Eligible Employee (on his
          Retirement Date if he ceases to be an Eligible Employee within one
          month of his Retirement Date).

     (b)  The effective date of complete termination of the Plan.

     An Employee or former Employee who was an Inactive Participant under the
Plan on December 31, 1995, shall continue to be an Inactive Participant on
January 1, 1996. Eligibility for any benefits payable to him or on his behalf
and the amount of the benefits shall be determined according to the provisions
of the prior document, unless otherwise stated in this document.

SECTION 2.03--CESSATION OF PARTICIPATION.

     A Participant, whether active or inactive, shall cease to be a Participant
on the earlier of the following:

     (a)  The date of his death.

     (b)  The date he receives a distribution of his entire benefit under the
          Plan.

ARTICLE II                             10
   15

                                   ARTICLE III

                                  CONTRIBUTIONS

SECTION 3.01--EMPLOYER CONTRIBUTIONS.

     The amount and time of Employer Contributions shall be determined based on
actuarial valuations and mendations as to the amounts required to fund benefits
under this Plan.

SECTION 3.02--INVESTMENT OF CONTRIBUTIONS.

     All Contributions are forwarded by the Trustee to. be deposited in the
Trust Fund. Investment of Contributions is governed by the provisions of the
Trust, Group Contract and any other funding arrangement in which the Trust is or
may be invested.

     Plan assets are not held for the exclusive benefit of Participants or their
Beneficiaries.

ARTICLE III                            11
   16

                         AMEND. NO. 1 PAGE DTD. 1-1-97
                         -----------------------------

                                   ARTICLE IV

                               RETIREMENT BENEFITS

SECTION 4.01--ACCRUED BENEFIT.

     An Active Participant's monthly Accrued Benefit as of any date will be
equal to the greatest of (a) reduced by (c), or (b) reduced by (c) below:

     (a)  Supplemental Benefit: For an Active Participant whose Average Monthly
          Compensation is at least 125% of the current salary minimum used in
          the definition of a highly compensated employee under an 414(q) of the
          Code, an amount equal to the sum of (1) and (2) below reduced by (3)
          below:

          (1)  An amount equal to (i) 70.5% of his Average Compensation,
               multiplied by (ii) his Pre-89 Accrued Benefit Adjustment.

          (2)  An amount equal to (i) 65% of his Average Compensation,
               multiplied by (ii) his Accrued Benefit Adjustment.

          (3)  An amount equal to (i) his Social Security Benefit multiplied by
               (ii) the sum of his Pre-89 Accrued Benefit Adjustment and his
               Accrued Benefit Adjustment.

     (b)  Excess Benefit: For any Active Participant, an amount equal to his
          accrued benefit under the Associated Plan, determined as if the limits
          of Section 415 and 401(a)(17) of the Code were not operative.

     (c)  The normal form accrued benefit expected to be paid to the Participant
          under the Associated Plan at Retirement Date.

However, Accrued Benefit is modified as follows:

     The actual dollar amount of a Participant's Accrued Benefit at retirement
     may vary depending on his Average Compensation as defined under the
     Associated Plan on any given date.

SECTION 4.02--AMOUNT OF BENEFIT AT RETIREMENT.

     An Active Participant's retirement benefit on his Retirement Date shall be
equal to his Accrued Benefit on such date.

     An Active Participant's retirement benefit on his Early or Late Retirement
Date for (a), (b) and (c) in Section 4.01 above shall be equal to his Accrued
Benefit on such specified date, multiplied by the early or late retirement
factor derived from the table in Section 4.03.of the Associated Plan.

     An Active Participant's retirement benefit on the Normal Form shall not be
less than the greatest amount of benefit that would have been provided for him
had he retired on an earlier Retirement Date.

ARTICLE IV                             12
   17

     The Participant's retirement benefits shall be distributed to the
Participant according to the distribution of benefits provisions of Article VI.
The amount of payment under any form (other than the Normal Form) shall be
determined as provided under the OPTIONAL FORMS OF DISTRIBUTION AND DISTRIBUTION
REQUIREMENTS SECTION of Article VI.

ARTICLE IV                             13
   18

                          AMEND. NO. 2 PAGE DTD. 1-l-98
                          -----------------------------

                                    ARTICLE V

                                 OTHER BENEFITS

SECTION 5.01--DEATH BENEFITS.

     If a Participant dies before his Normal Retirement Date, monthly payments
shall be payable to the Participant's spouse in an amount equal to the
preretirement survivor annuity which would have been determined under the
Associated Plan, based on his Accrued Benefit under this Plan. The distribution
of death benefits shall be subject to the distribution of benefits provisions of
Article VI.

     Any death benefit after Normal Retirement Date will be determined by the
form of retirement benefit in effect on such date.

SECTION 5.02--VESTED BENEFITS.

     A Participant who becomes an Inactive Participant before retirement or
death will be entitled to a deferred monthly retirement benefit on the Normal
Form to begin on his Retirement Date. The deferred retirement benefit will be
equal to the Participant's Accrued Benefit from this Plan on the day before he
became an Inactive Participant.

     The amount of payment under any form (other than the Normal Form) shall be
determined as provided under the OPTIONAL FORMS OF DISTRIBUTION SECTION of
Article VI.

     If the Participant dies before his Normal Retirement Date, death benefits
shall be distributed according to the provisions of the DEATH BENEFITS SECTION
of Article V.

SECTION 5.03--COST OF LIVING ADJUSTMENT.

     For purposes of this Section, the following terms are defined:

     PAYEE means

     (a)  A Participant whose Retirement Date has occurred.

     (b)  A spouse who is entitled to payments under the DEATH BENEFITS SECTION
          of this Article.

     (c)  A Contingent Annuitant who is entitled to payments under a
          survivorship optional form on account of the death of the Participant.

     (d)  A Beneficiary who is entitled to payments under a certain and life
          optional form on account of the death of the Participant.

     PRICE INDEX means as of each January 1 the average of the Consumer Price
     Index (U.S. city average for all urban consumers, all items) for the
     immediately preceding calendar year, as published by the United States
     Department of Labor.

ARTICLE V                              14
   19

                            AMEND. NO. 2 PAGE DTD, 1-1-98

     ADJUSTMENT DATE means each March 1.

     ADJUSTMENT FACTOR means a number based on the quotient of (a) divided by
     (b) as shown in the following table:

     (a)  The Price Index as of such Adjustment Date.

     (b)  The Price Index as of the last previous Adjustment Date.

                  Quotient                        Adjustment Factor
                  --------                        -----------------
                 Less than 1                               1
                  1 to 1.10                    1 plus 75% of the excess
               1.l0 or greater                           1.075

     If the Adjustment Factor on any Adjustment Date is between 1 and 1.01, no
adjustment will be made on that Adjustment Date. However, on the next following
Adjustment Date the Adjustment Factor will be the product of the Adjustment
Factor normally determined for the current Adjustment Date and the immediately
preceding Adjustment Date.

     As of each Adjustment Date, the amount of the monthly payment derived from
his Accrued Benefit shall be changed to the amount determined by multiplying
such payment by the Adjustment Factor as of such Adjustment Date subject to the
following provisions:

     (a)  No decrease shall become effective which would reduce the monthly
          payment for a Payee to an amount which would be less than the amount
          (called the Floor) he would have received had the provisions of this
          Section never been in effect except that a new Floor shall be created
          (1) at the Participant's Normal Retirement Date or (2) on the date of
          such Participant's death before his Normal Retirement Date.

     (b)  A Participant or a Participant's spouse will have the amount of any
          increase in the amount of monthly payment for him on his first
          Adjustment Date multiplied by the ratio of (1) to (2) below:

          (1)  The number of complete months he has been a Payee prior to such
               Adjustment Date.

          (2)  12.

SECTION 5.04--DISABILITY BENEFITS.

     An Active Participant shall continue to accrue benefits under the Plan if
he becomes Totally and Permanently Disabled as described in the Associated Plan
before his Retirement Date (Normal Retirement Date, if earlier). An Active
Participant who becomes Totally and Permanently Disabled on or after September
1, 1990, shall not continue to accrue benefits unless such disability (1)
continues uninterruptedly for at least one year and (2) he will have completed
10 or more years of Vesting Service under the Associated Plan at the end of that
one- year period.

     Accrual Service for a Participant who is continuing to accrue benefits
shall be credited as one day of service for each day (without regard to the one
year. limitation) he is Totally and Permanently Disabled to the extent it has
not already been credited.

ARTICLE V                              15
   20

                          AMEND. NO. 2 PAGE DTD. 1-1-98
                          -----------------------------

     For purposes of determining Vesting Service under the Associated Plan,
Severance from Service Date shall not occur during any period when he is Totally
and Permanently Disabled.

     Compensation for a Participant who is continuing to accrue benefits shall
be deemed to be the greater of (1) his Compensation for the calendar year prior
to the calendar year in which he became Totally and Permanently Disabled subject
to the adjustment described in the COST OF LIVING ADJUSTMENT SECTION of Article
V, or (2) his compensation for the current calendar year.

ARTICLE V                              16
   21

                          AMEND. NO. 2 PAGE DTD. l-1-98
                          -----------------------------

                                   ARTICLE VI

                WHEN BENEFITS START AND DISTRIBUTION OF BENEFITS

     Any benefit distributed according to the provisions of this article will be
paid from the general assets of the Employer. Participants have no greater
rights with regard to such benefit than any other general creditor of the
Employer.

SECTION 6.01--WHEN BENEFITS START.

     Benefits under the Plan begin when a Participant starts benefits under the
Associated Plan.

SECTION 6.02--AUTOMATIC FORMS OF DISTRIBUTION.

     The automatic form of retirement benefit payable to or on behalf of a
Participant shall be the same as the form of benefit being paid under the
Associated Plan.

SECTION 6.03--OPTIONAL FORMS OF DISTRIBUTION AND DISTRIBUTION REQUIREMENTS.

     The optional forms of retirement benefit shall be the optional forms
available under the Associated Plan. If an optional form is chosen under the
Associated Plan, that optional form will also be in effect under this Plan. The
benefit payable on any optional annuity form available (other than the Normal
Form) shall be the Actuarial Equivalent of the benefit that would otherwise be
payable on the Normal Form.

SECTION 6.04--DISTRIBUTIONS UNDER QUALIFIED DOMESTIC RELATIONS ORDERS.

     The Plan specifically permits distributions to an alternate payee under a
qualified domestic relations order, as defined in Code Section 414(p), at any
time, irrespective of whether the Participant has attained his earliest
retirement age, as defined in Code Section 414(p), under the Plan. A
distribution to an alternate payee before the Participant's attainment of
earliest retirement age, as defined in Code Section 414(p), is available only
if:

     (a)  the order specifies distributions at that time or permits an agreement
          between the Plan and the alternate payee to authorize an earlier
          distribution; and

     (b)  if the present value of the alternate payee's benefits under the Plan
          exceeds $5,000, and the order requires, the alternate payee consents
          to any distribution occurring before the Participant's attainment of
          earliest retirement age, as defined in Code Section 414(p).

Nothing in this section shall permit a Participant a right to receive a
distribution at a time otherwise not permitted under the Plan nor shall it
permit the alternate payee to receive a form of payment not permitted under the
Plan. Provided, however, in addition to the optional forms of retirement benefit
described in Section 6.03, a distribution required to be made under this section
may also be made in a single sum payment.

     The Plan Administrator shall establish reasonable procedures to determine
the qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Plan Administrator promptly shall notify the Participant
and an alternate payee named in the order, in writing, of the receipt of the
order and the Plan's procedures for determining the qualified status of the
order. Within a reasonable period of time after receiving

ARTICLE VI                             17
   22

                          AMEND. NO. 2 PAGE DTD. l-1-98
                          -----------------------------

the domestic relations order, the Plan Administrator shall determine the
qualified status of the order and shall notify the Participant and each
alternate payee, in writing, of its determination. The Plan Administrator shall
provide notice under this paragraph by mailing to the individual's address
specified in the domestic relations order, or in a manner consistent with
Department of Labor regulations. The Plan Administrator may treat as qualified
any domestic relations order entered before January 1, 1985, irrespective of
whether it satisfies all the requirements described in Code Section 414(p).

     If any portion of the Present Value of the Participant's Vested Accrued
Benefit is payable during the period the Plan Administrator is making its
determination of the qualified status of the domestic relations order, a
separate accounting shall be made of the amount payable. If the Plan
Administrator determines the order is a qualified domestic relations order
within 18 months of the date amounts are first payable following receipt of the
order, the payable amounts shall be distributed in accordance with the order. If
the Plan Administrator does not make its determination of the qualified status
of the order within the 18 month determination period, the payable amounts shall
be distributed in the manner the Plan would distribute if the order did not
exist and the order shall apply prospectively if the Plan Administrator later
determines the order is a qualified domestic relations order.

     The Plan shall make payments or distributions required under this section
by separate benefit checks or other separate distribution to the alternate
payee(s).

ARTICLE VI                             17a
   23

                                   ARTICLE VII

                               TERMINATION OF PLAN

     The Employer expects to continue the Plan indefinitely but reserves the
right to terminate the Plan in whole or in part at any time upon giving written
notice to all parties concerned.

     Upon complete termination of the Plan, no further Employees shall become
Participants, and no further Contributions shall be made.

ARTICLE VII                            18
   24

                          AMEND. NO. 2 PAGE DTD. 7-1-98
                          -----------------------------

                                  ARTICLE VIII

                             ADMINISTRATION OF PLAN

SECTION 8.01--ADMINISTRATION.

     The Plan Administrator has complete discretion to construe or interpret the
provisions of the Plan, including ambiguous provisions, if any, to determine
eligibility for benefits, and to determine the type and extent of benefits, if
any, to be provided. The Plan Administrator's decisions in such matters shall be
controlling, binding, and final. In any action to review any decision by the
Plan Administrator, the Plan Administrator shall be deemed to have exercised
discretion properly unless it is proven duly that the Plan Administrator has
acted arbitrarily and capriciously.

     Unless otherwise set out in the Plan or Group Contract, the Plan
Administrator may delegate recordkeeping and other duties which are necessary
for the administration of the Plan to any person or firm which agrees to accept
such duties. The Plan Administrator shall be entitled to rely upon all tables,
valuations, certificates and reports furnished by the consultant or actuary
appointed by the Plan Administrator and upon all opinions given by any counsel
selected or approved by the Plan Administrator.

     The Plan Administrator shall receive all claims for benefits by
Participants, former Participants, Beneficiaries, spouses, and Contingent
Annuitants. The Plan Administrator shall determine all facts necessary to
establish the right of any Claimant to benefits and the amount of those benefits
under the provisions of the Plan. The Plan Administrator may establish rules and
procedures to be followed by Claimants in filing claims for benefits, in
furnishing and verifying proofs necessary to determine age, and in any other
matters required to administer the Plan.

SECTION 8.02--PENSION PLAN INVESTMENT COMMITTEE.

     The Pension Plan Investment Committee of Principal Life Insurance Company
shall consist of a chairperson and other members appointed by the Chief
Executive Officer who shall serve until appointment of a successor or
resignation and without compensation for services as such.

     All expenses incurred shall be paid by the Employer.

     The Committee shall establish and periodically review the investment policy
with respect to Plan assets, and shall periodically report to the Management
Resources Committee.

     All acts and determinations of the Committee shall be duly recorded and all
such records shall be preserved in its custody.

SECTION 8.03--RECORDS.

     All acts and determinations of the Plan Administrator shall be duly
recorded. All these records, together with other documents necessary for the
administration of the Plan, shall be preserved in the Plan Administrator's
custody.

ARTICLE VIII                           19
   25

     Writing (handwriting, typing, printing), photostating, photographing,
microfilming, magnetic impulse, mechanical or electrical recording or other
forms of data compilation shall be acceptable means of keeping records.

SECTION 8.04--INFORMATION AVAILABLE.

     Any Participant in the Plan or any Beneficiary may examine copies of the
Plan description, latest annual report, any bargaining agreement, this Plan, the
Group Contract or any other instrument under which the Plan was established or
is operated. The Plan Administrator shall maintain all of the items listed in
this section in its office, or in such other place or places as it may designate
in order to comply with governmental regulations. These items may be examined
during reasonable business hours. Upon the written request of a Participant or
Beneficiary receiving benefits under the Plan, the Plan Administrator will
furnish him with a copy of any of these items. The Plan Administrator may make a
reasonable charge to the requesting person for the copy.

SECTION 8.05--CLAIM AND APPEAL PROCEDURES.

     A Claimant must submit any required forms and pertinent information when
making a claim for benefits under the Plan.

     If a claim for benefits under the Plan is denied, the Plan Administrator
shall provide adequate written notice to the Claimant whose claim for benefits
under the Plan has been denied. The notice must be furnished within 90 days of
the date that the claim is received by the Plan Administrator. The Claimant
shall be notified in writing within this initial 90-day period if special
circumstances require an extension of time needed to process the claim and the
date by which the Plan Administrator's decision is expected to be rendered. The
written notice shall be furnished no later than 180 days after the date the
claim was received by the Plan Administrator.

     The Plan Administrator's notice to the Claimant shall specify the reason
for the denial; specify references to pertinent Plan provisions on which denial
is based; describe any additional material and information needed for the
Claimant to perfect his claim for benefits; explain why the material and
information is needed; inform the Claimant that any appeal he wishes to make
must be in writing to the Plan Administrator within 60 days after receipt of the
Plan Administrator's notice of denial of benefits and that failure to make the
written appeal within such 60-day period shall render the Plan Administrator's
determination of such denial final, binding and conclusive.

     If the Claimant appeals to the Plan Administrator, the Claimant, or his
authorized representative, may submit in writing whatever issues and comments
the Claimant, or his representative, feels are pertinent. The Claimant, or his
authorized representative may review pertinent Plan documents. The Plan
Administrator shall reexamine ail facts related to the appeal and make a final
determination as to whether the denial of benefits is justified under the
circumstances. The Plan Administrator shall advise the Claimant of its decision
within 60 days of his written request for review, unless special circumstances
(such as a hearing) would make rendering a decision within the 60.day limit
unfeasible. The Claimant must be notified within the 60-day limit if an
extension is necessary. The Plan Administrator shall render a decision on a
claim for benefits no later than 120 days after the request for review is
received.

ARTICLE VIII                           20
   26

SECTION 8.06--DELEGATION OF AUTHORITY.

     All or any part of the administrative duties and responsibilities under
this article may be delegated by the Plan Administrator. The duties and
responsibilities delegated shall be set out here or in a separate written
agreement.

ARTICLE VIII                           21
   27

                                   ARTICLE IX

                               GENERAL PROVISIONS

SECTION 9.01--AMENDMENTS.

     The Board of Directors of the Employer reserves the right and authority to
amend the Plan provisions from time to time. In most instances this authority
has been delegated to the Employer who may amend this Plan at any period of time
as may be determined by Internal Revenue Service regulations) governmental
agency to which the Plan is subject.

SECTION 9.02--PROVISIONS RELATING TO THE INSURER.

     The obligations of an Insurer shall be governed solely by the provisions of
the Group Contract. The Insurer shall not be required to perform any act not
provided in or contrary to the provisions of the Group Contract. See the
CONSTRUCTiON SECTION of this article.

     Any issuer or distributor of investment contracts or securities is governed
solely by the terms of its policies, written investment contract, prospectuses,
security instruments, and any other written agreements entered into with the
Trustee.

     Such Insurer, issuer or distributor is not a party to the Plan or Trust,
nor bound in any way by the Plan or Trust provisions. Such parties shall not be
required to look to the terms of this Plan or Trust, nor to determine whether
the Employer, the Plan Administrator or the Trustee have the authority to act in
any particular manner or to make any contract or agreement.

     Until notice of any amendment or termination of this Plan or Trust has been
received by the Insurer at its home office or an issuer or distributor at their
principal address, they are and shall be fully protected in assuming that the
Plan or Trust has not been amended or terminated and in dealing with any party
acting as Trustee according to the latest information which they have received
at their home office or principal address.

SECTION 9.03--EMPLOYMENT STATUS.

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

SECTION 9.04--RIGHTS TO PLAN ASSETS.

     No Employee shall have any right to or interest in any assets of the Plan
upon termination of his employment or otherwise except as specifically provided
under this Plan, and then only to the extent of the benefits payable to such
Employee in accordance with Plan provisions. Any benefit payable will be
distributed from the general assets of the Employer. Participants have no
greater rights with regard to such benefit than any other general creditor of
the Employer.

     Any final payment or distribution to a Participant or his legal
representative or to any Beneficiaries, spouse or Contingent Annuitant of such
Participant under the Plan provisions shall be in full satisfaction of all
claims

ARTICLE IX                             22
   28

against the Plan, the Plan Administrator, the Trustee, the Insurer, and the
Employer arising under or by virtue of the Plan.

SECTION 9.05--BENEFICIARY.

     Each Participant may name a Beneficiary to receive any death benefit (other
than any income payable to a Contingent Annuitant) that may arise out of his
participation in the Plan, The Participant may change his Beneficiary from time
to time. The Participant's Beneficiary designation and any change of Beneficiary
shall be the same as under the Associated Plan. It is the responsibility of the
Participant to give written notice to the Insurer of the name of the Beneficiary
on a form furnished for that purpose.

     With the Employer's consent, the Plan Administrator may maintain records of
Beneficiary designations for Participants before their Retirement Dates. In that
event, the written designations made by Participants shall be filed with the
Plan Administrator. If a Participant dies before his Retirement Date, the Plan
Administrator shall certify to the Insurer the Beneficiary designation on its
records for the Participant.

     If, at the death of a Participant, there is no Beneficiary named or
surviving, any death benefit under the Group Contract shall be paid under the
applicable provisions of the Group Contract.

SECTION 9.06--NONALIENATION OF BENEFITS.

     Benefits payable under the Plan are not subject to the claims of any
creditor of any Participant, Beneficiary, spouse or Contingent Annuitant. A
Participant, Beneficiary, spouse or Contingent Annuitant does not have any
rights to alienate, anticipate, commute, pledge, encumber or assign any of such
benefits.

SECTION 9.07--CONSTRUCTION.

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

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

SECTION 9.08--LEGAL ACTIONS.

     The Plan, the Plan Administrator and the Trustee are the necessary parties
to any action or proceeding involving the assets held with respect to the Plan
or administration of the Plan or Trust. No person employed by the Employer, no
Participant, former Participant or their Beneficiaries or any other person
having or claiming to have an interest in the Plan is entitled to any notice of
process. A final judgment entered in any such action or proceeding shall be
binding and conclusive on all persons having or claiming to have an interest in
the Plan.

ARTICLE IX                             23
   29

                          AMEND. NO. 2 PAGE DTD. l-l-98
                          -----------------------------

SECTION 9.09--WORD USAGE.

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

SECTION 9.1O--SMALL AMOUNTS.

     If the Present Value of the Participant's deferred Accrued Benefit does not
exceed $5,000, such Present Value shall be payable in a single sum as of the
Participant's Retirement Date or the date he ceases to be an Active Participant
for any reason other than death. If the Participant's deferred Accrued Benefit
is zero on the date he ceases to be an Active Participant for any reason other
than death, he shall be deemed to have received a single-sum payment of the
Present Value of his deferred Accrued Benefit on such date. This is a small
amounts payment. Such small amounts payment shall be made to the Participant.
Such small amounts payment shall be in full settlement of all benefits otherwise
payable. If the Present Value of the Preretirement Survivor Annuity does not
exceed $5,000, the Present Value of any death benefit shall be payable in a
single sum as of the date the Participant dies if such Present Value is not more
than $5,000. This is a small amounts payment. Such small amounts payment shall
be made to the Participant's Beneficiary (Spouse, if the death benefit is
payable to the Spouse). Such small amounts payment is in full settlement of the
death benefit otherwise payable.

ARTICLE IX                             24
   30

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

     Executed this 21st day of August, 1996.
                   ----        ------    --

                                      PRINCIPAL MUTUAL LIFE INSURANCE COMPANY

                                      By: /s/ MAX F. JOHNSON
                                          -----------------------------------

                                      Vice President - Human Resources
                                      ---------------------------------------
                                                   Title

PLAN EXECUTION                         25
   1
                                                                    EXHIBIT 10.7

                              EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (the "Agreement") dated as of 5/19, 2000
("Agreement Date") by and between Principal Mutual Holding Company, an Iowa
mutual holding company (together with all successors thereto, "Mutual"),
Principal Financial Group, Inc., an Iowa corporation, Principal Financial
Services, Inc., an Iowa corporation, and Principal Life Insurance Company, an
Iowa corporation (together with all successors thereto, "Life") (each of the
foregoing referred to individually as a "Company" or collectively as
"Companies"), and J. Barry Griswell ("Executive"), a resident of Iowa. Executive
is currently serving as Chief Executive Officer of the Companies. The parties
desire to enter into this Agreement, which is intended to more fully embody the
agreement among the parties as to Executive's employment. This Agreement
supersedes the letters dated November 13, 1997 and January 26, 2000 from David
J. Drury to Executive. In consideration of the mutual agreements contained
herein, the Company and Executive agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

     The terms set forth below have the following meanings (such meanings to be
applicable to both the singular and plural forms, except where otherwise
expressly indicated):

     1.1 "Accrued Annual Bonus" means the amount of any Annual Bonus earned but
not yet paid with respect to any Fiscal Year ended prior to the Date of
Termination.

     1.2 "Accrued Base Salary" means the amount of Executive's Base Salary which
is accrued but not yet paid as of the Date of Termination.

     1.3 "Affiliate" means any Person that directly or indirectly controls, is
controlled by, is under common control with, a Company. For the purposes of this
definition, the term "control" when used with respect to any Person means (a)
the power to direct or cause the direction of management or policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, or (b) for purposes of Section 1.11 and
Article VII, the power substantially to influence the direction of strategic
management policies of such Person, and provided a Company has a direct or
indirect commercial relationship with such Person, all as determined by the
Human Resources Committee of the Board or its successor.

     1.4 "Agreement" -- see the introductory paragraph of this Agreement.

     1.5 "Agreement Date" -- see the introductory paragraph of this Agreement.

     1.6 "Anniversary Date" means any annual anniversary of the Agreement Date.

     1.7 "Annual Bonus" -- see Section 4.2.

     1.8 "Base Salary" -- see Section 4.1.

   2
     1.9  "Beneficiary" -- see Section 9.6.

     1.10 "Board" means the Board of Directors of Mutual unless the context
indicates otherwise.

     1.11 "Cause" means any of the following:

          (a) Executive's conviction of, plea of guilty to, or plea of nolo
     contendere to a felony or misdemeanor (other than a traffic-related felony
     or misdemeanor) that involves fraud, dishonesty or moral turpitude,

          (b) any willful action by Executive resulting in criminal, civil or
     internal Company conviction, sanction or judgment under Federal or State
     workplace harassment or discrimination laws or internal Company workplace
     harassment, discrimination or other workplace policy under which such
     action could be and could reasonably be expected to be grounds for
     immediate termination of a member of Senior Management (other than mere
     failure to meet performance goals, objectives, or measures),

          (c) Executive's habitual abuse of or addiction to alcohol or
     controlled substances, which interferes with the performance of
     Executive's duties,

          (d) Executive's willful and intentional material breach of this
     Agreement,

          (e) Executive's habitual neglect of duties, (other than resulting from
     Executive's incapacity due to physical or mental illness) which results in
     substantial financial detriment to any of the Companies or any Affiliate,

          (f) Executive's personally engaging in such conduct as results or is
     likely to result in (i) substantial damage to the reputation of any of the
     Companies or any Affiliate, as a respectable business, and (ii) substantial
     financial detriment (whether immediately or over time) to any of the
     Companies or any Affiliate,

          (g) Executive's willful and intentional material misconduct in the
     performance or gross negligence of his duties under this Agreement that
     results in substantial financial detriment to a Company or any Affiliate,

          (h) Executive's intentional failure (including a failure caused by
     gross negligence) to cause any of the Companies to comply with applicable
     law and regulations material to the business of such Company which results
     in substantial financial detriment to any of the Companies or any
     Affiliate, or

          (i) Executive's willful or intentional failure to comply in all
     material respects with a specific written direction of the Board that is
     consistent with normal business practice and not inconsistent with this
     Agreement and Executive's responsibilities hereunder.

For purposes of clauses (d), (e), (f), (g) and (h) of the preceding sentence,
Cause shall not mean the mere existence or occurrence of any one or more of the
following, and for purposes of clause

                                      -2-
   3
(i) of the preceding sentence, Cause shall not mean the mere existence or
occurrence of item (iv) below:

               (i) bad judgment,

               (ii) negligence, other than Executive's habitual neglect of
          duties or gross negligence;

               (iii) any act or omission that Executive believed in good faith
          to have been in the interest of the Company (without intent of
          Executive to gain therefrom, directly or indirectly, a profit to
          which he was not legally entitled), or

               (iv) failure to meet performance goals, objectives or measures;

provided, that for purposes of clauses (c), (d), (e), (f), (g), (h) and (i), any
act or omission that is curable shall not constitute Cause unless the Company
gives Executive written notice of such act or omission that specifically refers
to this Section and, within 10 days after such notice is received by Executive,
Executive fails to cure such act or omission. Notwithstanding anything to the
contrary herein, any act or omission of which any member of the Board who is not
a party to such act or omission has had actual knowledge for at least six months
shall not constitute "Cause" under any clause of this Section.

     1.12 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.

     1.13 "Company" -- see the introductory paragraph to this Agreement.

     1.14 "Competitive Business" means as of any date any corporation or other
Person (and any branch, office or operation thereof) that engages in, or
proposes to engage in:

          (a) the underwriting, reinsurance, marketing or sale of(i) any form of
     insurance of any kind that any of the Companies as of such date does, or
     has under active consideration a proposal to, underwrite, reinsure, market
     or sell (any such form of insurance, a "Company Insurance Product") or (ii)
     any other form of insurance that is marketed or sold in competition with
     any Company Insurance Product, or

          (b) the sale of financial services which involve (i) the management,
     for a fee or other remuneration, of an investment account or fund (or
     portions thereof or a group of investment accounts or funds), (ii) the
     giving of advice, for a fee or other remuneration, with respect to the
     investment and/or reinvestment of assets or funds (or any group of assets
     or funds), or (iii) financial planning services, or

          (c) the design, implementation and administration of employee benefit
     plans, including plan documents, employee communications, reporting,
     disclosure, financial advice, investment advice, and fiduciary services, or

          (d) any other business that as of such date is a direct and material
     competitor of a Company and its Affiliates to the extent that prior to the
     Date of Termination any of

                                      -3-
   4
     the Companies or its Affiliates engaged at any time within 12 months in or
     had under active consideration a proposal to engage in such competitive
     business;

and that is located anywhere in the United States or anywhere outside of the
United States where such Company or its Affiliates is then engaged in, or has
under active consideration a proposal to engage in, any of such activities.

     1.15 "Date of Termination" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by or on behalf of Mutual) or
by Mutual (if such Notice is given by Executive), or any later date, not more
than 15 days after the giving of such Notice, specified in such notice, as of
which Executive's employment with the Companies shall be terminated; provided,
however, that:

               (i) if Executive's employment is terminated by reason of death,
          the Date of Termination shall be the date of Executive's death; and

               (ii) if Executive's employment is terminated by reason of
          Disability, the Date of Termination shall be the 30th day after
          Executive's receipt of the physician's certification of Disability,
          unless, before such date, Executive shall have resumed the full-time
          performance of Executive's duties; and

               (iii) if Executive terminates his employment without Good Reason,
          the Date of Termination shall be the 30th day after the giving of such
          Notice; and

               (iv) if no Notice of Termination is given, the Date of
          Termination shall be the last date on which Executive is employed by
          the Companies.

     1.16 "Demutualization" means a conversion of Mutual from a company
organized as a mutual company to a stock company, whether through
reorganization, merger, consolidation, re-incorporation or otherwise.

     1.17 "Disability" means a mental or physical condition which renders
Executive . unable or incompetent to carry out the material job responsibilities
which such Executive held or the material duties to which Executive was assigned
at the time the disability was incurred, which has existed for at least six
months and which in the certified opinion of a physician mutually agreed upon by
Mutual and Executive (which agreement neither party shall unreasonably withhold)
is expected to be permanent or to last for an additional duration in excess of
six months.

     1.18 "Employment Period" -- see Section 3.1.

     1.19 "Executive" -- see the introductory paragraph of this Agreement.

     1.20 "Fiscal Year" means the fiscal year used in connection with the
preparation of the consolidated financial statements of Mutual.

     1.21 "Good Reason" means the occurrence of any one of the following events
unless Executive specifically agrees in writing that such event shall not be
Good Reason:

                                      -4-
   5
          (a) any material breach of the Agreement by any of the Companies,
     including any of the following, each of which shall be deemed material:

               (i) any adverse change in the title, status, responsibilities,
          authorities or perquisites of Executive;

               (ii) any failure of Executive to be nominated, appointed or
          elected and to continue to be nominated, re-elected, or re-appointed
          as President and Chief Executive Officer of Mutual;

               (iii) any failure of Executive to be nominated, appointed or
          elected and to continue to be nominated, re-elected, or re-appointed
          as a member of the Board of Directors of Mutual or the Board of
          Directors of Life;

               (iv) causing or requiring Executive to report to anyone other
          than the Board of Mutual;

               (v) assignment to Executive of duties materially inconsistent
          with his position and duties described in this Agreement, including
          status, offices, or responsibilities as contemplated under Section 2.1
          or any other action by any of the Companies which results in an
          adverse change in such position, status, offices, titles or
          responsibilities;

               (vi) any reduction or failure to pay Executive's Base Salary in
          violation of Section 4.1 or his Annual Bonus in violation of Section
          4.2;

               (vii) any failure to grant or pay an LTIP Award or LTIP Bonus
          required under Section 4.3; or

               (viii) any reduction in bonus or incentive (including without
          limitation, the LTIP) opportunity; provided that no such reduction
          shall be deemed to occur merely because the Company revises or
          modifies the structure of or performance factors taken into account
          (or the degree to which any such performance factors are taken into
          account) under any bonus or incentive (including without limitation,
          the LTIP) plan or arrangement; provided further that the Executive
          shall not be treated less favorably than the other members of Senior
          Management;

provided that the creation, existence or appointment of a Chief Executive
Officer other than Executive of any subsidiary of Mutual shall not be deemed to
be Good Reason if such other Chief Executive Officer reports, directly or
indirectly, to Executive; and provided, further, that no act or omission
described in clauses (i) through (viii) of this Section shall constitute Good
Reason unless Executive gives Mutual written notice of such act or omission and
the Company fails to cure such act or omission within 30-days after delivery of
such notice (except that Executive shall not be required to provide such notice
in case of intentional acts or omissions by a Company or more than once in cases
of repeated acts or omissions); or

                                      -5-
   6
          (b) the failure of Mutual to assign this Agreement to its successor or
     the failure of a successor of Mutual, Life or the Company to expressly
     assume and agree to be bound by the Agreement; or

          (c) relocation of the Company's executive offices or Executive's own
     office location to a location that is outside the United States;

provided, however, that a Demutualization in and of itself shall not constitute
Good Reason. In the event of an occurrence or omission constituting Good Reason,
Executive shall not be entitled to terminate his employment for Good Reason
unless within 3 months after Executive first obtains actual knowledge of such an
event constituting Good Reason, he notifies Mutual of the events constituting
such Good Reason and of his intention to terminate employment for Good Reason by
a Notice of Termination.

     1.22 "including" means including without limitation.

     1.23 "Life" -- see the introductory paragraph to this Agreement.

     1.24 "LTIP" means, as applicable, the Long-Term Performance Plan of Life,
the 1999 Long-Term Performance Plan, and any of their respective successors or
other long-term incentive plans in which Senior Management is generally eligible
to participate.

     1.25 "LTIP Award" means an incentive compensation opportunity granted under
the LTIP.

     1.26 "LTIP Bonus" means the amount paid or earned in respect of an LTIP
Award.

     1.27 "LTIP Performance Period" means any performance period designated in
accordance with any LTIP approved by the Board of Life or any committee of the
Board of Life.

     1.28 "Mutual" -- see the introductory paragraph to this Agreement. If,
prior to the Date of Termination, Mutual Demutualizes (as defined herein), the
term "Mutual" shall, from and after the date of the Demutualization is
effective, refer to the Demutualized entity.

     1.29 "Notice of Termination" means a written notice of termination of
Executive's employment given in accordance with Section 9.12 by Mutual on behalf
of the Companies, or by Executive, as the case may be, which sets forth (a) the
specific termination provision in this Agreement relied upon by the party giving
such notice, (b) in reasonable detail the specific facts and circumstances
claimed to provide a basis for such Termination of Employment, and (c) if the
Date of Termination is other than the date of receipt of such Notice of
Termination, the Date of Termination.

     1.30 "Person" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization,
corporation, institution, public benefit corporation, entity or government
instrumentality, division, agency, body or department.

     1.31 "Resent Value Actuarial Equivalent" means an amount equal in value to
a benefit payable in a specified form on (or commencing on) a specified date,
based on the method

                                      -6-
   7
specified in the Supplemental Executive Retirement Plan for Employees, as
established January 1,1982, as amended and restated from time to time ("SERP"),
under the definition of "Actuarial Equivalent" (which refers to the definition
of such term in the Principal Pension Plan as established April 1, 1940, as
amended and restated from time to time) or the successor plan to the SERP,
provided that if the SERP no longer exists or such method is no longer specified
in the SERP (whether by reference to another plan or otherwise), then based on
the assumed rates of interest and mortality (weighted .65 male and .35 female)
under Section 417(e) of the Code for the month (generally published at the
beginning of the following month) prior to the month of the Executive's Date of
Termination.

     1.32 "Prorata Annual Bonus" means the product of(i) the Target Annual Bonus
(provided that no effect shall be given to any reduction in such Target Annual
Bonus that would qualify as Good Reason if Executive were to terminate his
employment on account thereof) multiplied by (ii) a fraction of which the
numerator is the number of days which have elapsed in such Fiscal Year through
the Date of Termination and the denominator of which is 365.

     1.33 "Retirement" means any Termination of Employment after Executive
reaches age 57, other than for Cause and other than for Good Reason.

     1.34 "Senior Management" means Executive Vice Presidents or higher level
officers of Mutual in the United States.

     1.35 "Target Annual Bonus" -- see Section 4.2.

     1.36 "Target Annual Goals" -- see Section 4.2.

     1.37 "Tax Gross-Up Payment" means an amount payable to Executive such that
after payment of Taxes on such amount there remains a balance sufficient to pay
the Taxes being reimbursed.

     1.38 "Taxes" means the incremental federal, state, local and foreign
income, employment, exercise other taxes payable by Executive with respect to
any applicable item of income.

     1.39 "Termination For Good Reason" means a Termination of Employment by
Executive for a Good Reason.

     1.40 "Termination of Employment" means a termination by the Companies or
Executive of Executive's employment with the Companies and their Affiliates.

     1.41 "Termination Without Cause" means a Termination of Employment by the
Companies for any reason other than Cause or Executive's death or Disability.

     1.42 "Voting Securities" of a corporation means securities of such
corporation that are entitled to vote generally in the election of directors of
such corporation.

                                      -7-
   8
     1.43 "Withholding Taxes" means any federal, state, provincial, local or
foreign withholding taxes and other deductions required to be paid in accordance
with applicable law by reason of compensation received pursuant to this
Agreement.

                                   ARTICLE II.

                                     DUTIES

     2.1 Duties. Mutual shall continue to employ Executive during the Employment
Period as its President and Chief Executive Officer, and Executive shall have
the authority, duties, and responsibilities as are commensurate and consistent
with such position and title, and as provided in, Mutual's by-laws. The Parties
acknowledge that as of the Agreement Date, Executive also serves as President
and Chief Executive Officer of Life. It is contemplated that, in connection with
each annual meeting or action by written consent in lieu thereof of members (or,
after any Demutualization, stockholders or their equivalent) of Mutual and of
Life during the Employment Period, the members (or, if applicable, stockholders)
of Mutual and of Life, respectively will elect Executive to their respective
Boards. Executive shall report solely to the Board of Mutual. During the
Employment Period, Executive shall be the most senior executive of Mutual and
shall have broad discretion and authority to manage and direct the day-to-day
affairs and operations of the Companies in compliance with applicable law,
including the sole authority to direct the strategic direction of the Companies,
except to the extent required in connection with the exercise by the Board of
its corporate governance duties and responsibilities under Mutual's by-laws and
other applicable law. During the Employment Period, Executive shall follow the
directives of the Board and shall meet with the Board on a periodic basis
sufficient to enable the Board to fulfill its corporate governance
responsibilities. All operating, staff, other executives, and divisions of the
Companies, excluding the governmental relations department which may at the
Board's discretion report to the Board or its delegate, shall report solely to
Executive, either directly or indirectly through subordinates of Executive who
report to Executive. During the Employment Period, Executive shall perform the
duties assigned to him hereunder, and, subject to Section 2.2, shall devote his
till business time, attention and effort, excluding any periods of disability,
vacation, or sick leave to which Executive is entitled, to the affairs of the
Companies and shall use his best efforts to promote the interests of the
Companies. The Executive acknowledges that his business time is not limited to a
fixed number of hours per week.

     2.2 Other Activities. Executive may serve on corporate, civic or charitable
boards or committees, deliver lectures, fulfill speaking engagements or teach at
educational institutions, and manage personal investments; provided that such
activities do not individually or in the aggregate significantly interfere with
the performance of Executive's duties under this Agreement.

                                  ARTICLE III.

                                EMPLOYMENT PERIOD

     3.1 Employment Period. Subject to the termination provisions hereinafter
provided, the term of Executive's employment under this Agreement (the
"Employment Period") shall

                                      -8-
   9
begin on the Agreement Date and end on the Anniversary Date which is three years
tier such date or, if later, such later date to which the Employment Period is
extended pursuant to the following sentence. On the first anniversary of the
Agreement Date and thereafter, the Employment Period shall be automatically
extended each day by one day to create a new two year term until, at any time
after the first anniversary of the Agreement Date, Mutual delivers written
notice (an "Expiration Notice") to Executive or Executive delivers an Expiration
Notice to Mutual, in either case, to the effect that the Agreement shall expire
on a date specified in the Expiration Notice (the "Expiration Date") that is not
less than two years after the date the Expiration Notice is delivered to Mutual
or the Executive, respectively; provided, however, the Employment Period shall
automatically end on Executive's 65th birthday (March 15, 2014) unless Mutual
delivers, any time prior to one year before such date of expiration, written
notice to Executive that the Agreement shall not so expire and shall instead,
subject to the prompt consent of Executive, expire (unless further extended by
mutual consent) on a date specified ill such notice. The employment of Executive
by Mutual shall not be terminated other than in accordance with Article VI.

                                   ARTICLE IV.

                                  COMPENSATION

     4.1 Salary. Executive shall be paid in accordance with normal payroll
practices (but not less frequently than monthly) an annual salary at a rate of
$850,000 per year ("Base Salary"). During the Employment Period, the Base Salary
shall be reviewed periodically and may be increased from time to time as shall
be determined by the Board, in accordance with normal Company administrative
practices for Senior Management after consultation with Executive. After any
such increase, the term "Base Salary" shall thereafter refer to the increased
amount. Any increase in Base Salary shall not. limit or reduce any other
obligation of the Company to Executive under this Agreement. Base Salary shall
not be reduced at any time without the express written consent of Executive;
provided that the Board may, in its discretion restructure or alter the time of
payment of Base Salary after Demutualization in order to enhance the
deductibility thereof, provided there is no economic detriment to the Executive
and that the Board and Executive shall cooperate in good faith in such
restructuring or alteration.

     4.2 Annual Bonus.

          (a) Executive shall be paid an annual bonus ("Annual Bonus") in
     accordance with the terms hereof for each Fiscal Year which begins or ends
     during the Employment Period. Executive shall be eligible for an Annual
     Bonus based upon target performance goals (the "Target Annual Goals"), as
     determined by the Board on an annual basis, after consultation with
     Executive and in accordance with normal Company administrative practices
     for Senior Management, which provides for a payment opportunity of at least
     the highest target level generally available to Senior Management under any
     Company annual bonus plan ("Target Annual Bonus") upon the Executive's
     achievement of the Target Annual Goals. The parties acknowledge that, as of
     the Agreement Date, the Annual Bonus is payable in accordance with the
     Company plan named PrinPay. The appropriate Board may restructure or alter
     the time of payment of the Annual Bonus in order to enhance the
     deductibility thereof after Demutualization, provided there is no

                                      -9-
   10
     economic detriment to the Executive and that the Board and Executive shall
     cooperate in good faith in such restructuring or alteration.

          (b) The entire Annual Bonus that is payable to Executive with respect
     to ti Fiscal Year shall be paid in cash, or such other medium as is
     generally applicable to members of Senior Management, as soon as
     practicable after the appropriate Board has determined whether and the
     degree to which Target Annual Goals have been achieved following the close
     of such Fiscal Year. In any event, the entire Annual Bonus that is payable
     to Executive with respect to a Fiscal Year shall be paid at the same time
     as the dual Bonus is paid to the other members of Senior Management, but in
     any event no later than 90 days after the end of the Fiscal Year.

     4.3 Long-Term Incentive Plan Bonus and Other Incentive Compensation.
Executive shall have the opportunity to participate in the LTIP (if such plan
exists) and any other incentive compensation plan or program available to Senior
Management at the highest available level under such plan or program. The
appropriate Board may restructure or alter the time of payment of amounts under
the LTIP or other incentive compensation plan or program in order to enhance the
deductibility thereof after Demutualization, provided there is no economic
detriment to the Executive and that the Board and Executive shall cooperate in
good faith in such restructuring or alteration.

     4.4 Savings and Retirement Plans. Executive shall be eligible to
participate during the Employment Period in any Company's savings and retirement
plans, practices, policies and programs, in accordance with the terms thereof,
at the highest available level, if any, applicable from time to time to members
of Senior Management, including any supplemental executive retirement plan.

                                   ARTICLE V.

                                 OTHER BENEFITS

     5.1 Welfare Benefits. During the Employment Period, Executive and his
family shall be eligible to participate in at the highest level, and shall
receive all benefits under, any Company's welfare benefit plans, practices,
policies and programs provided or made generally available by the Company to
Senior Management (including medical, prescription, dental, disability, salary
continuance, employee life, group life, dependent life, accidental death and
travel accident insurance plans and programs), in accordance with their terms as
in effect from time to time. Notwithstanding the foregoing, the Companies shall
provide Executive with disability insurance coverage on terms no less favorable
to Executive than those in effect on the Agreement Date (including, without
limitation, percentage of salary provided as a disability benefit, but subject
to any maximum limitation on the dollar amount applicable to Senior Management,
provided that such limitation shall not be applied to reduce the dollar amount
of the monthly amount of Executive's long term disability benefit below
$46,630.87). In addition, to the extent not covered in the first sentence of
this Section 5.1, Executive shall be entitled to reimbursement for an annual
executive physical examination at the Mayo Clinic or equivalent medical facility
of his choosing.

                                      -10-
   11
     5.2 Fringe Benefits. During the Employment Period, Executive shall be
entitled to fringe benefits generally applicable to Senior Management in
accordance with their terms as in effect from time to time.

     5.3 Vacation. During the Employment Period, Executive shall be entitled to
paid vacation time under the plans, practices, policies, and programs generally
applicable to members of Senior Management in accordance with their terms as in
effect from time to time.

     5.4 Expenses. Executive shall be promptly reimbursed for all actual and
reasonable employment-related business expenses he incurs during the Employment
Period in accordance with any Company's practices, policies, and procedures
generally applicable to members of Senior Management in accordance with their
terms as in effect from time to time, including the timely submission of
required receipts and accountings. In addition, Executive shall be entitled to
first-class air travel for business. Notwithstanding the foregoing, no expense
shall be reimbursed more than once.

                                   ARTICLE VI.

                              TERMINATION BENEFITS

     6.1 Termination for Cause or Other than for Good Reason, etc.

          (a) If Mutual terminates Executive's employment with the Companies for
     Cause or Executive terminates his employment other than for Good Reason,
     death or Disability, the Executive shall be entitled to receive immediately
     after the Date of Termination a lump sum amount equal to the sum of
     Executive's Accrued Base Salary and Accrued Annual Bonus, and Executive
     shall not be entitled to receive any severance or other payment, other than
     compensation and benefits which relate to or derive from Executive's
     employment with the Companies on or prior to the Date of Termination
     (including, without limitation, any deferrals under the LTIP) and which
     are otherwise payable in case of termination for Cause or other than for
     Good Reason, death or Disability, as applicable.

          (b) Executive's employment may be terminated for Cause only if(i)
     Mutual provides Executive (before the Date of Termination) with written
     notice of the Board meeting referred to in clause (ii) of this Section
     6.1(b) at least twenty days prior to such meeting and specifies in detail
     in writing the basis of a claim of Cause and provides Executive, with or
     without counsel, at Executive's election, an opportunity to be heard and
     present arguments and evidence on Executive's behalf at such meeting, (ii)
     the Mutual Board, by affirmative vote of not less than 2/3 of the entire
     membership of the Mutual Board (excluding the Executive's vote from any
     such determination) that the acts or omissions constitute Cause which
     Executive failed to cure after being given an opportunity to cure if
     required by Section 1.11, and to the effect that Executive's employment
     should be terminated for Cause and (iii) Mutual thereafter provides
     Executive a Notice of Termination which specifies in detail the basis of
     such Termination of Employment for Cause. Nothing in this Section 6.1 (b)
     shall preclude the Board, by majority vote, from suspending Executive from
     his duties, with pay at any time.

                                      -11-
   12
          6.2 Termination for Retirement, Death or Disability. If, before the
     end of the Employment Period, Executive's employment terminates due to his
     Retirement, death or Disability, Executive or his Beneficiaries, as the
     case may be, shall be entitled to receive immediately after the Date of
     Termination, a lump sum amount which is equal to the sum of Executive's
     Accrued Base Salary, Accrued Annual Bonus, and Prorata Annual Bonus.
     Executive's LTIP Bonus shall be paid according to the terms of the LTIP.

          6.3 Termination Without Cause or for Good Reason. In the event of a
     Termination Without Cause or a Termination for Good Reason (in either case
     occurring during the Employment Period), Executive shall be entitled to
     receive the following:

               (a) promptly after the Date of Termination, (but in no event
          later than ten business days after the Date of Termination) a lump sum
          amount equal to the sum of Executive's Accrued Base Salary, Accrued
          Annual Bonus and Prorata Annual Bonus;

               (b) promptly after the Date of Termination, (but in no event
          later than ten business days after the Date of Termination), a lump
          sum amount equal to the product of (i) the sum of Base Salary plus
          Target Annual Bonus for the Fiscal Year during which the Date of
          Termination occurs (provided that no effect shall be given to any
          reduction in Target Annual Bonus that would qualify as Good Reason if
          Executive were to terminate his employment on account thereof), plus
          the LTIP Bonus most recently earned prior to the Date of Termination,
          and multiplied by (ii) two;

               (c) for each LTIP Performance Period that is unexpired as of the
          Date of Termination, Executive shall be treated as he would be treated
          under the LTIP effect on the Agreement Date if (i) he terminated
          employment at age 57 other than for cause (as defined in the LTIP) and
          (ii) he retired ("LTIP Benefit"); provided that the discretion of the
          Committee shall not be exercised so as to treat Executive less
          favorably than other members of Senior Management; provided further
          that if such payment cannot be provided under the terms of the LTIP,
          then the Company shall pay amounts equal to such LTIP Benefit,
          reduced by amounts actually payable under the LTIP at the same time as
          they otherwise would have been paid;

               (d) the benefits specified in Section 5.1, except to the extent
          provided under Section 6.3(e), and Section 5.2 to which Executive is
          entitled as of the Date of Termination, for two years following his
          Date of Termination, subject to the terms of applicable plans,
          programs or policies; provided that the Executive shall pay the same
          amount for such benefits as covered members of Senior Management who
          are actively employed would pay; provided further that any coverage
          required to be offered by the Consolidated Omnibus Budget
          Reconciliation Act of 1985, as amended, shall begin after such
          benefits otherwise cease hereunder;

               (e) if the Date of Termination occurs prior to the Executive's
          57th birthday, the benefits equivalent to those payable under the
          Principal Welfare Benefit Plan for Employees calculated under the
          terms of such plan as if the Date of Termination occurred after
          Executive's 57th birthday, reduced by amounts actually payable under
          such plan, and if either Executive or the Company reasonably believes
          it is likely that such benefits

                                      -12-
   13

          cannot be provided on a tax-favored basis, the Company shall pay the
          cost of the insurance premium for such benefits;

               (f) if the Date of Termination occurs prior to Executive's 57th
          birthday, promptly, but in no event later than ten business days after
          the Date of Termination, an amount equal to the Present Value
          Actuarial Equivalent of the benefits to which Executive would be
          entitled if he had reached his 57th birthday prior to his Date of
          Termination and if he had accrued a number of years of service that is
          equal to the number of years of service he would have accrued had his
          Date of Termination been his 57th birthday under the Principal Pension
          Plan for Employees, and the Supplemental Executive Retirement Plan for
          Employees, reduced by the Present Value Actuarial Equivalent of
          benefits actually payable under such plans calculated as though such
          plans permitted payment at the Executive's Date of Termination by
          applying an early retirement factor that declines by 5% (from the
          factor utilized for termination of employment at Executive's actual
          age at termination of employment and upon commencement of early
          retirement at the earliest retirement age) for each year that
          Executive's Date of Termination precedes the earliest age at which
          early retirement is actually permitted under such plan;

               (g) all outstanding stock options, stock appreciation rights, and
          restricted stock shall become vested; and

               (h) key executive level outplacement services, the provider of
          which shall be selected by Executive, up to a maximum of $10,000;
          provided that in no event shall any amount be payable to ,Executive in
          lieu of his receipt of such services.

Notwithstanding anything herein to the contrary, the benefits provided in
Section 6.3 shall be provided only upon Executive's execution of a release and
waiver as described in Section 6.5.

     6.4 Other Rights. This Agreement shall not prevent or limit Executive's
continuing or future participation in any benefit, bonus, incentive or other
plan, program or policy provided by the Company and for which Executive may
qualify, and shall not impair the Company's rights to amend or terminate any
benefit, bonus, incentive or other plan program or policy; provided however that
no such amendment or termination shall treat Executive less favorably than other
Senior Management and Executive's benefits, bonus and incentives in the
aggregate shall not be reduced. Amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan, program or policy and
any other payment or benefit required by law at or after the Date of Termination
shall be payable in accordance with such plan, program or policy or applicable
law except as expressly modified by this Agreement.

     6.5 Waiver and Release. Notwithstanding anything herein to the contrary,
upon any Termination of Employment (other than due to death)

          (a) the Executive shall execute a release and waiver in form mutually
     agreed by Executive and the Board of Mutual (which agreement neither party
     shall unreasonably withhold) which releases, waives, and forever discharges
     the Companies, their Affiliates, and their respective subsidiaries,
     affiliates, employees, officers, shareholders, members,

                                      -13-
   14
     partners, directors, agents, attorneys, predecessors, successors and
     assigns, from and against any and all claims, liabilities, demands, causes
     of action, costs, expenses, attorneys' fees, damages and obligations of
     every kind and nature in law, equity, or otherwise, known and unknown,
     suspected and unsuspected, disclosed and undisclosed, including but not
     limited to any and all such claims and demands directly or indirectly
     arising out of or in any way connected with the Executive's employment with
     and services as a director of the Companies and their Affiliates; claims or
     demands related to compensation or other amounts under any compensatory
     arrangement, stock, stock options, or any other ownership interests in any
     of the Companies or any Affiliate, vacation pay, fringe benefits, expense
     reimbursements, severance benefits, or any other form of compensation or
     equity; claims pursuant to any federal, state, local law, statute of cause
     of action including, but not limited to, the federal Civil Rights Act of
     1964, as amended; the federal Age Discrimination in Employment Act of 1967,
     as amended; the federal Americans with Disabilities Act of 1990; tort law,
     contract law; wrongful discharge, discrimination; defamation; harassment;
     or emotional distress; provided that Executive's waiver and release shall
     not relieve the Companies from any of the following obligations, to the
     extent they are to be performed after the date of the release and waiver:
     (i) payment of amounts due under Sections 6.1, 6.2 or 6.3, as applicable,
     (ii) any obligations under the. second sentence of Section 6.4, and (iii)
     payment of any gross-up amount due under Article VIII; and provided
     further that (x) neither party shall release the other from his or its
     obligations under Article IX of this agreement, to the extent such
     obligations are to be performed after the Date of Termination, and (y)
     Executive shall not be precluded from defending against Cause Claims (as
     defined in Section 6.5(b)); and

          (b) the Company shall execute a release and waiver in form mutually
     agreed by Executive and the Board of Mutual (which agreement neither party
     shall unreasonably withhold) which releases, waives, and forever discharges
     the Executive and his executors, administrators, successors and assigns,
     from and against any and all claims, liabilities, demands, causes of
     action, costs, expenses, attorneys' fees, damages and obligations of every
     kind and nature in law, equity, or otherwise, known and unknown, suspected
     and unsuspected, disclosed and undisclosed, including but not limited to
     any and all such claims and demands directly or indirectly arising out of
     or in any way connected with the Executive's employment with or service as
     a director of the Companies and their Affiliates, but excluding any such
     claims liabilities, demands, causes of action, costs, expenses, attorneys'
     fees, damages or obligations arising out of or in any way connected with
     events, acts or conduct giving rise to or in any way connected with
     Executive's Termination of Employment for Cause ("Cause Claims"), provided,
     however, that (i) neither party shall release the other from his or its
     obligations under Article IX of this agreement, to the extent such
     obligations are to be performed after the Date of Termination, and (ii)
     Executive shall not be precluded from defending against Cause Claims.

          (c) Executive hereby agrees that the execution of this Agreement is
     adequate consideration for the execution of such a release, and hereby
     acknowledges that the Companies would not have executed this Agreement had
     Executive not agreed to execute such a release.

                                      -14-
   15

                                  ARTICLE VII.

                              RESTRICTIVE COVENANTS

     7.1 Non-Competition. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the second anniversary of the Date
of Termination (whether or not during the Term), directly or indirectly, in any
capacity:

          (a) engage or participate in, become employed by, serve as a director
     of, or render advisory or consulting or other services in connection with,
     any Competitive Business; provided, however, that after the Date of
     Termination this Section 7.1(a) shall not preclude Executive from being an
     employee of, or consultant to, any business unit of a Competitive Business
     if (i) such business unit does not qualify as a Competitive Business in its
     own right and (ii) Executive does not have any direct or indirect
     involvement in, or responsibility for, any operations of such Competitive
     Business that cause it to qualify as a Competitive Business; or

          (b) make or retain any financial investment, whether in the form of
     equity or debt, or own any interest, in any Competitive Business; provided,
     however, that nothing in this subsection shall restrict Executive from
     making an investment in any Competitive Business if such investment (i)
     represents no more than 1% of the aggregate market value of the outstanding
     capital stock or debt (as applicable) of such Competitive Business, (ii)
     does not give Executive any right or ability, directly or indirectly, to
     control or influence the policy decisions or management of such Competitive
     Business, and (iii) does not create a conflict of interest between
     Executive's duties under this Agreement and his interest in such
     investment.

     7.2 Non-Solicitation. Executive shall not at any time during the period
beginning on the Agreement Date and ending on the second anniversary of the Date
of Termination (whether or not during the Term), directly or indirectly:

          (a) other than in connection with the good-faith performance of his
     duties as an officer of any of the Companies, encourage any employee or
     agent of the Companies or any Affiliate to terminate his relationship with
     any of the Companies or any Affiliate;

          (b) solicit the employment of or the engagement as a consultant or
     advisor of, any employee or agent of any of the Companies or any Affiliate
     (other than by the Company or an Affiliate), or cause or encourage any
     Person to do any of the foregoing;

          (c) establish (or take preliminary steps to establish) a business
     with, or encourage others to establish (or take preliminary steps to
     establish) a business with, any employee or agent of the Company or any
     Affiliate; or

          (d) interfere with the relationship of any of the Companies with, or
     endeavor to entice away from any of the Companies, any Person who or which
     at any time during the period commencing one year prior to the Agreement
     Date was or is a material client or material supplier of, or maintained a
     material business relationship with, any of the Companies or an Affiliate.

                                      -15-
   16

     7.3 Confidentiality The Executive acknowledges that in the course of
performing services for the Companies and Affiliates, he may create, develop,
learn of, receive or contribute non-public information, ideas, processes,
methods, designs, devices, inventions, data, models and other information
relating to the Companies and their Affiliates or their products, services,
businesses, operations, employees or customers, whether in tangible or
intangible form, and that the Companies or their Affiliates desire to protect
and keep secret and confidential, including trade secrets and information from
third parties that the Companies or their Affiliates are obligated to keep
confidential ("Confidential Information"). Confidential Information shall not
include: (i) information that is or becomes generally known through no fault of
Executive; (ii) information received from a third party outside of the Company
that was disclosed without a breach of any confidentiality obligation; or (iii)
information approved for release by written authorization of the Company. The
Executive recognizes that all such Confidential Information is the sole and
exclusive property of the Companies and their Affiliates, and that disclosure of
Confidential Information would cause damage to the Companies and their
Affiliates. The Executive agrees that, except as required by the duties of his
employment with any of the Companies or any of their and/or its Affiliates and
except in connection with enforcing the Executive's rights under this Agreement
or if compelled by a court or governmental agency, in each case provided that
prior written notice is given to Mutual, he will not, without the consent of
Mutual, willfully disseminate or otherwise disclose, directly or indirectly, any
Confidential Information obtained during his employment with any of the
Companies or their Affiliates, and will take all necessary precautions to
prevent disclosure, to any unauthorized individual or entity inside or outside
the Company, and will not use the Confidential Information or permit its use for
the benefit of Executive or any other person or entity other than the Companies
or the Affiliates. These obligations shall continue during and after the
termination of Executive's employment (whether or not during the Employment
Period).

     7.4 Intellectual Property. During the employment period, Executive shall
disclose immediately to the Company all ideas, inventions and business plans
that he makes, conceives, discovers or develops alone or with others during
the course of his employment with the Company, including any inventions,
modifications, discoveries, developments, improvements, computer programs,
processes, products or procedures (whether or not protectable upon application
by copyright, patent, trademark, trade secret or other proprietary rights)
("Work Product") that: (i) relate to the business of the Company or any customer
or supplier to the Company or any of the products or services being developed,
manufactured, sold or otherwise provided by the Company or that may be used in
relation therewith; or (ii) result from tasks assigned to Executive by the
Company; or (iii) result from the use of the premises or personal property
(whether tangible or intangible) owned, leased or contracted for by the Company.
Executive agrees that any Work Product shall be the property of the Company and,
if subject to copyright, shall be considered a "work made for hire" within the
meaning of the Copyright Act of 1976, as amended (the "Act). If and to the
extent that any such Work Product is found as a matter of law not to be a "work
made for hire" within the meaning of the Act, Executive expressly assigns to the
Company all right, title and interest in and to the Work Product, and all copies
thereof, and the copyright, patent, trademark, trade secret and all their
proprietary rights in the Work Product, without further consideration, free corn
any claim, lien for balance due or rights of retention thereto on the part of
Executive.

                                      -16-
   17

          (a) The Company hereby notifies Executive that the preceding paragraph
     does not apply to any inventions for which no equipment, supplies,
     facility, or trade secret information of the Company was used and which was
     developed entirely on the Executive's own time, unless: (i) the invention
     relates (a) to the Company's business, or (b) to the Company's actual or
     demonstrably anticipated research or development, or (ii) the invention
     results from any work performed by the Executive for the Company.

          (b) Executive agrees that upon disclosure of Work Product to the
     Company, Executive will, during his employment and at any time thereafter,
     at the request and cost of the Company, execute all such documents and
     perform all such acts as the Company or its duly authorized agents may
     reasonably require: (i) to apply for, obtain and vest in the name of the
     Company alone (unless the Company otherwise directs) letters patent,
     copyrights or other analogous protection in any country throughout the
     world, and when so obtained or vested to renew and restore the same; and
     (ii) to defend any opposition proceedings in respect of such applications
     and arty opposition proceedings or petitions or applications for revocation
     of such letters patent, copyright or other analogous protection.

          (c) In the event that the Company is unable, after reasonable effort,
     to secure Executive's signature on any letters patents, copyright or other
     analogous protection relating to Work Product, whether because of
     Executive's physical or mental incapacity or for any other reason
     whatsoever, Executive hereby irrevocably designates and appoints the
     Company and its duly authorized officers and agents as his agent and
     attorney-in-fact, to act for and on his behalf to execute and file any such
     application or applications and to do all other lawfully permitted acts to
     further the prosecution and issuance of letters patent, copyright and ether
     analogous protection with the same legal force and effect as if personally
     executed by Executive.

     7.5 Reasonableness of Restrictive Covenants.

          (a) Executive acknowledges that the covenants contained in Sections
     7.1, 7.2, 7.3 and 7.4 are reasonable in the scope of the activities
     restricted, the geographic area covered by the restrictions, and the
     duration of the restrictions, and that such covenants are reasonably
     necessary to protect the Companies' relationships with their employees,
     clients and suppliers. Executive further acknowledges such covenants are
     essential elements of this Agreement and that, but for such covenants, the
     Companies would not have entered into this Agreement.

          (b) The Companies and Executive have each consulted with their
     respective legal counsel and have been advised concerning the
     reasonableness and propriety of such covenants. Executive acknowledges that
     his observance of the covenants contained in Sections 7.1, 7.2, 7.3 and 7.4
     will not deprive him of the ability to earn a livelihood or to support his
     dependents.

          7.6 Right to Injunction; Survival of Undertakings.

          (a) In recognition of the necessity of the limited restrictions
     imposed by Sections 7.1, 7.2, 7.3 and 7.4, the parties agree that it would
     be impossible to measure

                                      -17-
   18

     solely in money the damages that any of the Companies would suffer if
     Executive were to breach any of his obligations under such Sections.
     Executive acknowledges that any breach of any provision of such Sections
     would irreparably injure the Companies. Accordingly, Executive agrees that
     any of the Companies shall be entitled, in addition to any other remedies
     to which such Company may be entitled under this Agreement or otherwise, to
     an injunction to be issued by a court of competent jurisdiction, to
     restrain any actual breach, or threatened breach, of such provisions, and
     Executive hereby waives any right to assert any defense that any of the
     Companies has to adequate remedy at law for any such breach.

          (b) If a court determines that any of the covenants included in this
     Article VII are unenforceable in whole or in part because of such
     covenant's duration or geographical or other scope, such court may modify
     the duration or scope of such provision, as the case may be, so as to cause
     such covenant as so modified to be enforceable.

          (c) All of the provisions of this Article VII shall survive any
     Termination of Employment without regard to (i) the reasons for such
     termination or (ii) the expiration of the Employment Period.

          (d) No Company shall have any further obligation to pay or provide
     severance or benefits under Section 6.3 if a court determines that the
     Executive has breached any covenant in this Article VII

                                  ARTICLE VIII.

                  CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

     8.1 Tax Gross-Up Payment. If at any time or from time to time it shall be
determined that any payment to Executive pursuant to this Agreement or any other
payment or benefit ("Potential Parachute Payment") hereunder or otherwise would
be subject to the excise tax imposed by Section 4999 of the Code or any similar
tax payable under any United States federal, state, local, foreign or other law
("Excise Tax"), then Executive shall receive and Mutual shall pay or cause to be
paid a Tax Gross-Up Payment with respect to all such excise taxes and other
Taxes; provided, however, that this Article VIII shall be subject in its
entirety to any Change of Control agreement with Executive entered after the
Agreement Date by the Company. The Tax Gross-up Payment is intended to
compensate Executive for all such excise taxes and any federal, state, local,
foreign or other income, employment, or excise taxes or other taxes payable by
Executive with respect to the Tax Gross-Up Payment.

     8.2 Limitations on Gross-Up Payments.

          (a) Notwithstanding any other provision of this Article VIII, if the
     aggregate After-Tax Amount (as defined below) of the Potential Parachute
     Payments and Tax Gross-Up Payment that, but for this Section 8.2, would be
     payable to Executive, does not exceed 120% of After-Tax Floor Amount (as
     defined below), then no Tax Gross-Up Payment shall be made to Executive and
     the aggregate amount of Potential Parachute Payments payable to Executive
     shall be reduced (but not below the Floor Amount) to the

                                      -18-
   19

     largest amount which would both (i) not cause any Excise Tax to be payable
     by Executive and (ii) not cause any Potential Parachute Payments to become
     nondeductible by the Company by reason of Section 280G of the Code (or any
     successor provision). For purposes of the preceding sentence, Executive
     shall be deemed to be subject to the highest effective after-tax marginal
     rate of Taxes.

          (b) For purposes of this Agreement:

               (i) "After-Tax Amount" means the portion of a specified amount
          that would remain after payment of all Taxes paid or payable by
          Executive in respect of such specified amount; and

               (ii) "Floor Amount" means the greatest pre-tax amount of
          Potential Parachute Payments that could be paid to Executive without
          causing Executive to (become liable for any Excise Taxes in connection
          therewith; and

               (iii) "After-Tax Floor Amount" means the After-Tax Amount of the
          Floor Amount.

                                   ARTICLE IX.

                                  MISCELLANEOUS

     9.1 Approvals. The Companies represent and warrant to Executive they have
taken all corporate action necessary to authorize this Agreement.

     9.2 No Mitigation. In no event shall Executive be obligated to seek other
employment or take any other action to mitigate the amounts payable to
Executive under any of the provisions of this Agreement, nor shall the amount of
any payment hereunder be reduced by any compensation earned as a result of
Executive's employment by another employer, except that any continued welfare
benefits provided for by Section 6.3(d) shall not duplicate any benefits that
are provided to Executive and his family by such other employer and shall be
secondary to any coverage provided by such other employer.

     The Companies' obligation to make the payments provided for in this
Agreement and otherwise perform the obligations hereunder shall not (unless
Executive is terminated for Cause) be affected by any circumstances, including
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Companies may have against Executive.

     9.3 Enforcement.

          (a) The Company shall promptly reimburse Executive for all attorneys'
     fees, costs and expenses incurred by Executive in connection with the
     negotiation, execution and delivery of this agreement, up to a maximum of
     $18,000. If Executive incurs legal, accounting, expert witness or other
     fees, costs or expenses (including arbitration fees, costs or expenses) in
     an effort to secure, preserve, establish entitlement to, or obtain
     compensation or benefits under this Agreement, the Company shall promptly
     reimburse Executive for such fees, costs and expenses whether or not
     Executive is successful;

                                      -19-
   20

     provided, however, that no reimbursement shall be made of such expenses if
     Executive's assertion of rights was in bad faith and Executive does not
     prevail (after exhaustion of all available judicial remedies).

          (b) If the Companies fail to pay any amount provided under any
     provision of this Agreement when due, the Executive shall be entitled to
     interest, compounded monthly, on such amount at a rate equal to the lesser
     of (i) (A) the highest rate of interest charged by the relevant Company's
     principal lender on its revolving credit agreements, or (B) in the absence
     of such a lender, the prime commercial lending rate announced by The Wall
     Street Journal in effect from time to time during the period of such
     nonpayment, or (ii) the highest legally-permissible interest rate allowed
     to be charged under applicable law.

     9.4 Indemnification and Insurance. The Executive shall be indemnified and
held harmless by the Companies to the greatest extent permitted under applicable
Iowa law as the same now exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits a Company to
provide broader indemnification than was permitted prior to such amendment) and
the Companies' respective by-laws as such exist on the Agreement Date if the
Executive was, is, or is threatened to be, made a party to any pending,
completed or threatened action, suit, arbitration, alternate dispute resolution
mechanism, investigation, administrative hearing or any other proceeding whether
civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that the Executive is or was, or had agreed to
become, a director, officer, employee, agent, or fiduciary of a Company or any
other entity which the Executive is or was serving at the request of a Company
("Proceeding"), against all expenses (including all reasonable attorneys' fees)
and all claims, damages, liabilities and losses incurred or suffered by the
Executive or to which the Executive may become subject for any reason. A
Proceeding shall not include any proceeding to the extent it concerns or relates
to a matter described in Section 9.3(a). Upon receipt from Executive of (i) a
written request for an advancement of expenses, which Executive reasonably
believes will be subject to indemnification hereunder and (ii) a written
undertaking by Executive to repay any such amounts if it shall ultimately be
determined that Executive is not entitled to indemnification under this
Agreement or otherwise, the Companies shall advance such expenses to Executive
or pay such expenses for Executive, all in advance of the final disposition of
any such matter. During Executive's employment and thereafter, Companies shall
provide Executive with coverage under a director's and officer's liability
insurance policy in amounts no less than, and on terms no less favorable than,
those provided to senior executive officers and directors of the Companies on
the Agreement Date and in amounts no less than, and on terms no less favorable
than those, as provided to senior executive officers and directors of the
Companies from time to time.

     9.5 Cooperation With Regard to Litigation. The Executive agrees to
cooperate with the Companies during his employment with any of the Companies
(whether or not during the Employment Period) and thereafter (including
following Executive's termination of employment for any reason, whether or not
pursuant to this Agreement) by making himself reasonably available to testify on
behalf of the Companies or their Affiliates, in any action, suit or proceeding,
whether civil, criminal, administrative, or investigative and to assist each
Company or any of its Affiliates in any such action, suit, or proceeding by
providing information and

                                      -20-
   21
meeting and consulting with the Board of such Company or Affiliate or counsel
or representatives or counsel to the Company or its Affiliates, as reasonably
requested by the Board or such counsel. The Executive shall be entitled to
reimbursement for any expenses (including legal fees) reasonably incurred by the
Executive in connection with his compliance with the foregoing covenant;
provided, however, that during the Employment Period the Executive shall not be
reimbursed for his time spent in connection with his compliance with the
foregoing covenant. The Companies agree to pay Executive a per diem of $3,500
per day for each day of service (including travel days) performed by Executive
in accordance with this Section after Executive is no longer employed by the
Companies.

     9.6 Beneficiary. If Executive dies prior to receiving all of the amounts
payable to him in accordance with the terms and conditions of this Agreement,
such amounts shall be paid to the beneficiary ("Beneficiary") designated by
Executive in writing to the Company during his lifetime, or if no such
Beneficiary is designated, to Executive's estate. Such payments shall be made
in a lump sum to the extent so payable and, to the extent not payable in a lump
sum, in accordance with the terms of this Agreement. Such payments shall not be
less than the amount payable to Executive as if Executive had lived to the date
of payment and were the payee. Executive, without the consent of any prior
Beneficiary, may change his designation of Beneficiary or Beneficiaries at any
time or from time to time by submitting to the Company a new designation in
writing.

     9.7 Assignment; Successors. This Agreement is personal to Executive and he
may not assign his duties or obligations under it. No Company may assign its
respective rights and obligations under this Agreement without the prior written
consent of Executive, except to a successor to the Company's business which
expressly assumes the Company's obligations hereunder in writing. This Agreement
shall be binding upon and inure to the benefit of Executive, his estate and
Beneficiaries, the Companies and their successors and permitted assigns. Each
Company shall require any successor to all or substantially all of the business
and/or assets of such Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock, or otherwise, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent as such
Company would be required to perform if no such succession had taken place.

     9.8 Non-alienation. Except as is otherwise expressly provided herein,
benefits payable under this Agreement shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution or levy of any kind, either voluntary or
involuntary, prior to actually being received by Executive, and any such attempt
to dispose of any right to benefits payable hereunder shall be void.

     9.9 Severability. If all or any part of this Agreement is declared to be
unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any portion of this Agreement not declared to be unlawful or invalid.
Any provision so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such provision to
the fullest extent possible while remaining lawful and valid.

     9.10 Amendment; Waiver. This Agreement shall not be amended or modified
except by written instrument executed by Mutual and Executive. A waiver of any
term, covenant or

                                      -21-
   22

condition contained in this Agreement shall not be deemed a waiver of any other
term, covenant or condition, and any waiver of any default in any such term,
covenant or condition shall not be deemed a waiver of any later default thereof
or of any other term, covenant or condition.

     9.11 Arbitration, Any dispute, controversy or claim arising out of or in
connection with or relating to this Agreement or any breach or alleged breach
thereof shall be submitted to and settled by binding arbitration in Des Moines,
Iowa, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (or at any other place or under any other form of
arbitration mutually acceptable to the parties so involved). Any dispute,
controversy or claim submitted for resolution shall be submitted to three (3)
arbitrators, each of whom is a nationally recognized executive compensation
specialist. The Company involved in the dispute, controversy or claim, or Mutual
if more than one Company is so involved, shall select one arbitrator, the
Executive shall select one arbitrator and the third arbitrator shall be selected
by the first two arbitrators. Any award rendered shall be final and conclusive
upon the parties and a judgment thereon may be entered in the highest court of a
forum, state or federal, having jurisdiction. The expenses of the arbitration
shall be borne according to Section 9.3, except that in the discretion of the
arbitrators any award may include the fees and costs of a party's attorneys if
the arbitrator expressly determines that the party against whom such award is
entered has caused the dispute, controversy or claim to be submitted to
arbitration in bad faith or as a dilatory tactic. No arbitration shall be
commenced after the date when institution of legal or equitable proceedings
based upon such subject matter would be barred by the applicable statute of
limitations. Notwithstanding anything to the contrary contained in this Section
9.11 or elsewhere in this Agreement, either party may bring an action in the
Iowa District Court for Polk County, or the United States District Court for the
Southern District of Iowa, if jurisdiction there lies, in order to maintain the
status quo ante of the parties. The "status quo ante" is defined as the last
peaceable, uncontested status between the parties. However, neither the party
bringing the action nor the party defending the action thereby waives its right
to arbitration of any dispute, controversy or claim arising out of or in
connection or relating to this Agreement. Notwithstanding anything to the
contrary contained in this Section 9.11 or elsewhere in this Agreement, either
party may seek relief in the form of specific performance, injunctive or other
equitable relief in order to enforce the decision of the arbitrator. The parties
agree that in any arbitration commenced pursuant to this Agreement, the parties
shall be entitled to such discovery (including depositions, requests for the
production of documents and interrogatories) as would be available in a federal
district court pursuant to Rules 26 through 37 of the Federal Rules of Civil
Procedure. In the event that either party fails to comply with its discovery
obligations hereunder, the arbitrator(s) shall have full power and authority to
compel disclosure or impose sanctions to the full extent of Rule 37, Fed. R.
Civ. P.

     9.12 Notices. All notices hereunder shall be in writing and delivered by
hand, by nationally-recognized delivery service that guarantees overnight
delivery, or by first-class, registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:

     If to a Company, to:     Principal Mutual Holding Company
                              711 High Street
                              Des Moines, Iowa 50392
                              Attention: Karen Shaff
                              Facsimile No.:  (515) 235-9852

                                      -22-
   23

     With copy to:            Pamela Baker, Esq.
                              Sonnenschein Nath & Rosenthal
                              8000 Sears Tower
                              Chicago, Illinois 60606
                              Facsimile No.:  (312) 876-7934

     If to Executive, to:     (at his most recent home address or facsimile
                              number on file with the Company)

     With copy to:            Susan J. Daley
                              Altheimer & Gray
                              10 South Wacker Drive
                              Suite 4000
                              Chicago, Illinois 60606
                              Facsimile No.:  (312) 715-4800

Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice shall be effective when actually received
by the addressee.

     9.13 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.

     9.14 Captions. The captions of this Agreement are not a part of the
provisions hereof and shall have no force or effect.

     9.15 Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to the subject matter contained in the Agreement
and shall supersede all prior agreements, promises and representations regarding
employment, compensation, severance or other payments contingent upon
termination of employment, whether in writing or otherwise.

     9.16 Applicable Law, This Agreement shall be interpreted and construed in
accordance with the laws of the State of Iowa, without regard to its choice of
law principles.

     9.17 Survival of Executive's Rights. All of Executive's rights hereunder,
including his rights to compensation and benefits, and his obligations under
Article VIII hereof, shall survive the termination of Executive's employment or
the termination of this Agreement.

                                      -23-
   24

     9.18 Joint and Several Liability. The obligations of the Companies to
Executive under this Agreement shall be joint and several.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.

                                        PRINCIPAL MUTUAL HOLDING COMPANY

                                        By: /s/ DAVID J. DRURY
                                           -----------------------------------
                                        Its: Chairman
                                           -----------------------------------

                                        PRINCIPAL LIFE INSURANCE COMPANY

                                        By: /s/ DAVID J. DRURY
                                           -----------------------------------
                                        Its: Chairman
                                           -----------------------------------

                                        PRINCIPAL FINANCIAL GROUP, INC.

                                        By: /s/ DAVID J. DRURY
                                           -----------------------------------
                                        Its: Chairman
                                           -----------------------------------

                                        PRINCIPAL FINANCIAL SERVICES, INC.

                                        By: /s/ DAVID J. DRURY
                                           -----------------------------------
                                        Its: Chairman
                                           -----------------------------------

                                        J. BARRY GRISWELL

                                        /s/ J. BARRY GRISWELL
                                        --------------------------------------

                                      -24-

   1
                                                                    EXHIBIT 10.8

                          CHANGE OF CONTROL SUPPLEMENT
                     AND AMENDMENT TO EMPLOYMENT AGREEMENT

                              FOR J. BARRY GRISWELL
   2

                                TABLE OF CONTENTS

                                                                                          PAGE
                                                                                          ----
                                                                                    
Article I. Certain Definitions .......................................................     1

   1.1      "Accrued LTIP Bonus" .....................................................     1
   1.2      "Accrued Obligations" ....................................................     1
   1.3      "Annual Performance Period" ..............................................     2
   1.4      "Annualized Target LTIP Bonus" ...........................................     2
   1.5      "Article" ................................................................     2
   1.6      "Beneficial Owner" .......................................................     2
   1.7      "Board" ..................................................................     2
   1.8      "Bonus Plan" .............................................................     2
   1.9      "Cause" ..................................................................     2
   1.10     "Change of Control" ......................................................     2
   1.11     "Company" ................................................................     3
   1.12     "Company Certificate" ....................................................     3
   1.13     "Consummation Date" ......................................................     3
   1.14     "Continuity of Ownership" ................................................     3
   1.15     "Demutualization" ........................................................     4
   1.16     "Effective Date" .........................................................     4
   1.17     "Employment Agreement" ...................................................     4
   1.18     "Exchange Act" ...........................................................     4
   1.19     "Excise Taxes" ...........................................................     4
   1.20     "Good Reason" ............................................................     4
   1.21     "Gross-up Multiple" ......................................................     4
   1.22     "Gross-up Payment" .......................................................     4
   1.23     "Imminent Control Change" ................................................     4
   1.24     "Imminent Control Change Period" .........................................     5
   1.25     "including" ..............................................................     5
   1.26     "IRS" ....................................................................     5
   1.27     "IRS Claim" ..............................................................     5
   1.28     "LTIP Target Award" ......................................................     5
   1.29     "LTIP Outstanding Award" .................................................     6
   1.30     "Lump Sum Value" .........................................................     6
   1.31     "Maximum Annuity" ........................................................     6
   1.32     "Merger of Equals" .......................................................     6
   1.33     "Merger of Equals Cessation Date" ........................................     7
   1.34     "Mutual Incumbent Directors" .............................................     7
   1.35     "New LTIP" ...............................................................     7
   1.36     "Notice of Consideration" ................................................     7
   1.37     "Plans" ..................................................................     7
   1.38     "Post-Change Employment Period" ..........................................     7
   1.39     "Post-Merger of Equals Period" ...........................................     7
   1.40     "Potential Parachute Payment" ............................................     7
   1.41     "Pro-rata Annual Bonus" ..................................................     7
   1.42     "Pro-rata LTIP Bonus .....................................................     8

   3

                                TABLE OF CONTENTS
                                   (CONTINUED)

                                                                                               PAGE
                                                                                               ----

     1.44   "Refund Claim" ...............................................................      9
     1.45   "Reorganization Transaction" .................................................      9
     1.46   "Restricted Shares" ..........................................................      9
     1.47   "SEC" ........................................................................      9
     1.48   "SEC Person" .................................................................      9
     1.49   "Section" ....................................................................      9
     1.50   "SERP" .......................................................................      9
     1.51   "Stock Options" ..............................................................      9
     1.52   "Supplement Date" ............................................................      9
     1.53   "Supplement Term" ............................................................      9
     1.54   "Surviving Corporation" ......................................................      9
     1.55   "Target Annual Bonus" ........................................................     10
     1.56   "Taxes" ......................................................................     10
     1.57   "Termination Date" ...........................................................     10
     1.58   "Termination of Employment" ..................................................     10
     1.59   "25% Owner" ..................................................................     10
     1.60   "Voting Securities" ..........................................................     10

  Article II. Post-Change Employment Period and Imminent Control Change Period ...........     11

     2.1    Position and Duties ..........................................................     11
     2.2    Compensation .................................................................     11
     2.3    Stock Incentive Awards .......................................................     12
     2.4    Unfunded Deferred Compensation ...............................................     13
     2.5    Pro-rata Annual Bonus ........................................................     13
     2.6    Pro-rata LTIP Bonus ..........................................................     14

  Article III. Termination of Employment .................................................     14

     3.1    Disability ...................................................................     14
     3.2    Death ........................................................................     15
     3.3    Termination for Cause ........................................................     15
     3.4    Good Reason ..................................................................     17

  Article IV. Company's Obligations Upon Certain Terminations of Employment ..............     19

     4.1    Termination During the Post-Change Employment Period .........................     19
     4.2    Termination During a Post-Merger or Equals Period ............................     22
     4.3    Termination During an Imminent Control Change Period (with no Change
            of Control) ..................................................................     23
     4.4    Termination During an Imminent Control Change Period (which Culminates in a
            Change of Control) ...........................................................     24
     4.5    Waiver and Release ...........................................................     25
     4.6    Termination by the Company for Cause .........................................     25

                                       ii

   4

                               TABLE OF CONTENTS
                                  (CONTINUED)

                                                                                 PAGE
                                                                                 ----
                                                                           
   4.7     Termination by Executive Other Than for Good Reason .............     26
   4.8     Termination by the Company for Disability .......................     26
   4.9     If upon Death ...................................................     26

Article V. Certain Additional Payments by the Company ......................     27

   5.1     Gross-Up Payment ................................................     27
   5.2     Limitation on Gross-Up Payments .................................     28
   5.3     Additional Gross-up Amounts .....................................     29
   5.4     Amount Increased or Contested ...................................     29
   5.5     Refunds .........................................................     31

Article VI. Expenses, Interest and Dispute Resolution ......................     31

   6.1     Legal Fees and Other Expenses ...................................     31
   6.2     Interest ........................................................     32
   6.3     Binding Arbitration .............................................     32

Article VII. No Set-off or Mitigation; No Double Payment ...................     33

   7.1     No Set-off by Company ...........................................     33
   7.2     No Mitigation ...................................................     33
   7.3     No Double Payment ...............................................     33

Article VIII. Non-Exclusivity of Rights ....................................     33

   8.1     Waiver of Certain Other Rights ..................................     33
   8.2     Other Rights ....................................................     34
   8.3     No Right to Continued Employment ................................     34

Article IX. Miscellaneous ..................................................     34

   9.1     No Assignability ................................................     34
   9.2     Successors ......................................................     34
   9.3     Payments to Beneficiary .........................................     34
   9.4     Non-Alienation of Benefits ......................................     34
   9.5     Severability ....................................................     35
   9.6     Amendments ......................................................     35
   9.7     Notices .........................................................     35
   9.8     Continuing Validity of Employment Agreement .....................     35
   9.9     Counterparts ....................................................     36
   9.10    Governing Law ...................................................     36
   9.11    Captions ........................................................     36
   9.12    Number and Gender ...............................................     36

                                      iii
   5

                               TABLE OF CONTENTS
                                  (CONTINUED)

                                                                                 PAGE
                                                                                 ----
                                                                           
   9.13   Tax Withholding...................................................     36
   9.14   Waiver............................................................     36
   9.15   Joint and Several Liability.......................................     36
   9.16   Entire Agreement..................................................     37

                                       iv
   6

                          CHANGE-OF-CONTROL SUPPLEMENT
                      AND AMENDMENT TO EMPLOYMENT AGREEMENT

                                       FOR
                               J. BARRY GRISWELL

     THIS CHANGE OF CONTROL SUPPLEMENT and AMENDMENT TO EMPLOYMENT AGREEMENT
("Supplement and Amendment") dated as of October 19, 2000 (the "Supplement
Date") is made by and among Principal Mutual Holding Company, an Iowa mutual
holding company (together with all successors thereto, "Mutual"), Principal
Financial Group, Inc., an Iowa corporation, Principal Financial Services, an
Iowa corporation, and Principal Life Insurance Company, an Iowa corporation
(together with all successors thereto, "Life") (each of the foregoing referred
to individually as a "Company" or collectively as "Companies"), and J. BARRY
GRISWELL ("Executive").

                                    RECITALS

     The Companies have determined that it is in the best interests of the
Companies and their members, (and if, at the relevant time, any are stock
companies, their stockholders) to assure that the Companies will have the
continued service of Executive. The Companies also believe it is imperative to
reduce the distraction of Executive that would result from the personal
uncertainties caused by a pending or threatened change of control of Mutual, to
encourage Executive's full attention and dedication to the Companies, and to
provide Executive with compensation and benefits arrangements upon a change of
control which ensure that the expectations of Executive will be satisfied and
are competitive with those of similarly-situated businesses. This Supplement and
Amendment is intended to accomplish these objectives, and to amend Executive's
Employment Agreement with the Companies dated as of May 19,2000 (such agreement
as amended from time to time, and any successors thereto, the "Employment
Agreement") in order to coordinate it with certain provisions that apply in the
event of a Change of Control or Imminent Control Change.

                                      ARTICLE I.

                                 CERTAIN DEFINITIONS

     As used in this Supplement and Amendment, capitalized terms have the
meaning specified in the Employment Agreement as amended from time to time,
except as indicated below:

     1.1 "Accrued LTIP Bonus" means the amount of any LTIP Bonus earned but
either) deferred or not paid on or prior to the Effective Date, Merger of
Equals Cessation Date, or Termination Date, as applicable.

     1.2 "Accrued Obligations" means, as of any date, the sum of Executive's
Accrued Base Salary, Accrued Annual Bonus, Accrued LTIP Bonus, any accrued but
unpaid paid time off, and any other amounts and benefits which are then due to
be paid or provided to Executive by the Company, but have not yet been paid or
provided (as applicable).

   7

     1.3 "Annual Performance Period" -- see Section 2.2(b).

     1.4 "Annualized Target LTIP Bonus" means, in respect of any Termination
Date, an amount, based on the most recently granted LTIP Award for which the
LTIP Performance Period has not expired or terminated (disregarding for this
purpose the premature termination of any LTIP Performance Period that occurred
on or after the Effective Date), calculated as follows:

          (a) If the most recently granted LTIP Award was granted under the
     1999 Long-Term Performance Plan, the projected target award (stated as a
     percentage of Base Salary) as calculated at the beginning of the three-year
     award cycle which Executive would have been entitled to receive with
     respect to such most recent allocation of performance units as if "Gain
     from Operations" and "Return on Equity" (as such terms are defined in the
     1999 Long-Term Performance Plan) targets had been met.

          (b) If the most recently granted LTIP Award was granted under a New
     LTIP under which consecutive LTIP Performance Periods end each 12 months,
     the Executive's LTIP Target Award with respect to such most recent grant.

          (c) If the most recently granted LTIP Award was granted under a New
     LTIP under which consecutive LTIP Performance Periods end more or less
     frequently than each 12 months, the Executive's LTIP Target Award with
     respect to such most recent grant, multiplied by a fraction, the numerator
     of which is 12 and the denominator of which is the number of whole months
     between payments of LTIP Bonuses.

          (d) If the Executive has no LTIP Awards outstanding with respect to
     which the LTIP Performance Period has not yet ended, the amount shall be
     zero.

     1.5 "Article" means, unless the context otherwise requires, an article of
this Supplement.

     1.6 "Beneficial Owner" means such term as defined in Rule 13d-3 of the SEC
under the Exchange Act.

     1.7 "Board" means the Board of Directors of Mutual or, from and after the
effective date of a Reorganization Transaction, the Board of Directors of the
Surviving Corporation.

     1.8 "Bonus Plan" -- see Section 2.2(b).

     1.9 "Cause" -- see Section 3.3.

     1.10 "Change of Control" means, except as otherwise provided below, the
occurrence of any one or more of the following:

          (a) any SEC Person becomes the Beneficial Owner of 25% or more of the
     common stock of Mutual or of Voting Securities representing 25% or more of
     the combined voting power of all Voting Securities of Mutual (such an SEC
     Person, a "25% Owner"); or

          (b) the Mutual Incumbent Directors (determined using the Supplement
     Date as the baseline date) cease for any reason to constitute at least a
     majority of the Board; or

                                      -2-
   8

          (c) consummation of a merger, reorganization, consolidation, or
     similar transaction (any of the foregoing, a "Reorganization Transaction")
     where the Continuity of Ownership is not more than 60%; or

          (d) approval by the members of Mutual, if at the relevant time Mutual
     is a mutual life insurance holding company, or approval by the stockholders
     of Mutual, if at the relevant time Mutual is a stock company, of a plan or
     agreement for the sale or other disposition of all or substantially all of
     the consolidated assets of Mutual or a plan of liquidation of Mutual.

Notwithstanding the foregoing, a Change of Control shall not occur merely as a
result of (i) Demutualization, or (ii) an underwritten initial public offering
of common stock of Mutual as filed with the SEC, unless such initial public
offering results in any SEC Person becoming a 25% Owner. Notwithstanding the
occurrence of any of the foregoing events, a Change of Control shall not occur
with respect to Executive if, in advance of such event, Executive agrees in
writing that such event shall not constitute a Change of Control.

     1.11 "Company" - see the introductory paragraph to this Supplement.

     1.12 "Company Certificate" -- see Section 5.4(a).

     1.13 "Consummation Date" means the first date after an Imminent Control
Change upon which an Effective Date occurs, provided, however that one of the
following is satisfied:

          (a) the Imminent Control Change has not lapsed; or

          (b) the Imminent Control Change in effect upon such Effective Date is
     the last Imminent Control Change in a series of Imminent Control Changes
     unbroken by any period of time between the lapse of an Imminent Control
     Change and the occurrence of a new Imminent Control Change.

     1.14 "Continuity of Ownership" of a stated percentage means

          (a) if at the relevant time Mutual is a mutual life insurance holding
     company, the Persons who were the members of Mutual immediately before a
     Reorganization Transaction became, immediately after the consummation of
     such Reorganization Transaction, the direct or indirect owners of Voting
     Securities of the Surviving Corporation representing the stated
     percentage of the combined voting power of the then outstanding Voting
     Securities of the Surviving Corporation, in substantially the same
     respective proportions as such Person's ownership of Voting Securities of
     Mutual immediately before such Reorganization Transaction, and

          (b) if at the relevant time Mutual is a stock company, the Persons who
     were the direct or indirect owners of the outstanding common stock and
     Voting Securities of Mutual immediately before such Reorganization
     Transaction became, immediately after the consummation of such
     Reorganization Transaction, the direct or indirect owners of both the
     stated percentage of the then-outstanding common stock of the Surviving
     Corporation and Voting Securities representing the stated percentage of the
     combined voting power of the then-outstanding Voting Securities of the
     Surviving Corporation, in

                                      -3-
   9

     substantially the same respective proportions as such Persons' ownership of
     the common stock and Voting Securities of Mutual immediately before such
     Reorganization Transaction.

     1.15 "Demutualization," solely as used in this Supplement and Amendment,
means the conversion of Mutual from a mutual life insurance company to a stock
company (x) at least 50% of whose stockholders are persons who were members of
Mutual immediately prior to such transaction or a trust or separate account
holding the shares of Mutual for the benefit of such members or (y) owned by a
corporation at least 50% of the shares of which are held by the persons or trust
described under clause (x), excluding any such conversion that results in any
SEC Person becoming a 25% Owner.

     1.16 "Effective Date" means the date on which a Change of Control first
occurs during the Supplement Term.

     1.17 "Employment Agreement" - see the introductory paragraph of this
Supplement and Amendment.

     1.18 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     1.19 "Excise Taxes" -- see Section 5.1.

     1.20 "Good Reason" -- see Section 3.4.

     1.21 "Gross-up Multiple" -- see Section 5.1.

     1.22 "Gross-Up Payment" -- see Section 5.1.

     1.23 "Imminent Control Change" means, as of any date on or after the
Supplement Date and prior to the Effective Date, the occurrence of any one or
more of the following:

          (a) Mutual enters into an agreement the consummation of which would
     constitute a Change of Control;

          (b) Any SEC Person attempts to acquire 25% or more of the member
     interests in Mutual, as evidenced by filing or other certification of
     notice of such intent with any State's governmental agency established to
     regulate the insurance industry, which if consummated would constitute a
     Change of Control;

          (c) After Demutualization, any SEC Person commences a "tender offer"
     (as such term is used in Section 14(d) of the Exchange Act) or exchange
     offer, which, if consummated, would result in a Change of Control; or

          (d) After Demutualization, any SEC Person files with the SEC a
     preliminary or definitive proxy solicitation or election contest to elect
     or remove one or more members of the Board, which, if consummated or
     effected, would result in a Change of Control;

provided, however, that an Imminent Control Change will lapse and cease to
qualify as an Imminent Control Change:

                                      -4-
   10

               (i) With respect to an Imminent Control Change described in
          clause (a) of this definition, the date such agreement is terminated,
          cancelled or expires without a Consummation Date occurring;

               (ii) With respect to an Imminent Control Change described in
          clause (b) of this definition, the date such filing or other
          certification is withdrawn, expires or is denied or otherwise rejected
          by the relevant state regulators without a Consummation Date
          occurring;

               (iii) With respect to an Imminent Control Change described in
          clause (c) of this definition, the date such tender offer or exchange
          offer is withdrawn or terminates without a Consummation Date
          occurring;

               (iv) With respect to an Imminent Control Change described in
          clause (d) of this definition, (1) the date the validity of such proxy
          solicitation or election contest expires under relevant state
          corporate law, or (2) the date such proxy solicitation or election
          contest culminates in a stockholder vote, in either case without a
          Consummation Date occurring; or

               (v) The date a majority of the Mutual Incumbent Directors make a
          good faith determination that any event or condition described in
          clause (a), (b), (c) or (d) of this definition no longer constitutes
          an Imminent Control Change, provided that such determination may not
          be made prior to the six (6) month anniversary of the occurrence of
          such event.

Notwithstanding the foregoing, an Imminent Control Change shall not occur merely
as a result of (A) planning, or filing or certifying an intent with any state's
governmental agency established to regulate the insurance industry of a
Demutualization application, or (B) the planned underwritten initial public
offering of common stock of Mutual as filed with the SEC; provided, however,
that such initial public offering is not expected to result in any SEC Person
becoming a 25% Owner.

     1.24 "Imminent Control Change Period" means the period commencing on the
date of an Imminent Control Change (or the first Imminent Control Change in a
series of Imminent Control Changes unbroken by any period of time between the
lapse of an Imminent Control Change and the occurrence of a new Imminent Control
Change) and ending on the Consummation Date, or if earlier, the date an Imminent
Control Change lapses (without the prior or concurrent occurrence of a new
Imminent Control Change).

     1.25 "including" means including without limitation.

     1.26 "IRS" means the Internal Revenue Service of the United States of
America.

     1.27 "IRS Claim" -- see Section 5.4.

     1.28 "LTIP" means the 1999 Long-Term Performance Plan as amended from time
to time.

     1.29 "LTIP Award" means an incentive compensation opportunity granted
under the LTIP or New LTIP.

                                      -5-
   11
     1.30 "LTIP Performance Period" means any performance period designated in
accordance with any LTIP or New LTIP approved by the Board of Life or any
committee of the Board of Life.

     1.31 "LTIP Target Award" means, in respect of any LTIP Award under a New
LTIP, the amount which Executive would have been entitled to receive for the
LTIP Performance Period corresponding to such LTIP Award if the performance
goals established pursuant to such LTIP Award were achieved at the target level
(currently 100%) as of the end of the LTIP Performance Period.

     1.32 "LTIP Outstanding Award" - see the definition of "Pro-rata LTIP
Bonus."

     1.33 "Lump Sum Value" of an annuity payable pursuant to a defined benefit
plan (whether or not qualified under Section 401(a) of the Code) means, as of a
specified date, the present value of such annuity, as determined, as of such
date, under generally accepted actuarial principles using (i) the applicable
interest rate, mortality tables and other methods and assumptions that the
Pension Benefit Guaranty Corporation ("PBGC") would use in determining the value
of an immediate annuity on the Termination Date or (ii) interest rate and
mortality assumptions are no longer published by the PBGC, interest rate and
mortality assumptions determined in a manner as similar as practicable to the
manner by which the PBGC's interest rate and mortality assumptions were
determined immediately prior to the PBGC's cessation of publication of such
assumptions; provided, however, that if such defined benefit plan provides for a
lump sum distribution and such lump-sum distribution either (x) is the only
payment method available under such plan or (y) provides for a greater amount
than the Lump Sum Value of the Maximum Annuity available under such plan, then
"Lump Sum Value" shall mean such lump sum amount.

     1.34 "Maximum Annuity" means, in respect of a defined benefit plan (whether
or not qualified under Section 401(a) of the Code), an annuity computed in
whatever manner permitted under such plan (including frequency of annuity
payments, attained age upon commencement of annuity payments, and nature of
surviving spouse benefits, if any) that yields the greatest Lump Sum Value.

     1.35 "Merger of Equals" means a Change of Control consisting of, as of any
date on or after the Supplement Date, a Reorganization Transaction that,
notwithstanding the fact that such transaction also qualifies as a Change of
Control, satisfies all of the following:

          (a) consummation of such Reorganization Transaction results in
     Continuity of Ownership of at least 40%, but not more than 60%; and

          (b) an SEC Person does not become a 25% Owner; and

          (c) Mutual Incumbent Directors (determined using the date immediately
     preceding the Effective Date as the baseline date), throughout the period
     beginning on the Effective Date and ending on the second anniversary of the
     Effective Date, continue to constitute not less than

                                      -6-
   12
               (i) a majority of the Board, if subsection (a) of this definition
          is satisfied because the Reorganization Transaction resulted in
          Continuity of Ownership of at least 50%, but not more than 60%; or

               (ii) one (1) member less than a majority of the Board, if
          subsection (a) of this definition is satisfied because the
          Reorganization Transaction resulted in Continuity of Ownership of at
          least 40%, but less than 50%; and

          (d) the person who was the Chief Executive Officer of Mutual
     immediately prior to the first to occur of the (x) the day prior to the
     beginning of the Imminent Control Change Period or (y) the day prior to the
     Effective Date shall serve as the Chief Executive Officer of the
     Surviving Corporation at all times during the period commencing on the
     Effective Date and ending on the first anniversary of the Effective Date;

provided, however, that a Merger of Equals shall cease to be considered a Merger
of Equals and shall instead qualify as a Change of Control that is not a Merger
of Equals from and after the first date (the "Merger of Equals Cessation Date")
as of which:

               (i) during the Post-Change Employment Period the conditions of
          any of clause (b) or clause (c) or clause (d) of this definition shall
          not be satisfied; or

               (ii) prior to the first anniversary of the Effective Date, the
          Company shall make a filing with the SEC, issue a press release, or
          make a public announcement to the effect that Mutual or the Surviving
          Corporation is seeking or intends to seek a replacement for its Chief
          Executive Officer, whether such replacement is to become effective
          before or after such first anniversary.

     1.36 "Merger of Equals Cessation Date" - see the definition of "Merger of
Equals."

     1.37 "Mutual Incumbent Directors" means, as of any specified baseline date,
individuals then serving as members of the Board who were members of the Board
as of the date immediately preceding such baseline date; provided that any
subsequently-appointed or elected member of the Board whose election, or
nomination for election by numbers or by stockholders of Mutual if Mutual is a
stock company at the relevant time, or stockholders or members, as applicable,
of the Surviving Corporation, as applicable, was approved by a vote or written
consent of at least a majority of the directors then comprising the Mutual
Incumbent Directors shall also thereafter be considered a Mutual Incumbent
Director, unless the initial assumption of office of such subsequently-elected
or appointed director was in connection with an Imminent Control Change, but
only if such Imminent Control Change was triggered by the occurrence of an event
described in subsection (d) of the definition of Imminent Control Change.

     1.38 "New LTIP" - see definition of "Pro-rata LTIP Bonus."

     1.39 "Notice of Consideration" -- see Section 3.3(a)(ii)(2).

     1.40 "Plans" means plans, programs, policies, practices or procedures of
the Company.

                                      -7-
   13
     1.41 "Post-Change Employment Period" means the period commencing on the
Effective Date and ending on the second anniversary of the Effective Date.

     1.42 "Post-Merger of Equals Period" means the period commencing on an
Effective Date of a Merger of Equals and ending on the first to occur of the
Merger of Equals Cessation Date or the end of the Post-Change Employment Period.

     1.43 "Potential Parachute Payment" -- see Section 5.1.

     1.44 "Pro-rata Annual Bonus" on and after the Effective Date means,
notwithstanding Section 1.32 of the Employment Agreement, an amount equal to the
product of Executive's Target Annual Bonus (for the fiscal year in which the
Effective Date, Merger of Equals Cessation Date or Termination Date occurs, as
applicable, but disregarding any reduction in such Target Annual Bonus that
would qualify as Good Reason if Executive were to terminate employment on
account thereof) multiplied by a fraction, the numerator of which equals the
number of days from and including the first day of such fiscal year through and
including the Effective Date, Merger of Equals Cessation Date or Termination
Date, as applicable, and the denominator of which equals 365.

     1.45 "Pro-rata LTIP Bonus" means an amount equal to the sum of the
following amounts, calculated separately for each LTIP Award for which the LTIP
Performance Period has not ended as of the Effective Date, Merger of Equals
Cessation Date, or Termination Date, as applicable:

          (a) For any LTIP Award that was granted under the LTIP, the sum of the
     following amounts (recalculated as of the applicable date for each such
     LTIP Award):

               (i) Executive's LTIP Outstanding Award (as defined below) with
          respect to any LTIP Performance Period which began prior to the
          calendar year of the Effective Date, Merger of Equals Cessation Date
          or Termination Date, as applicable; and

               (ii) Executive's LTIP Outstanding Award (as defined below) with
          respect to any LTIP Performance Period which began in the calendar
          year in which the Effective Date, Merger of Equals Cessation Date or
          Termination Date, as applicable, occurs, multiplied by a fraction, the
          numerator of which equals the number of days from and including the
          first day of such calendar year through and including the Effective
          Date, Merger of Equals Cessation Date or Termination Date, as
          applicable, and the denominator of which equals 365.

          (b) For any LTIP Award that was granted under a new or successor plan
     replacing or supplementing the LTIP ("New LTIP"), an amount calculated by
     adding together the amounts determined by multiplying each LTIP Target
     Award by a fraction, the numerator of which equals the number of days from
     and including the beginning of the LTIP Performance Period applicable to
     such LTIP Target Award through and including the Effective Date, Merger of
     Equals Cessation Date or Termination Date, as applicable, and the
     denominator of which equals the aggregate number of days in such LTIP
     Performance Period.

                                      -8-
   14

          "LTIP Outstanding Award" means, in respect of any LTIP Award, the
          amount which Executive would have been entitled to receive for the
          LTIP Performance Period applicable to such LTIP Award, which amount is
          equal to the product of (x) the number of Initial Performance Units
          (as defined in the LTIP) multiplied by (y) an amount determined by
          applying the formula described as the "Start Imputed Value" in the
          LTIP, but determining "Average Return on Equity" and "Equity of the
          consolidated Principal Financial Group" as of December 31 of the year
          preceding the year in which the applicable determination date occurs,
          and not taking into account any value for any unfinished year in the
          award cycle, not taking into account any performance scores,
          multipliers or adjustment factors, and not prorated for any unfinished
          year in the award cycle.

     1.46 "Refund Claim" -- see Section 5.4.

     1.47 "Reorganization Transaction" -- see clause (c) of the definition of
"Change of Control."

     1.48 "Restricted Shares" -- see Section 2.3.

     1.49 "SEC" means the United States Securities and Exchange Commission.

     1.50 "SEC Person" means any person (as such term is used in Rule 13d-5 of
the SEC under the Exchange Act) or group (as such term is defined in Sections
3(a)(9) and 13(d)(3) of the Exchange Act), other than an Affiliate or any
employee benefit plan (or any related trust) of Mutual or any of its Affiliates.

     1.51 "Section" means, unless the context otherwise requires, a section of
this Supplement and Amendment.

     1.52 "SERP" means a supplemental executive retirement Plan that is not
qualified under Section 401(a) of the Code, including the Supplemental Executive
Retirement Plan for Employees (or any successor plan).

     1.53 "Stock Options" -- see Section 2.3.

     1.54 "Supplement Date" -- see the introductory paragraph of this Supplement
and Amendment.

     1.55 "Supplement Term" means the period commencing on the Supplement Date
and ending on the latest of (a) the third anniversary of the Supplement Date,
(b) the second anniversary of an Effective Date occurring within one year of the
Supplement Date, or (c) last day the Employment Agreement is in effect. An
Expiration Notice with respect to the Employment Agreement given on or after the
first anniversary of the Supplement Date shall apply equally to this Supplement
and Amendment. Notwithstanding the foregoing, if an Effective Date or an
Imminent Control Change occurs before the Expiration Date specified in an
Expiration Notice, then such Expiration Notice shall be void and of no further
effect; provided, however, if such Imminent Control Change does not culminate in
a Consummation Date, then such Expiration Notice shall be reinstated and the
Supplement and Amendment and Employment

                                      -9-
   15

Agreement shall expire on the date originally specified as the Expiration Date,
or if later, the date the Imminent Control Change lapses.

     1.56 "Surviving Corporation" means the corporation resulting from a
Reorganization Transaction or, if securities representing at least 50% of the
aggregate voting power of such resulting corporation, (if such corporation is a
stock company at the relevant time), or of the mutual life insurance holding
company policies (if such corporation is a mutual life insurance holding company
at the relevant time) are directly or indirectly owned by another corporation,
such other corporation.

     1.57 "Target Annual Bonus," solely for purposes of this Supplement and
Amendment, means, as of any date, an amount equal to the product of Base Salary
determined as of such date multiplied by the percentage of such Base Salary to
which Executive would have been entitled immediately prior to such date under
any Bonus Plan for the Annual Performance Period for which such Annual Bonus is
awarded if the performance goals established pursuant to such Bonus Plan were
achieved at the 100% level as of the end of the Annual Performance Period;
provided, however, that any reduction in Executive's Base Salary or Annual Bonus
that would qualify as Good Reason shall be disregarded for purposes of this
definition.

     1.58 "Taxes" means the incremental federal, state, local and foreign
income, employment, excise and other taxes payable by Executive with respect to
any applicable item of income.

     1.59 "Termination Date" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by the Company) or by the
Company (if such Notice is given by Executive), or any later date, not more than
15 days after the giving of such Notice, specified in such notice as of which
Executives' employment shall be terminated; provided, however, that:

               (i) if Executive's employment is terminated by reason of death or
          Disability, the Termination Date shall be the date of Executive's
          death or the date of Disability (as described in Section 3.1(b)), as
          applicable; and

               (ii) if no Notice of Termination is given, the Termination Date
          shall be the last date on which Executive is employed by the Company.

     1.60 "Termination of Employment" means any termination of Executive's
employment with the Company, whether such termination is initiated by the
Company or by Executive.

     1.61 "25% Owner" -- see paragraph (a) of the definition of "Change of
Control."

     1.62 "Voting Securities" for purposes of this Supplement and Amendment
means, notwithstanding Section 1.42 of the Employment Agreement (defining Voting
Securities), (a) with respect to a corporation, securities of such corporation
that are entitled to vote generally in the election of directors of such
corporation, and (b) with respect to a mutual life insurance company or mutual
life insurance holding company, policies of such company entitled to vote
generally in the ejection of directors of such company.

                                      -10-
   16
                                   ARTICLE II.

          POST-CHANGE EMPLOYMENT PERIOD AND IMMINENT CONTROL CHANGE PERIOD

     2.1 Position and Duties.

          (a) Change of Control and Merger of Equals. During the Post-Change
     Employment Period (including any portion thereof that qualifies as a Merger
     of Equals), the provisions of Article II of the Employment Agreement shall
     continue to apply, except that Executive's services shall be performed at
     the location where Executive was employed immediately before the Effective
     Date (or if the Effective Date was the Consummation Date of an Imminent
     Control Change, before the beginning of such Imminent Control Change
     Period) or any other location no more than 50 miles Corn such former
     location.

          (b) Imminent Control Change Period. During any Imminent Control Change
     Period, the provisions of Article II of the Employment Agreement shall
     continue to apply.

     2.2 Compensation.

               (a) Base Salary During an Imminent Control Change Period and the
          Post-Change Employment Period (including any portion thereof that
          qualifies as a Merger of Equals), the provisions of Section 4.1 of the
          Employment Agreement (Salary) shall continue to apply. Any increase in
          Base Salary shall not limit or reduce any other obligation of the
          Company to Executive under this Supplement and Amendment.

               (b) Annual Bonus.

                    (i) Change of Control and Merger of Equals. During the
               Post-Change Employment Period (including any portion thereof that
               qualifies as a Merger of Equals), the provisions of Section 4.2
               of the Employment Agreement (Annual Bonus) shall continue to
               apply, unless modified by Section 2.2(b)(ii) below, provided that
               on and after the Effective Date, Executive's bonus opportunity
               shall be no less than and target performance goals shall be no
               higher than those in effect immediately prior to the Effective
               Date for each Annual Performance Period which ends during the
               Post-Change Employment Period. "Annual Performance Period" means
               each period of time designated in accordance with any annual
               bonus arrangement, including the Principal Incentive Pay Plan
               ("Prin Pay") and any successor thereto, (a "Bonus Plan") which is
               based upon performance and approved by the Board or any committee
               of the Board, or in the absence of any Bonus Plan or any such
               designated period of time, each calendar year.

                    (ii) Imminent Control Change Period. During an Imminent
               Control Change Period, the provisions of Section 4.2 of the
               Employment Agreement (Annual Bonus) shall continue to apply;
               provided, however, that if the Imminent Control Change Period
               culminates in a Consummation Date, then, in determining

                                      -11-
   17

               whether the Executive's Termination of Employment is for "Good
               Reason" shall be determined as though the provisions of Section
               2.2(b)(i) applied commencing with the first day of the Imminent
               Control Change Period.

               (c) Other Compensation and Benefits.

                    (i) Imminent Control Change Period, Post-Change Employment
               Period, Merger of Equals. During an Imminent Control Change
               Period and the Post-Change Employment Period (including any
               portion thereof that qualifies as a Merger of Equals) the
               provisions of Sections 4.3 (Long-Term Incentive Plan Bonus and
               Other Incentive Compensation), 4.4 (Savings and Retirement Plans)
               and Article V (Other Benefits) of the Employment Agreement shall
               continue to apply; provided that on and after the Effective Date,
               Executive's compensation and benefits shall not be materially
               less favorable, in the aggregate, than the most favorable
               compensation and benefits provided by the Company to Executive
               (including any such compensation and benefits provided under
               Plans) at any time during the 90-day period immediately before
               the Effective Date. In addition, during the Post-Change
               Employment Period (including any portion thereof that qualifies
               as a Merger of Equals):

                         (1) LTIP Awards. LTIP Awards shall be granted to
                    Executive at least as frequently as LTIP Awards were granted
                    during the three-year period immediately preceding the
                    Effective Date, with target payments no less than the
                    average (expressed as a percentage of Executive's Base
                    Salary in effect at the beginning of the applicable
                    Performance Period) of the Executive's LTIP Awards
                    outstanding immediately prior to the Effective Date, with
                    target performance goals substantially comparable to the
                    target performance goals under Executive's LTIP Awards
                    outstanding on the Effective Date; and

                         (2) Office and Support Staff. Executive shall be
                    entitled to an office or offices of a size and with
                    furnishings and other appointments, and to secretarial and
                    other assistance in accordance with the most favorable Plans
                    in effect prior to the Change of Control or Imminent Control
                    Change.

     2.3 Stock Incentive Awards.

          (a) Change of Control that is not a Merger of Equals. On the Effective
     Date, except as provided in Section 2.3 (b) or (c) below, Executive shall
     (i) become fully vested in, and may thereafter exercise in whole or in
     part, in accordance with the terms thereof, all outstanding stock options,
     stock appreciation rights, or similar incentive awards (collectively,
     "Stock Options") and (ii) become fully vested in all shares of restricted
     stock or restricted stock units and similar awards ("Restricted Shares").
     Notwithstanding the foregoing, if the Effective Date is a Reorganization
     Transaction and if so provided under the agreement pursuant to which the
     Reorganization Transaction is effected, then all Executive Stock Options
     shall (x) be extinguished for such consideration as is provided for vested
     options under such agreement or (y) be converted into options to purchase
     the stock of the Surviving Corporation, and such converted options shall be

                                      -12-
   18

     subject to the same option terms and restrictions as those applicable on
     the Effective Date.

          (b) Merger of Equals. Section 2.3(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.3(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date wherever such term appears.

          (c) Imminent Control Change Period. Section 2.3(a) and (b) shall not
     apply during an Imminent Control Change Period.

     2.4 Unfunded Deferred Compensation.

          (a) Change of Control that is not a Merger of Equals. On the Effective
     Date, except as provided in Section 2.4(b) or (c) below, Executive shall
     become fully vested in all benefits previously accrued under any deferred
     compensation Plan (including a SERP and any defined contribution excess
     plan) that is not qualified under Section 401(a) of the Code. To the
     extent not so provided under such non-qualified plan, within ten business
     days after the Effective Date, the Company shall pay or cause to be paid to
     Executive a lump-sum cash amount equal to:

               (i) the sum of the Lump-Sum Values of all Maximum Annuities that
          are payable pursuant to all such non-qualified plans that are defined
          benefit Plans, plus

               (ii) the sum of Executive's account balances under all such non-
          qualified plans that are defined contribution Plans.

          (b) Merger of Equals. Section 2.4(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.4(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date wherever such term appears.

          (c) Imminent Control Change Period. Section 2.4(a) and (b) shall not
     apply during an Imminent Control Change Period.

Executive shall have the opportunity to waive the accelerated vesting and
lump-sum payment at any time prior to the earlier of (i) the 15th day after the
date of an Imminent Control Change or (ii) the 30th day prior to a Change of
Control which is not preceded by an Imminent Control Change; provided, however,
that in no event shall the waiver be allowed on the Effective Date or
thereafter.

     2.5 Pro-rata Annual Bonus.

          (a) Change of Control that is not a Merger of Equals. Except as
     provided in Section 2.5(b) or (c) below, to the extent not so provided by
     the Bonus Plan, the Company shall pay or cause to be paid to Executive
     within ten business days after the Effective Date, a lump-sum cash payment
     equal to the Pro-rata Annual Bonus, in

                                      -13-
   19

     satisfaction of the Company's obligations under the Bonus Plan for periods
     prior to the Effective Date.

          (b) Merger of Equals. Section 2.5(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.5(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date.

          (c) Imminent Control Change Period. Section 2.5(a) and (b) shall not
     apply during an Imminent Control Change Period.

     2.6 Pro-rata LTIP Bonus.

          (a) Change of Control that is not a Merger of Equals. Except as
     provided in Section 2.6(b) or (c) below, to the extent not so provided by
     the LTIP or New LTIP, as applicable, the Company shall pay or cause to be
     paid to Executive, within ten business days after the Effective Date a
     lump-sum cash payment equal to the sum of (i) the Pro-rata LTIP Bonus and
     (ii) all Accrued LTIP Bonuses, in satisfaction of the Company's obligations
     under the LTIP and New LTIP for periods prior to the Effective Date.

          (b) Merger of Equals. Section 2.6(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.6(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date.

          (c) Imminent Control Change Period. Section 2.6(a) and (b) shall not
     apply during an Imminent Control Change Period.

                                  ARTICLE III.

                            TERMINATION OF EMPLOYMENT

     3.1 Disability. The provisions of this Section 3.1 and Section 4.8 shall
supersede the provisions of Section 1.17 of the Employment Agreement (definition
of "Disability") and Section 6.2 of the Employment Agreement (Termination for
Retirement, Death or Disability) during the Post-Change Employment Period or any
Imminent Control Change Period but only insofar as such Section 6.2 applies to
termination for Disability.

          (a) During the Post-Change Employment Period or any Imminent Control
     Change Period, the Company may terminate Executive's employment at any time
     because of Executive's Disability by giving Executive or his legal
     representative, as applicable, (i) written notice in accordance with
     Section 9.7 of the Company's intention to terminate Executive's employment
     pursuant to this Section and (ii) a certification of Executive's Disability
     by a physician selected by the Company or its insurers, subject to the
     consent of Executive or Executive's legal representative, which consent
     shall not be unreasonably withheld or delayed. Executive's employment shall
     terminate effective on the 30th day after Executive's receipt of such
     notice (which such 30th day shall be deemed to be the date of the
     Disability) unless, before such 30th day, Executive shall have resumed the
     full-time performance of Executive's duties.

                                      -14-
   20

          (b) "Disability" means any medically determinable physical or mental
     impairment that has lasted for a continuous period of not less than six
     months and can be expected to be permanent or of indefinite duration, and
     that renders Executive unable to perform the duties required under this
     Supplement and Amendment.

     3.2 Death. Executive's employment shall terminate automatically upon
Executive's death during the Post-Change Employment Period or Imminent Control
Change Period.

     3.3 Termination for Cause.

          (a) Post-Change Employment Period. During the Post-Change Employment
     Period (including any portion thereof that qualifies as a Post-Merger of
     Equals Period), the Company may terminate Executive's employment for Cause
     solely in accordance with all of the substantive and procedural provisions
     of this Section 3.3(a). Section 1.11 of the Employment Agreement
     (definition of "Cause") and Section 6.1 of the Employment Agreement
     (Termination for Cause or Other than for Good Reason, etc.) shall be
     inapplicable during any Post-Change Employment Period, insofar as it
     relates to the material contained in this Section 3.3 and Section 4.6,
     except as otherwise provided herein.

               (i) Definition of Cause. For purposes of this section 3.3(a),
          "Cause" has the following meaning:

                    (1) Executive's conviction of, plea of guilty to, or plea of
               nolo contendere to a felony or misdemeanor (other than a
               traffic-related felony or misdemeanor) that involves fraud,
               dishonesty or moral turpitude;

                    (2) Executive's willful and intentional material misconduct
               in the performance or gross neglect of his duties that results in
               substantial financial detriment to a Company or any Affiliate;

                    (3) Executive's habitual neglect of duties (other than
               resulting from Executive's incapacity due to physical or mental
               illness other than habitual abuse of or addiction to alcohol or
               controlled substances) which results in substantial financial
               detriment to any of the Companies or any Affiliate; or

                    (4) Executive's willful and intentional material breach of
               the Employment Agreement or this Supplement and Amendment;

               provided, however, that for purposes of clauses (2), (3) and (4),
               Cause shall not include any one or more of the following:

                    (A) Executive's bad judgment

                    (B) Executive's negligence, other than Executive's habitual
               neglect of duties or gross negligence;

                                      -15-
   21
                    (C) any act or omission believed by Executive in good faith
               to have been in or not opposed to the interest of the Company
               (without intent of Executive to gain, directly or indirectly, a
               profit to which Executive was not legally entitled); or

                    (D) failure to meet performance goals, objectives or
               measures following good faith efforts to meet such goals,
               objectives or measures; and

          further provided that, if a breach of the Employment Agreement or this
          Supplement and Amendment involved an act, or a failure to act, which
          was done, or omitted to be done, by Executive in good faith and with a
          reasonable belief that Executive's act, or failure to act, was in the
          best interests of the Company or was required by applicable law or
          administrative regulation, such breach shall not constitute Cause if,
          within 30 days after Executive is given written notice of such breach
          that specifically refers to this Section, Executive cures such breach
          to the fullest extent that it is curable.

               (ii) Procedural Requirements for Termination for Cause. The
          Company shall strictly observe each of the following procedures:

                    (1) Board Meeting. A meeting of the Board shall be called
               for the stated purpose of determining whether Executive's acts or
               omissions constitute Cause and, if so, whether to terminate
               Executive's employment for Cause.

                    (2) Notice of Consideration, Not less than 30 days prior to
               the date of such meeting the Company shall provide Executive and
               each member of the Board written notice (a "Notice of
               Consideration") of (x) a detailed description of the acts or
               omissions alleged to constitute Cause, (y) the date, time and
               location of such meeting of the Board, and (z) Executive's rights
               under clause (3) below.

                    (3) Opportunity to Present Response. Executive shall have
               the opportunity with or without counsel, at Executive's election,
               an opportunity to be heard and present arguments and evidence on
               Executive's behalf at such a meeting and / or to present to the
               Board a written response to the Notice of Consideration.

                    (4) Cause Determination. Executive's employment may be
               terminated for Cause only if (x) the acts or omissions specified
               in the Notice of Consideration did in fact occur and do
               constitute Cause as defined in this Section, (y) the Board makes
               a specific determination to such effect and to the effect that
               Executive's employment should be terminated for Cause ("Cause
               Determination") and (z) the Company thereafter provides
               Executive with a Notice of Termination which specifies in
               specific detail the basis of such Termination of Employment for
               Cause and which Notice shall be consistent with the reasons set
               forth

                                      -16-
   22
               in the Notice of Consideration. The Cause Determination shall
               require the affirmative vote of at least 66-2/3% of the members
               of the Board.

          (b) Imminent Control Change Period. Except as provided below, this
     Section 3.3 shall not apply during any Imminent Control Change Period.
     Instead, the terms of Section 6.1 of the Employment Agreement shall govern
     a termination of Executive for Cause during an Imminent Control Change
     Period. However, in the case of an Imminent Control Change Period that
     culminates in a Consummation Date, no termination of Executive's employment
     during such Imminent Control Change Period shall be deemed to have been for
     Cause unless all the substantive and procedural provisions of Section
     3.3(b) shall have been satisfied:

               (i) Definition of Cause. For purposes of this Section 3.3(b),
          "Cause" shall have the meaning ascribed to it in Section 3.3(a).

               (ii) Procedural Requirements for Termination for Cause. To
          qualify as a termination for Cause, a termination by the Company
          during the Imminent Control Change Period shall have strictly complied
          with the procedures set forth in Section 3.3(a)(ii), substituting the
          phrase Imminent Control Change Period for Post-Change Employment
          Period wherever it appears.

          (c) Standard of Review. If the Notice of Consideration is given to
     Executive during an Imminent Control Change Period or a Post-Change
     Employment Period, then in the event that the existence of Cause shall
     become an issue in any action or proceeding between the Company and
     Executive, the Company shall, notwithstanding the Cause determination
     referenced in clause (4)(y) of Section 3.3(a)(ii), have the burden of
     establishing that the actions or omissions specified in the Notice of
     Consideration did in fact occur and do constitute Cause and that the
     Company has satisfied the procedural requirements of Section 3.3(a)(ii).

     3.4 Good Reason. During the Post-Change Employment Period (including any
portion thereof that is a Post-Merger of Equals Period), the Executive may
terminate his employment for Good Reason solely in accordance with all of the
substantive and procedural provisions of this Section 3.4. Section 1.21 of the
Employment Agreement (definition of "Good Reason") and Section 6.3 of the
Employment Agreement (Termination Without Cause or for Good Reason) shall be
inapplicable during any Post-Change Employment Period, insofar as it relates to
the material contained in this Section 3.4 and Article IV, except as otherwise
provided herein.

          (a) Change of Control and a Merger of Equals. During the Post-Change
     Employment Period (including any portion thereof that is a Merger of
     Equals), Executive may terminate his employment for Good Reason in
     accordance with the substantive and procedural provisions of this Section
     3.4(a).

               (i) Good Reason Definition. For purposes of this Section 3.4(a),
          "Good Reason" means the occurrence of any one or more of the following
          actions or omissions during the Post-Change Employment Period:

                    (1) any act or omission that would constitute Good Reason as
               defined in Section 1.21 of the Employment Agreement;

                                      -17-
   23
                    (2)  failure to pay Executive's Base Salary in violation of
               Section 2.2(a) or any failure to increase Executive's Base Salary
               to the extent, if any, required by such Section;

                    (3)  any failure to pay Executive's Annual Bonus or any
               reduction in Executive's bonus opportunity, in either case in
               violation of Section 2.2(b);

                    (4)  requiring Executive to be based at any office or
               location other than the location specified in Section 2.1(a);

                   (5) any other material breach of this Supplement and
               Amendment by the Company;

                    (6)  any Termination of Employment by the Company that
               purports to be for Cause, but is not in full compliance with all
               of the substantive and procedural requirements of this Supplement
               and Amendment (any such purported termination shall be treated as
               a Termination of Employment without Cause for all purposes of
               this Supplement and Amendment); or

                    (7)  the failure at any time of a successor to the Company
               explicitly to assume and agree to be bound by this Supplement and
               Amendment.

               (ii) Determination of Good Reason. Any reasonable determination
          by Executive that any of the events specified in subsection (i) above
          has occurred and constitutes Good Reason shall be conclusive and
          binding for all purposes, unless the Company establishes that
          Executive did not have any reasonable basis for such determination.

          (b)  Imminent Control Change Period. Except as provided below, this
     Section 3.4 shall not apply during any Imminent Control Change Period.
     Instead, the terms of Section 6.3 of the Employment Agreement (Termination
     Without Cause or for Good Reason) shall govern a termination by Executive
     for Good Reason during an Imminent Control Change Period. However, in the
     case of an Imminent Control Change Period that culminates in a Consummation
     Date, no termination of Executive's employment during such Imminent Control
     Change Period shall be deemed to have been for Good Reason unless all the
     substantive and procedural provisions of this Section 3.4(b) shall have
     been satisfied:

               (i)  Definition of Good Reason. For purposes of this Section
          3.4(b), "Good Reason" shall have the same meaning as in Section
          3,4(a)(i), except that the act or omission shall have occurred during
          the Imminent Control Change Period.

               (ii) Determination of Good Reason. Executive's determination that
          an event constituting Good Reason as defined in Section
          3.4(a)(i)(2)-(7) has occurred

                                      -18-

   24

          during an Imminent Control Change Period shall not be entitled to any
          presumptive validity or other deference by a court.

          (c)  Notice by Executive. In the event of any Termination of
     Employment by Executive for Good Reason during a Post-Change Employment
     Period (or during an Imminent Control Change Period if Executive intends to
     claim benefits hereunder in the event the Imminent Control Change Period
     culminates in a Consummation Date), Executive shall as soon as practicable
     thereafter notify the Company of the events constituting such Good Reason
     by a Notice of Termination. A delay in the delivery of such Notice of
     Termination or a failure by Executive to include in the Notice of
     Termination any fact or circumstance which contributes to a showing of Good
     Reason shall not waive any right of Executive under this Supplement and
     Amendment or preclude Executive from asserting such fact or circumstance in
     enforcing rights under this Supplement and Amendment; provided that no act
     or omission by the Company shall qualify as Good Reason if Executive's
     Termination of Employment occurs more than 12 months after Executive first
     obtains actual knowledge of such act or omission.

                                   ARTICLE IV.

        COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT

     4.1 Termination During the Post-Change Employment Period. If, during the
Post-Change Employment Period (other than during a Post-Merger of Equals Period)
the Company terminates Executive's employment other than for Cause or
Disability, or Executive terminates employment for Good Reason, Section 6.3 of
the Employment Agreement (Termination Without Cause or For Good Reason) shall
not apply, and the Company's sole obligations to Executive under Articles II and
IV shall be as follows:

          (a) Severance Payments. The Company shall pay or provide Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount equal to the sum of the
     following, no more than ten business days after the Termination Date:

               (i)  Accrued Obligations. All Accrued Obligations;

               (ii) Prorated Annual Bonus for Year of Termination. Executive's
          Pro-rata Annual Bonus reduced (but not below zero) by the amount of
          any Annual Bonus paid to Executive with respect to the Company's
          fiscal year in which the Termination Date occurs, whether paid under
          Section 2.5 or otherwise;

               (iii) Prorated LTIP Bonus. Executive's Pro-rata LTIP Bonus
          reduced (but not below zero) by the amount of any LTIP Bonus paid to
          Executive with respect to the LTIP Performance Periods not completed
          as of the Termination Date, whether such amount was paid under Section
          2.6 or otherwise;

               (iv)  Additional LTIP Amount. For each LTIP Performance Period
          that is unexpired as of the Date of Termination, Executive shall be
          treated as he would be treated under the LTIP in effect on the
          effective date of the Employment Agreement if (1) he terminated
          employment at age 57 other than for cause (as

                                      -19-
   25

          defined in the LTIP) and (2) he retired ("LTIP Benefit"); provided
          that the discretion of the Committee shall not be exercised so as to
          treat Executive less favorably than other members of Senior
          Management; provided further that if such payment cannot be provided
          under the terms of the LTIP or New LTIP, as applicable, then the
          Company shall pay amounts equal to such LTIP Benefit, reduced by
          amounts actually payable under the LTIP or New LTIP, as applicable, at
          the same time as they otherwise would have been paid;

               (v)  Deferred Pensions and Pension Enhancements. The sum of

                    (1)  all amounts previously deferred by, or accrued to the
               benefit of, Executive under any defined contribution
               non-qualified Plans (as described in Section 2.4), whether vested
               or unvested, together with any accrued earnings thereon, to the
               extent that such amounts and earnings have not been previously
               paid by the Company (whether pursuant to Section 2.4 or
               otherwise) or are provided under the terms of such non- qualified
               Plan; plus

                    (2)  an amount equal to the positive difference, if any,
               between:

                    (A)  the sum of the Lump-Sum Values of each Maximum Annuity
               that would be payable to Executive under any defined benefit Plan
               (whether or not qualified under Section 401(a)) if Executive had:

                              (1)  become fully vested in all such previously-
                              unvested benefits,

                              (2)  accrued a number of years of service (for
                              purposes of determining the amount of such
                              benefits, entitlement to early retirement
                              benefits, and all other purposes of such defined
                              benefit plans) that is three years greater than
                              the number of years of service actually accrued
                              by Executive as of the Termination Date, and

                              (3) received the lump-sum severance benefits
                              specified in Section 4.1(a) (excluding LTip
                              Bonuses and any amounts in respect of Stock
                              Options or Restricted Shares, if any, including
                              severance multiples thereof) as covered
                              compensation in equal monthly installments during
                              the period of three years following the
                              Termination Date, minus

                    (B)  the sum of(x) the Lump-Sum Values of the Maximum
               Annuity benefits actually payable to Executive under each defined
               benefit Plan that is qualified under Section 401(a) of the Code
               and (y) the

                                      -20-
   26

               aggregate amounts previously paid (whether pursuant to Section
               2.4 or otherwise) to Executive under the defined benefit Plans
               (whether or not qualified under Section 401(a) of the Code)
               described in clause (A) of this Section 4.1 (a)(v)(2).

               Notwithstanding the foregoing, the amount payable under this
               Section 4.1(a)(v)(2) with respect to the SERP and Principal
               Pension Plan for Employees in the aggregate, shall not be less
               than the amount to which Executive would be entitled as of the
               Date of Termination under Section 6.3(f) of the Employment
               Agreement (providing for certain benefits if the Date of
               Termination occurs prior to the Executive's 57th birthday).

               (vi) Multiple of Salary, Bonus and LTIP. An amount equal to three
          (3.0) times the sum of (x) Base Salary, (y) the Target Annual Bonus,
          and (z) the Annualized Target LTIP Bonus, each determined as of the
          Termination Date; provided, however, that any reduction in Executive's
          Base Salary or Annual Bonus that would qualify as Good Reason shall be
          disregarded for purposes of this clause (vi); and provided further,
          that the Annualized Target LTIP Bonus in clause (z) of this Section
          4.1(a)(vi) shall not be included in the sum referenced above if the
          Termination Date occurs on or after the third anniversary of the date
          the Company first makes a grant of stock options to a peer executive
          of the Company pursuant to a written employee stock option plan
          applicable to peer executives of the Company; and

               (vii) Unvested Defined Contribution Plan. To the extent not paid
          pursuant to Section 4.1(a)(v), an amount equal to the sum of the value
          of the unvested portion of Executive's accounts or accrued benefits
          under any unqualified or qualified defined contribution retirement
          plan maintained by the Company as of the Termination Date and
          forfeited by Executive by reason of the Termination of Employment.

          (b)  Continuation of Welfare and Fringe Benefits. Until the third
     anniversary of the Termination Date or such later date as any Plan may
     specify, the Company shall continue to provide to Executive and Executive's
     family welfare benefits (including medical, prescription, dental,
     disability, salary continuance, individual life, group life, accidental
     death and travel accident insurance plans and programs) and fringe benefits
     which are at least as favorable as the most favorable Plans of the Company
     applicable to members of Senior Management who are actively employed on the
     Termination Date and their families. The cost of such welfare benefits to
     Executive shall not exceed the cost of such benefits to actively employed
     members of Senior Management as applicable from time to time.

     If the Date of Termination occurs prior to the Executive's 57th birthday,
     Executive shall be entitled to the benefits equivalent to those payable
     under the Principal Welfare Benefit Plan for Employees calculated under the
     terms of such plan as if the Date of Termination occurred after Executive's
     57th birthday, reduced by amounts actually payable under such plan, and if
     either Executive or the Company reasonably believes it is likely that such

                                      -21-
   27

     benefits cannot be provided on a tax-favored basis, the Company shall pay
     the cost of the insurance premium for such benefits.

     Executive's rights under this Section shall be in addition to, and not in
     lieu of, any post-termination continuation coverage or conversion rights
     Executive may have pursuant to applicable law, including continuation
     coverage required by Section 4980 of the Code.

          (c)  Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by
     Executive to provide outplacement services to Executive after the
     Termination Date, within ten business days of its receipt of an invoice
     therefor, subject to a maximum of $30,000.

          (d)  Indemnification, Directors' and Officers' Liability Insurance.
     The provisions of Section 9.4 of the Employment Agreement (Indemnification
     and Insurance) shall continue to apply after the Effective Date.

          (e) Stock Incentive Awards. Immediately prior to the Executive's
     Termination of Employment, Executive shall (i) become fully vested in, and
     may thereafter exercise in whole or in part, in accordance with the terms
     thereof, all outstanding Stock Options and (ii) become fully vested in all
     Restricted Shares.

     4.2 Termination During a Post-Merger of Equals Period. If, during a
Post-Merger of Equals Period, the Company terminates Executive's employment
other than for Cause or Disability, or if Executive terminates employment for
Good Reason, Section 6.3 of the Employment Agreement (Termination Without Cause
or for Good Reason) shall not apply, and the Company's sole obligations to
Executive under Articles II and IV shall be as follows:

          (a) Severance Payments. The Company shall pay or provide Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount, no more than thirty
     business days after the Termination Date, equal to the sum of all amounts
     described in Section 4.1(a).

          (b) Continuation of Welfare and Fringe Benefits. Until the third
     anniversary of the Termination Date or such later date as any Plan may
     specify, the Company shall continue to provide to Executive and Executive's
     family welfare benefits and fringe benefits with the same scope and cost as
     described in Section 4.1 (b).

     If the Date of Termination occurs prior to the Executive's 57th birthday,
     Executive shall be entitled to the benefits equivalent to those payable
     under the Principal Welfare Benefit Plan for Employees calculated under the
     terms of such plan as if the Date of Termination occurred after Executive's
     57th birthday, reduced by amounts actually payable under such plan, and if
     either Executive or the Company reasonably believes it is likely that such
     benefits cannot be provided on a tax-favored basis, the Company shall pay
     the cost of the insurance premium for such benefits.

     Executive's rights under this Section shall be in addition to, and not in
     lieu of, any post-termination continuation coverage or conversion rights
     Executive may have pursuant to applicable law, including continuation
     coverage required by Section 4980 of the Code.

                                      -22-
   28

          (c)  Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by the
     Company to provide outplacement services to Executive after the Termination
     Date, within ten business days of its receipt of an invoice therefor,
     subject to a maximum of $30,000.

          (d) Indemnification, Directors' and Officers' Liability Insurance The
     provisions of Section 9.4 of the Employment Agreement (Indemnification and
     Insurance) shall continue to apply during a Post-Merger of Equals Period.

          (e) Stock Incentive Awards. Immediately prior to Executive's
     Termination of Employment, Executive shall (i) become fully vested in, and
     may thereafter exercise in whole or in part, in accordance with the terms
     thereof, all outstanding Stock Options and (ii) become fully vested in all
     Restricted Shares.

     4.3 Termination During an Imminent Control Change Period (with no Change of
Control). If, during an Imminent Control Change Period, the Company terminates
Executive's employment other than for Disability and other than for a reason
that would constitute Cause if there were a Change of Control, or if Executive
terminates employment for a reason that would constitute Good Reason if there
were a Change of Control, and in either case the Imminent Control Change Period
does not culminate in a Consummation Date, the applicable terms of the
Employment Agreement shall govern, except that:

          (a)  Continuation of Welfare Benefits. Until the earlier of(i) the
     third anniversary of the Termination Date or (ii) the last day of the
     Imminent Control Change Period (or such later date as any Plan may
     specify), if it would provide greater benefits to Executive than under the
     Employment Agreement, the Company shall continue to provide to Executive
     and Executive's family welfare benefits with the same scope and cost as
     described in Section 6.3(d) of the Employment Agreement (Termination
     Without Cause or for Good Reason).

          (b)  Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by
     Executive to provide outplacement services to Executive after the
     Termination Date, within ten business days of its receipt of an invoice
     therefor, subject to a maximum of $30,000. All outplacement amounts payable
     on account of a Termination Date which occurred during an Imminent Control
     Change Period will be reduced (but not below zero) by outplacement amounts
     paid to Executive on account of such Termination Date but before payment
     pursuant to this Section 4.3(b).

          (c)  Stock Incentive Awards. In addition to vesting in accordance with
     Section 6.3(g) of the Employment Agreement, Executive's Stock Options
     (whether vested prior to or upon such Termination Date) will:

               (i)  not expire (unless such Stock Options would have so expired
          had Executive remained an employee of the Company) during the Imminent
          Control Change Period; and

                                      -23-
   29

               (ii) continue to be exercisable after the Termination Date to the
          extent provided in the applicable grant agreement or Plan, and
          thereafter, such Stock Options shall not be exercisable during the
          Imminent Control Change Period.

               Upon the date the Imminent Control Change lapses without a
               Consummation Date Executive's vested Stock Options may be
               exercised, in whole or in part, during the 30-day period
               following the lapse of the Imminent Control Change, (but in no
               case shall Stock Options remain exercisable after the date on
               which such Stock Options would have expired if Executive had
               remained an employee of the Company).

     4.4 Termination During an Imminent Control Change Period (which Culminates
in a Change of Control). If, during an Imminent Control Change Period that
culminates in a Consummation Date, the Company terminates Executive's employment
other than for Cause or Disability, or if Executive terminates employment for
Good Reason, the Employment Agreement shall govern prior to the Consummation
Date, and upon the Consummation Date the Company's sole obligations to Executive
under Articles II and IV shall be as follows:

          (a) Severance Payments. The Company shall pay or provide Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount equal to the sum of all
     amounts described in Section 4.1(a). Such amount shall be paid no more
     than ten business days after an Effective Date that does not qualify as a
     Merger of Equals and no more than 30 business days after an Effective Date
     which does qualify as a Merger of Equals. Notwithstanding the foregoing,
     all amounts paid pursuant to this Section 4.4(a) shall be reduced (but not
     below zero) by the same or similar amounts paid to Executive on account of
     the Termination of Employment (under this Supplement and Amendment, the
     Employment Agreement, or otherwise), to the extent such amounts would
     reasonably be considered duplicative, prior to the date payment is made
     under this Section 4.4(a).

          (b) Continuation of Welfare Benefits. Until the third anniversary of
     the Termination Date or such later date as any Plan may specify, the
     Company shall continue to provide to Executive and Executive's family
     welfare benefits with the same scope and cost as described in Section
     4.1(b). Notwithstanding the foregoing, all coverage under this Section
     4.4(b) shall be reduced by all coverage provided by the Company to
     Executive on account of the Termination of Employment (under this
     Supplement and Amendment, the Employment Agreement, or otherwise), to the
     extent such amounts would reasonably be considered duplicative, prior to
     the date such benefits are provided under this Section 4.4(b).

     If the Date of Termination occurs prior to the Executive's 57th birthday,
     Executive shall be entitled to the benefits equivalent to those payable
     under the Principal Welfare Benefit Plan for Employees calculated under the
     terms of such plan as if the Date of Termination occurred after Executive's
     57th birthday, reduced by amounts actually payable under such plan, and if
     either Executive or the Company reasonably believes it is likely that such
     benefits cannot be provided on a tax-favored basis, the Company shall pay
     the cost of the insurance premium for such benefits.

                                      -24-
   30

     Executive's rights under this Section shall be in addition to, and not in
     lieu of, any post-termination continuation coverage or conversion rights
     Executive may have pursuant to applicable law, including continuation
     coverage required by Section 4980 of the Code.

          (c)  Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by
     Executive to provide outplacement services to Executive after the
     Termination Date, within ten business days of its receipt of an invoice
     therefor, subject to a maximum of $30,000. Notwithstanding the foregoing,
     all outplacement amounts payable pursuant to this Section 4.4(c) shall be
     reduced (but not below zero) by outplacement amounts paid to Executive on
     account of such Termination Date (under this Supplement and Amendment, the
     Employment Agreement, or otherwise) prior to the date payment is made under
     this Section 4.4(c).

          (d)  Stock Incentive Awards. In addition to vesting in accordance with
     Section 6.3(g) of the Employment Agreement, Executive's vested Stock
     Options (whether vested prior to or upon such Termination Date) shall be
     treated as follows:

               (i)  not expire (unless such Stock Options would have so expired
          had Executive remained an employee of the Company) during the Imminent
          Control Change Period; and

               (ii) continue to be exercisable after the Termination Date to the
          extent provided in the applicable grant agreement or Plan, and
          thereafter, such Stock Options shall not be exercisable during the
          Imminent Control Change Period.

               Upon the Consummation Date, such vested Stock Options may be
               exercised by Executive in whole or in part, during the 30-day
               period following the Consummation Date, (but in no case shall
               Stock Options remain exercisable after the date on which such
               Stock Options would have expired if Executive had remained an
               employee of the Company). Notwithstanding any provision in this
               Section, if the Consummation Date is a Reorganization
               Transaction, and if so provided under the agreement pursuant to
               which the Reorganization Transaction is effected, then all
               Executive's Stock Options shall (a) be extinguished for such
               consideration as is provided for vested options under such
               agreement; or (b) be converted into options to purchase the stock
               of the Surviving Corporation, and such converted options shall be
               subject to the same option terms as those applicable prior to the
               Consummation Date.

     4.5 Waiver and Release. Notwithstanding anything herein to the contrary,
the Company shall have no obligation to Executive under Section 4.1, 4.2, 4.3,
or 4.4 or Article V unless and until Executive executes a release and waiver of
Mutual and the Companies, in substantially the same form as attached hereto as
Exhibit A. This Section 4.5 shall supersede Section 6.5 of the Employment
Agreement (Waiver and Release) insofar as it relates to material contained in
this Section 4.5, effective on the Effective Date.

     4.6 Termination by the Company for Cause. If the Company terminates
Executive's employment for Cause during the Post-Change Employment Period or
Imminent Control Change Period, Section 6.1 of the Employment Agreement
(Termination for Cause or Other than for

                                      -25-
   31

Good Reason, etc.) shall not apply, and the Company's sole obligation to
Executive under Articles II and IV shall be to pay Executive a lump-sum cash
amount equal to all Accrued Obligations determined as of the Termination Date.
The LTIP Bonus shall be governed according to the terms of the LTIP and New
LTIP, as applicable.

     4.7 Termination by Executive Other Than for Good Reason.

          (a)  If Executive terminates employment during the Post-Change
     Employment Period or Imminent Control Change Period other than for
     Retirement, Good Reason, Disability or death, Section 6.2 of the Employment
     Agreement (Termination for Retirement, Death or Disability) shall not
     apply, and the Company's sole obligation to Executive under Articles II and
     IV shall be to pay Executive a lump-sum cash amount equal to all Accrued
     Obligations determined as of the Termination Date. The LTIP Bonus shall be
     governed according to the terms of the LTIP and New LTIP, as applicable.

          (b)  If Executive terminates employment during the Post-Change
     Employment Period or Imminent Control Change Period due to his Retirement,
     Section 6.2 of the Employment Agreement (Termination for Retirement, Death
     or Disability) shall govern.

     4.8 Termination by the Company for Disability. If the Company terminates
Executive's employment by reason of Executive's Disability during the
Post-Change Employment Period or Imminent Control Change Period, Section 6.2 of
the Employment Agreement (Termination for Retirement, Death or Disability) shall
not apply, and Company's sole obligation to Executive under Articles II and IV
shall be as follows:

          (a)  to pay Executive (i) the amount determined in accordance with
     Section 6.2 of the Employment Agreement (Termination for Retirement, Death
     or Disability), and (ii) to the extent not paid under the Employment
     Agreement, a lump-sum cash amount equal to all Accrued Obligations
     determined as of the Termination Date, and

          (b) to provide Executive disability and other benefits after the
     Termination Date that are not less than the most favorable of such benefits
     then available under Plans of the Company to disabled peer executives of
     the Company.

If the Termination Date occurred during an Imminent Control Change Period which
had a Consummation Date which is not also a Merger of Equals or a Post-Change
Employment Period other than a Post-Merger of Equals Period, such disability and
other benefits shall also be no less favorable, in the aggregate, than the most
favorable of the disability and other benefits available to Executive under such
Plans in effect at any time during the 90-day period immediately preceding (1)
the Effective Date if such Termination Date occurred during a Post-Change
Employment Period or (2) the date of the Imminent Control Change if such
Termination Date occurred during an Imminent Control Change Period. The LTIP
Bonus shall be governed according to the terms of the LTIP and New LTIP, as
applicable.

     4.9 If upon Death. If Executive's employment is terminated by reason of
Executive's death during the Post-Change Employment Period or Imminent Control
Change Period, Section 6.2 of the Employment Agreement (Termination for
Retirement, Death or Disability)

                                      -26-
   32

shall not apply, and the Company's sole obligations to Executive under Articles
II and IV shall be as follows:

          (a) to pay Executive's Beneficiary or estate (i) the amount determined
     in accordance with Section 6.2 of the Employment Agreement (Termination for
     Retirement, Death or Disability) and (ii) to the extent not paid under the
     Employment Agreement, a lump-sum cash amount equal to all Accrued
     Obligations; and

          (b) to provide Executive's estate or Beneficiary survivor and other
     benefits that are not less than the most favorable survivor and other
     benefits then available under Plans of the Company to the estates or the
     surviving families of peer executives of the Company.

If the Termination Date occurred during an Imminent Control Change which had a
Consummation Date which is not also a Merger of Equals or a Post-Change
Employment Period other than a Post-Merger of Equals Period, such survivor
benefits shall also be no less favorable, in the aggregate, than the most
favorable of the survivor benefits available to Executive under such Plans in
effect at any time during the go-day period immediately preceding (1) the
Effective Date if such Termination Date occurred during a Post-Change Employment
Period or (2) the date of the Imminent Control Change if such Termination Date
occurred during an Imminent Control Change Period. The LTIP Bonus shall be
governed according to the terms of the LTIP and New LTIP, as applicable.

     4.10 Executive's Election to Waive. Notwithstanding the foregoing
provisions of this Article IV or any provision of the Employment Agreement, if
Executive's employment is terminated during a Post-Change Employment Period
other than for Disability, or other than by the Company for Cause, including
under circumstances entitling Executive to payments and provision of benefits
under Section 4.1 or 4.2., then Executive may waive ("Severance Waiver") all his
rights to such payments and benefits, and all rights to payments and provision
of benefits under Section 6.3 of the Employment Agreement; provided, however
that the Severance Waiver shall not include a waiver of payment or provision of
Executive's Accrued Obligations. Any such Severance Waiver shall be in writing,
and shall be delivered to the Company as provided in Section 9.7 within three
days of such termination of employment (and in any event prior to Executive's
receipt of any payments or benefits). The provisions of Section 7.1 of the
Employment Agreement (Non-Competition) shall not apply from and after the date
the Severance Waiver is duly delivered to the Company.

                                   ARTICLE V.

                       CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

     5.1 Gross-Up Payment. During the Supplement Term, this Section 5.1 shall
supersede Section 8.1 of the Employment Agreement, effective on an Effective
Date. If at any time or from time to time, it shall be determined by the
Company's independent auditors, but only after an Effective Date, that any
payment or other benefit to Executive pursuant to Article II or Article IV of
this Supplement and Amendment or otherwise ("Potential Parachute Payment") is or
will become subject to the excise tax imposed by Section 4999 of the Code or any
similar tax payable under any United States federal, state, local, foreign or
other law ("Excise Taxes"), then the

                                      -27-
   33

Company shall pay or cause to be paid a tax gross-up payment ("Gross-Up
Payment") with respect to all such Excise Taxes and other Taxes on the Gross-Up
Payment. The Gross-Up Payment shall be an amount equal to the product of

          (a)  The amount of the Excise Taxes (calculated at the effective
     marginal rates of all federal, state, local, foreign or other law),

     multiplied by

          (b) A fraction (the "Gross-Up Multiple"), the numerator or which is
     one (1.0), and the denominator of which is one (1.0) minus the lesser
     of (i) the sum, expressed as a decimal fraction, of the effective marginal
     rates of any Taxes and any Excise Taxes applicable to the Gross-Up Payment
     or (ii) .80. If different rates of tax are applicable to various portions
     of a Gross-Up Payment, the weighted average of such rates shall be used.
     For purposes of this section, Executive shall be deemed to be subject to
     the highest effective marginal rate of Taxes.

The Gross-Up Payment is intended to compensate Executive for all such Excise
Taxes and any other Taxes payable by Executive with respect to the Gross-Up
Payment. The Company shall pay or cause to be paid the Gross-Up Payment to
Executive within ten (10) days of the calculation of such amount, but in no
event after the Executive is required to make payment to the IRS of such Excise
Taxes.

     5.2 Limitation on Gross-Up Payments. This Section 5.2 shall supersede
Section 8.2 of the Employment Agreement, effective on the Supplement Date.

          (a) To the extent possible, any payments or other benefits to
     Executive pursuant to Article II and Article IV of this Supplement and
     Amendment shall be allocated as consideration for Executive's entry into
     the covenants of Article VII of the Employment Agreement (Restrictive
     Covenants).

          (b) Notwithstanding any other provision of this Article V, if the
     aggregate After-Tax Amount (as defined below) of the Potential Parachute
     Payments and Gross-Up Payment that, but for this Section 5.2, would be
     payable to Executive, does not exceed 110% of After-Tax Floor Amount (as
     defined below), then no Gross-Up Payment shall be made to Executive and the
     aggregate amount of Potential Parachute Payments payable to Executive shall
     be reduced (but not below the Floor Amount) to the largest amount which
     would both (i) not cause any Excise Tax to be payable by Executive and (ii)
     not cause any Potential Parachute Payments to become nondeductible by the
     Company by reason of Section 280G of the Code (or any successor provision).
     For purposes of the preceding sentence, Executive shall be deemed to be
     subject to the highest effective marginal rate of Taxes.

          (c) For purposes of this Supplement and Amendment:

               (i)  "After-Tax Amount" means the portion of a specified amount
          that would remain after payment of all Taxes paid or payable by
          Executive in respect of such specified amount;

                                      -28-
   34

              (ii)  "Floor Amount" means the greatest pre-tax amount of
          Potential Parachute Payments that could be paid to Executive without
          causing Executive to become liable for any Excise Taxes in connection
          therewith; and

             (iii) "After-Tax Floor Amount" means the After-Tax Amount of the
          Floor Amount.

     5.3 Additional Gross-up Amounts. If for any reason (whether pursuant to
subsequently enacted provisions of the Code, final regulations or published
rulings of the IRS, or a final judgment of a court of competent jurisdiction)
the Company's independent auditors later determine that the amount of Excise
Taxes payable by Executive is greater than the amount initially determined
pursuant to Section 5.1, then the Company shall, subject to Sections 5.2 and
5.4, pay Executive, within ten (10) days of such determination, or pay to the
IRS as required by applicable law, an amount (which shall also be deemed a
Gross-Up Payment) equal to the product of:

          (a) the sum of (i) such additional Excise Taxes and (ii) any interest,
     penalties, expenses or other costs incurred by Executive as a result of
     having taken a position in accordance with a determination made pursuant to
     Section 5.1 or 5.4,

multiplied by

          (b) the Gross-Up Multiple.

     5.4 Amount Increased or Contested.

          (a) Executive shall notify the Company in writing (an "Executive's
     Notice") of any claim by the IRS or other taxing authority (an "IRS Claim")
     that, if successful, would require the payment by Executive of Excise Taxes
     in respect of Potential Parachute Payments in an amount in excess of the
     amount of such Excise Taxes determined in accordance with Section 5.1.
     Executive's Notice shall include the nature and amount of such IRS
     Claim, the date on which such IRS Claim is due to be paid (the "IRS Claim
     Deadline"), and a copy of all notices and other documents or correspondence
     received by Executive in respect of such IRS Claim. Executive shall give
     the Executive's Notice as soon as practicable, but no later than the
     earlier of (i) 10 days after Executive first obtains actual knowledge of
     such IRS Claim or (ii) five days before the IRS Claim Deadline; provided,
     however, that any failure to give such Executive's Notice shall affect the
     Company's obligations under this Article only to the extent that the
     Company is actually prejudiced by such failure. If at least one business
     day before the IRS Claim Deadline the Company shall:

               (i)  deliver to Executive a written certificate from the
          Company's independent auditors ("Company Certificate") to the effect
          that, notwithstanding the IRS Claim, the amount of Excise Taxes,
          interest or penalties payable by Executive is either zero or an amount
          less than the amount specified in the IRS Claim,

               (ii) pay to Executive, or to the IRS as required by applicable
          law, an amount (which shall also be deemed a Gross-Up Payment) equal
          to difference

                                      -29-
   35

          between the product of (x) amount of Excise Taxes, interest and
          penalties specified in the Company Certificate, if any, multiplied by
          (y) the Gross-Up Multiple, less the portion of such product, if any,
          previously paid to Executive by the Company, and

               (iii) direct Executive pursuant to Section 5.4(d) to contest the
          balance of the IRS Claim,

     then Executive shall pay only the amount, if any, of Excise Taxes, interest
     and penalties specified in the Company Certificate. In no event shall
     Executive pay an IRS Claim earlier than 30 days after having given an
     Executive's Notice to the Company (or, if sooner, the IRS Claim Deadline).

          (b) At any time after the payment by Executive of any amount of Excise
     Taxes, other Taxes or related interest or penalties in respect of Potential
     Parachute Payments (including any such amount equal to or less than the
     amount of such Excise Taxes specified in any Company Certificate, or IRS
     Claim), the Company may in its discretion require Executive to pursue a
     claim for a refund (a "Refund Claim") of all or any portion of such Excise
     Taxes, other Taxes, interest or penalties as may be specified by the
     Company in a written notice to Executive.

          (c) If the Company notifies Executive in writing that the Company
     desires Executive to contest an IRS Claim or to pursue a Refund Claim,
     Executive shall:

               (i)  give the Company all information that it reasonably requests
          in writing from time to time relating to such IRS Claim or Refund
          Claim, as applicable,

               (ii) take such action in connection with such IRS Claim or
          Refund Claim (as applicable) as the Company reasonably requests in
          writing from time to time, including accepting legal representation
          with respect thereto by an attorney selected by the Company, subject
          to the approval of Executive (which approval shall not be unreasonably
          withheld or delayed),

               (iii) cooperate with the Company in good faith to contest such
          IRS Claim or pursue such Refund Claim, as applicable,

               (iv)  permit the Company to participate in any proceedings
          relating to such IRS Claim or Refund Claim, as applicable, and

               (v)   contest such IRS Claim or prosecute Refund Claim (as
          applicable) to a determination before any administrative tribunal, in
          a court of initial jurisdiction and in one or more appellate courts,
          as the Company may from time to time determine in its discretion.

     The Company shall control all proceedings in connection with such IRS Claim
     or Refund Claim (as applicable) and in its discretion may cause Executive
     to pursue or forego any and all administrative appeals, proceedings,
     hearings and conferences with the Internal Revenue Service or other taxing
     authority in respect of such IRS Claim or Refund Claim

                                      -30-
   36

     (as applicable); provided that (i) any extension of the statute of
     limitations relating to payment of taxes for the taxable year of Executive
     relating to the IRS Claim is limited solely to such IRS Claim, (ii) the
     Company's control of the IRS Claim or Refund Claim (as applicable) shall be
     limited to issues with respect to which a Gross-Up Payment would be
     payable, and (iii) Executive shall be entitled to settle or contest, as the
     case may be, any other issue raised by the Internal Revenue Service or
     other taxing authority.

          (d) The Company may at any time in its discretion direct Executive to
     (i) contest the IRS Claim in any lawful manner or (ii) pay the amount
     specified in an IRS Claim and pursue a Refund Claim; provided, however,
     that if the Company directs Executive to pay an IRS Claim and pursue a
     Refund Claim, the Company shall advance the amount of such payment to
     Executive on an interest-free basis and shall indemnify Executive, on an
     after-tax basis, for any Excise Tax or income tax, including related
     interest or penalties, imposed with respect to such advance.

          (e) The Company shall pay directly all legal, accounting and other
     costs and expenses (including additional interest and penalties) incurred
     by the Company or Executive in connection with any IRS Claim or Refund
     Claim, as applicable, and shall indemnify Executive, on an after-tax basis,
     for any Excise Tax or income tax, including related interest and penalties,
     imposed as a result of such payment of costs and expenses.

     5.5 Refunds. If, after the receipt by Executive or the IRS of any payment
or advance of Excise Taxes or other Taxes by the Company pursuant to this
Article, Executive receives any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 5.4) promptly pay the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 5.4, or receipt by the IRS of an amount paid by the
Company on behalf of the Executive pursuant to Section 5.4, a determination is
made that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify Executive in writing of its intent to
contest such determination within 30 days after the Company receives written
notice of such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid. Any contest
of a denial of refund shall be controlled by Section 5.4(d).

                                   ARTICLE VI.

                    EXPENSES, INTEREST AND DISPUTE RESOLUTION

     6.1 Legal Fees and Other Expenses.

          (a)  If Executive incurs legal fees or other expenses (including
     expert witness and accounting fees and arbitration costs and expenses under
     Section 6.3) in an effort to secure, preserve, establish entitlement to, or
     obtain benefits under this Supplement and Amendment, the Company shall,
     regardless of the outcome of such effort, reimburse Executive on a current
     basis (in accordance with Section 6.1(b)) for such fees and expenses.

                                      -31-
   37

          (b) Reimbursement of legal fees and expenses and gross-up payments
     shall be made monthly within 10 days after Executive's written submission
     of a request for reimbursement together with evidence that such fees and
     expenses were incurred.

          (c) If Executive does not prevail (after exhaustion of all available
     judicial remedies) in respect of a claim by Executive or by the Company
     hereunder, and the Company establishes before a court of competent
     jurisdiction that Executive had no reasonable basis for Executive's claim
     hereunder, or for Executive's response to the Company's claim hereunder, or
     that Executive acted in bad faith, no further reimbursement for legal fees
     and expenses shall be due to Executive in respect of such claim and
     Executive shall refund any amounts previously reimbursed hereunder with
     respect to such claim.

          (d)  In no event shall Executive be entitled to reimbursement under
     this Supplement and Amendment and under the Employment Agreement for the
     same fees, costs or expenses.

          (e)  The Company shall promptly reimburse Executive for all attorneys'
     fees, costs and expenses incurred by Executive in connection with the
     negotiation, execution and delivery of this Supplement and Amendment.

     6.2 Interest. If the Company does not pay any amount due to Executive under
this Supplement and Amendment within ten business days after such amount first
became due and owing, interest shall accrue on such amount from the date it
became due and owing until the date of payment at an annual rate equal to 300
basis points above the base commercial lending rate published in The Wall Street
Journal in effect from time to time during the period of such nonpayment.

     6.3 Binding Arbitration. Any dispute, controversy or claim arising out of
or in connection with or relating to this Supplement and Amendment or any breach
or alleged breach thereof, or any benefit or alleged benefit hereunder, shall be
submitted to and settled by binding arbitration in Des Moines, Iowa, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. Any dispute, controversy or claim submitted for resolution shall be
submitted to three (3) arbitrators, each of whom is a nationally recognized
executive compensation specialist. The Company involved in the dispute,
controversy or claim, or Mutual if more than one Company is so involved, shall
select one arbitrator, the Executive shall select one arbitrator and the third
arbitrator shall be selected by the first two arbitrators. Any award rendered
shall be final and conclusive upon the parties and a judgment thereon may be
entered in the highest court of a forum, state or federal, having jurisdiction.
The expenses of the arbitration shall be borne according to Section 6.1. No
arbitration shall be commenced after the date when institution of legal or
equitable proceedings based upon such subject matter would be barred by the
applicable statute of limitations. Notwithstanding anything to the contrary
contained in this Section 6.3 or elsewhere in this Supplement and Amendment,
either party may bring an action in the District Court of Polk County, or the
United States District Court for the Southern District of Iowa, if jurisdiction
there lies, in order to maintain the status quo ante of the parties. The "status
quo ante" is defined as the last peaceable, uncontested status between the
parties. However, neither the party bringing the action nor the party defending
the action thereby waives its right to arbitration of any dispute, controversy
or claim arising out of or in connection or relating to this

                                      -32-
   38

     Supplement and Amendment. Notwithstanding anything to the contrary
     contained in this Section 6.3 or elsewhere in this Supplement and
     Amendment, either party may seek relief in the form of specific
     performance, injunctive or other equitable relief in order to enforce the
     decision of the arbitrator(s). The parties agree that in any arbitration
     commenced pursuant to this Supplement and Amendment, the parties shall be
     entitled to such discovery (including depositions, requests for the
     production of documents and interrogatories) as would be available in a
     federal district court pursuant to Rules 26 through 37 of the Federal Rules
     of Civil Procedure. In the event that either party fails to comply with its
     discovery obligations hereunder, the arbitrator(s) shall have full power
     and authority to compel disclosure or impose sanctions to the full extent
     of Rule 37 of the Federal Rules of Civil Procedure.

                                  Article VII.

                   No Set-off or Mitigation; No Double Payment

     7.1 No Set-off by Company. Executive's right to receive when due the
payments and other benefits provided for under this Supplement and Amendment is
absolute, unconditional and subject to no setoff, counterclaim or legal or
equitable defense. Time is of the essence in the performance by the Company of
its obligations under this Supplement and Amendment. Any claim which the Company
may have against Executive, whether for a breach of this Supplement and
Amendment or otherwise, shall be brought in a separate action or proceeding and
not as part of any action or proceeding brought by Executive to enforce any
rights against the Company under this Supplement and Amendment.

     7.2 No Mitigation. Executive shall not have any duty to mitigate the
amounts payable by the Company under this Supplement and Amendment by seeking
new employment or self-employment following termination. Except as specifically
otherwise provided in this Supplement and Agreement, all amounts payable
pursuant to this Supplement and Agreement shall be paid without reduction
regardless of any amounts of salary, compensation or other amounts which may be
paid or payable to Executive as the result of Executive's employment by another
employer or self-employment.

     7.3 No Double Payment. Notwithstanding any other provision of this
Supplement and Amendment, the Executive shall not be entitled to payment under
both this Supplement and Amendment and the Employment Agreement for the same
type of benefit or payment, to the extent such payment would reasonably be
considered duplicative. Amounts paid hereunder shall be reduced by amounts paid
under the Employment Agreement for the same type of benefit or payment, to the
extent such payment would reasonably be considered duplicative.

                                  ARTICLE VIII.

                            NON-EXCLUSIVITY OF RIGHTS

     8.1 Waiver of Certain Other Rights. To the extent that lump sum cash
severance payments are made to Executive pursuant to Article IV, Executive
hereby waives the right to receive severance payments or severance benefits
under any other Plan or agreement of the Company, including under the Employment
Agreement.

                                      -33-
   39

     8.2 Other Rights. Except as expressly provided in Section 8.1 or elsewhere
in this Supplement and Amendment, this Supplement and Amendment shall not
prevent or limit Executive's continuing or future participation in any benefit,
bonus, incentive or other Plans provided by the Company and for which Executive
may qualify, nor shall this Supplement and Amendment limit or otherwise affect
such rights as Executive may have under any other agreements with the Company.
The applicable provisions of the Employment Agreement (including the provisions
in Article VII (Restrictive Covenants)) shall continue to apply, except as
expressly provided in Sections 8.1 and 4.10 or elsewhere in this Supplement and
Amendment. Amounts which are vested benefits or which Executive is otherwise
entitled to receive under any Plan and any other payment or benefit required by
law at or after the Termination Date shall be payable in accordance with such
Plan or applicable law except as expressly modified by this Supplement and
Amendment.

     8.3 No Right to Continued Employment. Nothing in this Supplement and
Amendment shall guarantee the right of Executive to continue in employment, and
the Companies retain the right to terminate the Executive's employment at any
time for any reason or for no reason.

                                   ARTICLE IX.

                                  MISCELLANEOUS

     9.1 No Assignability. This Supplement and Amendment is personal to
Executive and without the prior written consent of the Company shall not be
assignable by Executive otherwise than by will or the laws of descent and
distribution. This Supplement and Amendment shall inure to the benefit of and be
enforceable by Executive's legal representatives.

     9.2 Successors. This Supplement and Amendment shall inure to the benefit of
and be binding upon the Company and its successors and assigns. The Company will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to assume expressly and agree to perform this Supplement
and Amendment in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Any successor
to the business or assets of the Company which assumes or agrees to perform this
Supplement and Amendment by operation of law, contract, or otherwise shall be
jointly and severally liable with the Company under this Supplement and
Amendment as if such successor were the Company.

     9.3 Payments to Beneficiary. If Executive dies before receiving amounts to
which Executive is entitled under this Supplement and Amendment, such amounts
shall be paid in a lump sum to Executive's Beneficiary (or estate).

     9.4 Non-Alienation of Benefits. Benefits payable under this Supplement and
Amendment shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution or
levy of any kind, either voluntary or involuntary, before actually being
received by Executive, and any such attempt to dispose of any right to benefits
payable under this Supplement and Amendment shall be void.

                                      -34-
   40

     9.5 Severability. If any one or more Articles, Sections or other portions
of this Supplement and Amendment are declared by any court or governmental
authority to be unlawful or invalid, such unlawfulness or invalidity shall not
serve to invalidate any Article, Section or other portion not so declared to be
unlawful or invalid. Any Article, Section or other portion so declared to be
unlawful or invalid shall be construed so as to effectuate the terms of such
Article, Section or other portion to the fullest extent possible while remaining
lawful and valid.

     9.6 Amendments. This Supplement and Amendment shall not be amended or
modified except by written instrument executed by the Company and Executive.

     9.7 Notices. All notices and other communications under this Supplement and
Amendment shall be in writing and delivered by hand, by nationally-recognized
delivery service that promises overnight delivery, or by first-class registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:

               If to Executive, to Executive at his most recent home
               address on file with the Company.

               With copy to:

               Susan Daley, Esq.
               Altheimer & Grey
               10 South Wacker Drive, Suite 4000
               Chicago, Illinois 60606
               Facsimile No.: (312) 715-4800

               If to any Company:

               Principal Mutual Holding Company
               711 High Street
               Des Moines, Iowa 50392
               Attention: Karen Shaff
               Facsimile No.: (515) 235-9852

               With copy to:

               Pamela Baker, Esq.
               Sonnenschein Nath & Rosenthal
               8000 Sears Tower
               Chicago, Illinois 60606
               Facsimile No.: (312) 876-7934

or to such other address as either party shall have furnished to the other in
writing. Notice and communications shall be effective when actually received by
the addressee.

     9.8 Continuing Validity of Employment Agreement. Except as amended herein
or as subsequently amended, the Employment Agreement shall remain in effect in
accordance with its terms.

                                      -35-
   41

     9.9 Counterparts. This Supplement and Amendment may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together constitute one and the same instrument.

     9.10 Governing Law. This Supplement and Amendment shall be interpreted and
construed in accordance with the laws of the State of Iowa, without regard to
its choice of law principles.

     9.11 Captions. The captions of this Supplement and Amendment are not a part
of the provisions hereof and shall have no force or effect.

     9.12 Number and Gender. Wherever appropriate, the singular shall include
the plural, the plural shall include the singular, and the masculine shall
include the feminine.

     9.13 Tax Withholding. The Company may withhold from any amounts payable
under this Supplement and Amendment any Taxes that are required to be withheld
pursuant to any applicable law or regulation and may report all such amounts
payable to such authority as is required by any applicable law or regulation.

     9.14 Waiver. Executive's failure to insist upon strict compliance with any
provision of this Supplement and Amendment shall not be deemed a waiver of such
provision or any other provision of this Supplement and Amendment. A waiver of
any provision df this Supplement and Amendment shall not be deemed a waiver of
any other provision, and any waiver of any default in any such provision shall
not be deemed a waiver of any later default thereof or of any other provision.

     9.15 Joint and Several Liability. The obligations of the Companies to
Executive under this Supplement and Amendment shall be joint and several.

                                      -36-
   42

     9.16 Entire Agreement. This Supplement and Amendment, together with the
Employment Agreement, contains the entire understanding of Mutual, Company and
Executive with respect to its subject matter.

     IN WITNESS WHEREOF, Executive, Principal Mutual Holding Company, Principal
Financial Group, Principal Financial Services, Inc., and Principal Life
Insurance Company have executed this Supplement and Amendment as of the date
first above written.

                          EXECUTIVE

                          /s/ J. Barry Griswell
                          ----------------------------------------------
                          J. BARRY GRISWELL

                          PRINCIPAL MUTUAL HOLDING COMPANY

                          /s/ Daniel Gelatt
                          ----------------------------------------------
                          By: Daniel Gelatt
                          Title: Chairman Human Resource Committee of the
                          Board of Directors

                          PRINCIPAL FINANCIAL GROUP

                          /s/ Daniel Gelatt
                          ----------------------------------------------
                          By: Daniel Gelatt
                          Title: Chairman Human Resource Committee of the
                          Board of Directors

                          PRINCIPAL FINANCIAL SERVICES, INC.

                          /s/ Daniel Gelatt
                          ----------------------------------------------
                          By: Daniel Gelatt
                          Title: Chairman Human Resource Committee of the
                          Board of Directors

                          PRINCIPAL LIFE INSURANCE COMPANY

                          /s/ Daniel Gelatt
                          ----------------------------------------------
                          By: Daniel Gelatt
                          Title: Chairman Human Resource Committee of the
                          Board of Directors

                                      -37-
   1
                                                                    EXHIBIT 10.9

                      PRINCIPAL MUTUAL HOLDING COMPANY AND

                        PRINCIPAL LIFE INSURANCE COMPANY

                     CHANGE OF CONTROL EMPLOYMENT AGREEMENT

                             (TIER ONE EXECUTIVES)
   2

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
                                TABLE OF CONTENTS

Article I. Certain Definitions .............................................. 1
    1.1   "Accrued Annual Bonus" ............................................ 1
    1.2   "Accrued Base Salary" ............................................. 1
    1.3   "Accrued LTIP Bonus" .............................................. 1
    1.4   "Accrued Obligations" ............................................. 1
    1.5   "Affiliate" ....................................................... 2
    1.6   "Agreement Date" .................................................. 2
    1.7   "Agreement Term" .................................................. 2
    1.8   "Annual Bonus" .................................................... 2
    1.9   "Annual Performance Period" ....................................... 2
    1.10  "Annualized Target LTIP Bonus" .................................... 2
    1.11  "Article" ......................................................... 3
    1.12  "Base Salary" ..................................................... 3
    1.13  "Beneficial Owner" ................................................ 3
    1.14  "Beneficiary" ..................................................... 3
    1.15  "Board" ........................................................... 3
    1.16  "Bonus Plan" ...................................................... 3
    1.17  "Cause" ........................................................... 3
    1.18  "Change of Control" ............................................... 3
    1.19  "Code" ............................................................ 4
    1.20  "Company" ......................................................... 4
    1.21  "Company Certificate" ............................................. 4
    1.22  "Competitive Business" ............................................ 4
    1.23  "Consummation Date" ............................................... 4
    1.24  "Continuity of Ownership" ......................................... 4
    1.25  "Demutualization" ................................................. 5
    1.26  "Disability" ...................................................... 5
    1.27  "Effective Date" .................................................. 5
    1.28  "Exchange Act" .................................................... 5
    1.29  "Excise Taxes" .................................................... 5
    1.30  "Good Reason" ..................................................... 5
    1.31  "Gross-Up Multiple" ............................................... 5
    1.32  "Gross-Up Payment" ................................................ 5
    1.33  "Imminent Control Change" ......................................... 5
    1.34  "Imminent Control Change Period" .................................. 7
    1.35  "including" ....................................................... 7
    1.36  "IRS" ............................................................. 7
    1.37  "IRS Claim" ....................................................... 7
    1.38  "LTIP" ............................................................ 7
    1.39  "LTIP Award" ...................................................... 7
    1.40  "LTIP  Bonus" ..................................................... 7

   3

                                TABLE OF CONTENTS

                                   (CONTINUED)

                                                                            PAGE
                                                                            ----

    1.41  "LTIP Outstanding Award" .......................................... 7
    1.42  "LTIP Performance Period" ......................................... 7
    1.43  "LTIP Target Award" ............................................... 7
    1.44  "Lump Sum Value" .................................................. 7
    1.45  "Maximum Annuity" ................................................. 7
    1.46  "Merger of Equals" ................................................ 8
    1.47  "Merger of Equals Cessation Date" ................................. 8
    1.48  "Mutual" .......................................................... 8
    1.49  "Mutual Incumbent Directors" ...................................... 9
    1.50  "New LTIP" ........................................................ 9
    1.51  "Notice of Consideration" ......................................... 9
    1.52  "Notice of Termination" ........................................... 9
    1.53  "Person" .......................................................... 9
    1.54  "Plans" ........................................................... 9
    1.55  "Post-Change Employment Period" ................................... 9
    1.56  "Post-Merger of Equals Period" .................................... 9
    1.57  "Potential Parachute Payment" ..................................... 9
    1.58  "Pro-rata Annual Bonus" ........................................... 9
    1.59  "Pro-rata LTIP Bonus" .............................................10
    1.60  "Refund Claim" ....................................................10
    1.61  "Reorganization Transaction" ......................................10
    1.62  "Restricted Shares" ...............................................10
    1.63  "SEC" .............................................................10
    1.64  "SEC Person" ......................................................11
    1.65  "Section" .........................................................11
    1.66  "SERP" ............................................................11
    1.67  "Stock Options" ...................................................11
    1.68  "Surviving Corporation" ...........................................11
    1.69  "Target Annual Bonus" .............................................11
    1.70  "Taxes" ...........................................................11
    1.71  "Termination Date" ................................................11
    1.72  "Termination of Employment" .......................................11
    1.73  "25% Owner" .......................................................12
    1.74  "Voting Securities" ...............................................12

Article II. Post-Change Employment Period ...................................12
    2.1   Position and Duties ...............................................12
    2.2   Compensation ......................................................13
    2.3   Stock Incentive Awards ............................................16
    2.4   Unfunded Deferred Compensation ....................................16
    2.5   Pro-rata Annual Bonus .............................................17
    2.6   Pro-rata LTIP Bonus ...............................................17

                                      -ii-
   4

                                TABLE OF CONTENTS

                                   (CONTINUED)

                                                                            PAGE
                                                                            ----

Article III. Termination of Employment ......................................17
    3.1   Disability ........................................................17
    3.2   Death .............................................................18
    3.3   Termination for Cause. ............................................18
    3.4   Good Reason .......................................................21

Article IV. Company's Obligations Upon Certain Terminations of Employment ...23
    4.1   Termination During the Post-Change Employment Period ..............23
    4.2   Termination During a Post-Merger of Equals Period .................26
    4.3   Termination During an Imminent Control Change Period
          (with no Change of Control) .......................................27
    4.4   Termination During an Imminent Control Change Period
          (which Culminates in a Change of Control) .........................28
    4.5   Waiver and Release ................................................30
    4.6   Termination by the Company for Cause ..............................30
    4.7   Termination by Executive Other Than for Good Reason ...............31
    4.8   Termination by the Company for Disability .........................31
    4.9   If upon Death .....................................................31

Article V. Certain Additional Payments by the Company .......................32
    5.1   Gross-Up Payment ..................................................32
    5.2   Limitation on Gross-Up Payments ...................................32
    5.3   Additional Gross-up Amounts .......................................33
    5.4   Amount Increased or Contested .....................................33
    5.5   Refunds ...........................................................35

Article VI. Expenses, Interest and Dispute Resolution .......................36
    6.1   Legal Fees and Other Expenses .....................................36
    6.2   Interest ..........................................................36
    6.3   Binding Arbitration ...............................................36

Article VII. No Set-off or Mitigation .......................................37
    7.1   No Set-off by Company .............................................37
    7.2   No Mitigation .....................................................37

Article VIII. Confidentiality and Noncompetition ............................38
    8.1   Confidential Information ..........................................38
    8.2   Non-Competition ...................................................38
    8.3   Non-Solicitation ..................................................39
    8.4   Intellectual Property .............................................39
    8.5   Reasonableness of Restrictive Covenants ...........................40
    8.6   Right to Injunction; Survival of Undertakings .....................41

                                     -iii-
   5

                                TABLE OF CONTENTS

                                   (CONTINUED)

                                                                            PAGE
                                                                            ----

Article IX. Non-Exclusivity of Rights .......................................41
    9.1   Waiver of Certain Other Rights ....................................41
    9.2   Other Rights ......................................................41
    9.3   No Right to Continued Employment ..................................42

Article X. Miscellaneous ....................................................42
    10.1  No Assignability ..................................................42
    10.2  Successors ........................................................42
    10.3  Payments to Beneficiary ...........................................42
    10.4  Non-Alienation of Benefits ........................................42
    10.5  Severability ......................................................42
    10.6  Amendments ........................................................42
    10.7  Notices ...........................................................42
    10.8  Counterparts ......................................................43
    10.9  Governing Law .....................................................43
    10.10 Captions ..........................................................43
    10.11 Number and Gender .................................................43
    10.12 Tax Withholding ...................................................43
    10.13 Waiver ............................................................43
    10.14 Joint and Several Liability .......................................43
    10.15 Entire Agreement ..................................................44

                                      -iv-

   6

                      PRINCIPAL MUTUAL HOLDING COMPANY AND

                        PRINCIPAL LIFE INSURANCE COMPANY

                     CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT

     THIS AGREEMENT dated as of __________, 2000 (the "Agreement Date") is made
by and among Principal Mutual Holding Company, an Iowa mutual holding company
(together with all successors thereto, "Mutual"), Principal Financial Group,
Inc., an Iowa corporation, Principal Financial Services, Inc., an Iowa
corporation, and Principal Life Insurance Company, an Iowa corporation (together
with all successors thereto, "Life") (each of the foregoing referred to
individually as a "Company" or collectively as "Companies"), and ______________
("Executive").

                                    RECITALS

     The Companies have determined that it is in the best interests of the
Companies and their members, (and if, at the relevant time, any are stock
companies, their stockholders) to assure that the Companies will have the
continued service of Executive. The Companies also believe it is imperative to
reduce the distraction of Executive that would result from the personal
uncertainties caused by a pending or threatened change of control of Mutual, to
encourage Executive's full attention and dedication to the Companies, and to
provide Executive with compensation and benefits arrangements upon a change of
control which ensure that the expectations of Executive will be satisfied and
are competitive with those of similarly-situated businesses. This Agreement is
intended to accomplish these objectives.

                                   ARTICLE I.

                               CERTAIN DEFINITIONS

     As used in this Agreement, the terms specified below shall have the
following meanings:

     1.1  "Accrued Annual Bonus" means the amount of any Annual Bonus earned but
not yet paid with respect to the Company's latest fiscal year ended prior to the
Effective Date, Merger of Equals Cessation Date, or Termination Date, as
applicable.

     1.2  "Accrued Base Salary" means the amount of Executive's Base Salary that
is accrued but not yet paid as of the Termination Date.

     1.3  "Accrued LTIP Bonus" means the amount of any LTIP Bonus earned but
either deferred or not paid on or prior to the Effective Date, Merger of Equals
Cessation Date, or Termination Date, as applicable.

     1.4  "Accrued Obligations" means, as of any date, the sum of Executive's
Accrued Base Salary, Accrued Annual Bonus, Accrued LTIP Bonus, any accrued but
unpaid paid time

   7

off, and any other amounts and benefits which are then due to be paid or
provided to Executive by the Company, but have not yet been paid or provided (as
applicable).

     1.5  "Affiliate" means any Person that directly or indirectly controls, is
controlled by, or is under common control with, a Company. For purposes of this
definition the term "control" with respect to any Person means the power to
direct or cause the direction of management or policies of such Person, directly
or indirectly, whether through the ownership of Voting Securities, by contract
or otherwise.

     1.6  "Agreement Date" -- see the introductory paragraph of this Agreement.

     1.7  "Agreement Term" means the period commencing on the Agreement Date and
ending on the third anniversary of the Agreement Date or, if later, such later
date to which the Agreement Term is extended under the following sentence.
Commencing on the first anniversary of the Agreement Date, the Agreement Term
shall automatically be extended each day by one day to create a new two-year
term until, at any time after the first anniversary of the Agreement Date, the
Company delivers written notice (an "Expiration Notice") to Executive that the
Agreement shall expire on a date specified in the Expiration Notice (the
"Expiration Date") that is not less than 24 months after the date the Expiration
Notice is delivered to Executive; provided, however, that if an Effective Date
or an Imminent Control Change occurs before the Expiration Date specified in the
Expiration Notice, then such Expiration Notice shall be void and of no further
effect, provided, however, if such Imminent Control Change does not culminate in
a Consummation Date, then such Expiration Notice shall be reinstated and the
Agreement shall expire on the date originally specified as the Expiration Date,
or if later, the date the Imminent Control Change lapses. Notwithstanding
anything herein to the contrary, the Agreement Term shall end on the second
anniversary of the Effective Date.

     1.8  "Annual Bonus" -- see Section 2.2(b).

     1.9  "Annual Performance Period" -- see Section 2.2(b).

     1.10 "Annualized Target LTIP Bonus" means, in respect of any Termination
Date, an amount, based on the most recently granted LTIP Award for which the
LTIP Performance Period has not expired or terminated (disregarding for this
purpose the premature termination of any LTIP Performance Period that occurred
on or after the Effective Date), calculated as follows:

          (a) If the most recently granted LTIP Award was granted under the 1999
     Long-Term Performance Plan, the projected target award (stated as a
     percentage of Base Salary) as calculated at the beginning of the three-year
     award cycle which Executive would have been entitled to receive with
     respect to such most recent allocation of performance units as if "Gain
     from Operations" and "Return on Equity" (as such terms are defined in the
     1999 Long-Term Performance Plan) targets had been met.

          (b) If the most recently granted LTIP Award was granted under a New
     LTIP under which consecutive LTIP Performance Periods end each 12 months,
     the Executive's LTIP Target Award with respect to such most recent grant.

          (c) If the most recently granted LTIP Award was granted under a New
     LTIP under which consecutive LTIP Performance Periods end more or less
     frequently than

                                      -2-
   8

     each 12 months, the Executive's LTIP Target Award with respect to such most
     recent grant, multiplied by a fraction, the numerator of which is 12 and
     the denominator of which is the number of whole months between payments of
     LTIP Bonuses.

          (d) If the Executive has no LTIP Awards outstanding with respect to
     which the LTIP Performance Period has not yet ended, the amount shall be
     zero.

     1.11 "Article" means an article of this Agreement.

     1.12 "Base Salary -- see Section 2.2(a).

     1.13 "Beneficial Owner" means such term as defined in Rule 13d-3 of the SEC
under the Exchange Act.

     1.14 "Beneficiary" -- see Section 10.3.

     1.15 "Board" means the Board of Directors of Mutual or, from and after the
effective date of a Reorganization Transaction, the Board of Directors of the
Surviving Corporation.

     1.16 "Bonus Plan" -- see Section 2.2(b).

     1.17 "Cause" -- see Section 3.3.

     1.18 "Change of Control" means, except as otherwise provided below, the
occurrence of any one or more of the following:

          (a) any SEC Person becomes the Beneficial Owner of 25% or more of the
     common stock of Mutual or of Voting Securities representing 25% or more of
     the combined voting power of all Voting Securities of Mutual (such an SEC
     Person, a "25% Owner"); or

          (b) the Mutual Incumbent Directors (determined using the Agreement
     Date as the baseline date) cease for any reason to constitute at least a
     majority of the Board; or

          (c) consummation of a merger, reorganization, consolidation, or
     similar transaction (any of the foregoing, a "Reorganization Transaction")
     where the Continuity of Ownership is not more than 60%; or

          (d) approval by the members of Mutual, if at the relevant time Mutual
     is a mutual life insurance holding company, or approval by the stockholders
     of Mutual, if at the relevant time Mutual is a stock company, of a plan or
     agreement for the sale or other disposition of all or substantially all of
     the consolidated assets of Mutual or a plan of liquidation of Mutual.

Notwithstanding the foregoing, a Change of Control shall not occur merely as a
result of (i) Demutualization, or (ii) an underwritten initial public offering
of common stock of Mutual as filed with the SEC, unless such initial public
offering results in any SEC Person becoming a 25% Owner. Notwithstanding the
occurrence of any of the foregoing events, a Change of Control

                                      -3-
   9

shall not occur with respect to Executive if, in advance of such event,
Executive agrees in writing that such event shall not constitute a Change of
Control.

     1.19 "Code" means the Internal Revenue Code of 1986, as amended.

     1.20 "Company" -- see the introductory paragraph to this Agreement.

     1.21 "Company Certificate" -- see Section 5.4(a).

     1.22 "Competitive Business" means as of any date (including during the
one-year period commencing on the Termination Date) any Person (and any branch,
office or operation thereof) that engages in, or proposes to engage in:

          (a) the underwriting, reinsurance, marketing or sale of (i) any form
     of insurance of any kind that any of the Companies as of such date does, or
     has under active consideration a proposal to, underwrite, reinsure, market
     or sell (any such form of insurance, a "Company Insurance Product" or (ii)
     any other form of insurance that is marketed or sold in competition with
     any Company Insurance Product, or

          (b) the sale of financial services which involve (i) the management,
     for a fee or other remuneration, of an investment account or find (or
     portions thereof or a group of investment accounts or funds), (ii) the
     giving of advice, for a fee or other remuneration, with respect to the
     investment and/or reinvestment of assets or funds (or any group of assets
     or funds), or (iii) financial planning services, or

          (c) the design, implementation and administration of employee benefit
     plans, including plan documents, employee communications, reporting,
     disclosure, financial advice, investment advice, and fiduciary services, or

          (d) any other business that as of such date is a direct and material
     competitor of a Company and its Affiliates to the extent that prior to the
     Date of Termination any of the Companies or its Affiliates engaged at any
     time within 12 months in or had under active consideration a proposal to
     engage in such competitive business;

and that is located anywhere in the United States or anywhere outside of the
United States where such Company or its Affiliates is then engaged in, or has
under active consideration a proposal to engage in, any of such activities.

     1.23 "Consummation Date" means the first date after an Imminent Control
Change upon which an Effective Date occurs, provided, however that one of the
following is satisfied:

          (a) the Imminent Control Change has not lapsed; or

          (b) the Imminent Control Change in effect upon such Effective Date is
     the last Imminent Control Change in a series of Imminent Control Changes
     unbroken by any period of time between the lapse of an Imminent Control
     Change and the occurrence of a new Imminent Control Change.

     1.24 "Continuity of Ownership" of a stated percentage means

                                      -4-
   10

          (a) if at the relevant time Mutual is a mutual life insurance holding
     company, the Persons who were the members of Mutual immediately before a
     Reorganization Transaction became, immediately after the consummation of
     such Reorganization Transaction, the direct or indirect owners of Voting
     Securities of the Surviving Corporation representing the stated percentage
     of the combined voting power of the then- outstanding Voting Securities of
     the Surviving Corporation, in substantially the same respective proportions
     as such Person's ownership of Voting Securities of Mutual immediately
     before such Reorganization Transaction, and

          (b) if at the relevant time Mutual is a stock company, the Persons who
     were the direct or indirect owners of the outstanding common stock and
     Voting Securities of Mutual immediately before such Reorganization
     Transaction became, immediately after the consummation of such
     Reorganization Transaction, the direct or indirect owners of both the
     stated percentage of the then-outstanding common stock of the Surviving-
     Corporation and Voting Securities representing the stated percentage of the
     combined voting power of the then-outstanding Voting Securities of the
     Surviving Corporation, in substantially the same respective proportions as
     such Persons' ownership of the common stock and Voting Securities of Mutual
     immediately before such Reorganization Transaction.

     1.25 "Demutualization" means the conversion of Mutual from a mutual life
insurance holding company to a stock company (x) at least 50% of whose
stockholders are persons who were members of Mutual immediately prior to such
transaction or a trust or separate account holding the shares of Mutual for the
benefit of such members or (y) owned by a corporation at least 50% of the shares
of which are held by the persons or trust described under clause (x), excluding
any such conversion that results in any SEC Person becoming a 25% Owner.

     1.26 "Disability" -- see Section 3.1 (b).

     1.27 "Effective Date" means the date on which a Change of Control first
occurs during the Agreement Term.

     1.28 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     1.29 "Excise Taxes" -- see Section 5.1.

     1.30 "Good Reason" -- see Section 3.4.

     1.31 "Gross-Up Multiple" -- see Section 5.1.

     1.32 "Gross-Up Payment" -- see Section 5.1.

     1.33 "Imminent Control Change' means, as of any date on or after the
Agreement Date and prior to the Effective Date, the occurrence of any one or
more of the following:

          (a) Mutual enters into an agreement the consummation of which would
     constitute a Change of Control;

                                      -5-
   11

          (b) Any SEC Person attempts to acquire 25% or more of the member
     interests in Mutual, as evidenced by filing or other certification of
     notice of such intent with any state's governmental agency established to
     regulate the insurance industry, which if consummated would constitute a
     Change of Control;

          (c) After Demutualization., any SEC Person commences a "tender offer"
     (as such term is used in Section 14(d) of the Exchange Act) or exchange
     offer, which, if consummated, would result in a Change of Control; or

          (d) After Demutualization, any SEC Person files with the SEC a
     preliminary or definitive proxy solicitation or election contest to elect
     or remove one or more members of the Board, which, if consummated or
     effected, would result in a Change of Control;

provided, however, that an Imminent Control Change will lapse and cease to
qualify as an Imminent Control Change:

              (i)   With respect to an Imminent Control Change described in
          clause (a) of this definition, the date such agreement is terminated,
          cancelled or expires without a Consummation Date occurring;

              (ii)  With respect to an Imminent Control Change described in
          clause (b) of this definition, the date such filing or other
          certification is withdrawn, expires or is denied or otherwise rejected
          by the relevant state regulators without a Consummation Date
          occurring;

              (iii) With respect to an Imminent Control Change described in
          clause (c) of this definition, the date such tender offer or exchange
          offer is withdrawn or terminates without a Consummation Date
          occurring;

              (iv)  With respect to an Imminent Control Change described in
          clause (d) of this definition, (1) the date the validity of such proxy
          solicitation or election contest expires under relevant state
          corporate law, or (2) the date such proxy solicitation or election
          contest culminates in a stockholder vote, in either case without a
          Consummation Date occurring; or

              (v)   The date a majority of the Mutual Incumbent Directors make a
          good faith determination that any event or condition described in
          clause (a), (b), (c) or (d) of this definition no longer constitutes
          an Imminent Control Change, provided that such determination may not
          be made prior to the six (6) month anniversary of the occurrence of
          such event.

Notwithstanding the foregoing, an Imminent Control Change shall not occur merely
as a result of (A) planning, or filing or certifying an intent with any state's
governmental agency established to regulate the insurance industry of a
Demutualization application, or (B) the planned underwritten initial public
offering of common stock of Mutual as filed with the SEC; provided, however,
that such initial public offering is not expected to result in any SEC Person
becoming a 25% Owner.

                                      -6-
   12

     1.34 "Imminent Control Change Period" means the period commencing on the
date of an Imminent Control Change (or the first Imminent Control Change in a
series of Imminent Control Changes unbroken by any period of time between the
lapse of an Imminent Control Change and the occurrence of a new Imminent Control
Change) and ending on the Consummation Date, or if earlier, the date an Imminent
Control Change lapses (without the prior or concurrent occurrence of a new
Imminent Control Change).

     1.35 "including" means including without limitation.

     1.36 "IRS" means the Internal Revenue Service of the United States of
America.

     1.37 "IRS Claim" -- see Section 5.4.

     1.38 "LTIP means the 1999 Long-Term Performance Plan as amended from time
to time.

     1.39 "LTIP Award" means a grant under the LTIP or New LTIP

     1.40 "LTIP Bonus" means the amount paid or earned in respect of an LTIP
Award.

     1.41 "LTIP Outstanding Award" -- see the definition of "Pro-rata LTIP
Bonus."

     1.42 "LTIP Performance Period" means the performance period applicable to
an LTIP Award, as designated in accordance with the LTIP or New LTIP.

     1.43 "LTIP Target Award" means, in respect of any LTIP Award under a New
LTIP, the amount which Executive would have been entitled to receive for the
LTIP Performance Period corresponding to such LTIP Award if the performance
goals established pursuant to such LTIP Award were achieved at the target level
(currently 100%) as of the end of the LTIP Performance Period.

     1.44 "Lump Sum Value" of an annuity payable pursuant to a defined benefit
plan (whether or not qualified under Section 401(a) of the Code) means, as of a
specified date, the present value of such annuity, as determined, as of such
date, under generally accepted actuarial principles using (i) the applicable
interest rate, mortality tables and other methods and assumptions that the
Pension Benefit Guaranty Corporation ("PBGC") would use in determining the value
of an immediate annuity on the Termination Date or (ii) if such interest rate
and mortality assumptions are no longer published by the PBGC, interest rate and
mortality assumptions determined in a manner as similar as practicable to the
manner by which the PBGC's interest rate and mortality assumptions were
determined immediately prior to the PBGC's cessation of publication of such
assumptions; provided, however, that if such defined benefit plan provides for a
lump sum distribution and such lump-sum distribution either (x) is the only
payment method available under such plan or (y) provides for a greater amount
than the Lump Sum Value of the Maximum Annuity available under such plan, then
"Lump Sum Value" shall mean such lump sum amount.

     1.45 "Maximum Annuity" means, in respect of a defined benefit plan (whether
or not qualified under Section 401(a) of the Code), an annuity computed in
whatever manner permitted under such plan (including frequency of annuity
payments, attained age upon commencement of

                                      -7-
   13

annuity payments, and nature of surviving spouse benefits, if any) that yields
the greatest Lump Sum Value.

     1.46 "Merger of Equals" means a Change of Control consisting of, as of any
date on or after the Agreement Date, a Reorganization Transaction that,
notwithstanding the fact that such transaction also qualifies as a Change of
Control, satisfies all of the following:

          (a) consummation of such Reorganization Transaction results in
     Continuity of Ownership of at least 40%, but not more than 60%; and

          (b) an SEC Person does not become a 25% Owner; and

          (c) Mutual Incumbent Directors (determined using the date immediately
     preceding the Effective Date as the baseline date), throughout the period
     beginning on the Effective Date and ending on the second anniversary of the
     Effective Date, continue to constitute not less than

              (i)   a majority of the Board, if subsection (a) of this
          definition is satisfied because the Reorganization Transaction
          resulted in Continuity of Ownership of at least 50%, but not more than
          60%; or

              (ii)  one (1) member less than a majority of the Board, if
          subsection (a) of this definition is satisfied because the
          Reorganization Transaction resulted in Continuity of Ownership of at
          least 40%, but less than 50%; and

          (d) the person who was the Chief Executive Officer of Mutual
     immediately prior to the first to occur of the (x) the day prior to the
     beginning of the Imminent Control Change Period or (y) the day prior to the
     Effective Date shall serve as the Chief Executive Officer of the Surviving
     Corporation at all times during the period commencing on the Effective Date
     and ending on the first anniversary of the Effective Date;

provided, however, that a Merger of Equals shall cease to be considered a Merger
of Equals and shall instead qualify as a Change of Control that is not a Merger
of Equals from and after the first date (the "Merger of Equals Cessation Date")
as of which:

              (i)   during the Post-Change Employment Period the conditions of
          any of clause (b) or clause (c) or clause (d) of this definition shall
          not be satisfied; or

              (ii)  prior to the first anniversary of the Effective Date, the
          Company shall make a filing with the SEC, issue a press release, or
          make a public announcement to the effect that Mutual or the Surviving
          Corporation is seeking or intends to seek a replacement for its Chief
          Executive Officer, whether such replacement is to become effective
          before or after such first anniversary

     1.47 "Merger of Equals Cessation Date" -- see the definition of "Merger of
Equals."

     1.48 "Mutual" -- see the introductory paragraph of this Agreement.

                                      -8-
   14

     1.49 "Mutual Incumbent Directors" means, as of any specified baseline date,
individuals then serving as members of the Board who were members of the Board
as of the date immediately preceding such baseline date; provided that any
subsequently-appointed or elected member of the Board whose election, or
nomination for election by members, or by stockholders of Mutual if Mutual is a
stock company at the relevant time, or stockholders or members, as applicable,
of the Surviving Corporation, as applicable, was approved by a vote or written
consent of At least a majority of the directors then comprising the Mutual
Incumbent Directors shall also thereafter be considered a Mutual Incumbent
Director, unless the initial assumption of office of such subsequently-elected
or appointed director was in connection with an Imminent Control Change but only
if such Imminent Control Change was triggered by the occurrence of an event
described in subsection (d) of the definition of Imminent Control Change.

     1.50 "New LTIP" -- see definition of "Pro-rata Target LTIP Bonus."

     1.51 "Notice of Consideration" -- see Section 3.3.

     1.52 "Notice of Termination" means a written notice given in accordance
with Section 10.7 which sets forth (i) the specific termination provision in
this Agreement relied upon by the party giving such notice, (ii) in reasonable
detail the specific facts and circumstances claimed to provide a basis for such
Termination of Employment, and (iii) if the Termination Date is other than the
date of receipt of such Notice of Termination, the Termination Date.

     1.53 "Person" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, entity or
government instrumentality, division, agency, body or department.

     1.54 "Plans" means plans, programs, policies, practices or procedures of
the Company.

     1.55 "Post-Change Employment Period" means the period commencing on the
Effective Date and ending on the second anniversary of the Effective Date.

     1.56 "Post-Merger of Equals Period" means the period commencing on an
Effective Date of a Merger of Equals and ending on the first to occur of the
Merger of Equals Cessation Date or the end of the Post-Change Employment
Period.

     1.57 "Potential Parachute Payment" -- see Section 5. I.

     1.58 "Pro-rata Annual Bonus" means an amount equal to the product of
Executive's Target Annual Bonus (for the fiscal year in which the Effective
Date, Merger of Equals Cessation Date or Termination Date occurs, as applicable,
but disregarding any reduction in such Target Annual Bonus that would qualify as
Good Reason if Executive were to terminate employment on account thereof)
multiplied by a fraction, the numerator of which equals the number of days from
and including the first day of such fiscal year through and including the
Effective Date, Merger of Equals Cessation Date or Termination Date, as
applicable, and the denominator of which equals 365.

     1.59 "Pro-rata LTIP Bonus" means an amount equal to the sum of the
following amounts, calculated separately for each LTIP Award for which the LTIP
Performance Period has

                                      -9-
   15

not ended as of the Effective Date, Merger of Equals Cessation Date, or
Termination Date, as applicable:

          (a) For any LTIP Award that was granted under the LTIP, the sum of the
     following amounts (recalculated as of the applicable date for each such
     LTIP Award):

              (i)   Executive's LTIP Outstanding Award (as defined below) with
          respect to any LTIP Performance Period which began prior to the
          calendar year of the Effective Date, Merger of Equals Cessation Date
          or Termination Date, as applicable; and

              (ii)  Executive's LTIP Outstanding Award (as defined below) with
          respect to any LTIP Performance Period which began in the calendar
          year in which the Effective Date, Merger of Equals Cessation Date or
          Termination Date, as applicable, occurs, multiplied by a fraction, the
          numerator of which equals the number of days from and including the
          first day of such calendar year through and including the Effective
          Date, Merger of Equals Cessation Date or Termination Date, as
          applicable, and the denominator of which equals 365.

          (b) For any LTIP Award that was granted under a new or successor plan
     replacing or supplementing the LTIP ("New LTIP"), an amount calculated by
     adding together the amounts determined by multiplying each LTIP Target
     Award by a fraction, the numerator of which equals the number of days from
     and including the beginning of the LTIP Performance Period applicable to
     such LTIP Target Award through and including the Effective Date, Merger of
     Equals Cessation Date or Termination Date, as applicable, and the
     denominator of which equals the aggregate number of days in such LTIP
     Performance Period.

     "LTIP Outstanding Award" means, in respect of any LTIP Award, the amount
     which Executive would have been entitled to receive for the LTIP
     Performance Period applicable to such LTIP Award, which amount is equal to
     the product of (x) the number of Initial Performance Units (as defined in
     the LTIP) multiplied by (y) an amount determined by applying the formula
     described as the "Start Imputed Value" in the LTIP, but determining
     "Average Return on Equity" and "Equity of the consolidated Principal
     Financial Group" as of December 31 of the year preceding the year in which
     the applicable determination date occurs, and not taking into account any
     value for any unfinished year in the award cycle, not taking into account
     any performance scores, multipliers or adjustment factors, and not prorated
     for any unfinished year in the award cycle.

     1.60 "Refund Claim" -- see Section 5.4.

     1.61 "Reorganization Transaction" -- see clause (c) of the definition of
"Change of Control."

     1.62 "Restricted Shares" -- see Section 2.3.

     1.63 "SEC" means the United States Securities and Exchange Commission.

                                      -10-
   16

     1.64 "SEC Person" means any person (as such term is used in Rule 13d-5 of
the SEC under the Exchange Act) or group (as such term is defined in Sections
3(a)(9) and 13(d)(3) of the Exchange Act), other than an Affiliate or any
employee benefit plan (or any related trust) of Mutual or any of its Affiliates.

     1.65 "Section" means, unless the context otherwise requires, a section of
this Agreement.

     1.66 "SERP" means a supplemental executive retirement Plan that is not
qualified under Section 401 (a) of the Code, including the Supplemental
Executive Retirement Plan for Employees (or any successor plan).

     1.67 "Stock Options" -- see Section 2.3.

     1.68 "Surviving Corporation" means the corporation resulting from a
Reorganization Transaction or, if securities representing at least 50% of the
aggregate voting power of such resulting corporation, (if such corporation is a
stock company at the relevant time), or of the mutual life insurance holding
company policies (if such corporation is a mutual life insurance holding company
at the relevant time) are directly or indirectly owned by another corporation,
such other corporation.

     1.69 "Target Annual Bonus" as of a certain date means the amount equal to
the product of Base Salary determined as of such date multiplied by the
percentage of such Base Salary to which Executive would have been entitled
immediately prior to such date under any Bonus Plan for the Annual Performance
Period for which such Annual Bonus is awarded if the performance goals
established pursuant to such Bonus Plan were achieved at the 100% level as of
the end of the Annual Performance Period; provided, however, that any reduction
in Executive's Base Salary or Annual Bonus that would qualify as Good Reason
shall be disregarded for purposes of this definition.

     1.70 "Taxes" means the incremental federal, state, local and foreign
income, employment, excise and other taxes payable by Executive with respect to
any applicable item of income.

     1.71 "Termination Date" means the date of the receipt of the Notice of
Termination by Executive (if such Notice is given by the Company) or by the
Company (if such Notice is given by Executive), or any later date, not more than
15 days after the giving of such Notice, specified in such notice as of which
Executives' employment shall be terminated; provided, however, that:

              (i)   if Executive's employment is terminated by reason of death
          or Disability, the Termination Date shall be the date of Executive's
          death or the date of the Disability (as described in Section 3.1(a)),
          as applicable; and

              (ii)  if no Notice of Termination is given, the Termination Date
          shall be the last date on which Executive is employed by the Company.

     1.72 "Termination of Employment" means any termination of Executive's
employment with the Company, whether such termination is initiated by the
Company or by Executive.

                                      -11-
   17

     1.73 "25% Owner" -- see paragraph (a) of the definition of "Change of
Control."

     1.74 "Voting Securities" means (a) with respect to a corporation,
securities of such corporation that are entitled to vote generally in the
election of directors of such corporation, and (b) with respect to a mutual life
insurance company or mutual life insurance holding company, policies of such
company entitled to vote generally in the election of directors of such company.

                                   ARTICLE II.

                          POST-CHANGE EMPLOYMENT PERIOD

     2.1  Position and Duties.

          (a) Change of Control. During the Post-Change Employment Period,
     except as otherwise provided in Section 2.1 (b) below, (i) Executive's
     position (including offices, titles, reporting requirements and
     responsibilities, but not reporting responsibilities), authority and duties
     shall be at least commensurate in all material respects with the most
     significant of those held, exercised and assigned at any time during the
     90-day period immediately before the Effective Date (or if the Effective
     Date was the Consummation Date of an Imminent Control Change, during the
     90-day period immediately before the beginning of the Imminent Control
     Change Period) and (ii) Executive's services shall be performed at the
     location where Executive was employed immediately before the Effective Date
     (or before the beginning of such Imminent Control Change Period) or any
     other location no more than 50 miles from such former location.

          (b) Merger of Equals. During any portion of the Post-Change Employment
     Period that qualifies as a Post-Merger of Equals Period, the Company may in
     its discretion change the Executive's position, authority and duties and
     may change the location where Executive's services shall be performed;
     provided that during the portion of the Post-Change Employment Period
     commencing on the Merger of Equals Cessation Date, Section 2.1(a) shall be
     applicable in respect of changes in Executive's position, authority and
     duties occurring on or after such date, except that all references to
     "Effective Date" in such clause shall instead refer to the Merger of Equals
     Cessation Date.

          (c) Imminent Control Change Period. During any Imminent Control Change
     Period, the Company may in its discretion change the Executive's position,
     authority and duties and may change the location where Executive's services
     shall be performed; provided, however, that if the Imminent Control Change
     Period culminates in a Consummation Date, then, in determining whether the
     Executive's Termination of Employment is for Good Reason, "Good Reason"
     shall be determined as though the provisions of Sections 2.1(a) and (b)
     applied commencing with the first day of the Imminent Control Change Period
     and in determining whether Executive's Termination of Employment is for
     Cause, "Cause" shall be determined as though the provisions of Section
     2.1(d) applied commencing with the first day of the Imminent Control Change
     Period.

                                      -12-
   18
     (d) Executive's Obligations. During the Post-Change Employment Period,
(other than any periods of paid time off, sick leave or disability to which
Executive is entitled), Executive agrees to devote Executive's full attention
and time to the business and affairs of the Company and, to the extent necessary
to discharge the duties assigned to Executive in accordance with this Agreement,
to use Executive's best efforts to perform such duties. During the Post-Change
Employment Period, Executive may (i) serve on corporate, civic or charitable
boards or committees, (ii) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (iii) manage personal investments, so long
as such activities are consistent with the Plans of the Company at the Effective
Date and do not significantly interfere with the performance of Executive's
duties under this Agreement. To the extent that any such activities have been
conducted by Executive immediately prior to the Effective Date, and were
consistent with the Plans of the Company at the Effective Date the continued
conduct of such activities (or activities similar in nature and scope) after the
Effective Date, shall not be deemed to interfere with the performance of
Executive's duties under this Agreement.

22.  Compensation.

     (a)  Base Salary.

          (i)   Post-Change Employment Period. During the Post-Change Employment
     Period, the Company shall pay or cause to be paid to Executive an annual
     base salary in cash, unless modified by Section (a)(ii) or (a)(iii) below,
     which shall be paid in a manner consistent with the Company's payroll
     practices in effect immediately before the Effective Date at an annual rate
     not less than 12 times the highest monthly base salary paid or payable to
     Executive by the Company in respect of the 12-month period immediately
     before the Effective Date (such annual rate salary, the "Base Salary).
     During the Post-Change Employment Period, the Base Salary shall be reviewed
     at least annually and shall be increased at any time and from time to time
     as shall be substantially consistent with increases in base salary awarded
     to other peer executives of the Company.

          (ii)  Merger of Equals. Section 2.2(a)(i) shall apply in the case of
     a Merger of Equals.

          (iii) Imminent Control Change Period. Section 2.2(a)(i) and (ii)
     shall not apply during an Imminent Control Change Period; provided,
     however, that if the Imminent Control Change Period culminates in a
     Consummation Date, then, in determining whether the Executive's Termination
     of Employment is for Good Reason, "Good Reason" shall be determined as
     though the provisions of Sections 2.2(a)(i) and (ii) applied commencing
     with the first day of the Imminent Control Change Period.

     Any increase in Base Salary shall not limit or reduce any other obligation
     of the Company to Executive under this Agreement. After any such increase,
     the Base Salary shall not be reduced and the term "Base Salary" shall
     thereafter refer to the increased amount; provided, however, that Base
     Salary may be reduced as part of

                                      -13-
   19

     a broad-based compensation reduction applicable to other peer executives of
     the Company.

     (b)  Annual Bonus.

           (i)   Post-Change Employment Period. In addition to Base Salary, the
     Company shall provide, unless modified by Section (b)(ii) or (b)(iii)
     below, to Executive the opportunity to receive payment of an annual bonus
     (the "Annual Bonus") with a bonus opportunity no less than and target
     performance goals no higher than those in effect immediately prior to the
     Effective Date for each Annual Performance Period which ends during the
     Post-Change Employment Period. "Annual Performance Period" means each
     period of time designated in accordance with any annual bonus arrangement,
     including the Principal Incentive Pay Plan ("Prin Pay") and any successor
     thereto, (a "Bonus Plan") which is based upon performance and approved by
     the Board or any committee of the Board, or in the absence of any Bonus
     Plan or any such designated period of time, each calendar year.

           (ii)  Merger of Equals. Section 2.2(b)(i) shall apply in the case
     of a Merger of Equals.

           (iii) Imminent Control Change Period. Section 2.2(b)(i) and (ii)
     shall not apply during an Imminent Control Change Period; provided,
     however, that if the Imminent Control Change Period culminates in a
     Consummation Date, then, in determining whether the Executive's Termination
     of Employment is for "Good Reason" shall be determined as though the
     provisions of Sections 2.2(b)(i) and (ii) applied commencing with the first
     day of the Imminent Control Change Period.

     (c) Other Compensation and Benefits.

           (i) Post-Change Employment Period In addition to Base Salary and
     Annual Bonus, the Company shall, throughout the Post-Change Employment
     Period, unless modified by Section (c)(ii) or (c)(iii) below, provide the
     following other compensation and benefits to Executive, provided that, in
     no event shall such additional compensation and benefits be materially less
     favorable, in the aggregate, than the most favorable compensation and
     benefits provided by the Company to Executive (including any such
     compensation and benefits provided under Plans) at any time during the
     90-day period immediately before the Effective Date:

               (1) LTIP Awards. LTIP Awards shall be granted to Executive at
          least as frequently as LTIP Awards were granted during the
          three-year period immediately preceding the Effective Date, with
          target payments no less than the average (expressed as a percentage of
          Executive's Base Salary in effect at the beginning of the applicable
          Performance Period) of the Executive's LTIP Awards outstanding
          immediately prior to the Effective Date, with target performance goals
          substantially comparable to

                                      -14-
   20

          the target performance goals under Executive's LTIP Awards outstanding
          on the Effective Date;

               (2) Incentive, Savings and Retirement Plans. Executive shall be
          eligible to participate in all incentive (including long-term
          incentives), savings and retirement Plans applicable to other peer
          executives of the Company;

               (3) Welfare Benefit Plans. Executive and Executive's family shall
          be eligible to participate in, and receive all benefits under, welfare
          benefit Plans provided by the Company (including medical,
          prescription, dental, disability, salary continuance, individual life,
          group life, dependent life, accidental death and travel accident
          insurance Plans) and applicable to other peer executives of the
          Company and their families;

               (4) Fringe Benefits. Executive shall be entitled to fringe
          benefits in accordance with the most favorable Plans applicable to
          peer executives of the Company;

               (5) Expenses. Executive shall be entitled to prompt reimbursement
          of all reasonable employment-related expenses incurred by Executive
          upon the Company's receipt of accountings in accordance with the most
          favorable Plans applicable to peer executives of the Company;

               (6) Office and Support Staff. Executive shall be entitled to an
          office or offices of a size and with furnishings and other
          appointments, and to secretarial and other assistance in accordance
          with the most favorable Plans in effect prior to the Change of
          Control; and

               (7) Vacation. Executive shall be entitled to paid time off in
          accordance with the most favorable Plans applicable to peer executives
          of the Company.

          (ii) Merger of Equals. Section 2.2(c)(i) shall not apply in the case
     of a Merger of Equals until the Merger of Equals Cessation Date, if any, at
     which time Section 2.2(c)(i) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date wherever such term appears.
     During a Post-Merger of Equals Period, the Executive shall be entitled to
     aggregate compensation benefits and perquisites no less than those provided
     in the aggregate to other peer executives of the Company.

          (iii) Imminent Control Change Period. Section 2.2(c)(i) and (ii) shall
     not apply during an Imminent Control Change Period; provided, however, that
     if the Imminent Control Change Period culminates in a Consummation Date,
     then, in determining whether the Executive's Termination of Employment is
     for "Good Reason" shall be determined as though the provisions of Sections
     2.2(c)(i) and (ii) applied commencing with the first day of the Imminent
     Control Change Period.

                                      -15-
   21

     2.3  Stock Incentive Awards.

          (a) Change of Control that is not a Merger of Equals. On the Effective
     Date, except as provided in Section 2.3(b) or (c) below, Executive shall
     (i) become fully vested in, and may thereafter exercise in whole or in
     part, in accordance with the terms thereof, all outstanding stock options,
     stock appreciation rights, or similar incentive awards (collectively,
     "Stock Options") and (ii) become fully vested in all shares of restricted
     stock or restricted stock units and similar awards ("Restricted Shares").
     Notwithstanding the foregoing, if the Effective Date is a Reorganization
     Transaction and if so provided under the agreement pursuant to which the
     Reorganization Transaction is effected, then all Executive's Stock Options
     shall (x) be extinguished for such consideration as is provided for vested
     options under such agreement or (y) be converted into options to purchase
     the stock of the Surviving Corporation, and such converted options shall be
     subject to the same option terms and restrictions as those applicable on
     the Effective Date.

          (b) Merger of Equals. Section 2.3(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.3(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date wherever such term appears.

          (c) Imminent Control Change Period. Section 2.3(a) and (b) shall not
     apply during an Imminent Control Change Period; provided, however, that if
     the Executive has a Termination of Employment described in Section 4.4 and
     the Imminent Control Change Period culminates in a Consummation Date, then
     stock options and restricted shares shall be treated as described in
     Sections 4.4(f), (g) and (h).

     2.4  Unfunded Deferred Compensation.

          (a) Change of Control that is not a Merger of Equals. On the Effective
     Date, except as provided in Section 2.4(b) or (c) below, Executive shall
     become fully vested in all benefits previously accrued under any deferred
     compensation Plan (including a SERP and defined contribution excess plan)
     that is not qualified under Section 401(a) of the Code. To the extent not
     so provided under such non-qualified Plan, within ten business days after
     the Effective Date, the Company shall pay or cause to be paid to Executive
     a lump-sum cash amount equal to:

               (i) the sum of the Lump-Sum Values of all Maximum Annuities that
           are payable pursuant to all such non-qualified plans that are defined
           benefit Plans, plus

               (ii) the sum of Executive's account balances under all
           non-qualified plans that are defined contribution Plans.

           (b) Merger of Equals. Section 2.4(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 2.4(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date wherever such term appears.

                                      -16-
   22

           (c) Imminent Control Change Period. Section 2.4(a) and (b) shall not
     apply during an Imminent Control Change Period.

Executive shall have the opportunity to waive the accelerated vesting and
lump-sum payment at any time prior to the earlier of (i) the 15th day after the
date of an Imminent Control Change or (ii) the 30th day prior to a Change of
Control which is not preceded by an Imminent Control Change; provided, however,
that in no event shall the waiver be allowed on the Effective-Date or
thereafter.

     2.5   Pro-rata Annual Bonus.

           (a) Change of Control that is not a Merger of Equals. Except as
     provided in Section 25(b) or (c) below, to the extent not so provided by
     the Bonus Plan, the Company shall pay or cause to be paid to Executive
     within ten business days after the Effective Date, a lump-sum cash payment
     equal to the Pro-rata Annual Bonus, in satisfaction of the Company's
     obligations under the Bonus Plan for periods prior to the Effective Date.

           (b) Merger of Equals. Section 2.5(a) shall not apply in the case of a
     Merger of Equals unless (i) there occurs a Merger of Equals Cessation Date,
     at which time Section 2.4(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date.

           (c) Imminent Control Change Period. Section 2.4(a) and (b) shall not
     apply during an Imminent Control Change Period.

     2.6   Pro-rata LTIP Bonus.

           (a) Change of Control that is not a Merger of Equals. Except as
     provided in Section 2.6(b) or (c) below, to the extent not so provided by
     the LTIP or New LTIP, as applicable, the Company shall pay or cause to be
     paid, within ten business days after the Effective Date a lump-sum cash
     payment equal to the sum of (i) the Pro-rata LTIP Bonus and (ii) all
     Accrued LTIP Bonuses, in satisfaction of the Company's obligations under
     the LTIP and New LTIP for periods prior to the Effective Date.

           (b) Merger of Equals. Section 2.6(a) shall not apply in the case of a
     Merger of Equals unless (i) there occurs a Merger of Equals Cessation Date,
     at which time Section 2.6(a) shall be applied by substituting the Merger of
     Equals Cessation Date for the Effective Date.

           (c) Imminent Control Change Period. Section 2.6(a) and (b) shall not
     apply during an Imminent Control Change Period.

                                  ARTICLE III.

                            TERMINATION OF EMPLOYMENT

     3.1   Disability.

                                      -17-
   23

           (a) During the Post-Change Employment Period or any Imminent Change
     Period, the Company may terminate Executive's employment at any time
     because of Executive's Disability by giving Executive or his legal
     representative, as applicable, (i) written notice in accordance with
     Section 10.8 of the Company's intention to terminate Executive's employment
     pursuant to this Section and (ii) a certification of Executive's Disability
     by a physician selected by the Company or its insurers, subject to the
     consent of Executive or Executive's legal representative, which consent
     shall not be unreasonably withheld or delayed. Executive's employment shall
     terminate effective on the 30th day after Executive's receipt of such
     notice (which such 30th day shall be deemed to be the date of the
     Disability) unless, before such 30th day, Executive shall have resumed the
     full-time performance of Executive's duties.

           (b) "Disability" means any medically determinable physical or mental
     impairment that has lasted for a continuous period of not less than six
     months and can be expected to be permanent or of indefinite duration, and
     that renders Executive unable to perform the duties required under this
     Agreement.

     3.2   Death. Executive's employment shall terminate automatically upon
Executive's death during the Post-Change Employment Period or Imminent Control
Change Period.

     3.3   Termination for Cause.

           (a) Change of Control that is not a Merger of Equals. During the
     Post-Change Employment Period that is not a Post-Merger of Equals Period,
     the Company may terminate Executive's employment for Cause solely in
     accordance with all of the substantive and procedural provisions of this
     Section 3.3(a).

               (i) Definition of Cause. For purposes of this section 3.3(a),
          "Cause" means any one or more of the following:

                    (1) Executive's commission of a felony or other crime
               involving fraud, dishonesty or moral turpitude;

                    (2) Executive's willful or reckless material misconduct in
               the performance of Executive's duties;

                    (3) Executive's habitual neglect of duties; or

                    (4) Executive's willful or intentional breach of this
               Agreement;

          provided, however, that for purposes of clauses (2), (3) and (4),
          Cause shall not include any one or more of the following:

                    (A) Executive's bad judgment

                    (B) Executive's negligence, other than Executive's habitual
               neglect of duties or gross negligence;

                                      -18-
   24

                    (C) any act or omission believed by Executive in good faith
               to have been in or not opposed to the interest of the Company
               (without intent of Executive to gain, directly or indirectly, a
               profit to which Executive was not legally entitled); or

                    (D) failure to meet performance goals, objectives or
               measures following good faith efforts to meet such goals,
               objectives or measures; and

          further provided that, if a breach of this Agreement involved an act,
          or a failure to act, which was done, or omitted to be done, by
          Executive in good faith and with a reasonable belief that Executive's
          act, or failure to act, was in the best interests of the Company or
          was required by applicable law or administrative regulation, such
          breach shall not constitute Cause if, within 30 days after Executive
          is given written notice of such breach that specifically refers to
          this Section, Executive cures such breach to the fullest extent that
          it is curable.

               (ii) Procedural Requirements for Termination for Cause. The
          Company shall strictly observe each of the following procedures:

                    (1) Board Meeting. A meeting of the Board shall be called
               for the stated purpose of determining whether Executive's acts or
               omissions constitute Cause and, if so, whether to terminate
               Executive's employment for Cause.

                    (2) Notice of Consideration. Not less than 30 days prior to
               the date of such meeting the Company shall provide Executive and
               each member of the Board written notice (a "Notice of
               Consideration") of (x) a detailed description of the acts or
               omissions alleged to constitute Cause, (y) the date, time and
               location of such meeting of the Board, and (z) Executive's rights
               under clause (3) below.

                     (3) Opportunity to Present Response. Executive shall have
               the opportunity to appear before the Board in person and, at
               Executive's option, with legal counsel, and/or to present to the
               Board a written response to the Notice of Consideration.

                     (4) Cause Determination. Executive's employment may be
               terminated for Cause only if (x) the acts or omissions specified
               in the Notice of Consideration did in fact occur and do
               constitute Cause as defined in this Section, (y) the Board makes
               a specific determination to such effect and to the effect that
               Executive's employment should be terminated for Cause ("Cause
               Determination") and (z) the Company thereafter provides Executive
               with a Notice of Termination which specifies in specific detail
               the basis of such Termination of Employment for Cause and which
               Notice shall be consistent with the reasons set forth in the
               Notice of Consideration. The Cause Determination shall require
               the affirmative vote of at least 66-2/3% of the members of the
               Board.

                                      -19-
   25

                     (iii) Standard of Review. In the event that the existence
               of Cause shall become an issue in any action or proceeding
               between the Company and Executive, the Company shall,
               notwithstanding the Cause determination referenced in clause
               (4)(y) of Section 3.3(a)(ii), have the burden of establishing
               that the actions or omissions specified in the Notice of
               Consideration did in fact occur and do constitute Cause and that
               the Company has satisfied the procedural requirements of Section
               3.3(a)(ii).

               (b) Merger of Equals. Section 3.3(a) shall not apply in the case
          of a Merger of Equals unless there occurs a Merger of Equals Cessation
          Date, at which time Section 3.3(a) shall apply to any termination for
          Cause during the Post-Change Employment Period for which the Notice of
          Consideration is given on or after the Merger of Equals Cessation
          Date. During any Post-Merger of Equals Period, the Company may
          terminate Executive's employment for Cause solely in accordance with
          all of the substantive and procedural provisions of this Section
          3.3(b).

                    (i) Definition of Cause. For purposes of this Section
               3.3(b), "Cause" shall have the same meaning as in Section
               3.3(a)(i).

                    (ii) Procedural Requirements for Termination for Cause. The
               Company shall strictly observe the procedures set forth in
               Section 3.3(a)(ii), except that

                         (1) If the Notice of Consideration is given to
                    Executive during a Post-Merger of Equals Period, Executive
                    shall have the opportunity to present to the board a written
                    response to the Notice of Consideration, but shall not have
                    the right to appear in person or by counsel before the
                    Board; and

                         (2) The Cause Determination shall require the
                    affirmative vote of a simple majority of the members of the
                    Board.

                    (iii) Standard of Review. If the Notice of Consideration is
               given to Executive during a Post-Merger of Equals Period, then in
               the event that the existence of Cause shall become an issue in
               any action or proceeding between the Company and Executive, the
               Board's Cause determination referenced in clause (4)(y) of
               Section 3.3(a)(ii) shall be binding on all parties.

               (c) Imminent Control Change Period. This Section 3.3 shall not
          apply during any Imminent Control Change Period that does not
          culminate in a Consummation Date. In the case of an Imminent Control
          Change Period that culminates in a Consummation Date, no termination
          of Executive's employment during the Imminent Control Change Period
          shall be deemed to have been for Cause unless all the substantive and
          procedural provisions of Section 3.3(c) shall have been satisfied:

                    (i) Definition of Cause. For purposes of this Section
               3.3(c), "Cause" shall have the meaning as in Section 3.3(a)(i),
               except that, for purposes of clauses

                                      -20-
   26

               (2), (3) and (4) of Section 3.3(a)(i), Cause shall not exclude
               failure to meet performance goals, objectives or measures.

               (ii) Procedural Requirements for Termination for Cause. To
          qualify as a termination for Cause, a termination by the Company
          during the Imminent Control Change Period shall have strictly complied
          with the procedures set forth in Section 3.3(b)(ii), substituting the
          phrase Imminent Control Change Period for Post-Merger of Equals Period
          wherever it appears.

               (iii) Standard of Review. If the Notice of Consideration is given
          to Executive during an Imminent Control Change Period, then in the
          event that the existence of Cause shall become an issue in any action
          or proceeding between the Company and Executive, the Board's Cause
          determination referenced in clause (4)(y) of Section 3.3(a)(ii) shall
          be binding on all parties.

     3.4  Good Reason.

          (a) Change of Control that is not a Merger of Equals. During the
     Post-Change Employment Period that is not a Merger of Equals, Executive may
     terminate his or her employment for Good Reason in accordance with the
     substantive and procedural provisions of this Section 3.4(a).

               (i) Good Reason Definition. For purposes of this Section 3.4(a),
          "Good Reason" means the occurrence of any one or more of the following
          actions or omissions during the Post-Change Employment Period other
          than during a Post-Merger of Equals Period:

                   (1) any failure to pay Executive's Base Salary in violation
               of Section 2.2(a) or any failure to increase Executive's Base
               Salary to the extent, if any, required by such Section;

                   (2) any failure to pay Executive's Annual Bonus or any
               reduction in Executive's bonus opportunity, in either case in
               violation of Section 2.2(b);

                   (3) any material adverse change in Executive's position
               (including offices, titles, or reporting requirements, but not
               reporting responsibilities), authority or duties as contemplated
               by Section 2.1(a)(i);

                   (4) any material reduction in aggregate compensation and
               benefits as provided in Article II;

                   (5) requiring Executive to be based at any office or
               location other than the location specified in Section 2.1(a);

                   (6) any other material breach of this Agreement by the
               Company;

                                      -21-
   27

                    (7) any Termination of Employment by the Company that
               purports to be for Cause, but is not in full compliance with all
               of the substantive and procedural requirements of this Agreement
               (any such purported termination shall be treated as a Termination
               of Employment without Cause for all purposes of this Agreement);
               or

                    (8) the failure at any time of a successor to the Company
               explicitly to assume and agree to be bound by this Agreement.

               (ii) Determination of Good Reason. Any reasonable determination
          by Executive that any of the events specified in subsection (i) above
          has occurred and constitutes Good Reason shall be conclusive and
          binding for all purposes, unless the Company establishes that
          Executive did not have any reasonable basis for such determination.

          (b) Merger of Equals. Section 3.4(a) shall not apply in the case of a
     Merger of Equals unless there occurs a Merger of Equals Cessation Date, at
     which time Section 3.4(a) shall apply to any termination for Good Reason
     during the Post-Change Employment Period for which the event(s)
     constituting Good Reason occurred on or after the Merger of Equals
     Cessation Date. During any Post-Merger of Equals Period, the Executive may
     terminate his or her employment for Good Reason in accordance with the
     substantive and procedural provisions of this Section 3.4(b).

               (i) Definition of Good Reason. For purposes of this Section
          3.4(b), "Good Reason" shall have the same meaning as in Section
          3.4(a)(i), except that (1) the act or omission shall have occurred
          during the Post-Merger of Equals Period, and (2) clauses 3.4(a)(i)(3)
          and (5) shall not apply.

               (ii) Determination of Good Reason. Executive's determination that
          an event constituting Good Reason has occurred during a Post-Merger of
          Equals Period shall not be entitled to any presumptive validity or
          other deference by a court.

          (c) Imminent Control Change Period. This Section 3.4 shall not apply
     during any Imminent Control Change Period that does not culminate in a
     Consummation Date. In the case of an Imminent Control Change Period that
     culminates in a Consummation Date, no termination of Executive's employment
     during the Imminent Control Change Period shall be deemed to have been for
     Good Reason unless all the substantive and procedural provisions of this
     Section 3.4(c) shall have been satisfied:

               (i) Definition of Good Reason. For purposes of this Section
          3.4(b), "Good Reason" shall have the same meaning as in Section
          3.4(a)(i), except that (1) the act or omission shall have occurred
          during the Imminent Control Change Period, and (2) clauses
          3.4(a)(i)(3) and (5) shall not apply.

               (ii) Determination of Good Reason. Executive's determination that
          an event constituting Good Reason has occurred during an Imminent
          Control Change

                                      -22-
   28

          Period shall not be entitled to any presumptive validity or other
          deference by a court.

          (d) Notice by Executive. In the event of any Termination of Employment
     by Executive for Good Reason, Executive shall as soon as practicable
     thereafter notify the Company of the events constituting such Good Reason
     by a Notice of Termination. A delay in the delivery of such Notice of
     Termination or a failure by Executive to include in the Notice of
     Termination any fact or circumstance which contributes to a showing of Good
     Reason shall not waive any right of Executive under this Agreement or
     preclude Executive from asserting such fact or circumstance in enforcing
     rights under this Agreement; provided that no act or omission by the
     Company shall qualify as Good Reason (i) if Executive's Termination of
     Employment occurs more than 12 months after Executive first obtains actual
     knowledge of such act or omission or (ii) during a Post-Merger of Equals
     Period 12 months after the first date on which Executive obtained actual
     knowledge of the fact that no Merger of Equals has occurred or that a
     Merger of Equals Cessation has occurred.

                                   ARTICLE IV.

          COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT

   4.1 Termination During the Post-Change Employment Period. If, during the
Post-Change Employment Period (other than during a Post-Merger of Equals
Period) the Company terminates Executive's employment other than for Cause or
Disability, or Executive terminates employment for Good Reason, the Company's
sole obligations to Executive under Articles II and IV shall be as follows:

          (a) Severance Payments. The Company shall pay or provide Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount equal to the sum of the
     following, no more than ten business days after the Termination Date:

               (i)   Accrued Obligations. all Accrued Obligations;

               (ii)  Prorated Annual Bonus for Year of Termination. Executive's
          Pro-rata Annual Bonus reduced (but not below zero) by the amount of
          any Annual Bonus paid to Executive with respect to the Company's
          fiscal year in which the Termination Date occurs, whether paid under
          Section 2.5 or otherwise;

               (iii) Prorated LTIP Bonus. Executive's Pro-rata LTIP Bonus
          reduced (but not below zero) by the amount of any LTIP Bonus paid to
          Executive with respect to the LTIP Performance Periods not completed
          as of the Termination Date, whether such amount was paid under Section
          2.6 or otherwise;

                (iv) Deferred Pensions and Pension Enhancements. The sum of

                    (1) all amounts previously deferred by, or accrued to the
               benefit of, Executive under any defined contribution
               non-qualified plans (as described in Section 2.4), whether vested
               or unvested, together with

                                      -23-
   29

               any accrued earnings thereon, to the extent that such amounts and
               earnings have not been previously paid by the Company (whether
               pursuant to Section 2.4 or otherwise) or are provided under the
               terms of such non-qualified Plan; plus

                    (2) an amount equal to the positive difference, if any,
               between:

                    (A) the sum of the Lump-Sum Values of each Maximum Annuity
               that would be payable to Executive under any defined benefit Plan
               (whether or not qualified under Section 401(a)) if Executive
               had:

                         (1) become fully vested in all such previously unvested
                    benefits,

                         (2) accrued a number of years of service (for purposes
                    of determining the amount of such benefits, entitlement to
                    early retirement benefits, and all other purposes of such
                    defined benefit plans) that is three years greater than the
                    number of years of service actually accrued by Executive as
                    of the Termination Date, and

                         (3) received the lump-sum severance benefits specified
                    in Section 4.1(a) (excluding LTIP Bonuses and any amounts
                    in respect of Stock Options or Restricted Shares, if any,
                    including severance multiples thereof) as covered
                    compensation in equal monthly installments during the period
                    of three years following the Termination Date,

          minus

               (B) the sum of (x) the Lump-Sum Values of the Maximum Annuity
          benefits actually payable to Executive under each defined-benefit Plan
          that is qualified under Section 401(a) of the Code and (y) the
          aggregate amounts previously paid (whether pursuant to Section 2.4 or
          otherwise) to Executive under the defined benefit Plans (whether or
          not qualified under Section 401(a) of the Code) described in clause
          (A) of this Section 4.1(a)(iv)(2).

          (v) Multiple of Salary. Bonus and LTIP. An amount equal to three (3.0)
     times the sum of (x) Base Salary, (y) the Target Annual Bonus, and (z) the
     Annualized Target LTIP Bonus, each determined as of the Termination Date;
     provided, however, that any reduction in Executive's Base Salary or Annual
     Bonus that would qualify as Good Reason shall be disregarded for purposes
     of this clause (v); and provided further, that the Annualized Target LTIP
     Bonus in clause (z) of this Section 4.1(a)(v) shall not be included in the
     sum referenced above if the Termination Date occurs on or after the third
     anniversary of the date

                                      -24-
   30
          the Company first makes a grant of stock options to a peer executive
          of the Company pursuant to a written employee stock option plan
          applicable to peer executives of the Company; and

               (vi) Unvested Defined Contribution Plan. To the extent not paid
          pursuant to clause (iv) of this Section 4.1(a), an amount equal to the
          sum of the value of the unvested portion of Executive's accounts or
          accrued benefits under any unqualified or qualified defined
          contribution retirement plan maintained by the Company as of the
          Termination Date and forfeited by Executive by reason of the
          Termination of Employment.

          (b) Continuation of Welfare Benefits. Until the third anniversary of
     the Termination Date or such later date as any Plan may specify, the
     Company shall continue to provide to Executive and Executive's family
     welfare benefits (including medical, prescription, dental, disability,
     salary continuance, individual life, group life, accidental death and
     travel accident insurance plans and programs) which are at least as
     favorable as the most favorable Plans of the Company applicable to peer
     executives who are actively employed after the Termination Date and their
     families. The cost of such welfare benefits to Executive shall not exceed
     the cost of such benefits to actively employed peer executives of the
     Company as applicable from time to time. Executive's rights under this
     Section shall be in addition to, and not in lieu of, any post-termination
     continuation coverage or conversion rights Executive may have pursuant to
     applicable law, including continuation coverage required by Section 4980 of
     the Code. Notwithstanding anything herein to the contrary, such welfare
     benefits shall be secondary to any similar welfare benefits provided by the
     Executive's subsequent employer (if any).

          (c) Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by
     Executive to provide outplacement services to Executive after the
     Termination Date, within ten business days of its receipt of an invoice
     therefor, subject to a maximum of $30,000.

          (d) Indemnification. The Executive shall be indemnified and held
     harmless by the Companies to the greatest extent permitted under applicable
     Iowa law (or the law of the State of incorporation of any successor or
     Surviving Corporation) as the same now exists or may hereafter be amended
     (but, in the case of any such amendment, only to the extent that such
     amendment permits a Company to provide broader indemnification than was
     permitted prior to such amendment) and the Companies' respective by-laws as
     such exist on the Agreement Date if the Executive was, is, or is threatened
     to be, made a party to any pending, completed or threatened action, suit,
     arbitration, alternate dispute resolution mechanism, investigation,
     administrative hearing or any other proceeding whether civil, criminal,
     administrative or investigative, and whether formal or informal, by reason
     of the fact that the Executive is or was, or had agreed to become, a
     director, officer, employee, agent, or fiduciary of a Company or any other
     entity which the Executive is or was serving at the request of a Company
     ("Proceeding"), against all expenses (including all reasonable attorneys'
     fees) and all claims, damages, liabilities and losses incurred or suffered
     by the Executive or to which the Executive may become subject for any
     reason. A Proceeding shall not include any proceeding to the extent it
     concerns or relates to a matter described in Section 6.1(a) (concerning
     reimbursement of

                                      -25-
   31

     certain costs and expenses). Upon receipt from Executive of (i) a written
     request for an advancement of expenses, which Executive reasonably believes
     will be subject to indemnification hereunder and (ii) a written undertaking
     by Executive to repay any such amounts if it shall ultimately be determined
     that Executive is not entitled to indemnification under this Agreement or
     otherwise, Mutual shall advance such expenses to Executive or pay such
     expenses for Executive, all in advance of the final disposition of any such
     matter.

          (e) Directors' and Officers' Liability Insurance. For a period of six
     years after the Termination Date, the Companies shall provide Executive
     with coverage under a directors' and officers' liability insurance policy
     in amounts no less than, and on terms no less favorable than, those
     provided to senior executive officers and directors of the Companies on the
     Effective Date.

          (f) Stock Incentive Awards. Immediately prior to the Executive's
     Termination of Employment, Executive shall (i) become fully vested in, and
     may thereafter exercise in whole or in part, in accordance with the terms
     thereof, all outstanding Stock Options and (ii) become fully vested in all
     Restricted Shares.

     4.2 Termination During a Post-Merger of Equals Period. If, during a
Post-Merger of Equals Period, the Company terminates Executive's employment
other than for Cause or Disability, or if Executive terminates employment for
Good Reason, the Company's sole obligations to Executive under Articles II and
IV shall be as follows:

          (a) Severance Payments. The Company shall pay or provide Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount, no more than thirty
     business days after the Termination Date, equal to the sum of all amounts
     described in Section 4.1(a).

          (b) Continuation of Welfare Benefits. Until the third anniversary of
     the Termination Date or such later date as any Plan may specify, the
     Company shall continue to provide to Executive and Executive's family
     welfare benefits with the same scope and cost as described in Section
     4.1(b). Executive's rights under this Section shall be in addition to, and
     not in lieu of, any post-termination continuation coverage or conversion
     rights Executive may have pursuant to applicable law, including
     continuation coverage required by Section 4980 of the Code. Notwithstanding
     anything herein to the contrary, such welfare benefits shall be secondary
     to any similar welfare benefits provided by the Executive's subsequent
     employer (if any).

          (c) Stock Incentive Awards. Immediately prior to the Executive's
     Termination of Employment, Executive shall (i) become fully vested in, and
     may thereafter exercise in whole or in part, in accordance with the terms
     thereof, all outstanding Stock Options and (ii) become fully vested in all
     Restricted Shares.

          (d) Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by the
     Company to provide outplacement services to Executive after the Termination
     Date, within ten business days of its receipt of an invoice therefor,
     subject to a maximum of $30,000.

                                      -26-
   32
          (e) Indemnification. The Executive shall be indemnified and held
     harmless by the Companies to the same extent as provided in Section 4.1(d).

          (f) Directors' and Officers' Liability Insurance. The Companies shall
     provide Executive with Directors' and Officers' Liability Insurance to the
     same extent as provided in Section 4.1(e).

     4.3  Termination During an Imminent Control Change Period (with no Change
of Control). If, during an Imminent Control Change Period, the Company
terminates Executive's employment other than for Disability and other than for a
reason that would constitute Cause if there were a Change of Control, or if
Executive terminates employment for a reason that would constitute Good Reason
if there were a Change of Control, and in either case the Imminent Control
Change Period does not culminate in a Consummation Date, the Company's sole
obligations to Executive under Articles II and IV shall be as follows:

          (a) Continuation of Welfare Benefits. Until the earlier of (i) the
     third anniversary of the Termination Date or (ii) the last day of the
     Imminent Control Change Period (or such later date as any Plan may
     specify), the Company shall continue to provide to Executive and
     Executive's family welfare benefits with the same scope and cost as
     described in Section 4.1(b). Executive's rights under this Section shall
     be considered a part of, and shall therefore reduce, any post-termination
     continuation coverage or conversion rights Executive may have pursuant to
     applicable law, including, continuation coverage required by Section 4980
     of the Code. Notwithstanding anything herein to the contrary, such welfare
     benefits shall be secondary to any similar welfare benefits provided by the
     Executive's subsequent employer (if any).

          (b) Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by the
     Company to provide outplacement services to Executive after the Termination
     Date, within ten business days of its receipt of an invoice therefor,
     subject to a maximum of $30,000. Notwithstanding the foregoing, all
     outplacement amounts payable pursuant to this Section 4.3(b) shall be
     reduced (but not below zero) by outplacement amounts paid to Executive on
     account of a Termination Date prior to the date payment is made under this
     Section 4.3(b).

          (c) Indemnification. The Executive shall be indemnified and held
     harmless by the Companies to the same extent as provided in Section 4.1(d),
     but only during the Imminent Control Change Period.

          (d) Directors' and Officers' Liability Insurance. The Companies shall
     provide the same level of directors' and officers' liability insurance for
     Executive as provided in Section 4.1(e), but only during the Imminent
     Control Change Period.

          (e) Vested Stock Options. Executive's vested Stock Options will:

              (i) not expire (unless such Stock Options would have expired had
          Executive remained an employee of the Company) during the Imminent
          Control Change Period; and

                                      -27-
   33
              (ii) continue to be exercisable after the Termination Date to the
          extent provided in the applicable grant agreement or Plan, and
          thereafter, such Stock Options shall not be exercisable during the
          Imminent Control Change Period.

     Upon the date the Imminent Control Change lapses without a Consummation
     Date Executive's vested Stock Options may be exercised, in whole or in
     part, during the 30-day period following the lapse of the Imminent Control
     Change, (but in no case shall Stock Options remain exercisable after the
     date on which such Stock Options would have expired if Executive had
     remained an employee of the Company).

          (f) Unvested Stock Options. Executive's unvested Stock Options will:

              (i) not expire (unless such Stock Options would have expired had
          Executive remained an employee of the Company) during the Imminent
          Control Change Period; and

              (ii) not continue to vest and not be exercisable during the
          Imminent Control Change Period.

     Upon the date the Imminent Control Change lapses without a Consummation
     Date, such unvested Stock Options will expire.

          (g) Restricted Shares. Executive's unvested Restricted Shares will:

              (i) not be forfeited during the Imminent Control Change Period;
          and

              (ii) not continue to vest during the Imminent Control Change
          Period.

     Upon the date the Imminent Control Change lapses without a Consummation
     Date, such unvested Restricted Stock shall be forfeited.

     4.4 Termination During an Imminent Control Change Period (which Culminates
in a Change of Control). If, during an Imminent Control Change Period that
culminates in a Consummation Date, the Company terminates Executive's employment
other than for Cause or Disability, or if Executive terminates employment for
Good Reason, the Company's sole obligations to Executive under Articles II and
IV shall be as follows:

          (a) Cash Severance Payments. The Company shall pay Executive, in
     addition to all vested rights arising from Executive's employment as
     specified in Article II, a lump-sum cash amount equal to the sum of all
     amounts described in Section 4.1(a). Such amount shall be paid no more than
     ten business days after an Effective Date that does not qualify as a Merger
     of Equals and no more than 30 business days after an Effective Date which
     does qualify as a Merger of Equals. Notwithstanding the foregoing, all
     amounts paid pursuant to this Section 4.4(a) shall be reduced (but not
     below zero) by amounts paid to Executive on account of the Termination of
     Employment, to the extent such amounts would reasonably be considered
     duplicative, prior to the date payment is made under this Section 4.4(a).

                                      -28-
   34

          (b) Continuation of Welfare Benefits. Until the third anniversary of
     the Termination Date or such later date as any Plan may specify, the
     Company shall continue to provide to Executive and Executive's family
     welfare benefits with the same scope and cost as described in Section 4.1
     (b). Executive's rights under this Section shall be in addition to, and not
     in lieu of, any post-termination continuation coverage or conversion rights
     Executive may have pursuant to applicable law, including continuation
     coverage required by Section 4980 of the Code. Notwithstanding the
     foregoing, such welfare benefits shall be secondary to any similar welfare
     benefits provided by the Executive's subsequent employer (if any).

          (c) Outplacement. The Company shall pay on behalf of Executive
     reasonable fees and costs charged by the outplacement firm selected by the
     Company to provide outplacement services to Executive after the Termination
     Date, within ten business days of its receipt of an invoice therefor,
     subject to a maximum of $30,000. Notwithstanding the foregoing, all
     outplacement amounts payable pursuant to this Section 4.4(c) shall be
     reduced (but not below zero) by outplacement amounts paid to Executive on
     account of such Termination Date but prior to the date payment is made
     pursuant to this Section 4.4(c).

          (d) Indemnification. The Executive shall be indemnified and held
     harmless by the Companies to the same extent as provided in Section 4.1(d).

          (e) Directors' and Officers' Liability Insurance. The Companies shall
     provide Executive with Directors' and Officers' liability insurance to the
     same extent as provided in Section 4.1(e).

          (f) Unvested Stock Options. Executive's unvested Stock Options will:

              (i) not expire (unless such Stock Options would have so expired
          had Executive remained an employee of the Company) during the Imminent
          Control Change Period;

              (ii) not continue to vest during the Imminent Control Change
          Period; and

              (iii) not be exercisable during the Imminent Control Change
          Period;

     Immediately prior to the Consummation Date, such unvested Stock Options
     shall become fully vested, and may thereupon be exercised in whole or in
     part by the Executive at any time during the 30-day period following the
     Consummation Date (but in no case shall Stock Options remain exercisable
     after the date on which such Stock Options would have expired if Executive
     had remained an employee of the Company). Notwithstanding the foregoing, if
     the Consummation Date is a Reorganization Transaction and if so provided
     under the agreement pursuant to which the Reorganization Transaction is
     effected, then all Executive's Stock Options shall (a) be extinguished for
     such consideration as is provided for vested options under such agreement
     or (b) be converted into options to purchase the stock of the Surviving
     Corporation, and such converted options shall be subject to the same option
     terms and restrictions as those applicable on the Consummation Date.

                                      -29-
   35

          (g) Vested Stock Options. Executive's vested Stock Options will:

              (i) not expire (unless such Stock Options would have so expired
          had Executive remained an employee of the Company) during the Imminent
          Control Change Period; and

              (ii) continue to be exercisable after the Termination Date to the
          extent provided in the applicable grant agreement or Plan, and
          thereafter, such Stock Options shall not be exercisable during the
          Imminent Control Change Period.

     Upon the Consummation Date, such vested. Stock Options may be exercised by
     Executive in whole or in part, during the 30-day period following the
     Consummation Date, (but in no case shall Stock Options remain exercisable
     after the date on which such Stock Options would have expired if Executive
     had remained an employee of the Company). Notwithstanding any provision in
     this Section, if the Consummation Date is a Reorganization Transaction, and
     if so provided under the agreement pursuant to which such Reorganization
     Transaction is effected, then all of the Executive's vested Stock Options
     shall (a) be extinguished for such consideration as is provided for vested
     options under such agreement or (b) be converted into options to purchase
     the stock of the Surviving Corporation, and such converted options shall be
     subject to the same option terms as those applicable on the Consummation
     Date.

          (h) Restricted Shares. Executive's unvested Restricted Shares will:

              (i) not be forfeited during the Imminent Control Change Period;
          and

              (ii) not continue to vest during the Imminent Control Change
          Period.

     Immediately prior to the Consummation Date, Executive shall become fully
     vested in all of Executive's Restricted Stock and within ten business days
     after the Consummation Date, the Company shall deliver to Executive all of
     such shares theretofore held by or on behalf of the Company, which will be
     subject to the same terms which other stockholders of the Company receive
     in the transaction.

     4.5  Waiver and Release. Notwithstanding anything herein to the contrary,
the Company shall have no obligation to Executive under Section 4.1, 4.2, 4.3 or
4.4 or Article V unless and until Executive executes a release and waiver of
Mutual and the Companies, in substantially the same form as attached hereto as
Exhibit A.

     4.6  Termination by the Company for Cause. If the Company terminates
Executive's employment for Cause during the Post-Change Employment Period or
Imminent Control Change Period, the Company's sole obligation to Executive under
Articles II and IV shall be to pay Executive, pursuant to the Company's
then-effective Plans, a lump-sum cash amount equal to all Accrued Obligations
determined as of the Termination Date. The LTIP Bonus shall be governed
according to the terms of the LTIP and New LTIP, as applicable.

     4.7  Termination by Executive Other Than for Good Reason. If Executive
elects to retire or otherwise terminate employment during the Post-Change
Employment Period or Imminent Control Change Period other than for Good Reason,
Disability or death, the

                                      -30-
   36

Company's sole obligation to Executive under Articles II and IV shall be to pay
Executive, pursuant to the Company's then-effective Plans, a lump-sum cash
amount equal to all Accrued Obligations determined as of the Termination Date.
The LTIP Bonus shall be governed according to the terms of the LTIP and New
LTIP, as applicable.

     4.8  Termination by the Company for Disability. If the Company terminates
Executive's employment by reason of Executive's Disability during the
Post-Change Employment Period or Imminent Control Change Period, the Company's
sole obligation to Executive under Articles II and IV shall be as follows:

          (a) to pay Executive, pursuant to the Company's then-effective Plans,
     a lump-sum cash amount equal to all Accrued Obligations determined as of
     the Termination Date, and

          (b) to provide Executive disability and other benefits after the
     Termination Date that are not less than the most favorable of such benefits
     then available under Plans of the Company to disabled peer executives of
     the Company.

If the Termination Date occurred during an Imminent Control Change Period which
had a Consummation Date which is not also a Merger of Equals or a Post-Change
Employment Period other than a Post-Merger of Equals Period, such disability and
other benefits shall also be no less favorable, in the aggregate, than the most
favorable of the disability and other benefits available to Executive under such
Plans in effect at any time during the 90-day period immediately preceding (1)
the Effective Date if such Termination Date occurred during a Post-Change
Employment Period or (2) the date of the Imminent Control Change if such
Termination Date occurred during an Imminent Control Change Period. The LTIP
Bonus shall be governed according to the terms of the LTIP and New LTIP, as
applicable.

     4.9  If upon Death. If Executive's employment is terminated by reason of
Executive's death during the Post-Change Employment Period or Imminent Control
Change Period, the Company's sole obligations to Executive under Articles II and
IV shall be as follows:

          (a) to pay Executive's Beneficiary, pursuant to the Company's
     then-effective Plans, a lump-sum cash amount equal to all Accrued
     Obligations; and

          (b) to provide Executive's Beneficiary survivor and other benefits
     that are not less than the most favorable survivor and other benefits then
     available under Plans of the Company to the estates or the surviving
     families of peer executives of the Company.

If the Termination Date occurred during an Imminent Control Change which had a
Consummation Date which is not also a Merger of Equals or a Post-Change
Employment Period other than a Post-Merger of Equals Period, such survivor
benefits shall also be no less favorable, in the aggregate, than the most
favorable of the survivor benefits available to Executive under such Plans in
effect at any time during the 90-day period immediately preceding (1) the
Effective Date if such Termination Date occurred during a Post-Change Employment
Period or (2) the date of the Imminent Control Change if such Termination Date
occurred during an Imminent Control Change Period. The LTIP Bonus shall be
governed according to the terms of the LTIP and New LTIP, as applicable.

                                      -31-
   37

                                   ARTICLE V.

                   CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

     5.1  Gross-Up Payment. If at any time or from time to time, it shall be
determined by the Company's independent auditors, but only after an Effective
Date, that any payment or other benefit to Executive pursuant to Article II or
Article IV of this Agreement or otherwise ("Potential Parachute Payment") is or
will become subject to the excise tax imposed by Section 4999 of the Code or any
similar tax payable under any United States federal, state, local, foreign or
other law ("Excise Taxes"), then the Company shall pay or cause to be paid a tax
gross-up payment ("Gross-Up Payment") with respect to all such Excise Taxes and
other. Taxes on the Gross-Up Payment. The Gross-Up Payment shall be an amount
equal to the product of

          (a) The amount of the Excise Taxes (calculated at the effective
     marginal rates of all federal, state, local, foreign or other law),

     multiplied by

          (b) A fraction (the "Gross-Up Multiple"), the numerator or which is
     one (1.O), and the denominator of which is one (1.O) minus the lesser
     of (i) the sum, expressed as a decimal fraction, of the effective marginal
     rates of any Taxes and any Excise Taxes applicable to the Gross-Up Payment
     or (ii).80. If different rates of tax are applicable to various portions of
     a Gross-Up Payment, the weighted average of such rates shall be used. For
     purposes of this section, Executive shall be deemed to be subject to the
     highest effective marginal rate of Taxes.

The Gross-Up Payment is intended to compensate Executive for all such Excise
Taxes and any other Taxes payable by Executive with respect to the Gross-Up
Payment. The Company shall pay or cause to be paid the Gross-Up Payment to
Executive within ten (10) days of the calculation of such amount, but in no
event after the Executive makes the payment to the IRS of such Excise Taxes.

     5.2 Limitation on Gross-Up Payments.

         (a) To the extent possible, any payments or other benefits to
     Executive pursuant to Article II and Article IV of this Agreement shall be
     allocated as consideration for Executive's entry into the covenants of
     Article VIII.

         (b) Notwithstanding any other provision of this Article V, if the
     aggregate After-Tax Amount (as defined below) of the Potential Parachute
     Payments and Gross-Up Payment that, but for this Section 5.2, would be
     payable to Executive, does not exceed 110% of After-Tax Floor Amount (as
     defined below), then no Gross-Up Payment shall be made to Executive and the
     aggregate amount of Potential Parachute Payments payable to Executive shall
     be reduced (but not below the Floor Amount) to the largest amount which
     would both (i) not cause any Excise Tax to be payable by Executive and (ii)
     not cause any Potential Parachute Payments to become nondeductible by the
     Company by reason of Section 280G of the Code (or any successor provision).
     For purposes of the preceding sentence, Executive shall be deemed to be
     subject to the highest effective marginal rate of Taxes.

                                      -32-
   38

          (c) For purposes of this Agreement:

              (i) "After-Tax Amount" means the portion of a specified amount
          that would remain after payment of all Taxes paid or payable by
          Executive in respect of such specified amount;

              (ii) "Floor Amount" means the greatest pre-tax amount of Potential
          Parachute Payments that could be paid to Executive without causing
          Executive to become liable for any Excise Taxes in connection
          therewith; and

              (iii) "After-Tax Floor Amount" means the After-Tax Amount of the
          Floor Amount.

     5.3  Additional Gross-up Amounts. If, for any reason (whether pursuant to
subsequently enacted provisions of the Code, final regulations or published
rulings of the IRS, or a final judgment of a court of competent jurisdiction)
the Company's independent auditors later determine that the amount of Excise
Taxes payable by Executive is greater than the amount initially determined
pursuant to Section 5.1, then the Company shall, subject to Sections 5.2 and
5.4, pay Executive, within ten (10) days of such determination, or pay to the
IRS as required by applicable law, an amount (which shall also be deemed a
Gross-Up Payment) equal to the product of:

          (a) the sum of (i) such additional Excise Taxes and (ii) any interest,
     penalties, expenses or other costs incurred by Executive as a result of
     having taken a position in accordance with a determination made pursuant to
     Section 5.1 or 5.4,

     multiplied   by

          (b) the Gross-Up Multiple.

     5.4  Amount Increased or Contested.

          (a) Executive shall notify the Company in writing (an "Executive's
     Notice") of any claim by the IRS or other taxing authority (an "IRS Claim")
     that, if successful, would require the payment by Executive of Excise Taxes
     in respect of Potential Parachute Payments in an amount in excess of the
     amount of such Excise Taxes determined in accordance with Section 5.1.
     Executive's Notice shall include the nature and amount of such IRS Claim,
     the date on which such IRS Claim is due to be paid (the "IRS Claim
     Deadline"), and a copy of all notices and other documents or correspondence
     received by Executive in respect of such IRS Claim. Executive shall give
     the Executive's Notice as soon as practicable, but no later than the
     earlier of (i) 10 days after Executive first obtains actual knowledge of
     such IRS Claim or (ii) five days before the IRS Claim Deadline; provided,
     however, that any failure to give such Executive's Notice shall affect the
     Company's obligations under this Article only to the extent that the
     Company is actually prejudiced by such failure. If at least one business
     day before the IRS Claim Deadline the Company shall:

              (i) deliver to Executive a written certificate from the Company's
          independent auditors ("Company Certificate") to the effect that,
          notwithstanding

                                      -33-
   39

          the IRS Claim, the amount of Excise Taxes, interest or penalties
          payable by Executive is either zero or an amount less than the amount
          specified in the IRS Claim,

              (ii) pay to Executive, or to the IRS as required by applicable
          law, an amount (which shall also be deemed a Gross-Up Payment) equal
          to difference between the product of (x) amount of Excise Taxes,
          interest and penalties specified in the Company Certificate, if any,
          multiplied by (y) the Gross-Up Multiple, less the portion of such
          product, if any, previously paid to Executive by the Company, and

              (iii) direct Executive pursuant to Section 5.4(d) to contest the
          balance of the IRS Claim,

     then Executive shall pay only the amount, if any, of Excise Taxes, interest
     and penalties specified in the Company Certificate. In no event shall
     Executive pay an IRS Claim earlier than 30 business days after having given
     an Executive's Notice to the Company (or, if sooner, the IRS Claim
     Deadline).

          (b) At any time after the payment by Executive of any amount of Excise
     Taxes, other Taxes or related interest or penalties in respect of Potential
     Parachute Payments (including any such amount equal to or less than the
     amount of such Excise Taxes specified in any Company Certificate, or IRS
     Claim), the Company may in its discretion require Executive to pursue a
     claim for a refund (a "Refund Claim") of all or any portion of such Excise
     Taxes, other Taxes, interest or penalties as may be specified by the
     Company in a written notice to Executive.

          (c) If the Company notifies Executive in writing that the Company
     desires Executive to contest an IRS Claim or to pursue a Refund Claim,
     Executive shall:

              (i) give the Company all information that it reasonably requests
          in writing from time to time relating to such IRS Claim or Refund
          Claim, as applicable,

              (ii) take such action in connection with such IRS Claim or Refund
          Claim (as applicable) as the Company reasonably requests in writing
          from time to time, including accepting legal representation with
          respect thereto by an attorney selected by the Company, subject to the
          approval of Executive (which approval shall not be unreasonably
          withheld or delayed),

              (iii) cooperate with the Company in good faith to contest such IRS
          Claim or pursue such Refund Claim, as applicable,

              (iv) permit the Company to participate in any proceedings relating
          to such IRS Claim or Refund Claim, as applicable, and

              (v) contest such IRS Claim or prosecute Refund Claim (as
          applicable) to a determination before any administrative tribunal, in
          a court of initial

                                      -34-
   40

          jurisdiction and in one or more appellate courts, as the Company may
          from time to time determine in its discretion.

     The Company shall control all proceedings in connection with such IRS Claim
     or Refund Claim (as applicable) and in its discretion may cause Executive
     to pursue or forego any and all administrative appeals, proceedings,
     hearings and conferences with the Internal Revenue Service or other taxing
     authority in respect of such IRS Claim or Refund Claim (as applicable);
     provided that (i) any extension of the statute of limitations relating to
     payment of taxes for the taxable year of Executive relating to the IRS
     Claim is limited solely to such IRS Claim, (ii) the Company's control of
     the IRS Claim or Refund Claim (as applicable) shall be limited to issues
     with respect to which a Gross-Up Payment would be payable, and (iii)
     Executive shall be entitled to settle or contest, as the case may be, any
     other issue raised by the Internal Revenue Service or other taxing
     authority.

          (d) The Company may at any time in its discretion direct Executive to
     (i) contest the IRS Claim in any lawful manner or (ii) pay the amount
     specified in an IRS Claim and pursue a Refund Claim; provided, however,
     that if the Company directs Executive to pay an IRS Claim and pursue a
     Refund Claim, the Company shall advance the amount of such payment to
     Executive on an interest-free basis and shall indemnify Executive, on an
     after-tax basis, for any Excise Tax or income tax, including related
     interest or penalties, imposed with respect to such advance.

          (e) The Company shall pay directly all legal, accounting and other
     costs and expenses (including additional interest and penalties) incurred
     by the Company or Executive in connection with any IRS Claim or Refund
     Claim, as applicable, and shall indemnify Executive, on an after-tax basis,
     for any Excise Tax or income tax, including related interest and penalties,
     imposed as a result of such payment of costs and expenses.

     5.5  Refunds. If, after the receipt by Executive or the IRS of any payment
or advance of Excise Taxes or other Taxes by the Company pursuant to this
Article, Executive receives any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 5.4) promptly pay the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 5.4 or receipt by the IRS of an amount paid by the
Company on behalf of the Executive pursuant to Section 5.4, a determination is
made that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify Executive in writing of its intent to
contest such determination within 30 days after the Company receives written
notice of such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid. Any contest
of a denial of refund shall be controlled by Section 5.4(d).

                                   ARTICLE VI.

                    EXPENSES, INTEREST AND DISPUTE RESOLUTION

     6.1  Legal Fees and Other Expenses.

                                      -35-
   41
          (a) If, after the Agreement Date, Executive incurs legal fees or other
     expenses (including expert witness and accounting fees and arbitration
     costs and expenses under Section 6.3) in an effort to secure, preserve, or
     obtain benefits under this Agreement, the Company shall, regardless of the
     outcome of such effort, reimburse Executive on a current basis (in
     accordance with Section 6.1(b)) for such fees and expenses.

          (b) Reimbursement of legal fees and expenses and gross-up payments
     shall be made monthly within 10 days after Executive's written submission
     of a request for reimbursement together with evidence that such fees and
     expenses were incurred.

          (c) If Executive does not prevail (after exhaustion of all available
     judicial remedies) in respect of a claim by Executive or by the Company
     hereunder, and the Company establishes before a court of competent
     jurisdiction that Executive had no reasonable basis for Executive's claim
     hereunder, or for Executive's response to the Company's claim hereunder, or
     that Executive acted in bad faith, no further reimbursement for legal fees
     and expenses shall be due to Executive in respect of such claim and
     Executive shall refund any amounts previously reimbursed hereunder with
     respect to such claim.

     6.2  Interest. If the Company does not pay any amount due to Executive
under this Agreement within ten business days after such amount first became due
and owing, interest shall accrue on such amount from the date it became due and
owing until the date of payment at an annual rate equal to 300 basis points
above the base commercial lending rate published in The Wall Street Journal in
effect from time to time during the period of such nonpayment.

     6.3  Binding Arbitration. Any dispute, controversy or claim arising out of
or in connection with or relating to this Agreement or any breach or alleged
breach thereof, or any benefit or alleged benefit hereunder, shall be submitted
to and settled by binding arbitration in Des Moines, Iowa, in accordance with
the Commercial Arbitration Rules of the American Arbitration Association. Any
dispute, controversy or claim submitted for resolution shall be submitted to
three (3) arbitrators, each of whom is a nationally recognized executive
compensation specialist. The Company involved in the dispute, controversy or
claim, or Mutual if more than one Company is so involved, shall select one
arbitrator, the Executive shall select one arbitrator and the third arbitrator
shall be selected by the first two arbitrators. Any award rendered shall be
final and conclusive upon the parties and a judgment thereon may be entered in
the highest court of a forum, state or federal, having jurisdiction. The
expenses of the arbitration shall be borne according to Section 6.1. No
arbitration shall be commenced after the date when institution of legal or
equitable proceedings based upon such subject matter would be barred by the
applicable statute of limitations. Notwithstanding anything to the contrary
contained in this Section 6.3 or elsewhere in this Agreement, either party may
bring an action in the District Court of Polk County, or the United States
District Court for the Southern District of Iowa, if jurisdiction there lies, in
order to maintain the status quo ante of the parties. The "status quo ante" is
defined as the last peaceable, uncontested status between the parties. However,
neither the party bringing the action nor the party defending the action thereby
waives its right to arbitration of any dispute, controversy or claim arising out
of or in connection or relating to this Agreement. Notwithstanding anything to
the contrary contained in this Section 6.3 or elsewhere in this Agreement,
either party may seek relief in the form of specific performance, injunctive or
other equitable relief in order to enforce the decision of the arbitrator(s).
The parties agree that

                                      -36-
   42

in any arbitration commenced pursuant to this Agreement, the parties shall be
entitled to such discovery (including depositions, requests for the production
of documents and interrogatories) as would be available in a federal district
court pursuant to Rules 26 through 37 of the Federal Rules of Civil Procedure.
In the event that either party fails to comply with its discovery obligations
hereunder, the arbitrator(s) shall have full power and authority to compel
disclosure or impose sanctions to the full extent of Rule 37 of the Federal
Rules of Civil Procedure.

                                  ARTICLE VII.

                            NO SET-OFF OR MITIGATION

     7.1  No Set-off by Company. Executive's right to receive when due the
payments and other benefits provided for under this Agreement is absolute,
unconditional and subject to no setoff, counterclaim or legal or equitable
defense. Time is of the essence in the performance by the Company of its
obligations under this Agreement. Any claim which the Company may have against
Executive, whether for a breach of this Agreement or otherwise, shall be brought
in a separate action or proceeding and not as part of any action or proceeding
brought by Executive to enforce any rights against the Company under this
Agreement.

     7.2  No Mitigation. Executive shall not have any duty to mitigate the
amounts payable by the Company under this Agreement by seeking new employment or
self-employment following termination. Except as specifically otherwise
provided in this Agreement, all amounts payable pursuant to this Agreement shall
be paid without reduction regardless of any amounts of salary, compensation or
other amounts which may be paid or payable to Executive as the result of
Executive's employment by another employer or self-employment.

                                  ARTICLE VIII.

                       CONFIDENTIALITY AND NONCOMPETITION

     8.1  Confidential Information. The Executive acknowledges that in the
course of performing services for the Companies and Affiliates, he may create,
develop, learn of, receive or contribute non-public information, ideas,
processes, methods, designs, devices, inventions, data, models and other
information relating to the Companies and their Affiliates or their products,
services, businesses, operations, employees or customers, whether in tangible or
intangible form, and that the Companies or their Affiliates desire to protect
and keep secret and confidential, including trade secrets and information from
third parties that the Companies or their Affiliates are obligated to keep
confidential ("Confidential Information"). Confidential Information shall not
include: (i) information that is or becomes generally known through no fault of
Executive; (ii) information received from a third party outside of the Company
that was disclosed without a breach of any confidentiality obligation; or (iii)
information approved for release by written authorization of the Company. The
Executive recognizes that all such Confidential Information is the sole and
exclusive property of the Companies and their Affiliates, and that disclosure of
Confidential Information would cause damage to the Companies and their
Affiliates. The Executive agrees that, except as required by the duties of his
employment with any of the Companies or any of their and/or its Affiliates and
except in connection with enforcing the Executive's rights under this Agreement
or if compelled by a court or governmental agency, in each case provided that
prior written notice is given to Mutual, he will

                                      -37-
   43

not, without the consent of Mutual, willfully disseminate or otherwise disclose,
directly or indirectly, any Confidential Information obtained during his
employment with any of the Companies or their Affiliates, and will take all
necessary precautions to prevent disclosure, to any unauthorized individual or
entity inside or outside the Company, and will not use the Confidential
Information or permit its use for the benefit of Executive or any other person
or entity other than the Companies or the Affiliates These obligations shall
continue during and after the termination of Executive's employment (whether or
not after a Change of Control or an Imminent Control Change).

     8.2  Non-Competition. During the period beginning on the Agreement Date and
ending on the first to occur of (x) the first anniversary of a Termination Date
occurring during a Post-Change Employment Period or Imminent Control Change
Period and caused by (I) a termination of Executive's employment by the
Company other than for Disability or Cause or (II) a Termination of Employment
by Executive for Good Reason, and, in either event of (I) or (II) of this
Section 8.2, Executive receives benefits under Article IV, or (y) a Termination
Date other than that described in clause (x) of this Section 8.2, Executive
shall not at any time, directly or indirectly, in any capacity:

          (a) engage or participate in, become employed by, serve as a director
     of, or render advisory or consulting or other services in connection with,
     any Competitive Business; provided, however, that after the Termination
     Date this Section 8.2 shall not preclude Executive from being an employee
     of, or consultant to, any business unit of a Competitive Business if (i)
     such business unit does not qualify as a Competitive Business in its own
     right and (ii) Executive does not have any direct or indirect involvement
     in, or responsibility for, any operations of such Competitive Business that
     cause it to qualify as a Competitive Business.

          (b) make or retain any financial investment, whether in the form of
     equity or debt, or own any interest, in any Competitive Business. Nothing
     in this subsection shall, however, restrict Executive from making an
     investment in any Competitive Business if such investment does not (i)
     represent more than 1% of the aggregate market value of the outstanding
     capital stock or debt (as applicable) of such Competitive Business, (ii)
     give Executive any right or ability, directly or indirectly, to control or
     influence the policy decisions or management of such Competitive Business,
     and (iii) create a conflict of interest between Executive's duties under
     this Agreement and his interest in such investment.

     8.3  Non-Solicitation. During the period beginning on the Agreement Date
and ending on the first anniversary of any Termination Date, whether or not
after a Change of Control or Imminent Control Change, Executive shall not,
directly or indirectly:

          (a) other than in connection with the good-faith performance of his
     duties as an officer of the Company, encourage any employee or agent of the
     Company to terminate his or her relationship with the Company;

          (b) employ, engage as a consultant or adviser, or solicit the
     employment or engagement as a consultant or adviser, of any employee or
     agent of the Company (other

                                      -38-
   44

     than by the Company or its Affiliates), or cause or encourage any Person to
     do any of the foregoing;

          (c) establish (or take preliminary steps to establish) a business
     with, or encourage others to establish (or take preliminary steps to
     establish) a business with, any employee or agent of the Company; or

          (d) interfere with the relationship of the Company with, or endeavor
     to entice away from the Company, any Person who or which at any time during
     the period commencing one year prior to the Agreement Date was or is a
     material customer or material supplier of, or maintained a material
     business relationship with, the Company.

     8.4  Intellectual Property. During the employment period, whether or not
after a Change of Control or Imminent Control Change, Executive shall disclose
immediately to the Company all ideas, inventions and business plans that he
makes, conceives, discovers or develops alone or with others during the course
of his employment with the Company, including any inventions, modifications,
discoveries, developments, improvements, computer programs, processes, products
or procedures (whether or not protectable upon application by copyright, patent,
trademark, trade secret or other proprietary rights) ("Work Product") that: (i)
relate to the business of the Company or any customer or supplier to the Company
or any of the products or services being developed, manufactured, sold or
otherwise provided by the Company or that may be used in relation therewith; or
(ii) result from tasks assigned to Executive by the Company; or (iii) result
from the use of the premises or personal property (whether tangible or
intangible) owned, leased or contracted for by the Company. Executive agrees
that any Work Product shall be the property of the Company and, if subject to
copyright, shall be considered a "work made for hire" within the meaning of the
Copyright Act of 1976, as amended (the "Act"). If and to the extent that any
such Work Product is found as a matter of law not to be a "work made for hire"
within the meaning of the Act, Executive expressly assigns to the Company all
right, title and interest in and to the Work Product, and all copies thereof,
and the copyright, patent, trademark, trade secret and all their proprietary
rights in the Work Product, without further consideration, free from any claim,
lien for balance due or rights of retention thereto on the part of Executive.

          (a) The Company hereby notifies Executive that the preceding paragraph
     does not apply to any inventions for which no equipment, supplies,
     facility, or trade secret information of the Company was used and which was
     developed entirely on the Executive's own time, unless: (i) the invention
     relates (a) to the Company's business, or (b) to the Company's actual or
     demonstrably anticipated research or development, or (ii) the invention
     results from any work performed by the Executive for the Company.

          (b) Executive agrees that upon disclosure of Work Product to the
     Company, Executive will, during his employment and at any time thereafter,
     at the request and cost of the Company, execute all such documents and
     perform all such acts as the Company or its duly authorized agents may
     reasonably require: (i) to apply for, obtain and vest in the name of the
     Company alone (unless the Company otherwise directs) letters patent,
     copyrights or other analogous protection in any country throughout the
     world, and when so obtained or vested to renew and restore the same; and
     (ii) to defend any opposition

                                      -39-
   45

     proceedings in respect of such applications and any opposition proceedings
     or petitions or applications for revocation of such letters patent,
     copyright or other analogous protection.

          (c) In the event that the Company is unable, after reasonable effort,
     to secure Executive's signature on any letters patent, copyright or other
     analogous protection relating to Work Product, whether because of
     Executive's physical or mental incapacity or for any other reason
     whatsoever, Executive hereby irrevocably designates and appoints the
     Company and its duly authorized officers and agents as his agent and
     attorney-in-fact, to act for and on his behalf to execute and file any such
     application or applications and to do all other lawfully permitted acts to
     further the prosecution and issuance of letters patent, copyright and other
     analogous protection with the same legal force and effect as if personally
     executed by Executive.

     8.5 Reasonableness of Restrictive Covenants.

          (a) Executive acknowledges that the covenants contained in Sections
     8.1, 8.2, 8.3 and 8.4 are reasonable in the scope of the activities
     restricted, the geographic area covered by the restrictions, and the
     duration of the restrictions, and that such covenants are reasonably
     necessary to protect the Company's legitimate interests in its Confidential
     Information and in its relationships with its employees, customers and
     suppliers. Executive further acknowledges such covenants are essential
     elements of this Agreement and that, but for such covenants, the Company
     would not have entered into this Agreement.

          (b) The Company and Executive have each consulted with their
     respective legal counsel and have been advised concerning the
     reasonableness and propriety of such covenants. Executive acknowledges that
     his observance of the covenants contained in Sections 8.1, 8.2, 8.3 and 8.4
     will not deprive him of the ability to earn a livelihood or to support his
     dependents.

     8.6 Right to Injunction; Survival of Undertakings.

          (a) In recognition of the confidential nature of the Confidential
     Information, and in recognition of the necessity of the limited
     restrictions imposed by Sections 8.1, 8.2, 8.3 and 8.4 the parties
     agree that it would be impossible to measure solely in money the damages
     which the Company would suffer if Executive were to breach any of his
     obligations under such Sections. Executive acknowledges that any breach of
     any provision of such Sections would irreparably injure the Company.
     Accordingly, Executive agrees that if he breaches any of the provisions of
     such Sections, the Company shall be entitled, in addition to any other
     remedies to which the Company may be entitled under this Agreement or
     otherwise, to an injunction to be issued by a court of competent
     jurisdiction, to restrain any breach, or threatened breach, of such
     provisions, and Executive hereby waives any right to assert any claim or
     defense that the Company has an adequate remedy at law for any such breach.

          (b) If a court determines that any of the covenants included in this
     Article VIII is unenforceable in whole or in part because of such
     covenant's duration or geographical or other scope, such court shall have
     the power to modify the duration or scope of such

                                      -40-
   46

     provision, as the case may be, so as to cause such covenant as so modified
     to be enforceable.

          (c) All of the provisions of this Article VIII shall survive any
     Termination of Employment without regard to (i) the reasons for such
     termination or (ii) the expiration of the Agreement Term.

          (d) No Company shall have any further obligation to pay or provide
     severance or benefits under Article IV if a court determines that the
     Executive has breached any covenant in this Article VIII.

                                   ARTICLE IX.

                            NON-EXCLUSIVITY OF RIGHTS

     9.1  Waiver of Certain Other Rights. To the extent that lump sum cash
severance payments are made to Executive pursuant to Article IV, Executive
hereby waives the right to receive severance payments or severance benefits
under any other Plan or agreement of the Company.

     9.2 Other Rights. Except as expressly provided in Section 9.1 or elsewhere
in this agreement, this Agreement shall not prevent or limit Executive's
continuing or future participation in any benefit, bonus, incentive or other
Plans provided by the Company and for which Executive may qualify, nor shall
this Agreement limit or otherwise affect such rights as Executive may have under
any other agreements with the Company. Amounts which are vested benefits or
which Executive is otherwise entitled to receive under any Plan and any other
payment or benefit required by law at or after the Termination Date shall be
payable in accordance with such Plan or applicable law except as expressly
modified by this Agreement.

     9.3  No Right to Continued Employment. Nothing in this Agreement shall
guarantee the right of Executive to continue in employment, and the Companies
retain the right to terminate the Executive's employment at any time for any
reason or for no reason.

                                   ARTICLE X.

                                  MISCELLANEOUS

     10.1 No Assignability. This Agreement is personal to Executive and without
the prior written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Executive's legal
representatives.

     10.2 Successors. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. The Company will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to assume expressly and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Any successor to the business
or assets of the Company

                                      -41-
   47

which assumes or agrees to perform this Agreement by operation of law, contract,
or otherwise shall be jointly and severally liable with the Company under this
Agreement as if such successor were the Company.

     10.3 Payments to Beneficiary. If Executive dies before receiving amounts to
which Executive is entitled under this Agreement, such amounts shall be paid in
a lump sum to one or more beneficiaries designated in writing by Executive
(each, a "Beneficiary"). If none is so designated, the Executive's estate shall
be his or her Beneficiary.

     10.4 Non-Alienation of Benefits. Benefits payable under this Agreement
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, before actually being received by
Executive, and any such attempt to dispose of any right to benefits payable
under this Agreement shall be void.

     10.5 Severability. If any one or more Articles, Sections or other portions
of this Agreement are declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any Article, Section or other portion not so declared to be unlawful
or invalid. Any Article, Section or other portion so declared to be unlawful or
invalid shall be construed so as to effectuate the terms of such Article,
Section or other portion to the fullest extent possible while remaining lawful
and valid.

     10.6 Amendments. This Agreement shall not be amended or modified except by
written instrument executed by the Company and Executive.

     10.7 Notices. All notices and other communications under this Agreement
shall be in writing and delivered by hand, by nationally-recognized delivery
service that promises overnight delivery, or by first-class registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

              If to Executive, to Executive at his most recent home address on
              file with the Company. If to any Company:

              Principal Mutual Holding Company
              711 High Street
              Des Moines, Iowa 50392
              Attention: Karen Shaff
              Facsimile No.: (515) 235-9852

              With copy to:
              Pamela Baker, Esq.
              Sonnenschein Nath & Rosenthal
              8000 Sears Tower
              Chicago, Illinois 60606
              Facsimile No.: (312) 876-7934

                                      -42-
   48

or to such other address as either party shall have furnished to the other in
writing. Notice and communications shall be effective when actually received by
the addressee.

     10.8  Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one and the same instrument.

     10.9  Governing Law. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Iowa, without regard to its choice of
law principles.

     10.10  The captions of this Agreement are not a part of the provisions
hereof and shall have no force or effect.

     10.11  Number and Gender. Wherever appropriate, the singular shall include
the plural, the plural shall include the singular, and the masculine shall
include the feminine.

     10.12  Tax Withholding. The Company may withhold from any amounts payable
under this Agreement any Taxes that are required to be withheld pursuant to any
applicable law or regulation and may report all such amounts payable to such
authority as is required by any applicable law or regulation.

     10.13  Waiver. Executive's failure to insist upon strict compliance with
any provision of this Agreement shall not be deemed a waiver of such provision
or any other provision of this Agreement. A waiver of any provision of this
Agreement shall not be deemed a waiver of any other provision, and any waiver of
any default in any such provision shall not be deemed a waiver of any later
default thereof or of any other provision.

     10.14  Joint and Several Liability. The obligations of the Companies to
Executive under this Agreement shall be joint and several.

     10.15  Entire Agreement. This Agreement contains the entire understanding
of Mutual, Company and Executive with respect to its subject matter.

                                      -43-
   49

          IN WITNESS WHEREOF, Executive, Principal Mutual Holding Company,
Principal Financial Group, Principal Financial Services, Inc., and Principal
Life Insurance Company have executed this Change of Control Employment Agreement
as of the date first above written.

                                EXECUTIVE

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

                                PRINCIPAL MUTUAL HOLDING COMPANY

                                By:  /s/ J. Barry Griswell
                                   ---------------------------------------------
                                Title: President and Chief Executive Officer
                                      ------------------------------------------

                                PRINCIPAL FINANCIAL GROUP

                                By:  /s/ J. Barry Griswell
                                   ---------------------------------------------
                                Title: President and Chief Executive Officer
                                      ------------------------------------------

                                PRINCIPAL FINANCIAL SERVICES, INC.

                                By:  /s/ J. Barry Griswell
                                   ---------------------------------------------
                                Title: President and Chief Executive Officer
                                      ------------------------------------------

                                PRINCIPAL LIFE INSURANCE COMPANY

                                By:  /s/ J. Barry Griswell
                                   ---------------------------------------------
                                Title: President and Chief Executive Officer
                                      ------------------------------------------

                                      -44-
   1
                                                                   Exhibit 10.10

                             FISCAL AGENCY AGREEMENT

                                      among

           PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED
                                (ACN 087 430 331)
                                    as Issuer

                                       and

                       PRINCIPAL FINANCIAL SERVICES, INC.
                                  as Guarantor

                                       and

                      U.S. BANK TRUST NATIONAL ASSOCIATION
                                 as Fiscal Agent

                          dated as of August 25, 1999

                  $200,000,000 7.95% Notes due August 15, 2004

                                       and

                  $465,000,000 8.20% Notes due August 15, 2009
   2
                                TABLE OF CONTENTS

                                                                       Page
                                                                       ----

                                    ARTICLE I

                                   DEFINITIONS

  SECTION 1.1.   Definitions .....................................       1
  SECTION 1.2.   Rules of Construction ...........................      10
  SECTION 1.3.   Compliance Certificates and Opinions ............      11

                                   ARTICLE II

                          SECURITY AND GUARANTEE FORMS

  SECTION 2.1.   Forms of Securities Generally ...................      11
  SECTION 2.2.   Form of Face of 7.95% Notes .....................      15
  SECTION 2.3.   Form of Reverse of 7.95% Notes ..................      19
  SECTION 2.4.   Form of Fiscal Agent's Certificate of
                       Authentication of 7.95% Notes .............      28
  SECTION 2.5.   Form of Face of 8.20% Notes .....................      28
  SECTION 2.6.   Form of Reverse of 8.20% Notes ..................      33
  SECTION 2.7.   Form of Fiscal Agent's Certificate of
                       Authentication of 8.20% Notes .............      42
  SECTION 2.8.   Form of Guarantee ...............................      42
  SECTION 2.9.   Registrar, Paying Agent, Depository and
                       Custodian .................................      48
  SECTION 2.10.   Payment on Securities ..........................      49
  SECTION 2.11.   Holder Lists ...................................      50
  SECTION 2.12.   Outstanding  Securities ........................      51
  SECTION 2.13.   Treasury Securities ............................      51

                                   ARTICLE III

                                 THE SECURITIES

    SECTION 3.1.   Title and Terms ...............................      52
(*) SECTION 3.2.   Denominations .................................      54
    SECTION 3.3.   Execution, Authentication, Delivery
                          and Dating .............................      54
    SECTION 3.4.   Temporary Securities Other Than Regulation S
                         Temporary Securities ....................      56
    SECTION 3.5.   Registration, Registration of Transfer and
                       Exchange Generally; Restrictions on
                       Transfer and Exchange .....................      57

                                       -i-
   3
                                                                       Page
                                                                       ----

SECTION 3.6.   Mutilated, Destroyed, Lost and Stolen
                    Securities ...................................      67
SECTION 3.7.   Payment of Interest; Interest
                      Rights Preserved ...........................      68
SECTION 3.8.   Persons Deemed Owners .............................      70
SECTION 3.9.   Cancellation ......................................      70
SECTION 3.10.  Computation of Interest ...........................      71

                                   ARTICLE IV

                              PAYMENT RESTRICTIONS

SECTION 4.1.   Unpaid Amounts ....................................      71

                                    ARTICLE V

                                    COVENANTS

SECTION 5.1.   Payment of Principal and Interest .................      72
SECTION 5.2.   Rule 144A Information .............................      72
SECTION 5.3.   Other Information .................................      72
SECTION 5.4.   Corporate Existence ...............................      73
SECTION 5.5.   Compliance with Investment Company Act ............      73
SECTION 5.6.   Additional Amounts ................................      73
SECTION 5.7.   Limitations upon Liens ............................      76
SECTION 5.8.   Limitation on the Disposition of Stock of
                    Restricted Subsidiaries ......................      76
SECTION 5.9.   Annual Review Certificate; Notice of Defaults
                    or Events of Default .........................      77

                                   ARTICLE VI

                    REORGANIZATION, CONSOLIDATION, MERGER OR
                               SALE BY THE COMPANY

SECTION 6.1.   Consolidation, Merger or Sale of Assets
                     Permitted ...................................      78

                                   ARTICLE VII

                              DEFAULTS AND REMEDIES

SECTION 7.1.   Events of Default .................................      80
SECTION 7.2.   Acceleration; Rescission and Annulment ............      82

                                      -ii-
   4
                                                                      Page
                                                                      ----

SECTION 7.3.   Collection of Indebtedness and Suits for
                     Enforcement by Fiscal Agent .................      84
SECTION 7.4.   Fiscal Agent May File Proofs of Claim .............      84
SECTION 7.5.   Fiscal Agent May Enforce Claims without
                     Possession of Securities ....................      85
SECTION 7.6.   Delay or Omission Not Waiver ......................      85
SECTION 7.7.   Waiver of Past Defaults ...........................      86
SECTION 7.8.   Control by Majority ...............................      86
SECTION 7.9.   Limitation on Suits by Holders ....................      86
SECTION 7.10.   Rights of Holders to Receive Payment .............      87
SECTION 7.11.   Application of Money Collected ...................      88
SECTION 7.12.   Restoration of Rights and Remedies ...............      88
SECTION 7.13.   Rights and Remedies Cumulative ...................      89
SECTION 7.14.   Waiver of Usury, Stay or Extension Laws ..........      89
SECTION 7.15.   Undertaking for Costs ............................      89
SECTION 7.16.   Judgment Currency ................................      90

                                  ARTICLE VIII

                                   REDEMPTION

SECTION 8.1.   Applicability of Article ..........................      90
SECTION 8.2.   Election to Redeem; Notice to
                     Fiscal Agent ................................      91
SECTION 8.3.   Selection by Fiscal Agent of Securities to Be
                     Redeemed ....................................      91
SECTION 8.4.   Notice of Redemption ..............................      92
SECTION 8.5.   Deposit of Redemption Price .......................      93
SECTION 8.6.   Securities Payable on Redemption Date .............      93
SECTION 8.7.   Securities Redeemed in Part .......................      94
SECTION 8.8.   Optional Redemption ...............................      94
SECTION 8.9.   Optional Redemption Due to Changes in Tax
                     Treatment ...................................      96

                                   ARTICLE IX

                                  FISCAL AGENT

SECTION 9.1.   Duties of Fiscal Agent ............................      97
SECTION 9.2.   Rights of Fiscal Agent ............................      98
SECTION 9.3.   Individual Rights of Fiscal Agent .................      99
SECTION 9.4.   Fiscal Agent's Disclaimer .........................      99
SECTION 9.5.   Compensation and Indemnity ........................      99
SECTION 9.6.   Replacement of Fiscal Agent .......................     100

                                      -iii-
   5
                                                                      Page
                                                                      ----

SECTION 9.7.   Successor Fiscal Agent,
                     Agents by Merger, Etc. ......................     100
SECTION 9.8.   Eligibility .......................................     101
SECTION 9.9.   Notice of Defaults ................................     101

                                    ARTICLE X

               AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 10.1.     Without Consent of Holders .....................     101
SECTION 10.2.     With Consent of Holders ........................     102
SECTION 10.3.     Revocation and Effect of Consents ..............     104
SECTION 10.4.     Notation on or Exchange of Securities ..........     104
SECTION 10.5.     Fiscal Agent to Sign Amendments, Etc ...........     104

                                   ARTICLE XI

                               MEETINGS OF HOLDERS

SECTION 11.1.     Purposes for Which Meetings
                     May Be Called ...............................     105
SECTION 11.2.     Call, Notice and Place of Meetings .............     105
SECTION 11.3.     Persons Entitled to Vote at Meetings ...........     106
SECTION 11.4.     Quorum .........................................     106
SECTION 11.5.     Action by Written Consent ......................     107
SECTION 11.6.     Determination of Voting Rights; Conduct and
                     Adjournment of Meetings .....................     107
SECTION 11.7.     Counting Votes and Recording Action of
                     Meetings ....................................     108

                                   ARTICLE XII

                                    GUARANTEE

SECTION 12.1.     Guarantee ......................................     108
SECTION 12.2.     Execution and Delivery of Guarantee ............     114

                                  ARTICLE XIII

                             ASSUMPTION BY GUARANTOR

SECTION 13.1.     Mandatory Assumption by Guarantor upon
                     Failure to Consummate Acquisition ...........     115
SECTION 13.2.   Optional Assumption by Guarantor .................     115

                                      -iv-
   6
                                                                     Page
                                                                     ----

                                   ARTICLE XIV

                       DEFEASANCE AND COVENANT DEFEASANCE

SECTION 14.1.   Option of Company and Guarantor to Effect
                     Defeasance or Covenant Defeasance ...........     116
SECTION 14.2.   Defeasance and Discharge .........................     116
SECTION 14.3.   Covenant Defeasance ..............................     117
SECTION 14.4.   Conditions to Defeasance or Covenant
                     Defeasance ..................................     117
SECTION 14.5.   Deposited Money and U.S.  Government
                     Obligations to Be Held in Trust;
                     Miscellaneous Provisions ....................     121
SECTION 14.6.   Reinstatement ....................................     121

                                   ARTICLE XV

                                  MISCELLANEOUS

SECTION 15.1.     Notices ........................................     122
SECTION 15.2.     Governing Law ..................................     123
SECTION 15.3.     No Recourse against Others .....................     123
SECTION 15.4.     Duplicate Originals ............................     124
SECTION 15.5.     Headings and Table of Contents .................     124
SECTION 15.6.     Successor and Assigns ..........................     124
SECTION 15.7.     Separability ...................................     124
SECTION 15.8.     Legal Holidays .................................     124

                                       -v-
   7
         FISCAL AGENCY AGREEMENT dated as of August 25, 1999, between PRINCIPAL
FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED (ACN 087 430 331), a company
organized under the laws of the State of Victoria, Commonwealth of Australia
(the "Company"), PRINCIPAL FINANCIAL SERVICES, INC., a company organized under
the laws of the State of Iowa, as Guarantor (the "Guarantor"), and U.S. BANK
TRUST NATIONAL ASSOCIATION, a banking organization organized under the laws of
the United States, as Fiscal Agent (together with any successor as Fiscal Agent
hereunder, the "Fiscal Agent").

         Each party agrees as follows for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Company's 7.95% Notes
due August 15, 2004 (the "7.95% Notes") and 8.20% Notes due August 15, 2009 (the
"8.20% Notes" and together with the 7.95% Notes, the "Securities") and any
Additional Securities (as defined below) issued hereunder:

                                    ARTICLE I

                                   DEFINITIONS

            SECTION 1.1.   Definitions.

         In this Agreement, unless the context otherwise requires:

         "Acquisition" has the meaning set forth in the definition of
"Acquisition Agreement";

         "Acquisition Agreement" means the Share Sale Deed, dated June 17, 1999,
among BT Investments (Australia) LLC, BT Foreign Investment Corporation, BT New
Zealand Limited, BT International (Delaware), Inc. and Nominees (H.K.) Limited
(collectively, the "Vendors"), Deutsche Bank AG (the "Warrantor"), Bankers Trust
Corporation (the "Vendors' Guarantor"), Principal Financial Group (Australia)
Pty Limited (the "Purchaser") and the Guarantor, pursuant to which the Purchaser
agreed to purchase from the vendors and the Vendors agreed to sell to the
Purchaser the Sale Shares in consideration for the Purchase Price (the
"Acquisition");

         "Additional Amounts" has the meaning set forth in Section 5.6;
   8
         "Additional Securities" means Securities of any series issued from time
to time after the Issue Date under the terms of this Agreement (except for
Securities authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Securities pursuant to Sections 3.4, 3.5, 3.6
or 8.7);

         "Agent" means any Registrar, Paying Agent, Co-Registrar or Custodian;

         "Agent Member" has the meaning set forth in Section 3.5;

         "Agreement" means this Agreement, as amended or supplemented from time
to time;

         "Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Security, Euroclear and
Cedelbank, in each case to the extent applicable to such transaction and as in
effect at the time of such transfer or transaction;

         "Bankruptcy Code" has the meaning set forth in Section 12.1;

         "Bankruptcy Law" has the meaning set forth in Section 7.1;

         "Beneficial Holder" means each participant in the Depository that holds
an interest in a Security, as indicated in the Participants List;

         "Board of Directors" means, with respect to the Company or the
Guarantor, either the board of directors of the Company or the Guarantor, as the
case may be, or any duly authorized committee of that board. Except as otherwise
provided or unless the context otherwise requires, each reference herein to the
"Board of Directors" shall mean the Board of Directors of the Company;

         "Board Resolution" of the Company or the Guarantor means a copy of a
resolution certified by an Officer, the Secretary or an Assistant Secretary or
by other authorized designees of the Board of Directors of the Company or the
Guarantor, as the case may be, to have been duly adopted by its Board of
Directors and to be in full force and effect on

                                       -2-
   9
the date of such certification, and delivered to the Fiscal Agent. Except as
otherwise expressly provided or unless the context otherwise requires, each
reference herein to a "Board Resolution" shall mean a Board Resolution of the
Company;

         "Business Day" means any day other than a Saturday, Sunday or any other
day on which banking institutions are authorized or required by law or executive
order to close in New York, New York or Des Moines, Iowa;

         "Cedelbank" means Cedelbank, societe anonyme (or any successor
securities clearing agency);

         "Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference to a particular section of the Code shall include any
successor Code section;

         "Commissioner" means the Commissioner of the Insurance Division of the
Department of Commerce of the State of Iowa, or such governmental officer, body
or authority as may after the date hereof succeed to such Commissioner as the
primary regulator of Principal Life's financial condition under applicable law;

         "Company Order" means any request, instruction, order or directive
signed by an Officer;

         "Co-Registrar" has the meaning set forth in Section 2.9;

         "Covenant Defeasance" has the meaning specified in Section 14.2;

         "Custodian" has the meaning set forth in Section 2.9;

         "Debt" means indebtedness for money borrowed;

         "Default" means any event which is, or after notice or passage of time,
or both, would be, an Event of Default;

         "Defaulted Interest" has the meaning specified in Section 3.7;

         "Defeasance" has the meaning specified in Section 14.3;

                                       -3-
   10
         "Department" means the Insurance Division of the Department of Commerce
of the State of Iowa;

         "Depositary" means, with respect to any Securities, a clearing agency
that is registered as such under the Exchange Act and is designated by the
Company to act as Depositary for such Securities (or any successor securities
clearing agency so registered);

         "Depositary Securities Certification" has the meaning set forth in
Section 2.1;

         "Depository" means, with respect to the Securities issuable or issued
in whole or in part in global form, the person specified in Section 2.9 as the
Depository with respect to the Securities, until a successor shall have been
appointed and becomes such pursuant to the applicable provisions of this
Agreement, and, thereafter, "Depository" shall mean such successor;

         "Dollars or $" means such coin or currency of the United States of
America which is legal tender for payment of public and private debts;

         "DTC" means The Depository Trust Company, a New York corporation;

         "Euroclear" means the Euroclear Clearance System (or any successor
securities clearing agency);

         "Event of Default" has the meaning set forth in Section 7.1;

         "Exchange Act" means the Securities Exchange Act of 1934, as amended;

         "GAAP" shall mean generally accepted accounting principles of the
relevant jurisdiction, as in effect from time to time;

         "Global Security" means a Security that is registered in the Security
Register in the name of a Depositary or a nominee thereof;

         "Guarantee" means any Guarantee of the Guarantor endorsed on a Security
authenticated and delivered pursuant

                                       -4-
   11
to this Fiscal Agency Agreement and shall include the Guarantee set forth in
Section 2.8;

         "Holder" means a Person in whose name a Security is registered in the
Security Register;

         "Initial Purchasers" means each of Goldman, Sachs & Co., J.P. Morgan
Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith Barney
Inc., each as an initial purchaser under the Purchase Agreement;

         "Institutional Accredited Investor" means an institutional investor
that is an "accredited investor" within the meaning of Rule 501(a)(l), (2), (3)
or (7) of Regulation D under the Securities Act;

         "Insurance Law" means the insurance laws promulgated under the Code of
Iowa;

         "Interest Payment Date" shall mean (1) with respect to the 7.95% Notes,
each February 15 and August 15, commencing February 15, 2000 and (2) with
respect to the 8.20% Notes, each February 15 and August 15, commencing February
15, 2000;

         "Issue Date" shall mean August 25, 1999.

         "Lien" means any mortgage, deed of trust, pledge, lien, security
interest or other encumbrance (including, without limitation, any conditional
sale or other title retention agreement or lease in the nature thereof, any
filing or agreement to give a lien or to file a financing statement as a debtor
under the Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to the Guarantor or any Restricted
Subsidiary under a lease which is not in the nature of a conditional sale or
title retention agreement);

         "Make-Whole Amount" has the meaning set forth in Section 8.8;

         "Maturity", when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise;

                                       -5-
   12
         "Officer" means the Chairman of the Board, the President, any Executive
or Senior Vice President, or any Vice President of the Company or the Guarantor,
as the case may be;

         "Officers' Certificate" means a certificate signed by at least two
Officers or by one Officer and any other person duly authorized by the Board of
Directors of the Company or the Guarantor, as the case may be;

         "Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Fiscal Agent. The counsel may be an employee of or
counsel to the Company;

         "Outstanding Securities" means the outstanding Securities determined in
accordance with Section 2.12;

         "Owner Securities Certification" has the meaning set forth in Section
2.1;

         "Participants List" means the list furnished by the Depository showing
persons that have a beneficial interest in the Securities evidenced by any
Security in global form held by the Depository and the amount of such interest;

         "Paying Agent" has the meaning set forth in section 2.9;

         "Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
estate, unincorporated organization or government or any agency or political
subdivision thereof;

         "Predecessor Security" of any particular Security means every Security
issued before, and evidencing all or a portion of the same debt as that
evidenced by, such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under Section 3.6 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall
be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen
Security;

         "Principal" or "principal amount" means principal of the Securities
and, where the context so requires, premium, if any, payable upon redemption of
the Securities in accordance with paragraph two thereof;

                                       -6-
   13
         "Principal Life" means Principal Life Insurance Company, an insurance
company organized under the laws of the State of Iowa;

         "Principal Mutual Holding Company" means Principal Mutual Holding
Company, a mutual insurance holding company organized under the laws of the
State of Iowa;

         "Purchase Agreement" means the Purchase Agreement dated August 18,
1999, among the Company, the Guarantor and the Initial Purchasers;

         "Purchase Price" has the meaning ascribed to such term in the
Acquisition Agreement;

         "QIB" means a "qualified institutional buyer" as defined in Rule 144A
under the Securities Act;

         "Receiver" has the meaning set forth in Section 7.1;

         "Redemption Date" has the meaning set forth in Section 8.8;

         "Redemption Price" has the meaning set forth in Section 8.8;

         "Registrar" has the meaning set forth in Section 2.9;

         "Register" means the register of each series of the Securities
maintained pursuant to Section 2.9;

         "Regular Record Date" for the interest payable on any Interest Payment
Date means February 1 and August 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date;

         "Regulation S" means Regulation S under the Securities Act (or any
successor provision), as it may be amended from time to time;

         "Regulation S Global Securities" has the meaning specified in Section
2.1;

         "Reinvestment Rate" has the meaning set forth in Section 8.8;

                                       -7-
   14
         "Responsible Officer" means any officer or assistant officer of the
Fiscal Agent assigned by the Fiscal Agent to administer the transactions
contemplated hereby;

         "Restricted Global Securities" has the meaning specified in Section
2.1;

         "Restricted Period" has the meaning set forth in Section 2.1;

         "Restricted Securities" has the meaning set forth in Section 2.1;

         "Restricted Subsidiary" means (i) the Company and (ii) a Subsidiary
which is a regulated insurance company principally engaged in one or more of the
life, annuity, property and casualty insurance businesses; provided that no such
Subsidiary shall be a Restricted Subsidiary if (1) (a) the total assets of such
Subsidiary are less than 10% of the total assets of the Guarantor and its
consolidated Subsidiaries (including such Subsidiary), in each case as set forth
on the most recent fiscal year-end balance sheets of such Subsidiary and the
Guarantor and its consolidated Subsidiaries, respectively, and computed in
accordance with GAAP, and (b) the total revenues of such Subsidiary are less
than 10% of the total revenues of the Guarantor and its consolidated
Subsidiaries (including such Subsidiary), in each case as set forth on the most
recent fiscal year-end income statements of such Subsidiary and the Guarantor
and its consolidated Subsidiaries, respectively, and computed in accordance with
GAAP or (2) in the judgment of the Board of Directors, as evidenced by a Board
Resolution, such Subsidiary is not material to the financial condition of the
Guarantor and its consolidated Subsidiaries taken as a whole;

         "Rule 144A" means Rule 144A under the Securities Act (or any successor
provision), as it may be amended from time to time;

         "Rule 144A Information" has the meaning set forth in Section 5.2;

         "Sale Shares" has the meaning ascribed to such term in the Acquisition
Agreement;

                                       -8-
   15
         "Securities" means the 7.95% Notes and the 8.20% Notes, collectively;

         "Securities Act" means the Securities Act of 1933, as amended;

         "Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.5;

         "series of Securities" means the 7.95% Notes, collectively, or the
8.20% Notes, collectively or any Additional Securities, collectively, as the
context requires;

         "Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Fiscal Agent pursuant to Section 3.7;

         "Stated Maturity", when used with respect to any Security or any
instalment of interest thereon, means the date specified in such Security as the
fixed date on which the principal of such Security or such instalment of
interest, as the case may be, is due and payable;

         "Stated Rate" means (i) with respect to the 7.95% Notes, a rate of
interest equal to 7.95% per annum, and (ii) with respect to the 8.20% Notes, a
rate of interest equal to 8.20% per annum;

         "Statistical Release" has the meaning set forth in Section 8.8;

         "Subsidiary" means, with respect to any Person, (i) a corporation more
than 50% of the combined voting power of the outstanding Voting Stock of which
is owned, directly or indirectly, by such Person or by one or more other
Subsidiaries of such Person or by such Person and one or more Subsidiaries
thereof, (ii) any other Person (other than a corporation) in which such Person,
or one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, has at least a majority
ownership and power to direct the policies, management and affairs thereof, or
(iii) any other Person which is otherwise controlled by such Person or by one or
more other Subsidiaries of such Person or by such Person and one or more other
Subsidiaries of such Person;

                                       -9-
   16
         "Temporary Regulation S Global Securities" has the meaning set forth in
Section 2.1;

         "Total Assets" means, at any date, the total assets appearing on the
most recently prepared consolidated balance sheet of the Guarantor and its
consolidated Subsidiaries as of the end of a fiscal quarter of the Guarantor,
prepared in accordance with GAAP;

         "Transferee Securities Certification" has the meaning set forth in
Section 3.5;

         "Unpaid Amount" has the meaning set forth in Section 4.1;

         "Unrestricted Securities" has the meaning set forth in Section 2.1; and

         "Voting Stock" of any Person means capital stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.

                  SECTION 1.2. Rules of Construction. In this Agreement, unless
the context otherwise requires:

                  (1) the words "herein", "hereof" and "hereunder" and other
         words of similar import refer to this Agreement and the forms of
         Security included as Exhibits hereto as a whole, and not to any
         particular Article, Section or other subdivision;

                  (2) "or" is not exclusive;

                  (3) words in the singular include the plural, and words in the
         plural include the singular;

                  (4) provisions apply to successive events and transactions;
         and

                  (5) any reference to a party includes its successors from
         time to time.

                                      -10-
   17
              SECTION 1.3.   Compliance Certificates and Opinions.

         Upon any application or request by the Company or the Guarantor to the
Fiscal Agent to take or refrain from taking any action under any provision of
this Fiscal Agency Agreement, the Company or the Guarantor shall furnish to the
Fiscal Agent such certificates and opinions as may be as required by the Fiscal
Agent. Each such certificate or opinion shall be given in the form of an
Officer's Certificate, if to be given by an officer of the Company or the
Guarantor, or an Opinion of Counsel, if to be given by counsel, and shall comply
with any requirements set forth in this Fiscal Agency Agreement.

         Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (except for certificates
provided for in Section 5.6) shall include,

                  (a) a statement that each individual signing such certificate
         or opinion has read such covenant or condition and the definitions
         herein relating thereto;

                  (b) a brief statement as to the nature and scope of the
         examination or investigation upon which the statements or opinions
         contained in such certificate or opinion are based;

                  (c) a statement that, in the opinion of each such individual,
         he has made such examination or investigation as is necessary to enable
         him to express an informed opinion as to whether or not such covenant
         or condition has been complied with; and

                  (d) a statement as to whether, in the opinion of each such
         individual, such condition or covenant has been complied with.

                                   ARTICLE II

                          SECURITY AND GUARANTEE FORMS

                  SECTION 2.1. Forms of Securities Generally.

         The Securities shall be in substantially the forms set forth in this
Article, and the Guarantee to be endorsed

                                      -ll-
   18
thereon shall be in substantially the form set forth in Section 2.8 of this
Agreement, in each case with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Agreement, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with the rules of any securities exchange or Depositary thereof, the Code and
regulations thereunder, or as may, consistently herewith, be determined by the
officers executing such Securities or Guarantee endorsed thereon, as the case
may be, as evidenced by their execution thereof. The Fiscal Agent's certificates
of authentication shall be in substantially the form set forth in Section 2.4,
with respect to the 7.95% Notes and Section 2.7 with respect to the 8.20% Notes.
The Company shall approve the form of the Securities and any notation, legend or
endorsement on the Securities.

         The definitive Securities and the Guarantee endorsed thereon shall be
printed, lithographed or engraved or produced by any combination of these
methods on steel engraved borders or may be produced in any other manner
permitted by the rules of any securities exchange on which the Securities or the
Guarantee endorsed thereon, as the case may be, may be listed, all as determined
by the officers executing such Securities or Guarantee as evidenced by their
execution thereof.

         In certain cases described elsewhere herein, the legends set forth in
the first seven paragraphs of Section 2.2 or Section 2.5, as the case may be,
may be omitted from Securities issued hereunder.

         Securities offered and sold in their initial distribution in reliance
on Regulation S shall be initially issued in the form of temporary Global
Securities, one or more for each series, in fully registered form without
interest coupons, substantially in the form of Security set forth in Sections
2.2 and 2.3 or Sections 2.5 and 2.6, as the case may be, with such applicable
legends as are provided for in Section 2.2 and 2.5, as the case may be. Such
Global Securities shall be registered in the name of the U.S. Depositary or its
nominee and deposited with the Fiscal Agent, at its New York office, as
custodian for the U.S. Depositary, duly executed by the Company and
authenticated by the Fiscal Agent as hereinafter provided, for credit to the
respective accounts at the U.S. Depositary

                                      -12-
   19
of the depositories for Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear, or Cedelbank. Until such time as the
Restricted Period (as defined below) shall have terminated, such temporary
Global Securities shall be referred to herein as "Temporary Regulation S Global
Securities." Until such time as the Restricted Period shall have terminated,
investors may hold beneficial interests in such Global Securities only through
Euroclear and Cedelbank, unless delivery of such beneficial interest upon
transfer shall be made through a Restricted Global Security in accordance with
the certification requirements discussed below in Section 3.5(b)(v). After such
time as the Restricted Period shall have terminated, such certification
requirements shall no longer be required for such transfers. After such time as
the Restricted Period shall have terminated and the certifications referred to
below in the next succeeding paragraph shall have been provided, such temporary
Global Securities shall be exchanged for interests in like Global Securities,
referred to herein collectively as the "Regulation S Global Securities,"
substantially in the form of Security set forth in Section 2.2 and 2.3 or
Sections 2.5 or 2.6, as the case may be, with such applicable legends as are
provided for in Section 2.2 or Section 2.5. As used herein, the term "Restricted
Period" means the period up to (but not including) the 40th day following the
later of (i) the day that Goldman, Sachs & Co., as representative of the several
initial purchasers of the Securities, advises the Company and the Fiscal Agent
of the day on which the Securities are first offered to persons other than
distributors (as defined in Regulation S) in reliance on Regulation S and (ii)
August 25, 1999. The Temporary Regulation S Global Securities, Regulation S
Global Securities following the Restricted Period and all other Securities that
are not Restricted Securities shall collectively be referred to herein as the
"Unrestricted Securities."

         Interests in a Temporary Regulation S Global Security may be exchanged
for interests in a Regulation S Global Security of the same series only on or
after the termination of the Restricted Period after delivery by a beneficial
owner of an interest therein to Euroclear or Cedelbank of a written
certification (an "Owner Securities Certification") substantially in the form of
Annex C-l hereto, and upon delivery by Euroclear or Cedelbank to the Fiscal
Agent of a written certification (a "Depositary Securities Certification")
substantially in the form

                                      -13-
   20
attached hereto as Annex C-2. Upon receipt of such certification, the Fiscal
Agent will exchange the portion of the Temporary Regulation S Global Security
covered by such certification for interests in a Regulation S Global Security of
the same series.

         Securities offered and sold in their initial distribution in reliance
on Rule 144A shall be issued in the form of Global Securities, one or more for
each series (collectively, as to each series, the "Restricted Global
Securities"), in fully registered form without interest coupons, substantially
in the form of Security set forth in Sections 2.2 and 2.3 or Sections 2.5 and
2.6, as the case may be, with such applicable legends as are provided for in
Section 2.2 or Section 2.5, as the case may be, except as otherwise permitted
herein. Such Global Securities shall be registered in the name of the U.S.
Depositary or its nominee and deposited with the Fiscal Agent, at its New York
office, as custodian for the U.S. Depositary, duly executed by the Company and
authenticated by the Fiscal Agent as hereinafter provided. The aggregate
principal amount of a Restricted Global Security may be increased or decreased
from time to time by adjustments made on the records of the Fiscal Agent, as
custodian for the U.S. Depositary, in connection with a corresponding decrease
or increase in the aggregate principal amount of the Temporary Regulation S
Global Security or Regulation S Global Security each of the same series, as the
case may be, as hereinafter provided. The Restricted Global Securities and all
other Securities evidencing the debt, or any portion of the debt, initially
evidenced by such Global Securities, other than Securities transferred or
exchanged upon certification as provided in Section 3.5(b)(ii), (iii), (iv) or
(vii), shall collectively be referred to herein as the "Restricted Securities."

         The Securities will be issued only in registered form. The Securities
will be issued in minimum denominations of $1,000, except that Securities
offered other than in reliance on Regulation S or to Qualified Institutional
Buyers will be issued only in definitive certificated form and will be issued
initially in minimum denominations of $100,000 and integral multiples of $1,000
in excess thereof. Such Securities (i.e., Securities sold to Institutional
Accredited Investors) will also be considered to be Restricted Securities
hereunder.

                                      -14-
   21
                  SECTION 2.2. Form of Face of 7.95% Notes

                  [INCLUDE IF SECURITY IS A TEMPORARY REGULATION S GLOBAL
SECURITY -- THIS SECURITY IS A TEMPORARY REGULATION S GLOBAL SECURITY WITHIN THE
MEANING OF THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER. EXCEPT IN THE
CIRCUMSTANCES DESCRIBED IN THE FISCAL AGENCY AGREEMENT, NO TRANSFER OR EXCHANGE
OF AN INTEREST IN THIS TEMPORARY GLOBAL SECURITY MAY BE MADE FOR AN INTEREST IN
THE RESTRICTED GLOBAL SECURITY. NO EXCHANGE OF AN INTEREST IN THIS TEMPORARY
GLOBAL SECURITY MAY BE MADE FOR AN INTEREST IN THE REGULATION S GLOBAL SECURITY
EXCEPT ON OR AFTER THE TERMINATION OF THE RESTRICTED PERIOD AND UPON DELIVERY OF
THE OWNER SECURITIES CERTIFICATION AND THE DEPOSITARY SECURITIES CERTIFICATION
RELATING TO SUCH INTEREST IN ACCORDANCE WITH THE TERMS OF THE FISCAL AGENCY
AGREEMENT.]

                  [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- THIS SECURITY
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) BY THE INITIAL INVESTOR (I) TO A
PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE TRANSACTION COMPLYING
WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (III)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY
RULE 144 THEREUNDER (IF AVAILABLE) AND (B) BY SUBSEQUENT INVESTORS, AS SET FORTH
IN (A) ABOVE AND, IN ADDITION, TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A
TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES. SECURITIES OWNED BY AN INITIAL INVESTOR THAT IS NOT A QUALIFIED
INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK-ENTRY FORM AND MAY NOT BE
TRANSFERRED WITHOUT CERTIFICATION THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS, AS PROVIDED IN THE FISCAL AGENCY AGREEMENT. NO REPRESENTATION CAN
BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 FOR RESALES
OF SECURITIES.]

                  [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS
A GLOBAL SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.

                                      -15-

   22
THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY
REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE
REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE
THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE FISCAL AGENCY
AGREEMENT.]

         [INCLUDE ON ALL SECURITIES -- NO ASSOCIATE (AS DEFINED IN DIVISION 16F
OF THE INCOME TAX ASSESSMENT ACT OF 1936 OF THE COMMONWEALTH OF AUSTRALIA (THE
"TAX ACT") (BUT ON THE BASIS THAT SUB-PARAGRAPHS 159GZC(l)(a)(ii), (l)(b)(i) and
(l)(d)(i) OF THE TAX ACT DO NOT APPLY) OF THE ISSUER (AS DEFINED HEREIN) MAY
(DIRECTLY OR INDIRECTLY) ACQUIRE THIS SECURITY OR ANY INTEREST IN OR RIGHT IN
RESPECT OF THIS SECURITY (OTHER THAN SUCH A PERSON WHO ACQUIRES THIS SECURITY OR
SUCH INTEREST OR RIGHT IN THE CAPACITY OF A DEALER IN RELATION TO THE PLACEMENT
OF THE SECURITY, INTEREST OR RIGHT).

         EACH PERSON WHO SO ACQUIRES THIS SECURITY OR SUCH INTEREST OR RIGHT IS
TAKEN TO HAVE WARRANTED IN FAVOR OF THE ISSUER THAT THE PERSON IS NOT AN
ASSOCIATE.

         ANY ASSOCIATE WHO SO ACQUIRES THIS SECURITY MAY BE SUBJECT TO
AUSTRALIAN INTEREST WITHHOLDING TAX AND, IF SO, WILL NOT BE ENTITLED TO RECEIVE
ANY PAYMENT OF ADDITIONAL AMOUNTS FROM THE ISSUER OR THE GUARANTOR (AS DEFINED
HEREIN) IN RESPECT OF ANY AMOUNT DEDUCTED BY THE ISSUER OR THE GUARANTOR ON
ACCOUNT OF SUCH TAX FROM AMOUNTS PAYABLE UNDER OR IN RESPECT OF THIS SECURITY.]

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY AND THE DEPOSITORY TRUST
COMPANY IS THE U.S. DEPOSITARY -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK
CORPORATION, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CEDE &
CO. (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

                                      -16-
   23
           PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED
                                (ACN 087 430 331)

                         7.95% NOTES DUE August 15, 2004

             GUARANTEED AS TO PAYMENT OF PRINCIPAL, PREMIUM (IF ANY)
                                 AND INTEREST BY
                       PRINCIPAL FINANCIAL SERVICES, INC.

No. _______                                         U.S.$

CUSIP No.:  [If Restricted Global Securities--74251UAA2]
            [If Regulation S Global Securities--Q77548AA5]
            [If Restricted Securities--74251UABO]
ISIN:   [If Restricted Global Securities--US74251UAA25]
        [If Regulation S Global Securities--USQ77548AA55]
        [If Restricted Securities--US74251UABO8]
Common Code: [If Restricted Global Securities--010112753]
             [If Regulation S Global Securities--010112478]

         PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED, a
corporation duly organized and existing under the laws of the Commonwealth of
Australia, State of Victoria (herein called the "Company," which term includes
any successor Person under the Fiscal Agency Agreement referred to on the
reverse hereof), for value received, hereby promises to pay to _______________,
or registered assigns, the principal sum of _____________, U.S. Dollars, [or
such other amount (not to exceed Two Hundred Million U.S. Dollars (U.S.
$200,000,000) when taken together with all of the Company's 7.95% Notes due
August 15, 2004 issued and outstanding in definitive certificated form or in the
form of another Global Security) as may from time to time represent the
principal amount of the Company's 7.95% Notes due August 15, 2004 in respect of
which beneficial interests are held through the U.S. Depositary in the form of a
[Restricted] [Temporary Regulation S Global Security or a Regulation S] Global
Security,] -- [omit from Non-Global Securities] on August 15, 2004, and to pay
interest thereon from August 25, 1999 or from the most recent Interest Payment
Date (as defined below) to which interest has been paid or duly provided for,
semi-annually in arrears on February 15 and August 15 in each year, commencing
on February 15, 2000, and at Maturity at the rate of 7.95% per annum, until the

                                      -17-
   24
principal hereof is paid or made available for payment, provided that any amount
of such principal (and premium, if any) or interest that is overdue shall bear
interest at the rate of 7.95% per annum (to the extent that payment of such
interest shall be legally enforceable), from the date such amount is due until
it is paid or made available for payment, and such interest on any overdue
amount shall be payable on demand. The interest so payable, and punctually paid
or duly provided for, on any Interest Payment Date will, as provided in such
Fiscal Agency Agreement, be paid to the Person in whose name this Security (or
one or more Predecessor Securities) is registered at the close of business on
the Regular Record Date for such interest, which shall be the February 1 or
August 1 (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Regular
Record Date and may either be paid to the Person in whose name this Security (or
one or more Predecessor Securities) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed by
the Fiscal Agent, notice thereof shall be given to Holders of Securities not
less than 10 days prior to such Special Record Date, or be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said Fiscal Agency
Agreement.

         Payment of the principal of this Security and the interest due at
Stated Maturity will be made in immediately available funds upon surrender of
this Security at the office or agency of the Paying Agent, maintained for that
purpose in New York, New York, or at such other paying agency as the Company may
determine. Payments of interest, other than interest due at Stated Maturity,
will be made by U.S. dollar check mailed to the address of the Person entitled
thereto as such address shall appear in the Security register. A Holder of U.S.
$5,000,000 or more in aggregate principal amount of Securities having the same
Interest Payment Date will be entitled to receive payments of interest, other
than interest due at Stated Maturity, by wire transfer of immediately available
funds if appropriate wire transfer instructions have been received by the Paying
Agent in writing not less than 15 calendar days prior to the applicable Interest
Payment Date.

                                      -18-
   25
         Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.

         Unless the certificate of authentication hereon has been executed by
the Fiscal Agent referred to on the reverse hereof by the manual signature of
one of its authorized signatories, this Security shall not be entitled to any
benefit under the Fiscal Agency Agreement or be valid or obligatory for any
purpose.

         IN WITNESS WHEREOF, the Company has caused this Security to be duly
executed under its corporate seal.

Date:

                               PRINCIPAL FINANCIAL GROUP
                               (AUSTRALIA) HOLDINGS PTY LIMITED

                                     By________________________

Attest:

_________________________________

         SECTION 2.3. Form of Reverse of 7.95% Notes.

           PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED

         This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one series
under a Fiscal Agency Agreement, dated as of August 25, 1999, among the Company,
Principal Financial Services, Inc. (the "Guarantor") and U.S. Bank Trust
National Association, as Fiscal Agent (herein called the "Fiscal Agent", which
term includes any successor fiscal agent under the Fiscal Agency Agreement),

                                      -19-
   26
and reference is hereby made to the Fiscal Agency Agreement for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Guarantor, the Fiscal Agency Agreement and the Holders of
the Securities and of the terms upon which the Securities and the Guarantee
endorsed thereon are, and are to be, authenticated and delivered. This Security
is one of the series designated on the face hereof limited in aggregate
principal amount to U.S. $200,000,000 or its equivalent in another currency or
composite currency. The Company has appointed U.S. Bank Trust National
Association at its corporate trust office in New York, New York as the paying
agent (the "Paying Agent", which term includes any additional or successor
Paying Agent appointed by the Company) with respect to the Securities.

         This Security shall be redeemable, in whole or in part at any time, at
the option of the Company on any date (a "Redemption Date"), at a Redemption
Price equal to the sum of (1) 100% of the principal amount of this Security plus
accrued interest thereon to the Redemption Date and (2) the Make-Whole Amount,
if any, with respect to this Security (the "Redemption Price"). From and after
the date notice has been given as provided in Section 8.4 of the Fiscal Agency
Agreement, if funds for the redemption of this Security shall have been made
available on such Redemption Date, this Security will cease to bear interest on
the date fixed for such redemption specified in such notice and the only right
of the Holder of this Security will be to receive payment of the Redemption
Price.

         "Make-Whole Amount" means, in connection with any optional redemption
or accelerated payment of this Security, the excess, if any of (1) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest (exclusive
of interest accrued to the date of redemption or accelerated payment) that would
have been payable in respect of such dollar if such redemption or accelerated
payment had not been made, determined by discounting, on a semi-annual basis,
such principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date such notice of redemption is given or
declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment

                                  -20-
   27
had not been made, over (2) the aggregate principal amount of the 7.95% Notes
being redeemed or paid.

         "Reinvestment Rate" means 20 basis points plus the arithmetic mean of
the yields under the respective headings "This Week" and "Last Week" published
in the Statistical Release under the caption "Treasury Constant Maturities" for
the maturity (rounded to the nearest month) corresponding to the remaining life
to maturity, as of the payment date, of the principal being redeemed or paid. If
no maturity exactly corresponds to such maturity, yields for the two published
maturities most closely corresponding to such maturity shall be calculated
pursuant to the immediately preceding sentence and the Reinvestment Rate shall
be interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month. For the purposes
of calculating the Reinvestment Rate, the most recent Statistical Release
published prior to the date of determination of the Make-Whole Amount shall be
used.

         "Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded U.S.
government securities adjusted to constant maturities, or, if such statistical
release is not published at the time of any determination under the Fiscal
Agency Agreement, then such other reasonably comparable index which shall be
designated by the Company.

         If as the result of any change in or any amendment to the laws,
regulations or published tax rulings of Australia, or of any political
subdivision or taxing authority thereof or therein, affecting taxation, or any
change in the official administration, application or interpretation by any
Australian court or tribunal, government or government authority of such laws,
regulations or published tax rulings either generally or in relation to this
particular Security (or the Guarantee thereof), which change or amendment
becomes effective on or after the original issue date of this Security and
Guarantee or which change in official administration, application or
interpretation shall not have been available to the public prior to such issue
date, the Company or the Guarantor would be required to pay any Additional
Amounts pursuant to Section 5.6 of the Fiscal Agency Agreement in respect of

                                      -21-
   28
interest on the next succeeding Interest Payment Date (assuming, in the case of
the Guarantor, a payment in respect of such interest was required to be made by
the Guarantor under the Guarantee thereof on such Interest Payment Date), on
which the Guarantor would be unable, for reasons outside its control, to procure
payment by the Company, and the obligation to pay Additional Amounts cannot be
avoided by the use of reasonable measures available to the Company or the
Guarantor, the Company or the Guarantor may, at either of their options, redeem
all (but not less than all) the Securities of this series in respect of which
such Additional Amounts would be so payable at any time, upon notice as provided
in Sections 8.2 and 8.4 of the Fiscal Agency Agreement, at a Redemption Price
equal to 100 percent of the principal amount thereof plus all accrued and unpaid
interest to the date fixed for redemption; provided, however, that (a) no such
notice of redemption may be given earlier than 60 days prior to the earliest
date on which the Company or the Guarantor, as the case may be, would be
obligated to pay such Additional Amounts were a payment in respect of this
Security or the Guarantee thereof then due, and (b) at the time any such
redemption notice is given, such obligation to pay such Additional Amounts must
remain in effect. Prior to any redemption of this Security pursuant to Section
8.9 of the Fiscal Agency Agreement, the Company shall provide the Fiscal Agent
with an Opinion of Counsel that the conditions precedent to the right of the
Company to redeem this Security pursuant to such Section have occurred and a
certificate signed by an Authorized Officer stating that the obligation to pay
Additional Amounts with respect of this Security, cannot be avoided by taking
measures that the Company or the Guarantor, as the case may be, believes are
reasonable. Such Opinion of Counsel shall be based on the laws and application
and interpretation thereof in effect on the date of such opinion or to become
effective on or before the next succeeding Interest Payment Date.

         If an Event of Default with respect to Securities shall occur and be
continuing, the principal (and premium, if any) of the Securities may be
declared due and payable in the manner and with the effect provided in the
Fiscal Agency Agreement. Upon payment (i) of the amount of principal (and
premium, if any) so declared due and payable and (ii) of interest on any overdue
principal and interest (in each case to the extent that the payment of such
interest shall be legally enforceable), all of the Company's obligations in

                                     -22-
   29
respect of the payment of the principal (and premium, if any) and interest, if
any, on the Securities shall terminate.

         The Company hereby agrees that all payments of, or in respect of,
principal of (and premium, if any) and any interest on, the Securities, shall be
made without withholding or deduction for, or on account of, any present or
future taxes, duties, assessments or governmental charges of whatever nature
imposed or levied by or on behalf of the Commonwealth of Australia or any
political subdivision or taxing authority thereof or therein, unless such taxes,
duties, assessments or governmental charges are required by Australia or any
political subdivision or taxing authority thereof or therein to be withheld or
deducted. In that event, the Company will pay such additional amounts of, or in
respect of, principal of (and premium, if any) and any interest on, the
Securities ("Additional Amounts") as will result (after deduction of such taxes,
duties, assessments 'or governmental charges and any additional taxes, duties,
assessments or governmental charges payable in respect of such) in the payment
to the Holder of this Security of the amounts which would have been payable in
respect of this Security had no such withholding or deduction been required,
except that no Additional Amounts shall be so payable for or on account of (1)
any tax, duty, assessment or other governmental charge which would not have been
imposed but for the fact that such Holder (A) was a resident, domiciliary or
national of, or engaged in business or maintained a permanent establishment or
was physically present in, Australia or otherwise had some connection with
Australia other than the mere ownership of, or receipt of payment under this
Security or this Guarantee; (B) presented this Security or this Guarantee for
payment in Australia, unless this Security or this Guarantee could not have been
presented for payment elsewhere; or (C) presented this Security or this
Guarantee, as the case may be, more than thirty (30) days after the date on
which the payment in respect of this Security first became due and payable or
provided for, whichever is later, except to the extent that the Holder would
have been entitled to such Additional Amounts if it had presented this Security
or this Guarantee for payment on any day within such period of thirty (30) days
(2) any estate, inheritance, gift, sales, transfer, personal property or similar
tax, assessment or other governmental charge or any withholding or deduction on
account of such taxes, (3) any tax, assessment or other

                                      -23-
   30
governmental charge which is payable otherwise than by withholding or
deduction from payments of (or in respect of) principal of (or premium, if any),
or any interest pursuant to this Security or this Guarantee, (4) any
withholding, deduction, tax, assessment or other governmental charge that is
imposed or withheld by reason of the failure to comply by the Holder or the
beneficial owner of this Security with a request of the Company or the Company
addressed to such Holder or beneficial owner, as the case may be, (A) to provide
information concerning the nationality, residence or identity of such Holder or
such beneficial owner or (B) to make any declaration or other similar claim or
satisfy any information or reporting requirement, which, in the case of (A) or
(B), is required or imposed by a statute, treaty, regulation or administrative
practice of Australia or any political subdivision or taxing authority thereof
or therein as a precondition to exemption from all or part of such withholding,
deduction, tax, assessment or other governmental charge, (5) any withholding,
deduction, tax, assessment or other governmental charge which is imposed or
withheld by reason of such Holder being an associate of the Company or the
Company for the purposes of Section 128(F) of the Income Tax Assessment Act 1936
of Australia, (6) a determination by the Commissioner of Taxation that
Australian interest withholding tax is payable in respect of the amount in the
circumstances where the Holder or such entity, or a person on behalf of the
Holder or such entity, is party to or participated in a scheme to avoid
Australian interest withholding tax, being a scheme which the Company neither
was party to nor participated in, or (7) any combination of items (l), (2), (3),
(4), (5) and (6), nor shall Additional Amounts be paid with respect to any
payment of, or in respect of, the principal of (and premium, if any), or any
interest on, this Security to any such Holder who is a fiduciary or partnership
or other than the sole beneficial owner of such payment to the extent such
payment would be required by the laws of Australia or any political subdivision
or taxing authority thereof or therein to be included in the income for tax
purposes of a beneficiary or settlor with respect to such fiduciary or a member
of such partnership or a beneficial owner, any of whom would not have been
entitled to such Additional Amounts had it been the Holder of this Security.

         The Securities are entitled to the benefits of the covenants of the
Company or the Guarantor, as the case may be, set forth in the Fiscal Agency
Agreement.

                                      -24-
   31
         As provided in the Fiscal Agency Agreement and subject to certain
limitations therein set forth, the obligations of the Company under the Fiscal
Agency Agreement and this Security are Guaranteed pursuant to the Guarantee
endorsed hereon.

         The Fiscal Agency Agreement contains provision for defeasance at any
time of the entire indebtedness of this Security or certain restrictive
covenants and Events of Default with respect to this Security, in each case upon
compliance with certain conditions set forth in the Fiscal Agency Agreement.

         The Fiscal Agency Agreement permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the Guarantor and the rights of the Holders of
the Securities under the Fiscal Agency Agreement at any time by the Company, the
Guarantor and the Fiscal Agent with either (a) the consent of the Holders of a
majority in principal amount of the Securities under the Fiscal Agency Agreement
at the time Outstanding or (b) by the adoption of a resolution, at a meeting of
Holders of Outstanding Securities at which a quorum is present, by the Holders
of a majority in principal amount of the Securities under the Fiscal Agency
Agreement at the time Outstanding represented at such meeting. The Fiscal Agency
Agreement also contains provisions permitting the Holders of specified
percentages in principal amount of the Securities under the Fiscal Agency
Agreement at the time Outstanding, on behalf of the Holders of all Securities
under the Fiscal Agency Agreement at the time Outstanding, to waive compliance
by the Company and the Guarantor with certain provisions of the Fiscal Agency
Agreement and certain past defaults under the Fiscal Agency Agreement and their
consequences. Any such consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange hereof or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Security.

         As provided in and subject to the provisions of the Fiscal Agency
Agreement, the Holder of this Security shall not have the right to institute any
proceeding with respect to the Fiscal Agency Agreement or for the appointment of
a receiver or trustee or for any other remedy

                                      -25-
   32
thereunder, unless such Holder shall have previously given the Fiscal Agency
written notice of a continuing Event of Default with respect to the Securities
under the Fiscal Agency Agreement, the Holders of not less than 25% in principal
amount of the Securities under the Fiscal Agency Agreement at the time
Outstanding shall have made written request to the Fiscal Agent to institute
proceedings in respect of such Event of Default as Fiscal Agent and offered the
reasonable indemnity, and the Fiscal Agent shall not have received from the
Holders of a majority in principal amount of Securities under the Fiscal Agency
Agreement at the time Outstanding a direction inconsistent with such request,
and shall have failed to institute any such proceeding, for 60 days after
receipt of such notice, request and offer of indemnity. The foregoing shall not
apply to any suit instituted by the Holder of this Security for the enforcement
of any payment of principal hereof (and premium, if any) or interest hereon on
or after the respective due dates expressed herein.

         No reference herein to the Fiscal Agency Agreement and no provision of
this Security or of the Fiscal Agency Agreement shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this Security at the times, place
and rate, and in the coin or currency, herein prescribed.

         As provided in the Fiscal Agency Agreement and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this Security are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
like tenor, of authorized denominations and for the same aggregate principal
amount and with the Guarantee endorsed thereon, will be issued to the designated
transferee or transferees. As provided in the Fiscal Agency Agreement and
subject to certain limitations therein set forth, the Securities are
exchangeable for a like aggregate principal amount of Securities and of like
tenor of a different authorized

                                      -26-
   33
denomination, as requested by the Holder surrendering the same.

         This Security, and any Security or Securities issued upon transfer or
exchange hereof, is issuable only in fully registered form, ,without coupons,
and, except as provided in the Fiscal Agency Agreement, in denominations of
$1,000 and any 'integral multiples of $1,000 in excess thereof.

         [IF THIS SECURITY IS A TEMPORARY REGULATION S SECURITY -- This
Temporary Regulation S Security is exchangeable in whole for a Regulation S
Global Security only (i) after the termination of the Restricted Period (as
defined in the Fiscal Agency Agreement) and (ii) upon presentation of
certification of non-United States beneficial ownership of 100% of the aggregate
principal amount of this Temporary Regulation S Security, as required in the
Fiscal Agency Agreement. Upon exchange of this Temporary Regulation S Global
Security for a Regulation S Global Security, the Fiscal Agent shall cancel this
Temporary Regulation S Global Security and it shall become void.]

         [IF THIS SECURITY IS A GLOBAL SECURITY -- This Security is a Global
Security and shall be exchangeable for Securities registered in the names of
Persons other than the Depositary with respect to this Global Security or its
nominee only if (i) such Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for this Global Security or at any time ceases
to be a clearing agency registered as such under the Securities Exchange Act of
1934, as amended or (ii) there shall have occurred and be continuing an Event of
Default with respect to the Securities.]

         No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.

         Prior to due presentment of this Security for registration of transfer,
the Company, the Guarantor, the Fiscal Agent and any agent of the Company, the
Guarantor, or the Fiscal Agent may treat the Person in whose name this 'Security
is registered as the owner hereof for all purposes, whether or not this Security
be overdue, and neither the

                                      -27-
   34
Company, the Guarantor, the Fiscal Agent nor any such agent shall be affected by
notice to the contrary.

         All terms used in this Security which are defined in the Fiscal Agency
Agreement shall have the meanings assigned to them in the Fiscal Agency
Agreement.

         THE FISCAL AGENCY AGREEMENT AND THIS SECURITY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED
STATES OF AMERICA, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS
THEREOF.

         SECTION 2.4. Form of Fiscal Agent's Certificate of Authentication of
7.95% Notes.

         The Fiscal Agent's certificates of authentication shall be in
substantially the following form:

         This is one of the Securities referred to in the within-mentioned
Fiscal Agency Agreement.

Dated:

                                     U.S. Bank Trust National Association,
                                                         as Fiscal Agent

                                           By:
                                              ---------------------------------
                                                Authorized  Signatory

         SECTION 2.5. Form of Face of 8.20% Notes.

         [INCLUDE IF SECURITY IS A TEMPORARY REGULATION S GLOBAL SECURITY --
THIS SECURITY IS A TEMPORARY REGULATION S GLOBAL SECURITY WITHIN THE MEANING OF
THE FISCAL AGENCY AGREEMENT REFERRED TO HEREINAFTER. EXCEPT IN THE CIRCUMSTANCES
DESCRIBED IN THE FISCAL AGENCY AGREEMENT, NO TRANSFER OR EXCHANGE OF AN INTEREST
IN THIS TEMPORARY GLOBAL SECURITY MAY BE MADE FOR AN INTEREST IN THE RESTRICTED
GLOBAL SECURITY. NO EXCHANGE OF AN INTEREST IN THIS TEMPORARY GLOBAL SECURITY
MAY BE MADE FOR AN INTEREST IN THE REGULATION S GLOBAL SECURITY EXCEPT ON OR
AFTER THE TERMINATION OF THE RESTRICTED PERIOD AND UPON DELIVERY OF THE OWNER
SECURITIES CERTIFICATION AND THE DEPOSITARY

                                      -28-
   35
SECURITIES CERTIFICATION RELATING TO SUCH INTEREST IN ACCORDANCE WITH THE TERMS
OF THE FISCAL AGENCY AGREEMENT.]

         [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- THIS SECURITY HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT (A) BY THE INITIAL INVESTOR (I) TO A PERSON WHO
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (III) PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE) AND (B) BY SUBSEQUENT INVESTORS, AS SET FORTH IN (A)
ABOVE AND, IN ADDITION, TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED
STATES. SECURITIES OWNED BY AN INITIAL INVESTOR THAT IS NOT A QUALIFIED
INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK- ENTRY FORM AND MAY NOT BE
TRANSFERRED WITHOUT CERTIFICATION THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS, AS PROVIDED IN THE FISCAL AGENCY AGREEMENT. NO REPRESENTATION
CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 FOR
RESALES OF SECURITIES.]

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS A GLOBAL
SECURITY WITHIN THE MEANING OF THE FISCAL AGENCY AGREEMENT HEREINAFTER REFERRED
TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS
SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND
NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME
OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE FISCAL AGENCY AGREEMENT.]

         [INCLUDE ON ALL SECURITIES -- NO ASSOCIATE (AS DEFINED IN DIVISION 16F
OF THE INCOME TAX ASSESSMENT ACT OF 1936 OF THE COMMONWEALTH OF AUSTRALIA (THE
"TAX ACT") (BUT ON THE BASIS THAT SUB-PARAGRAPHS 159GZC(l)(a)(ii), (l)(b)(i) and
(l)(d)(i) OF THE TAX ACT DO NOT APPLY) OF THE ISSUER (AS DEFINED HEREIN) MAY
(DIRECTLY OR INDIRECTLY) ACQUIRE THIS SECURITY OR ANY INTEREST IN OR RIGHT IN
RESPECT OF THIS

                                      -29-
   36
SECURITY (OTHER THAN SUCH A PERSON WHO ACQUIRES THIS SECURITY OR SUCH INTEREST
OR RIGHT IN THE CAPACITY OF A DEALER IN RELATION TO THE PLACEMENT OF THE
SECURITY, INTEREST OR RIGHT).

         EACH PERSON WHO SO ACQUIRES THIS SECURITY OR SUCH INTEREST OR RIGHT IS
TAKEN TO HAVE WARRANTED IN FAVOR OF THE ISSUER THAT THE PERSON IS NOT AN
ASSOCIATE.

         ANY ASSOCIATE WHO SO ACQUIRES THIS SECURITY MAY BE SUBJECT TO
AUSTRALIAN INTEREST WITHHOLDING TAX AND, IF SO, WILL NOT BE ENTITLED TO RECEIVE
ANY PAYMENT OF ADDITIONAL AMOUNTS FROM THE ISSUER OR THE GUARANTOR (AS DEFINED
HEREIN) IN RESPECT OF ANY AMOUNT DEDUCTED BY THE ISSUER OR THE GUARANTOR ON
ACCOUNT OF SUCH TAX FROM AMOUNTS PAYABLE UNDER OR IN RESPECT OF THIS SECURITY.]

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY AND THE DEPOSITORY TRUST
COMPANY IS THE U.S. DEPOSITARY -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK
CORPORATION, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CEDE &
CO. (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

                                      -30-
   37
           PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED
                                (ACN 087 430 331)

                         8.20% NOTES DUE AUGUST 15, 2009

                     GUARANTEED AS TO PAYMENT OF PRINCIPAL,
                        PREMIUM (IF ANY) AND INTEREST BY
                       PRINCIPAL FINANCIAL SERVICES, INC.

No. ________                                                   U.S.$

CUSIP No.:  [If Restricted Global Securities-74251UAC8]
            [If Regulation S Global Securities-Q77548AB3]
            [If Restricted Securities-74251UAD6]
ISIN: [If Restricted Global Securities-US74251UAC80]
      [If Regulation S Global Securities-USQ77548AB39]
      [If Restricted Securities-US74251UAD63]
Common Code: [If Restricted Global Securities-010112800]
             [If Regulation S Restricted Securities-010112796]

         PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED, a
corporation duly organized and existing under the laws of the Commonwealth of
Australia, State of Victoria (herein called the "Company," which term includes
any successor Person under the Fiscal Agency Agreement referred to on the
reverse hereof), for value received, hereby promises to pay to _______________,
or registered assigns, the principal sum of ______________ U.S. Dollars, [or
such other amount (not to exceed Four Hundred Sixty Five Million U.S. Dollars
(U.S. $465,000,000) when taken together with all of the Company's 8.20% Notes
due August 15, 2009 issued and outstanding in definitive certificated form or
in the form of another Global Security) as may from time to time represent the
principal amount of the Company's 8.20% Notes due August 15, 2009 in respect of
which beneficial interests are held through the U.S. Depositary in the form of a
[Restricted] [Temporary Regulation S Global Security or a Regulation S] Global
Security,] -- [omit from Non-Global Securities] on August 15, 2009, and to pay
interest thereon from August 25, 1999 or from the most recent Interest Payment
Date (as defined below) to which interest has been paid or duly provided for,
semi-annually in arrears on

                                      -31-
   38
February 15 and August 15 in each year, commencing on February 15, 2000, and at
Maturity at the rate of 8.20% per annum, until the principal hereof is paid or
made available for payment, provided that any amount of such principal (and
premium, if any) or interest that is overdue shall bear interest at the rate of
8.20% a per annum (to the extent that payment of such interest shall be legally
enforceable), from the date such amount is due until it is paid or made
available for payment, and such interest on any overdue amount shall be payable
on demand. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Fiscal Agency Agreement, be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the February 1 or August 1 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for will forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Fiscal Agent, notice
thereof shall be given to Holders of Securities not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in said Fiscal Agency Agreement.

         Payment of the principal of this Security and the interest due at
Stated Maturity will be made in immediately available funds upon surrender of
this Security at the office or agency of the Paying Agent, maintained for that
purpose in New York, New York, or at such other paying agency as the Company may
determine. Payments of interest, other than interest due at Stated Maturity,
will be made by U.S. dollar check mailed to the address of the Person entitled
thereto as such address shall appear in the Security register. A Holder of U.S.
$5,000,000 or more in aggregate principal amount of Securities having the same
Interest Payment Date will be entitled to receive payments of interest, other
than interest due at Stated Maturity, by wire transfer of immediately available
funds if appropriate wire transfer instructions have been received by the Paying
Agent

                                      -32-
   39
in writing not less than 15 calendar days prior to the applicable Interest
Payment Date.

         Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.

         Unless the certificate of authentication hereon has been executed by
the Fiscal Agent referred to on the reverse hereof by the manual signature of
one of its authorized signatories, this Security shall not be entitled to any
benefit under the Fiscal Agency Agreement or be valid or obligatory for any
purpose.

         IN WITNESS WHEREOF, the Company has caused this Security to be duly
executed under its corporate seal.

Date:

                                  PRINCIPAL FINANCIAL GROUP
                                  (AUSTRALIA) HOLDINGS PTY LIMITED

                                  BY _______________________________

Attest:

____________________________________

                  SECTION 2.6. Form of Reverse of 8.20% Notes.

           PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LIMITED

         This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one series
under a Fiscal Agency Agreement, dated as of August 25, 1999, among the Company,
Principal Financial Services, Inc. (the "Guarantor") and U.S. Bank Trust
National Association, as Fiscal Agent (herein called the "Fiscal Agent", which
term includes any

                                      -33-
   40
successor fiscal agent under the Fiscal Agency Agreement), and reference is
hereby made to the Fiscal Agency Agreement for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Guarantor, the Fiscal Agency Agreement and the Holders of the Securities and
of the terms upon which the Securities and the Guarantee endorsed thereon are,
and are to be, authenticated and delivered. This Security is one of the series
designated on the face hereof limited in aggregate principal amount to U.S.
$465,000,000 or its equivalent in another currency or composite currency. The
Company has appointed U.S. Bank Trust National Association at its corporate
trust office in New York, New York as the paying agent (the "Paying Agent,"
which term includes any additional or successor Paying Agent appointed by the
Company) with respect to the Securities.

         This Security shall be redeemable, in whole or in part at any time, at
the option of the Company on any date (a "Redemption Date"), at a Redemption
Price equal to the sum of (1) 100% of the principal amount of this Security plus
accrued interest thereon to the Redemption Date and (2) the Make-Whole Amount,
if any, with respect to this Security (the "Redemption Price"). From and after
the date notice has been given as provided in Section 8.4 of the Fiscal Agency
Agreement, if funds for the redemption of this Security shall have been made
available on such Redemption Date, this Security will cease to bear interest on
the date fixed for such redemption specified in such notice and the only right
of the Holder of this Security will be to receive payment of the Redemption
Price.

         "Make-Whole Amount" means, in connection with any optional redemption
or accelerated payment of this Security, the excess, if any of (1) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest (exclusive
of interest accrued to the date of redemption or accelerated payment) that would
have been payable in respect of such dollar if such redemption or accelerated
payment had not been made, determined by discounting, on a semi-annual basis,
such principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date such notice of redemption is given or
declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment

                                      -34-
   41
had not been made, over (2) the aggregate principal amount of the 8.20% Notes
being redeemed or paid.

         "Reinvestment Rate" means 25 basis points plus the arithmetic mean of
the yields under the respective headings "This Week" and "Last Week" published
in the Statistical Release under the caption "Treasury Constant Maturities" for
the maturity (rounded to the nearest month) corresponding to the remaining life
to maturity, as of the payment date, of the principal being redeemed or paid. If
no maturity exactly corresponds to such maturity, yields for the two published
maturities most closely corresponding to such maturity shall be calculated
pursuant to the immediately preceding sentence and the Reinvestment Rate shall
be interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month. For the purposes
of calculating the Reinvestment Rate, the most recent Statistical Release
published prior to the date of determination of the Make-Whole Amount shall be
used.

         "Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded U.S.
government securities adjusted to constant maturities, or, if such statistical
release is not published at the time of any determination under the Fiscal
Agency Agreement, then such other reasonably comparable index which shall be
designated by the Company.

         If as the result of any change in or any amendment to the laws,
regulations or published tax rulings of Australia, or of any political
subdivision or taxing authority thereof or therein, affecting taxation, or any
change in the official administration, application or interpretation by any
Australian court or tribunal, government or government authority of such laws,
regulations or published tax rulings either generally or in relation to this
particular Security (or the Guarantee thereof), which this particular Security
(or the Guarantee thereof), which change or amendment becomes effective on or
after the original issue date of this Security and Guarantee or which change in
official administration, application or interpretation shall not have been
available to the public prior to such issue date, the Company or the Guarantor
would be required to pay any Additional Amounts pursuant to

                                      -35-
   42
Section 5.6 of the Fiscal Agency Agreement in respect of interest on the next
succeeding Interest Payment Date (assuming, in the case of the Guarantor, a
payment in respect of such interest was required to be made by the Guarantor
under the Guarantee thereof on such Interest Payment Date), on which the
Guarantor would be unable, for reasons outside its control, to procure payment
by the Company, and the obligation to pay Additional Amounts cannot be avoided
by the use of reasonable measures available to the Company or the Guarantor, the
Company or the Guarantor may, at either of their options, redeem all (but not
less than all) the Securities of this series in respect of which such Additional
Amounts would be so payable at any time, upon notice as provided in Sections 8.2
and 8.4 of the Fiscal Agency Agreement, at a Redemption Price equal to 100
percent of the principal amount thereof plus all accrued and unpaid interest to
the date fixed for redemption; provided, however, that (a) no such notice of
redemption may be given earlier than 60 days prior to the earliest date on which
the Company or the Guarantor, as the case may be, would be obligated to pay such
Additional Amounts were in payment in respect of this Security or the Guarantee
thereof then due, and (b) at the time any such redemption notice is given, such
obligation to pay such Additional Amounts must remain in effect. Prior to any
redemption of this Security pursuant to Section 8.9 of the Fiscal Agency
Agreement, the Company shall provide the Fiscal Agent with an Opinion of Counsel
that the conditions precedent to the right of the Company to redeem this
Security pursuant to such Section have occurred and a certificate signed by an
Authorized Officer stating that the obligation to pay Additional Amounts with
respect of this Security, cannot be avoided by taking measures that the Company
or the Guarantor, as the case may be, believes are reasonable. Such Opinion of
Counsel shall be based on the laws and application and interpretation thereof in
effect on the date of such opinion or to become effective on or before the next
succeeding Interest Payment Date.

          If an Event of Default with respect to Securities shall occur and be
continuing, the principal (and premium, if any) of the Securities may be
declared due and payable in the manner and with the effect provided in the
Fiscal Agency Agreement. Upon payment (i) of the amount of principal (and
premium, if any) so declared due and payable and (ii) of interest on any overdue
principal and interest (in each case to the extent that the payment of such
interest shall be

                                      -36-
   43
legally enforceable), all of the Company's obligations in respect of the payment
of the principal (and premium, if any) and interest, if any, on the Securities
shall terminate.

          The Company hereby agrees that all payments of, or in respect of,
principal of (and premium, if any) and any interest on, the Securities, shall be
made without withholding or deduction for, or on account of, any present or
future taxes, duties, assessments or governmental charges of whatever nature
imposed or levied by or on behalf of the Commonwealth of Australia or any
political subdivision or taxing authority thereof or therein, unless such taxes,
duties, assessments or governmental charges are required by Australia or any
political subdivision or taxing authority thereof or therein to be withheld or
deducted. In that event, the Company will pay such additional amounts of, or in
respect of, principal of (and premium, if any) and any interest on, the
Securities ("Additional Amounts") as will result (after deduction of such taxes,
duties, assessments or governmental charges and any additional taxes, duties,
assessments or governmental charges payable in respect of such) in the payment
to the Holder of this Security of the amounts which would have been payable in
respect of this Security had no such withholding or deduction been required,
except that no Additional Amounts shall be so payable for or on account of (1)
any tax, duty, assessment or other governmental charge which would not have been
imposed but for the fact that such Holder (A) was a resident, domiciliary or
national of, or engaged in business or maintained a permanent establishment or
was physically present in, Australia or otherwise had some connection with
Australia other than the mere ownership of, or receipt of payment under this
Security or this Guarantee; (B) presented this Security or this Guarantee for
payment in Australia, unless this Security or this Guarantee could not have been
presented for payment elsewhere; or (C) presented this Security or this
Guarantee, as the case may be, more than thirty (30) days after the date on
which the payment in respect of this Security first became due and payable or
provided for, whichever is later, except to the extent that the Holder would
have been entitled to such Additional Amounts if it had presented this Security
or this Guarantee for payment on any day within such period of thirty (30) days,
(2) any estate, inheritance, gift, sales, transfer, personal property or similar
tax, assessment or other governmental charge or any withholding or deduction on

                                      -37-
   44
account of such taxes, (3) any tax, assessment or other governmental charge
which is payable otherwise than by withholding or deduction from payments of (or
in respect of) principal of (or premium, if any), or any interest pursuant to
this Security or this Guarantee, (4) any withholding, deduction, tax, assessment
or other governmental charge that is imposed or withheld by reason of the
failure to comply by the Holder or the beneficial owner of this Security with a
request of the Company or the Company addressed to such Holder or beneficial
owner, as the case may be, (A) to provide information concerning the
nationality, residence or identity of such Holder or such beneficial owner or
(B) to make any declaration or other similar claim or satisfy any information or
reporting requirement, which, in the case of (A) or (B), is required or imposed
by a statute, treaty, regulation or administrative practice of Australia or any
political subdivision or taxing authority thereof or therein as a precondition
to exemption from all or part of such withholding, deduction, tax, assessment or
other governmental charge, (5) any withholding, deduction, tax, assessment or
other governmental charge which is imposed or withheld by reason of such Holder
being an associate of the Company or the Company for the purposes of Section
128(F) of the Income Tax Assessment Act 1936 of Australia, (6) a determination
by the Commissioner of Taxation that Australian interest withholding tax is
payable in respect of the amount in the circumstances where the Holder or such
entity, or a person on behalf of the Holder or such entity, is party to or
participated in a scheme to avoid Australian interest withholding tax, being a
scheme which the Company neither was party to nor participated in, or (7) any
combination of items (l), (2), (3), (4), (5) and (6), nor shall Additional
Amounts be paid with respect to any payment of, or in respect of, the principal
of (and premium, if any), or any interest on, this Security to any such Holder
who is a fiduciary or partnership or other than the sole beneficial owner of
such payment to the extent such payment would be required by the laws of
Australia or any political subdivision or taxing authority thereof or therein to
be included in the income for tax purposes of a beneficiary or settlor with
respect to such fiduciary or a member of such partnership or a beneficial owner,
any of whom would not have been entitled to such Additional Amounts had it been
the Holder of this Security.

                                      -38-
   45
          The Securities are entitled to the benefits of the covenants of the
Company or the Guarantor, as the case may be, set forth in the Fiscal Agency
Agreement.

          As provided in the Fiscal Agency Agreement and subject to certain
limitations therein set forth, the obligations of the Company under the Fiscal
Agency Agreement and this Security are Guaranteed pursuant to the Guarantee
endorsed hereon.

          The Fiscal Agency Agreement contains provision for defeasance at any
time of the entire indebtedness of this Security or certain restrictive
covenants and Events of Default with respect to this Security, in each case upon
compliance with certain conditions set forth in the Fiscal Agency Agreement.

          The Fiscal Agency Agreement permits, with certain exceptions as
therein provided, the amendment thereof and the modification of the rights and
obligations of the Company and the Guarantor and the rights of the Holders of
the Securities under the Fiscal Agency Agreement at any time by the Company, the
Guarantor and the Fiscal Agent with either (a) the consent of the Holders of a
majority in principal amount of the Securities under the Fiscal Agency Agreement
at the time Outstanding or (b) by the adoption of a resolution, at a meeting of
Holders of Outstanding Securities at which a quorum is present, by the Holders
of a majority in principal amount of the Securities under the Fiscal Agency
Agreement at the time Outstanding represented at such meeting. The Fiscal Agency
Agreement also contains provisions permitting the Holders of specified
percentages in principal amount of the Securities under the Fiscal Agency
Agreement at the time Outstanding, on behalf of the Holders of all Securities
under the Fiscal Agency Agreement at the time Outstanding, to waive compliance
by the Company and the Guarantor with certain provisions of the Fiscal Agency
Agreement and certain past defaults under the Fiscal Agency Agreement and their
consequences. Any such consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof
or in exchange hereof or in lieu hereof, whether or not notation of such consent
or waiver is made upon this Security.

                                      -39-
   46
          As provided in and subject to the provisions of the Fiscal Agency
Agreement, the Holder of this Security shall not have the right to institute any
proceeding with respect to the Fiscal Agency Agreement or for the appointment of
a receiver or trustee or for any other remedy thereunder, unless such Holder
shall have previously given the Fiscal Agent written notice of a continuing
Event of Default with respect to the Securities under the Fiscal Agency
Agreement, the Holders of not less than 25% in principal amount of the
Securities under the Fiscal Agency Agreement at the time Outstanding shall have
made written request to the Fiscal Agent to institute proceedings in respect of
such Event of Default as Fiscal Agent and offered the reasonable indemnity, and
the Fiscal Agent shall not have received from the Holders of a majority in
principal amount of Securities under the Fiscal Agency Agreement at the time
Outstanding a direction inconsistent with such request, and shall have failed to
institute any such proceeding, for 60 days after receipt of such notice, request
and offer of indemnity. The foregoing shall not apply to any suit instituted by
the Holder of this Security for the enforcement of any payment of principal
hereof or interest hereon on or after the respective due dates expressed herein.

          No reference herein to the Fiscal Agency Agreement and no provision of
this Security or of the Fiscal Agency Agreement shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this Security at the times, place
and rate, and in the coin or currency, herein prescribed.

          As provided in the Fiscal Agency Agreement and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this Security are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
like tenor, of authorized denominations and for the same aggregate principal
amount and with the Guarantee endorsed thereon, will be

                                      -40-
   47
issued to the designated transferee or transferees. As provided in the Fiscal
Agency Agreement and subject to certain limitations therein set forth, the
Securities are exchangeable for a like aggregate principal amount of Securities
and of like tenor of a different authorized denomination, as requested by the
Holder surrendering the same.

          [IF THIS SECURITY IS A TEMPORARY REGULATION S SECURITY -- This
Temporary Regulation S Security is exchangeable in whole for a Regulation S
Global Security only (i) after the termination of the Restricted Period (as
defined in the Fiscal Agency Agreement) and (ii) upon presentation of
certification of non-United States beneficial ownership of 100% of the aggregate
principal amount of this Temporary Regulation S Security, as required in the
Fiscal Agency Agreement. Upon exchange of this Temporary Regulation S Global
Security for a Regulation S Global Security, the Fiscal Agent shall cancel this
Temporary Regulation S Global Security and it shall become void.]

          This Security, and any Security or Securities issued upon transfer or
exchange hereof, is issuable only in fully registered form, without coupons,
and, except as provided in the Fiscal Agency Agreement, in denominations of
$1,000 and any integral multiples of $1,000 in excess thereof.

          [IF THIS SECURITY IS A GLOBAL SECURITY -- This Security is a Global
Security and shall be exchangeable for Securities registered in the names of
Persons other than the Depositary with respect to this Global Security or its
nominee only if (i) such Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for this Global Security or at any time ceases
to be a clearing agency registered as such under the Securities Exchange Act of
1934, as amended, or (ii) there shall have occurred and be continuing an Event
of Default with respect to the Securities.]

          No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.

                                      -41-
   48
          Prior to due presentment of this Security for registration of
transfer, the Company, the Guarantor, the Fiscal Agent and any agent of the
Company, the Guarantor, or the Fiscal Agent may treat the Person in whose name
this Security is registered as the owner hereof for all purposes, whether or not
this Security be overdue, and neither the Company, the Guarantor, the Fiscal
Agent nor any such agent shall be affected by notice to the contrary.

          All terms used in this Security which are defined in the Fiscal Agency
Agreement shall have the meanings assigned to them in the Fiscal Agency
Agreement.

          THE FISCAL AGENCY AGREEMENT AND THIS SECURITY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED
STATES OF AMERICA, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS
THEREOF.

          SECTION 2.7. Form of Fiscal Agent's Certificate of Authentication of
8.20% Notes.

          The Fiscal Agent's certificates of authentication shall be in
substantially the following form:

          This is one of the Securities referred to in the within-mentioned
Fiscal Agency Agreement.

Dated:
                                         U.S. Bank Trust National Association,
                                                             as Fiscal Agent

                                         By:____________________________________
                                            Authorized Signatory

          SECTION 2.8.  Form of Guarantee.

                                    GUARANTEE

          For value received, the Guarantor named (or deemed herein to be named)
below hereby unconditionally guarantees, to the Holder of the Security upon
which this Guarantee is endorsed, and to the Fiscal Agent on behalf of such
Holder,

                                      -42-
   49
the due and punctual payment of the principal of (and premium, if any) and
interest on such Security when and as the same shall become due and payable,
whether at the Stated Maturity, by acceleration, call for redemption, purchase
or otherwise, according to the terms thereof and of the Fiscal Agency Agreement
referred to therein. In case of the failure of the Company punctually to make
any such payment, the Guarantor hereby agrees to cause such payment to be made
punctually when and as the same shall become due and payable, whether at the
Stated Maturity or by acceleration, call for redemption, purchase or otherwise,
and as if such payment were made by the Company.

          The Guarantor hereby agrees that all payments pursuant to this
Guarantee shall be made without withholding or deduction for, or on account of,
any present or future taxes, duties, assessments or governmental charges of
whatever nature imposed or levied by or on behalf of the Commonwealth of
Australia or any political subdivision or taxing authority thereof or therein,
unless such taxes, duties, assessments or governmental charges are required by
Australia or any political subdivision or taxing authority thereof or therein to
be withheld or deducted. In that event, the Guarantor will pay such additional
amounts of, or in respect of, payments pursuant to this Guarantee ("Additional
Amounts") as will result (after deduction of such taxes, duties, assessments or
governmental charges and any additional taxes, duties, assessments or
governmental charges payable in respect of such) in the payment to the Holder of
this Security of the amounts which would have been payable in respect of this
Guarantee had no such withholding or deduction been required, except that no
Additional Amounts shall be so payable for or on account of (1) any tax, duty,
assessment or other governmental charge which would not have been imposed but
for the fact that such Holder (A) was a resident, domiciliary or national of, or
engaged in business or maintained a permanent establishment or was physically
present in, Australia or otherwise had some connection with Australia other than
the mere ownership of, or receipt of payment under this Security or this
Guarantee; (B) presented this Security or this Guarantee for payment in
Australia, unless this Security or this Guarantee could not have been presented
for payment elsewhere; or (C) presented this Security or this Guarantee, as the
case may be, more than thirty (30) days after the date on which the payment in
respect of this Security first became due and payable or provided for, whichever
is later, except to the

                                      -43-
   50
extent that the Holder would have been entitled to such Additional Amounts if it
had presented this Security or this Guarantee for payment on any day within such
period of thirty (30) days, (2) any estate, inheritance, gift, sales, transfer,
personal property or similar tax, assessment or other governmental charge or any
withholding or deduction on account of such taxes, (3) any tax, assessment or
other governmental charge which is payable otherwise than by withholding or
deduction from payments pursuant to this Guarantee, (4) any withholding,
deduction, tax, assessment or other governmental charge that is imposed or
withheld by reason of the failure to comply by the Holder or the beneficial
owner of this Security with a request of the Company or the Guarantor addressed
to such Holder or beneficial owner, as the case may be, (A) to provide
information concerning the nationality, residence or identity of such Holder or
such beneficial owner or (B) to make any declaration or other similar claim or
satisfy any information or reporting requirement, which, in the case of (A) or
(B), is required or imposed by a statute, treaty, regulation or administrative
practice of Australia or any political subdivision or taxing authority thereof
or therein as a precondition to exemption from all or part of such withholding,
deduction, tax, assessment or other governmental charge, (5) any withholding,
deduction, tax, assessment or other governmental charge which is imposed or
withheld by reason of such Holder being an associate of the Company or the
Guarantor for the purposes of Section 128(F) of the Income Tax Assessment Act
1936 of Australia, (6) a determination by the Commissioner of Taxation that
Australian interest withholding tax is payable in respect of the amount in the
circumstances where the Holder or such entity, or a person on behalf of the
Holder or such entity, is party to or participated in a scheme to avoid
Australian interest withholding tax, being a scheme which the Company neither
was party to nor participated in, or (7) any combination of items (l), (2), (3),
(4), (5) and (6), nor shall Additional Amounts be paid with respect to any
payments pursuant to this Guarantee to any such Holder who is a fiduciary or
partnership or other than the sole beneficial owner of such payment to the
extent such payment would be required by the laws of Australia or any political
subdivision or taxing authority thereof or therein to be included in the income
for tax purposes of a beneficiary or settlor with respect to such fiduciary or a
member of such partnership or a beneficial owner, any of whom would not have
been

                                      -44-
   51
entitled to such Additional Amounts had it been the Holder of this Security.

          The Guarantor has agreed that if the sale and purchase of the Sale
Shares pursuant to the Acquisition Agreement does not occur before August 25,
2000, the Guarantor shall assume all of the obligations of the Company under the
Fiscal Agency Agreement, the Purchase Agreement and the Securities in accordance
with the Assumption Agreement, the terms of which are deemed to be incorporated
herein as if set forth in full in this Guarantee.

          The Guarantor hereby agrees that its obligations hereunder shall be
unconditional, irrespective of (i) the validity, regularity or enforceability of
such Security or the Fiscal Agency Agreement, (ii) the absence of any action to
enforce the same, (iii) any creation, exchange, release or non-perfection of any
Lien on any collateral for, or any release or amendment or waiver of any term of
any other Guarantee of, or any consent to departure from any requirement of any
other Guarantee of, all or of any of the Securities, (iv) the election by the
Fiscal Agent or any of the Holders in any proceeding under Chapter 11 of the
Bankruptcy Code of the application of Section 1111(b)(2) of the Bankruptcy Code,
(v) any borrowing or grant of a security interest by the Company, as
debtor-in-possession, under Section 364 of the Bankruptcy Code, (vi) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of
the claims of the Fiscal Agent or any of the Holders for payment of any of the
Securities, (vii) any waiver or consent by the Holder of such Security or by the
Fiscal Agent or either of them with respect to any provisions thereof or of the
Fiscal Agency Agreement, (viii) the obtaining of any judgment against the
Company or any action to enforce the same or (ix) any other circumstances which
might otherwise constitute a legal or equitable discharge or defense of the
Guarantor. For purposes of clauses (iv), (v) and (vi) of the foregoing sentence,
references to sections of the Bankruptcy Code shall be deemed to include any
equivalent or like provisions of Australian or Iowa law which might be
applicable to the Company or the Guarantor, as the case may be. The Guarantor
hereby waives the benefits of diligence, presentment, demand of payment, any
requirement that the Fiscal Agent or any of the Holders protect, secure, perfect
or insure any security interest in or other Lien on any property subject thereto
or exhaust any right or take any action against the Company or

                                      -45-
   52
any other Person or any collateral, filing of claims with a court in the event
of insolvency or bankruptcy of the Company, any right to require a proceeding
first against the Company, protest or notice with respect to such Security or
the indebtedness evidenced thereby and all demands whatsoever, and covenants
that this Guarantee will not be discharged except by complete performance of the
obligations contained in such Security and in this Guarantee. The Guarantor
hereby agrees that, in the event of a default in payment of principal (or
premium, if any) or interest on such Security, whether at their Stated Maturity,
by acceleration, call for redemption, purchase or otherwise, legal proceedings
may be instituted by the Fiscal Agent on behalf of, or by, the Holder of such
Security, subject to the terms and conditions set forth in the Fiscal Agency
Agreement, directly against the Guarantor to enforce this Guarantee without
first proceeding against the Company. The Guarantor agrees that if, after the
occurrence and during the continuance of an Event of Default, the Fiscal Agent
or any of the Holders are prevented by applicable law from exercising their
respective rights to accelerate the maturity of the Securities, to collect
interest on the Securities, or to enforce or exercise any other right or remedy
with respect to the Securities, the Guarantor agrees to pay to the Fiscal Agent
for the account of the Holders, upon demand therefor, the amount that would
otherwise have been due and payable had such rights and remedies been permitted
to be exercised by the Fiscal Agent or any of the Holders.

          No reference herein to the Fiscal Agency Agreement and no provision of
this Guarantee or of the Fiscal Agency Agreement shall alter or impair the
Guarantee of the Guarantor, which is absolute and unconditional, of the due and
punctual payment of the principal (and premium, if any) and interest on the
Security upon which this Guarantee is endorsed.

          The Guarantor shall be subrogated to all rights of the Holder of such
Security against the Company in respect of any amounts paid by the Guarantor on
account of such Security pursuant to the provisions of the Guarantee or the
Fiscal Agency Agreement; provided, however, that the Guarantor shall not,
without the consent of the Holders of all the Outstanding Securities be entitled
to enforce or to receive any payments arising out of, or based upon, such right
of subrogation until the principal of (and premium, if

                                      -46-
   53
any) and interest on this Security and all other Securities issued under the
Fiscal Agency Agreement shall have been paid in full.

          This Guarantee shall remain in full force and effect and continue to
be effective should any petition be filed by or against the Company for
liquidation or reorganization should the Company become insolvent or make an
assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any significant part of the Company's assets, and shall, to
the fullest extent permitted by law, continue to be effective or be reinstated,
as the case may be, if at any time payment and performance of the Securities is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee on the Securities, whether as a "voidable
preference," "fraudulent transfer" or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Securities shall, to
the fullest extent permitted by law, be reinstated and deemed reduced only by
such amount paid and not so rescinded, reduced, restored or returned.

          The Guarantor shall be released from this Guarantee upon the terms and
subject to the conditions set forth in the Fiscal Agency Agreement.

          All terms used in this Guarantee which are defined in the Fiscal
Agency Agreement referred to in the Security upon which this Guarantee is
endorsed shall have the meanings assigned to them in such Fiscal Agency
Agreement.

          This Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Security upon which this Guarantee is
endorsed shall have been executed by the Fiscal Agent under the Fiscal Agency
Agreement by manual signature.

          Reference is made to Article XII of the Fiscal Agency Agreement for
further provisions with respect to this Guarantee.

          THIS GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICTS OF LAWS THEREOF.

                                      -47-
   54
          IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be duly
executed.

                                         Principal Financial Services, Inc.,
                                         As Guarantor

                                         By:____________________________________
                                                         [Officer]

                                         By:____________________________________
                                                         [Officer]

Attest:

_____________________________
         [Secretary]
    [Assistant Secretary]

          SECTION 2.9. Registrar, Paying Agent, Depository and Custodian. (a)
The Company shall appoint itself or another Person to maintain an office or
agency where Securities may be presented for registration of transfer or
exchange (the Company or such other Person being referred to, in such capacity,
as the "Registrar"). As set forth in Article IV hereof, the Registrar shall keep
a register of each series of the Securities and of their transfer and exchange
(the "Register"). The Company may appoint one or more co-Registrars (each, a
"Co-Registrar") and may act as Co-Registrar. The Company initially appoints the
Fiscal Agent to act as Registrar.

          (b) The Company shall appoint itself or another Person to maintain an
office or agency where Securities may be presented for payment (the Company or
such other Person being referred to, in such capacity, as the "Paying Agent").
The term "Paying Agent" includes any additional paying agent. The Company
initially appoints the Fiscal Agent to act as Paying Agent.

          (c) The Company shall appoint one or more other Persons to act as
Depository with respect to any Securities

                                      -48-
   55
issued in global form. The Company initially appoints DTC to act as Depository
with respect to the Securities issued in global form. The Company may, in
certain circumstances, appoint a successor Depository, and may at any time
determine that the Securities issued in the form of global Securities shall no
longer be represented by such global Securities.

          (d) The Company shall appoint itself or one or more other Persons to
act as custodian for the Depository (the "Custodian") with respect to any
Securities issued in global form. The Company initially appoints the Fiscal
Agent to act as Custodian with respect to the Securities in global form.

          (e) The Company shall notify the Fiscal Agent of the name and address
of the Depository and of any Agent not a party to this Agreement, and shall give
the Fiscal Agent at least thirty days' notice prior to changing the Depository
or any such Agent.

          SECTION 2.10. Payment on Securities. (a) The Company shall provide to
the Paying Agent, in immediately available funds on or prior to 11:30 a.m., New
York time, on each Interest Payment Date or the applicable Maturity Date, such
amount, in U.S. dollars, as is necessary to make such payment as is due, and the
Company hereby authorizes and directs the Paying Agent from funds so provided to
it to make or cause to be made payment of the principal of and interest on the
Securities in the manner, at the times and for the purposes set forth herein and
in the text of the Securities; provided that any payment of interest on the
Securities may be made by check mailed to the Holders as of the close of
business on the relevant Record' Date. Payments of interest on or principal of
the Securities shall be made, in the case of a Holder of at least $5,000,000
aggregate principal amount of Securities, by wire transfer to an account
maintained by the payee ,with a bank if such Holder so elects by giving notice
to the Paying Agent, not less than 15 days (or such fewer days as the Paying
Agent may accept at its discretion) prior to the date on which such (*)payments
are scheduled to be made, of such election and of the account to which payment
is to be made. Unless such designation is revoked, any such designation made by
such Holder with respect to such Securities shall remain in effect with respect
to any future payments with respect to such Securities payable to such Holder.
The Company shall

                                      -49-
   56
pay any reasonable administrative costs in connection with making any such
payments.

          (b) The Company will pay interest on each Security on each Interest
Payment Date to the Holder of such Security as of the close of business on the
Record Date for the applicable Interest Payment Date or on the subsequent
special record date, if any, determined pursuant to Section 4.1. The Company
will make payment of the principal of the Securities on the applicable Maturity
Date to the Holder of such Security against presentation and surrender thereof
at the principal office of the Paying Agent, or at such other location of a
Paying Agent as the Company shall have otherwise instructed the Fiscal Agent in
writing.

          (c) Interest will continue to accrue at the Stated Rate on (i) any
unpaid principal and (ii) to the extent permitted by law, any payment of
interest which is not punctually paid or duly provided for on the applicable
Interest Payment Date, in each case to, but not including, the date of actual
payment.

          (d) The Company shall require each Paying Agent other than the Fiscal
Agent to agree in writing that the Paying Agent will hold on behalf of the
Fiscal Agent all money held by the Paying Agent for the payment of principal of
or interest on the Securities, and will notify the Fiscal Agent of any failure
by the Company to make any such payment. Until any such failure has been
remedied, the Fiscal Agent may require a Paying Agent to pay all money held by
it to the Fiscal Agent. In the event the Company wishes to terminate the Fiscal
Agent's appointment as Paying Agent, the Company shall provide ten days' prior
written notice to the Fiscal Agent that the Fiscal Agent's appointment to act as
Paying Agent is so terminated and the Fiscal Agent may rely on such notice. The
Company at any time may require a Paying Agent to pay all money held by the
Paying Agent to the Fiscal Agent. Upon doing so, the Paying Agent shall have no
further liability for the money so paid.

          SECTION 2.11. Holder Lists. The Fiscal Agent shall preserve in as
current a form as is reasonably practicable a separate list of the names and
addresses of Holders of each series of the Securities. If the Fiscal Agent is
not the Registrar, the Company shall furnish to the Fiscal Agent not less than
five business days prior to each Interest Payment Date and at such other times
as the Fiscal

                                      -50-
   57
Agent may request in writing a separate list in such form and as of such date as
the Fiscal Agent may reasonably require of the names and addresses of Holders of
each series of the Securities.

          SECTION 2.12. Outstanding Securities. The Securities outstanding at
any time are only those Securities authenticated by the Fiscal Agent (or an
authenticating agent appointed pursuant to Section 3.3), except for those
cancelled by the Fiscal Agent, those delivered to the Fiscal Agent for
cancellation, those reductions in the interest in a Global Security effected by
the Fiscal Agent hereunder, and those described in this Section as not
outstanding.

          A Security does not cease to be outstanding because the Company holds
the Security.

          If a Security is replaced pursuant to Section 3.6, it ceases to be
outstanding unless the Fiscal Agent receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.

          Securities are not outstanding which have been called for redemption
in accordance with Article VIII or which otherwise have become payable at the
Maturity Date and, in each case, monies sufficient to pay the principal thereof
and any interest thereon have been paid.

          SECTION 2.13. Treasury Securities. In determining whether the Holders
of the required principal amount of Securities have concurred in any direction,
waiver or consent required or permitted to be given to the Fiscal Agent under
this Agreement, Securities owned by the Company or any subsidiary or affiliate
of the Company shall be disregarded, except that for the purposes of determining
whether the Fiscal Agent shall be protected in relying on any such direction,
waiver or consent, only Securities which the Company declares in writing to the
Fiscal Agent as being so owned shall be so disregarded.

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   58
                                   ARTICLE III

                                 THE SECURITIES

          SECTION 3.1. Title and Terms.

          The Securities shall be issued in two separate series and shall be
known and designated as the "7.95% Notes due August 15, 2004" and the "8.20%
Notes due August 15, 2009" of the Company. The aggregate principal amount of the
7.95% Notes which may be authenticated and delivered under this Fiscal Agency
Agreement is limited to $200,000,000 and the aggregate principal amount of the
8.20% Notes which may be authenticated and delivered under this Fiscal Agency
Agreement is limited to $465,000,000, and the aggregate principal amount of
Additional Securities which may be authenticated and delivered under this Fiscal
Agency Agreement is limited to the amount determined in accordance with Section
3.3, except for Securities authenticated and delivered upon registration of
transfer of, or in exchange for, or in lieu of, other Securities pursuant to
Section 3.3, 3.4, 3.5, 3.6 or 9.7 of this Fiscal Agency Agreement. In no event
shall the aggregate principal amount of Outstanding Securities exceed
$665,000,000 and up to the aggregate principal amount of Additional Securities
of one or more series issued subsequently, in the manner set forth in Section
3.3.

          Each of the two series (each, a "series") of the Securities issued
hereunder shall be treated separately for purposes of the acts of Holders
permitted or required under the Fiscal Agency Agreement, the giving of waivers
or consents by Holders, Events of Default and accelerations of the respective
series, registrations of transfer and exchange of Securities, replacement of
Securities, and all other events and actions under the Fiscal Agency Agreement
as to which the interests of the Holders of the separate series of the
Securities may differ or it is otherwise appropriate to treat such series
separately, whether or not express mention is made of such separate treatment in
a particular context.

          The Stated Maturity of the 7.95% Notes shall be August 15, 2004 and
they shall bear interest at the rate of 7.95% per annum from August 25, 1999 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, as the case may be, payable semi-annually

                                      -52-
   59
in arrears on February 15 and August 15 of each year, commencing February 15,
2000, and at Maturity, until the principal thereof is paid or made available for
payment, provided that any amount of such principal or interest that is overdue
shall bear interest at the rate of 7.95% per annum (to the extent that the
payment of such interest shall be legally enforceable), from the date such
amount is due until it is paid or made available for payment, and such interest
on any overdue amount shall be payable on demand. The Regular Record Date for
the 7.95% Notes for the interest payable on any Interest Payment Date shall be
the February 1 and August 1, as the case may be, immediately preceding such
Interest Payment Date.

          The Stated Maturity of the 8.20% Notes shall be August 15, 2009, and
they shall bear interest at the rate of 8.20% per annum from August 25, 1999 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, as the case may be, payable semi-annually in arrears on
February 15 and August 15 of each year, commencing February 15, 2000, and at
Maturity, until the principal thereof is paid or made available for payment,
provided that any amount of such principal or interest that is overdue shall
bear interest at the rate of 8.20% per annum (to the extent that the payment of
such interest shall be legally enforceable), from the date such amount is due
until it is paid or made available for payment, and such interest on any overdue
amount shall be payable on demand. The Regular Record Date for the 8.20% Notes
for the interest payable on any Interest Payment Date shall be the February 1
and August 1, as the case may be, immediately preceding such Interest Payment
Date.

          Payment of the principal (and premium, if any) of the Securities and
the interest due at Stated Maturity will be made at the office or agency of U.S.
Bank Trust National Association maintained for that purpose in New York, New
York, or at such other paying agency as the Company may determine. Payments of
interest, other than interest due at Stated Maturity, will be made to the
address of the Person entitled thereto as such address shall appear in the
Security Register. A Holder of U.S. $5,000,000 or more in aggregate principal
amount of Securities having the same Interest Payment Date will be entitled to
receive payments of interest, other than interest due at Stated Maturity, by
wire transfer if appropriate wire transfer instructions have been received by
the Paying Agent in writing not less than

                                      -53-
   60
15 calendar days prior to the applicable Interest Payment Date.

          The Securities shall be redeemable by the Company prior to maturity as
set forth in Section 8.8 herein. No sinking fund is provided for in the
Securities.

          The Company shall have no obligation to redeem or purchase the
Securities pursuant to any sinking fund or analogous provision, or at the option
of a Holder thereof.

          The Securities shall be executed, authenticated, delivered and dated
in accordance with Section 3.3 herein.

          The Securities shall be entitled to the benefits of Article XII herein
providing for the unconditional guarantee by the Guarantor of the due and
punctual payment of the principal of and interest on the Securities when as the
same shall become due and payable, whether at the Stated Maturity, by
acceleration, purchase or otherwise, in accordance with the terms of the
Securities and the Fiscal Agency Agreement.

          SECTION 3.2. Denominations.

          The Securities shall be issuable only in registered form without
coupons only in denominations of $1,000 and except that Securities offered to
Institutional Accredited Investors will be issued only in definitive
certificated form and will be issued initially in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof.

          SECTION 3.3. Execution, Authentication, Delivery and Dating.

          The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Vice Chairman of the Board, Chief Executive Officer,
its President or one of its Vice Presidents or one of its directors. The
signature of any of these officers on the Securities may be manual or facsimile.
The signatures required hereby may in each case be the manual signatures of any
person duly delegated by a director.

          Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper

                                      -54-
   61
officers or directors of the Company shall bind the Company, notwithstanding
that such individuals or any of them have ceased to hold such offices prior to
the authentication and delivery of such Securities or did not hold such offices
at the date of such Securities.

          At any time and from time to time after the execution and delivery of
this Fiscal Agency Agreement, the Company may deliver Securities executed by the
Company and having endorsed (by attachment or imprint) thereon the Guarantees
executed as provided in Section 12.2 by the Guarantor to the Fiscal Agent for
authentication, together with a Company Order for the authentication and
delivery of such Securities with such Guarantees endorsed thereon; and the
Fiscal Agent in accordance with such Company Order shall authenticate and
deliver such Securities with such Guarantees endorsed thereon as in this
Fiscal Agency Agreement provided and not otherwise.

          Each Security shall be dated the date of its authentication.

          No Security or Guarantee endorsed thereon shall be entitled to any
benefit under this Fiscal Agency Agreement or be valid or obligatory for any
purpose unless there appears on such Security a certificate of authentication
substantially in the form provided for herein executed by the Fiscal Agent by
manual signature, and such certificate upon any Security shall be conclusive
evidence, and the only evidence, that such Security has been duly authenticated
and delivered hereunder and that each Guarantee endorsed thereon has been duly
endorsed thereon and delivered hereunder.

          The Fiscal Agent may appoint an authenticating agent acceptable to the
Company to authenticate Securities. An authenticating agent may authenticate
Securities whenever the Fiscal Agent may do so, other than upon original
issuance or pursuant to Section 3.6. Each reference in this Agreement to
authentication by the Fiscal Agent includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company.

          The Company shall be entitled, subject to Section 3.1, to issue
Additional Securities under this Fiscal Agency Agreement which shall have
identical terms as the Securities of any series issued on the Issue Date, other
than with respect to the date of issuance, issue price and

                                      -55-
   62
amount of interest payable on the first payment date applicable to such series.
The Securities of any series issued on the Issue Date and any Additional
Securities of such series shall be treated as a single class for all purposes
under this Fiscal Agency Agreement.

          With respect to any Additional Securities, the Company shall set forth
in a Board Resolution and an Officer's Certificate, a copy of each of which
shall be delivered to the Fiscal Agent, the following information:

                    (1) the series and the aggregate principal amount of such
          Additional Securities to be authenticated and delivered pursuant to
          this Fiscal Agency Agreement; and

                    (2) the issue price, the issue date and the CUSIP, common
          code and ISIN numbers of such Additional Securities and the amount of
          interest payable on the first payment date applicable thereto;
          provided, however, that no Additional Securities may be issued at a
          price that would cause such Additional Securities to have "original
          issue discount" within the meaning of Section 1273 of the U.S.
          Internal Revenue Code of 1986, as amended.

          SECTION 3.4. Temporary Securities Other Than Regulation S Temporary
Securities.

          Pending the preparation of definitive Securities and Guarantees, the
Company may execute, and upon Company Order the Fiscal Agent shall authenticate
and deliver, temporary Securities with temporary Guarantees endorsed thereon,
which Securities and Guarantees are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities and Guarantees,
respectively, in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Securities and Guarantees may determine, as evidenced by their
execution thereof.

          If temporary Securities are issued, the Company will cause definitive
Securities and Guarantees to be prepared without unreasonable delay. After the
preparation of definitive Securities and Guarantees, the temporary Securities
shall be exchangeable for definitive Securities

                                      -56-
   63
with definitive Guarantees endorsed thereon, upon surrender of the temporary
Securities at any office or agency of the Company designated pursuant to this
Fiscal Agency Agreement, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities the Company shall execute
and the Fiscal Agent shall authenticate and deliver in exchange therefor a like
principal amount of definitive Securities of authorized denominations having
endorsed thereon definitive Guarantees executed by the Guarantor. Until so
exchanged the temporary Securities and Guarantees shall in all respects be
entitled to the same benefits under this Fiscal Agency Agreement as definitive
Securities and Guarantees, respectively.

          SECTION 3.5. Registration, Registration of Transfer and Exchange
Generally; Restrictions on Transfer and Exchange.

          (a) Registration, Registration of Transfer and Exchange Generally. The
Company shall cause to be kept at the Corporate Trust Office of the Fiscal Agent
a register (the register maintained in such office and in any other office or
agency of the Company designated pursuant to this Fiscal Agency Agreement being
herein sometimes collectively referred to as the "Security Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Securities and of transfers and exchanges of
Securities. The Fiscal Agent is hereby appointed "Security Registrar" for the
purpose of registering Securities and transfers and exchanges of Securities as
herein provided.

          Upon surrender for registration of transfer of any Security at an
office or agency of the Company designated pursuant to this Fiscal Agency
Agreement for such purpose, the Company shall execute, and the Fiscal Agent
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Securities of any authorized denominations, of a
like aggregate principal amount and bearing such restrictive legends as may be
required by this Fiscal Agency Agreement, each such new Security having endorsed
thereon the Guarantee executed by the Guarantor.

                                      -57-
   64
          At the option of the Holder, and subject to the other provisions of
this Section 3.5, Securities may be exchanged for other Securities of any
authorized denominations, of a like aggregate principal amount, each such new
Security having endorsed thereon the Guarantee executed by the Guarantor, upon
surrender of the Securities to be exchanged at any such office or agency.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Fiscal Agent shall authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.

          All Securities and the Guarantees endorsed thereon issued upon any
registration of transfer or exchange of Securities shall be the valid
obligations of the Company and the Guarantor, evidencing the same debt, and
entitled to the same benefits under this Fiscal Agency Agreement, as the
Securities and Guarantees endorsed thereon, respectively, surrendered upon such
registration of transfer or exchange.

          Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Company or the Security Registrar)
be duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.

          No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 3.3, 3.4, 3.5 or 8.7 not involving any transfer.

          The Company shall not be required (i) to issue, register the transfer
of or exchange any Security during a period beginning at the opening of business
15 days before the day of the mailing of a notice of redemption of Securities
selected for redemption under Section 8.3 and ending at the close of business on
the day of such mailing, or (ii) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.

                                      -58-
   65
          (b) Certain Transfers and Exchanges. Notwithstanding any other
provisions of the Fiscal Agency Agreement or the Securities (but subject to
Section 2.1 hereof), transfers of a Global Security, in whole or in part,
transfers and exchanges of interests therein of the kinds described in clauses
(iii), (iv), (v), (vi), (vii) and (viii) below and exchanges of interests in
Global Securities shall be made only in accordance with this Section 3.5.
Transfers and exchanges subject to this Section 3.5 shall also be subject to the
other provisions of the Fiscal Agency Agreement that are not inconsistent with
this Section 3.5.

                    (i) Limitation on Transfers of a Global Security. A Global
          Security may not be transferred, in whole or in part, to any Person
          other than the U.S. Depositary or a nominee thereof, and no such
          transfer to any such other Person may be registered; provided that
          this clause (1) shall not prohibit any transfer of a Security that
          is issued in exchange for a Global Security but is not itself a Global
          Security. No transfer of a Security to any Person shall be effective
          under this Fiscal Agency Agreement or the Securities unless and until
          such Security has been registered in the name of such Person. Nothing
          in this Section 3.5(b)(i) shall prohibit or render ineffective any
          transfer of a beneficial interest in a Global Security effected in
          accordance with the other provisions of this Section 3.5(b).

                    (ii) Temporary Regulation S Global Security. After the
          Restricted Period, if the holder of a beneficial interest in a
          Temporary Regulation S Global Security wishes to transfer such
          interest to a Person who wishes to take delivery thereof in the form
          of a beneficial interest in such Temporary Regulation S Global
          Security, such transfer may be effected, subject to the rules and
          procedures of the Depositary, Euroclear and Cedelbank, in each case to
          the extent applicable and as in effect from time to time (the
          "Applicable Procedures"), only in accordance with this Section
          3.5(b)(ii). Upon delivery (a) by a beneficial owner of an interest in
          a Temporary Regulation S Global Security to Euroclear or Cedelbank, as
          the case may be, of an Owner Securities Certification, (b) by the
          transferee of such beneficial interest in the Temporary Regulation S
          Global Security to Euroclear or Cedelbank, as the case may be, of a
          written certification (a "Transferee Securities Certification")
          substantially in

                                      -59-
   66
          the form of Annex C-3 hereto and (c) by Euroclear or Cedelbank, as the
          case may be, to the Fiscal Agent, as Security Registrar, of a
          Depositary Securities Certification, the Fiscal Agent may direct
          either Euroclear or Cedelbank, as the case may be, to reflect on its
          records the transfer of a beneficial interest in the Temporary
          Regulation S Global Security from the beneficial owner providing the
          Owner Securities Certification to the Person providing the Transferee
          Securities Certification.

                    (iii) Restricted Global Security to Temporary Regulation S
          Global Security. If the holder of a beneficial interest in the
          Restricted Global Security wishes at any time to transfer such
          interest to a Person who wishes to take delivery thereof in the form
          of a beneficial interest in the Temporary Regulation S Global Security
          of the same series, such transfer may be effected, subject to the
          Applicable Procedures, only in accordance with the provisions of this
          Section 3.5(b)(iii). Upon receipt by the Fiscal Agent, as Security
          Registrar, at its office in The City of New York of (A) written
          instructions given in accordance with the Applicable Procedures from
          a member of, or participant in, the U.S. Depositary (an "Agent
          Member") directing the Fiscal Agent to credit or cause to be credited
          to a specified Agent Member's account a beneficial interest in the
          Temporary Regulation S Global Security in a principal amount equal to
          that of the beneficial interest in the Restricted Global Security of
          the same series to be so transferred, (B) a written order given in
          accordance with the Applicable Procedures containing information
          regarding the account of the Agent Member (and the Euroclear or
          Cedelbank account, as the case may be) to be credited with, and the
          account of the Agent Member to be debited for, such beneficial
          interest and (C) a certificate in substantially the form set forth
          in Annex A-1 given by the holder of such beneficial interest, the
          Fiscal Agent, as Security Registrar, shall instruct the U.S.
          Depositary to reduce the principal amount of the applicable Restricted
          Global Security, and to increase the principal amount of the
          Temporary Regulation S Global Security of the same series, by the
          principal amount of the beneficial interest in the Restricted Global
          Security to be so transferred, and to credit or cause to be credited
          to the account of the Person specified

                                      -60-
   67
          in such instructions (which shall be the Agent Member for Euroclear or
          Cedelbank or both, as the case may be) a beneficial interest in the
          Temporary Regulation S Global Security of the same series having a
          principal amount equal to the amount by which the principal amount of
          the Restricted Global Security was reduced upon such transfer.

                    (iv) Restricted Global Security to Regulation S Global
          Security. If the holder of a beneficial interest in a Restricted
          Global Security wishes at any time to transfer such interest to a
          Person who wishes to take delivery thereof in the form of a beneficial
          interest in the Regulation S Global Security of the same series, such
          transfer may be effected, subject to the Applicable Procedures, only
          in accordance with this Section 3.5(b)(iv). Upon receipt by the Fiscal
          Agent, as Security Registrar, at its office in The City of New York of
          (A) written instructions given in accordance with the Applicable
          Procedures from an Agent Member directing the Fiscal Agent to credit
          or cause to be credited to a specified Agent Member's account a
          beneficial interest in a Regulation S Global Security in a principal
          amount equal to that of the beneficial interest in the Restricted
          Global Security of the same series to be so transferred, (B) a written
          order given in accordance with the Applicable Procedures containing
          information regarding the account of the Agent Member (and, if
          applicable, the Euroclear or Cedelbank account, as the case may be) to
          be credited with, and the account of the Agent Member to be debited
          for, such beneficial interest and (C) a certificate in substantially
          the form set forth in Annex A-2 given by the holder of such beneficial
          interest, the Fiscal Agent, as Security Registrar, shall instruct the
          U.S. Depositary to reduce the principal amount of the applicable
          Restricted Global Security, and to increase the principal amount of
          the Regulation S Global Security of the same series, by the principal
          amount of the beneficial interest in the Restricted Global Security to
          be so transferred, and to credit or cause to be credited to the
          account of the Person specified in such instructions (which during the
          Restricted Period shall be the Agent Member for Euroclear or Cedelbank
          or both, as the case may be) a beneficial interest in the Regulation S
          Global Security of the same series having a principal amount equal to
          the

                                      -61-
   68
          amount by which the principal amount of the Restricted Global Security
          was reduced upon such transfer.

                    (v) Temporary Regulation S Global Security or Regulation S
          Global Security to Restricted Global Security. If the holder of a
          beneficial interest in a Temporary Regulation S Global Security or a
          Regulation S Global Security wishes at any time to transfer such
          interest to a Person who wishes to take delivery thereof in the form
          of a beneficial interest in the Restricted Global Security of the same
          series, such transfer may be effected, subject to the Applicable
          Procedures, only in accordance with this Section 3.5(b)(v). Upon
          receipt by the Fiscal Agent, as Security Registrar, at its office in
          The City of New York of (A) written instructions given in accordance
          with the Applicable Procedures from an Agent Member directing the
          Fiscal Agent to credit or cause to be credited to a specified Agent
          Member's account a beneficial interest in a Restricted Global Security
          in a principal amount equal to that of the beneficial interest in the
          Temporary Regulation S Global Security of the same series or the
          Regulation S Global Security to be so transferred, (B) a written order
          given in accordance with the Applicable Procedures containing
          information regarding the account of the Agent Member to be credited
          with, and the account of the Agent Member (and, if applicable, the
          Euroclear or Cedelbank account, as the case may be) to be debited for,
          such beneficial interest and (C) a certificate in substantially the
          form set forth in Annex B given by the holder of such beneficial
          interest, the Fiscal Agent, as Security Registrar, shall instruct the
          U.S. Depositary to reduce the principal amount of the applicable
          Temporary Regulation S Global Security or the Regulation S Global
          Security, as the case may be, and to increase the principal amount of
          the Restricted Global Security of the same series, by the principal
          amount of the beneficial interest in the Temporary Regulation S Global
          Security or the Regulation S Global Security to be so transferred, and
          to credit or cause to be credited to the account of the Person
          specified in such instructions a beneficial interest in the Restricted
          Global Security of the same series having a principal amount equal to
          the amount by which the principal amount of the Temporary Regulation S
          Global

                                      -62-
   69
          Security or the Regulation S Global Security, as the case may be, was
          reduced upon such transfer.

                    (vi) Non-Global Restricted Security to Global Security. If
          the holder of a Restricted Security (other than a Global Security)
          wishes at any time to transfer all or a portion of such Security to a
          Person who wishes to take delivery thereof in the form of a beneficial
          interest in the Restricted Global Security, the Temporary Regulation S
          Global Security or the Regulation S Global Security, in each case of
          the same series, such transfer may be effected, subject to the
          Applicable Procedures, only in accordance with this Section
          3.5(b)(vi). Upon receipt by the Fiscal Agent, as Security Registrar,
          at its office in The City of New York of (A) such Security and written
          instructions given in accordance with the Applicable Procedures from
          an Agent Member directing the Fiscal Agent to credit or cause to be
          credited to a specified Agent Member's account a beneficial interest
          in the Restricted Global Security, the Temporary Regulation S Global
          Security or the Regulation S Global Security, as the case may be, in a
          specified principal amount equal to the principal amount of the
          Restricted Security (or portion thereof) of the same series to be so
          transferred, and (B) an appropriately completed certificate
          substantially in the form set forth in Annex D-l hereto, if the
          specified account is to be credited with a beneficial interest in a
          Restricted Global Security, or Annex D-2 hereto, if the specified
          account is to be credited with a beneficial interest in the Temporary
          Regulation S Global Security or the Regulation S Global Security,
          given by the holder of such beneficial interest, the Fiscal Agent, as
          Security Registrar, shall cancel such Restricted Security (and issue a
          new Security in respect of any untransferred portion thereof) as
          provided in Section 3.5(b) and increase the principal amount of the
          Restricted Global Security, Temporary Regulation S Global Security or
          Regulation S Global Security, as the case may be, in each case of the
          same series, by the specified principal amount as provided in Section
          3.5(d) (iii).

                    (vii) Exchanges. In the event that a Restricted Global
          Security or any portion thereof is exchanged for a Regulation S Global
          Security or Securities of the same series other than Global
          Securities, such other

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          Securities may in turn be exchanged (on transfer or otherwise) for
          Securities of the same series that are not Global Securities or for
          beneficial interests in a Global Security of the same series (if any
          is then outstanding) only in accordance with such procedures, which
          shall be substantially consistent with the provisions of clauses (i)
          through (vi) above and (viii) below (including the certification
          requirements intended to insure that transfers and exchanges of
          beneficial interests in a Global Security comply with Rule 144A, Rule
          144 or Regulation S, as the case may be) and any Applicable
          Procedures, as may be from time to time adopted by the Company and the
          Fiscal Agent.

                    (viii) Interests in Temporary Regulation S Global Security
          to be Held Through Euroclear or Cedelbank. Until the termination of
          the Restricted Period, interests in the Temporary Regulation S Global
          Securities may be held only through Agent Members acting for and on
          behalf of Euroclear and Cedelbank, provided that this clause (viii)
          shall not prohibit any transfer in accordance with Section 3.5(b)(v)
          hereof.

                    (ix) Certain Initial Transfers of Non-Global Securities. In
          the case of Securities initially issued other than in global form, an
          initial transfer or exchange of such Securities that does not involve
          any change in beneficial ownership may be made to an Institutional
          Accredited Investor or Investors as if such transfer or exchange were
          not an initial transfer or exchange.

          (c) Each Restricted Security and Global Security issued hereunder
shall, upon issuance, bear the legends required by Section 2.2 or Section 2.5 to
be applied to such a Security and such required legends shall not be removed
from such Security except as provided in the next sentence or paragraph (d) of
this Section 3.5. The legend required for a Restricted Security may be removed
from a Security if there is delivered to the Company such satisfactory evidence,
which may include an opinion of independent counsel licensed to practice law in
the State of New York, as may be reasonably required by the Company that neither
such legend nor the restrictions on transfer set forth therein are required to
ensure that transfers of such Security will not violate the registration
requirements of the Securities Act. Upon provision of such satisfactory
evidence, the Fiscal

                                      -64-
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Agent, at the written direction of the Company, shall authenticate and deliver
in exchange for such Security another Security or Securities of the same series
having an equal aggregate principal amount that does not bear such legend. If
such a legend required for a Restricted Security has been removed from a
Security as provided above, no other Security issued in exchange for all or any
part of such Security shall bear such legend, unless the Company has reasonable
cause to believe that such other Security is a "restricted security" within the
meaning of Rule 144 and instructs the Fiscal Agent in writing to cause a legend
to appear thereon.

          (d) The provisions of clauses (i), (ii), (iii) and (iv) below shall
apply only to Global Securities:

                    (i) Each Global Security authenticated under the Fiscal
          Agency Agreement shall be registered in the name of the U.S.
          Depositary or a nominee thereof and delivered to such U.S. Depositary
          or a nominee thereof or custodian therefor, and each such Global
          Security shall constitute a single Security for all purposes of the
          Fiscal Agency Agreement.

                    (ii) Notwithstanding any other provision in the Fiscal
          Agency Agreement or the Securities, no Global Security may be
          exchanged in whole or in part for Securities registered, and no
          transfer of a Global Security in whole or in part may be registered,
          in the name of any Person other than the U.S. Depositary or a nominee
          thereof unless (A) the U.S. Depositary (i) has notified the Company
          that it is unwilling or unable to continue as U.S. Depositary for such
          Global Security or (ii) has ceased to be a clearing agency registered
          under the Exchange Act, (B) in the case of a Global Security held for
          an account of Euroclear or Cedelbank, Euroclear or Cedelbank, as the
          case may be, (i) is closed for business for a continuous period of 14
          days (other than by reason of statutory or other holidays) or (ii)
          announces an intention permanently to cease business or does in fact
          do so, (C) there shall have occurred and be continuing an Event of
          Default with respect to such Global Security or (D) a request for
          certificates has been made upon at least 60 days' prior written notice
          given to the Fiscal Agent in accordance with the U.S. Depositary's
          customary procedures and a copy of such notice has been received by
          the Company

                                      -65-
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          from the Fiscal Agent. Any Global Security exchanged pursuant to
          clause (A) or (B) above shall be so exchanged in whole and not in part
          and any Global Security exchanged pursuant to clause (C) or (D) above
          may be exchanged in whole or from time to time in part as directed by
          the U.S. Depositary. Any Security issued in exchange for a Global
          Security or any portion thereof shall be a Global Security, provided
          that any such Security so issued that is registered in the name of a
          Person other than the U.S. Depositary or a nominee thereof shall not
          be a Global Security.

                    (iii) Securities issued in exchange for a Global Security or
          any portion thereof pursuant to clause (ii) above shall be of the same
          series as the Global Security to be exchanged, shall be issued in
          definitive, fully registered form, without interest coupons, shall
          have an aggregate principal amount equal to that of such Global
          Security or portion thereof to be so exchanged, shall be registered in
          such names and be in such authorized denominations as the U.S.
          Depositary shall designate and shall bear any legends required
          hereunder. Any Global Security to be exchanged in whole shall be
          surrendered by the U.S. Depositary to the Fiscal Agent, as Security
          Registrar. With regard to any Global Security to be exchanged in part,
          either such Global Security shall be so surrendered for exchange or,
          if the Fiscal Agent is acting as custodian for the U.S. Depositary or
          its nominee with respect to such Global Security, the principal amount
          thereof shall be reduced, by an amount equal to the portion thereof to
          be so exchanged, by means of an appropriate adjustment made on the
          records of the Fiscal Agent. Upon any such surrender or adjustment,
          the Fiscal Agent shall authenticate and make available for delivery
          the Security issuable on such exchange to or upon the written order of
          the U.S. Depositary or an authorized representative thereof.

                    (iv) In the event of the occurrence of any of the events
          specified in clause (ii) above, the Company will promptly make
          available to the Fiscal Agent a reasonable supply of certificated
          Securities in definitive, fully registered form, without interest
          coupons.

                    (v) No Agent Members nor any other Persons on whose behalf
          Agent Members may act (including Euroclear

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          and Cedelbank and account holders and participants therein) shall have
          any rights under the Fiscal Agency Agreement with respect to any
          Global Security, or under any Global Security, and the U.S. Depositary
          or such nominee, as the case may be, may be treated by the Company,
          the Fiscal Agent and any agent of the Company or the Fiscal Agent as
          the absolute owner and holder of such Global Security for all purposes
          whatsoever. Notwithstanding the foregoing, nothing herein shall
          prevent the Company, the Fiscal Agent or any agent of the Company or
          the Fiscal Agent from giving effect to any written certification,
          proxy or other authorization furnished by the U.S. Depositary or such
          nominee, as the case may be, or impair, as between the U.S.
          Depositary, its Agent Members and any other person on whose behalf an
          Agent Member may act, the operation of customary practices of such
          Persons governing the exercise of the rights of a holder of any
          Security.

          SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.

          If any mutilated Security is surrendered to the Fiscal Agent, the
Company shall execute and the Fiscal Agent shall authenticate and deliver in
exchange therefor a new Security of like tenor and principal amount, having
endorsed thereon the Guarantees executed by the Guarantor and bearing a number
not contemporaneously outstanding.

          If there shall be delivered to the Company and the Fiscal Agent (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by either of them to save
each of them, the Guarantor and any agent of any of them harmless, then, in the
absence of notice to the Company or the Fiscal Agent that such Security has been
acquired by a bona fide purchaser, the Company shall execute and upon its
request the Fiscal Agent shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and principal
amount, having endorsed thereon the Guarantees executed by the Guarantor and
bearing a number not contemporaneously outstanding.

          In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and

                                      -67-
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payable, the Company in its discretion may, instead of issuing a new Security,
pay such Security.

          Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Fiscal Agent) connected
therewith.

          Every new Security issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Security, and each Guarantee endorsed
thereon, shall constitute an original additional contractual obligation of the
Company and the Guarantor, respectively, whether or not the mutilated,
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Fiscal Agency Agreement
equally and proportionately with any and all other Securities and Guarantees,
respectively, duly issued hereunder.

          The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies of any Holder with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.

          SECTION 3.7. Payment of Interest; Interest Rights Preserved.

          Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest.

          Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in Clause (1) or (2) below:

                    (1) The Company may elect to make payment of any Defaulted
          Interest to the Persons in whose names the

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          Securities (or their respective Predecessor Securities) are registered
          at the close of business on a Special Record Date for the payment of
          such Defaulted Interest, which shall be fixed in the following manner.
          The Company shall notify the Fiscal Agent in writing of the amount of
          Defaulted Interest proposed to be paid on each Security and the date
          of the proposed payment, and at the same time the Company shall
          deposit with the Fiscal Agent an amount of money equal to the
          aggregate amount proposed to be paid in respect of such Defaulted
          Interest or shall make arrangements satisfactory to the Fiscal Agent
          for such deposit prior to the date of the proposed payment, such money
          when deposited to be held in trust for the benefit of the Persons
          entitled to such Defaulted Interest as in this Clause provided.
          Thereupon the Fiscal Agent shall fix a Special Record Date for the
          payment of such Defaulted Interest which shall be not more than 15
          days and not less than 10 days prior to the date of the proposed
          payment and not less than 10 days after the receipt by the Fiscal
          Agent of the notice of the proposed payment. The Fiscal Agent shall
          promptly notify the Company of such Special Record Date and, in the
          name and at the expense of the Company, shall cause notice of the
          proposed payment of such Defaulted Interest and the Special Record
          Date therefor to be mailed, first-class postage prepaid, to each
          Holder of Securities at such Holder's address as it appears in the
          Security Register, not less than 10 days prior to such Special Record
          Date. Notice of the proposed payment of such Defaulted Interest and
          the Special Record Date therefor having been so mailed, such Defaulted
          Interest shall be paid to the Persons in whose names the Securities
          (or their respective Predecessor Securities) are registered at the
          close of business on such Special Record Date and shall no longer be
          payable pursuant to the following Clause (2).

                    (2) The Company may make payment of any Defaulted Interest
          in any other lawful manner not inconsistent with the requirements of
          any securities exchange on which the Securities may be listed, and
          upon such notice as may be required by such exchange, if, after notice
          given by the Company to the Fiscal Agent of the proposed payment
          pursuant to this Clause, such manner of payment shall be deemed
          practicable by the Fiscal Agent.

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           Subject to the foregoing provisions of this Section, each Security
delivered under this Fiscal Agency Agreement upon registration of transfer of or
in exchange for or in lieu of any other Security shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such other
Security.

           SECTION 3.8. Persons Deemed Owners.

           Prior to due presentment of a Security for registration of transfer,
the Company, the Guarantor, the Fiscal Agent and any agent of the Company, the
Guarantor or the Fiscal Agent may treat the Person in whose name such Security
is registered as the owner of such Security for the purpose of receiving payment
of principal of (and premium, if any) and (subject to Section 3.7) interest on
such Security and for all other purposes whatsoever, whether or not such
Security be overdue, and neither the Company, the Guarantor, the Fiscal Agent
nor any agent of the Company, the Guarantor or the Fiscal Agent shall be
affected by notice to the contrary.

           SECTION 3.9. Cancellation.

           All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Fiscal
Agent, be delivered to the Fiscal Agent and, together with the Guarantees
endorsed thereon, shall be promptly cancelled by it. The Company may at any time
deliver to the Fiscal Agent for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall, together with the
Guarantees endorsed thereon, be promptly cancelled by the Fiscal Agent. No
Securities shall be authenticated in lieu of or in exchange for any Securities
cancelled as provided in this Section, except as expressly permitted by this
Fiscal Agency Agreement. All cancelled Securities held by the Fiscal Agent,
together with the Guarantees endorsed thereon, shall be disposed of by the
Fiscal Agent and the Fiscal Agent will certify as to such disposal to the
reasonable satisfaction of the Company.

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           SECTION 3.10. Computation of Interest.

           Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months provided, however, that any interest on
overdue principal of (and premium, if any) and interest on any Securities, shall
be computed on the basis of a 365-day or 366-day year, as the case may be, and
the number of days actually elapsed during the period of default in the payment
of such overdue principal (and premium, if any) or interest.

                                   ARTICLE IV

                              PAYMENT RESTRICTIONS

           SECTION 4.1. Unpaid Amounts. Notwithstanding anything to the contrary
set forth herein, any payment of interest on any Security which is not
punctually paid or duly provided for on the applicable Interest Payment Date
(such payment being referred to as an "Unpaid Amount"), will forthwith cease to
be payable to the Holder of such Security at the close of business on the
relevant Record Date, and such Unpaid Amount, together with accrued interest
thereon (if any) will instead be payable on a subsequent special payment date to
the Holder of such Security as of the close of business on a subsequent Special
Record Date. The Company shall fix such Special Record Date and special payment
date for any Unpaid Amount and at least 20 days before such special record date
shall notify the Fiscal Agent in writing of the special record date, the special
payment date and the amount of interest to be paid. At least 15 days before the
special record date, the Fiscal Agent shall mail to each Holder of the
Securities a notice that also states the special record date, special payment
date and amount of interest to be paid. On the special payment date set forth in
such notice, the Paying Agent shall pay the amount of interest to be so paid to
each Holder of the Securities in the manner set forth in Section 2.10(a).

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                                    ARTICLE V

                                    COVENANTS

           SECTION 5.1. Payment of Principal and Interest. The Company will duly
and punctually pay or cause to be paid the principal of and interest on the
Securities in accordance with, and subject to, the terms of such Securities
and this Agreement.

           SECTION 5.2. Rule 144A Information. So long as the Guarantor is not
subject to Section 13 or 15(d) of the Exchange Act, upon the request of a
Holder, the Guarantor shall promptly furnish or cause the Fiscal Agent to
furnish to such Holder or to a prospective purchaser of such Security designated
by such Holder, as the case may be, the information required to be delivered
pursuant to Rule 144A (d)(4) under the Securities Act ("Rule 144A Information")
to permit compliance with Rule 144A in connection with resales of the
Securities; provided, however, that the Guarantor shall not be required to
furnish Rule 144A Information in connection with any request made on or after
the date which is three years from the later of (x) the date of original
issuance of such Security (or any predecessor Security) or (y) the date such
Security (or any predecessor Security) was last held by the Guarantor or an
affiliate of the Guarantor within the meaning of Rule 144 under the Securities
Act. So long as the Guarantor is required to furnish Rule 144A Information as
set forth herein, the Guarantor shall notify the Fiscal Agent in writing if at
any time it becomes subject to Section 13 or 15(d) of the Exchange Act.

           SECTION 5.3. Other Information. The Guarantor shall deliver to the
Fiscal Agent, who shall deliver to each Holder without charge, (i) promptly
after it is available, a copy of the Principal Financial Group's annual report
to policyowners, (ii) upon written request, the Guarantor's audited consolidated
financial statements and quarterly financial information and (iii) during any
period in which the Guarantor is subject to Section 13 or 15(d) of the Exchange
Act, the annual reports, quarterly reports and current reports which the
Guarantor is required to file with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Exchange Act.

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           SECTION 5.4. Corporate Existence. Subject to Article VI, each of the
Company and the Guarantor will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence, material
rights (charter and statutory) and franchises; provided, however, that neither
the Company nor the Guarantor shall be required to preserve any such existence,
right or franchise if the Board of Directors of the Company or the Guarantor, as
the case may be, shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company or the Guarantor, as the
case may be, or that not preserving such right or franchise is in the best
interest of the Holders of the Company or the Guarantor, or the policyholders of
Principal Life, as the case may be, and, in each case, that any such action is
effected only in a manner which does not adversely affect the interests of any
Holder in any material respect.

           SECTION 5.5. Compliance with Investment Company Act. The Company is
not an open-end investment company, closed-end investment company, unit
investment trust or face-amount certificate company that is or is required to be
registered under Section 8 of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), and will not take any action if such action
would cause the Company to be in violation of the Investment Company Act at any
time prior to payment in full of the Securities.

           SECTION 5.6. Additional Amounts. All payments of, or in respect of,
principal of (and premium, if any), and any interest on, the Securities, and all
payments pursuant to the Guarantee, shall be made without withholding or
deduction for, or on account of, any present or future taxes, duties,
assessments or governmental charges of whatever nature imposed or levied by or
on behalf of the Commonwealth of Australia or any political subdivision or
taxing authority thereof or therein, unless such taxes, duties, assessments or
governmental charges are required by Australia or any political subdivision or
taxing authority thereof or therein to be withheld or deducted. In that event,
the Company or Guarantor, as applicable, will pay such additional amounts of, or
in respect of, principal of (and premium, if any), and any interest on, the
Securities ("Additional Amounts") as will result (after deduction of such taxes,
duties, assessments or governmental charges and any additional taxes, duties,
assessments or governmental charges payable in respect of such) in the payment
to the

                                      -73-
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Holder of each Security of the amounts which would have been payable in respect
of such Security or the Guarantee, as the case may be, had no such withholding
or deduction been required, except that no Additional Amounts shall be so
payable for or on account of:

           (1) any tax, duty, assessment or other governmental charge which
      would not have been imposed but for the fact that such Holder: (A) was a
      resident, domiciliary or national of, or engaged in business or maintained
      a permanent establishment or was physically present in, Australia or
      otherwise had some connection with Australia other than the mere ownership
      of, or receipt of payment under such Security or Guarantee; (B) presented
      such Security or Guarantee for payment in Australia, unless such Security
      or Guarantee could not have been presented for payment elsewhere; or (C)
      presented such Security or Guarantee, as the case may be, more than thirty
      (30) days after the date on which the payment in respect of such Security
      first became due and payable or provided for, whichever is later, except
      to the extent that the Holder would have been entitled to such Additional
      Amounts if it had presented such Security or Guarantee for payment on any
      day within such period of thirty (30) days;

           (2) any estate, inheritance, gift, sales, transfer, personal property
      or similar tax, assessment or other governmental charge or any withholding
      or deduction on account of such taxes;

           (3) any tax, assessment or other governmental charge which is payable
      otherwise than by withholding or deduction from payments of (or in respect
      of) principal of (and premium, if any), or any interest on, the Securities
      or the Guarantee;

           (4) any tax, assessment or other governmental charge that is imposed
      or withheld by reason of the failure to comply by the Holder or the
      beneficial owner of such Security with a request of the Company or the
      Guarantor addressed to such Holder or beneficial owner, as the case may
      be, (A) to provide information concerning the nationality, residence or
      identity of such Holder or such beneficial owner or (B) to make any
      declaration or other similar claim or satisfy any information or reporting
      requirement, which, in the

                                      -74-
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      case of (A) or (B), is required or imposed by a statute, treaty,
      regulation or administrative practice of Australia or any political
      subdivision or taxing authority thereof or therein as a precondition to
      exemption from all or part of such withholding, deduction, tax, assessment
      or other governmental charge;

           (5) any withholding, deduction, tax, assessment or other governmental
      charge which is imposed or withheld by reason of such Holder being an
      associate of the Company or the Guarantor for the purposes of Section
      128(F) of the Income Tax Assessment Act 1936 of Australia;

           (6) a determination by the Commissioner of Taxation that Australian
      interest withholding tax is payable in respect of the amount in the
      circumstances where the Holder or such entity, or a person on behalf of
      the Holder or such entity, is party to or participated in a scheme to
      avoid Australian interest withholding tax, being a scheme which the
      Company neither was party to nor participated in; or

           (7) any combination of items (l), (2), (3), (4), (5) and (6);

nor shall Additional Amounts be paid with respect to any payment of, or in
respect of, the principal of (and premium, if any), or any interest on, any such
Security or Guarantee to any such Holder who is a fiduciary or partnership or
other than the sole beneficial owner of such payment to the extent such payment
would be required by the laws of Australia or any political subdivision or
taxing authority thereof or therein to be included in the income for tax
purposes of a beneficiary or settlor with respect to such fiduciary or a member
of such partnership or a beneficial owner, any of whom would not have been
entitled to such Additional Amounts had it been the Holder of the Security.

           Whenever in this Agreement there is mentioned, in any context, the
payment of, or in respect of, the principal of (and premium, if any), or any
interest on, any Security or any payments pursuant to the Guarantee, such
mention shall be deemed to include mention of the payment of Additional Amounts
provided for in this Section to the extent that, in such context, Additional
Amounts are, were

                                      -75-
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or would be payable in respect thereof pursuant to the provisions of this
Section, and any express mention of the payment of Additional Amounts in any
provisions hereof shall not be construed as excluding Additional Amounts in
those provisions hereof where such express mention is not made.

           At least 10 days prior to each date on which the payment of, or in
respect of, principal of (and premium, if any), and any interest on, any
Security or any payment pursuant to the Guarantee is due and payable, if the
Company or Guarantor will be obligated to pay Additional Amounts with respect to
such payment, the Company or Guarantor, as the case may be, will deliver to the
Fiscal Agent and the Paying Agent an Officer's Certificate stating the fact that
such Additional Amounts will be payable and the amounts so payable and will set
forth such other information necessary to enable the Fiscal Agent and such
Paying Agent to pay such Additional Amounts to the Holders on the payment date;
provided, however, that if 10 days prior to each date on which any such payment
is due and payable the amount of such payment has not yet been determined, the
Company or Guarantor, as the case may be, shall notify the Fiscal Agent of such
amount promptly after such amount has been determined.

           SECTION 5.7. Limitations upon Liens. The Company and the Guarantor
will not, nor will they permit any Restricted Subsidiary of the Company or the
Guarantor, directly or indirectly, to, create, issue, assume, incur, or
guarantee or become liable with respect to any indebtedness for money borrowed
if such indebtedness is secured by a Lien on any present or future common stock
of any Restricted Subsidiary (whether such shares of common stock are now owned
or hereafter acquired) without in any such case making or causing to be made
effective a provision (and each of the Company and the Guarantor covenants that
in any such case it shall make or cause to be made effective such provision)
whereby the Securities, will be secured equally and ratably with, or prior to,
such indebtedness or guarantee; it being understood that in such event the
Company and the Guarantor may also so secure any other such indebtedness of the
Company, the Guarantor or such Restricted Subsidiary entitled thereto, subject
to any applicable priority of payment.

           SECTION 5.8. Limitation on the Disposition of Stock of Restricted
Subsidiaries. Except in a transaction

                                      -76-
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governed by Article VI of this Agreement, the Guarantor will not issue, sell,
convey, lease, transfer or otherwise dispose of any shares of, securities
convertible or exchangeable into or warrants, rights or options to sub- scribe
for or purchase shares of, capital stock (other than preferred stock having no
voting rights of any kind, except as required by law or in the event of
non-payment of dividends) of any Restricted Subsidiary, nor will it permit any
Restricted Subsidiary to issue (other than to the Guarantor) any shares (other
than directors' qualifying shares) of, or securities convertible or exchangeable
into, or warrants, rights or options to subscribe for or purchase shares of,
capital stock (other than preferred stock having no voting rights of any kind,
except as required by law or in the event of non-payment of dividends) of any
Restricted Subsidiary if, after giving effect to any such transaction and the
issuance of the maximum number of shares issuable upon the conversion or
exercise of all such convertible securities, warrants, rights or options, the
Guarantor would own, directly or indirectly, less than 80% of the capital stock
of any of the Restricted Subsidiaries (other than preferred stock having no
voting rights of any kind, except as required by law or in the event of
non-payment of dividends); provided, however, that (i) any such issuance, sale,
conveyance, lease, transfer or other disposition permitted by the foregoing may
only be made for at least fair market value, as determined by the Board of
Directors pursuant to a Board Resolution adopted in good faith, and (ii) the
foregoing shall not prohibit any such issuance, sale, conveyance, lease,
transfer or disposition of securities if required by any law or any regulation
or order of any governmental or insurance regulatory authority, including,
without limitation, any order of the Insurance Commissioner of the State of Iowa
pursuant to Section 521A.14 of the Iowa Code or any successor provision.
Notwithstanding the foregoing, the Guarantor may (x) merge or consolidate any of
the Restricted Subsidiaries into or with another direct, wholly owned Subsidiary
of the Guarantor and (y) subject to the provisions of Article VI of this
Agreement, sell, convey, lease, transfer or otherwise dispose of the entire
capital stock of any Restricted Subsidiary at one time for at least a fair
market value consideration, as determined by the Board of Directors pursuant to
a Board Resolution adopted in good faith.

           SECTION 5.9. Annual Review Certificate; Notice of Defaults or Events
of Default. Each of the Company and the

                                      -77-
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Guarantor covenants and agrees to deliver to the Fiscal Agent within 120 days
after the end of each fiscal year of the Company and the Guarantor,
respectively, ending after the date hereof, a certificate from the principal
executive officer, principal financial officer or principal accounting officer
of the Company or the Guarantor, as the case may be, covering the preceding
calendar year, stating whether or not to the best knowledge of the signer(s)
thereof the Company or the Guarantor, as the case may be, is in default in the
performance, observance or fulfillment of or compliance with any of the terms,
provisions, covenants and conditions of this Agreement, and if the Company or
the Guarantor, as the case may be, shall be in default, specifying all such
defaults and the nature and status thereof of which they may have knowledge. For
the purposes of this Section 5.9, compliance shall be determined without regard
to any grace period or requirement of notice provided pursuant to the terms of
this Agreement.

                                   ARTICLE VI

                    REORGANIZATION, CONSOLIDATION, MERGER OR
                               SALE BY THE COMPANY

           SECTION 6.1. Consolidation, Merger or Sale of Assets Permitted.
Neither the Company nor the Guarantor shall reorganize, consolidate with or
merge with or into, or transfer or lease all or substantially all of its assets
including, without limitation, in connection with a demutualization of Principal
Mutual Holding Company to, any Person unless:

           (1) the Person formed by or surviving any such reorganization,
      consolidation or any merger (if other than the Company or the Guarantor,
      as the case may be), or to which such transfer or lease shall have been
      made, is a corporation organized and existing under the laws of the
      Commonwealth of Australia or any State thereof, in the case of the
      Company, or under the laws of the United States, any State thereof or the
      District of Columbia, in the case of the Guarantor;

           (2) the Person formed by or surviving any such reorganization,
      consolidation or merger (if other than the Company or the Guarantor, as
      the case may be), or to which such transfer or lease shall have been made,
      expressly assumes by supplemental fiscal agency

                                      -78-
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      agreement hereto executed and delivered to the Fiscal Agent, in form
      satisfactory to the Fiscal Agent, the due and punctual payment of the
      principal, premium, if any, interest, if any and any Additional Amounts,
      with respect to all of the Securities and the performance or observance of
      every covenant under this Agreement and the Securities on the part of the
      Company and the Guarantor to be performed under the Securities and this
      Agreement;

           (3) immediately after giving effect to the transaction and treating
      any indebtedness which becomes an obligation of the Company or the
      Guarantor or a Subsidiary of the Guarantor as a result of such transaction
      as having been incurred by the Company, the Guarantor or such Subsidiary
      at the time of such transaction no Default or Event of Default exists and
      is continuing;

           (4) if, as a result of any such transaction, properties or assets of
      the Company or the Guarantor would become subject to a mortgage, pledge,
      lien, security interest or other encumbrance which would not be permitted
      by the Securities of any series, the Company, the Guarantor or such
      successor person, as the case may be, shall take such steps as shall be
      necessary effectively to secure such Securities equally and ratably with
      all indebtedness secured thereby; and

           (5) each of the Company and the Guarantor shall deliver to the Fiscal
      Agent prior to the proposed transaction an Officers' Certificate to the
      foregoing effect and an Opinion of Counsel stating that the proposed
      transaction and such supplemental fiscal agency agreement comply with this
      Agreement and that all conditions precedent to the consummation of the
      transaction under this Agreement have been met.

           In the event of the assumption by a successor corporation as provided
in clause (2) above, such successor corporation shall succeed to and be
substituted for the Company or the Guarantor, as the case may be, hereunder and
under the Securities with the same effect as if it had been named hereunder and
thereunder and, except in the case of a lease, any coupons appertaining thereto
and all such obligations of the Company or the Guarantor, as the case may be,
shall terminate.

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                                   ARTICLE VII

                              DEFAULTS AND REMEDIES

           SECTION 7.1. Events of Default. An "Event of Default" occurs with
respect to the Securities of either series if (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any payment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):

           (1) the Company or the Guarantor defaults in the payment of interest
      on any Security of that series or any Additional Amount payable with
      respect to any Security of that series when the same becomes due and
      payable and such default continues for a period of 30 days;

           (2) the Company or the Guarantor defaults in the payment of the
      principal of (or any premium on) any Security of that series when the same
      becomes due and payable at its maturity or on redemption or otherwise;

           (3) the Company or the Guarantor fails to comply in any material
      respect with any of its agreements or covenants in, or any of the
      provisions of, this Agreement with respect to any Security of that series
      (other than an agreement, covenant or provision for which non-compliance
      is elsewhere in this Section specifically dealt with), and such
      non-compliance continues for a period of 90 days after there has been
      given by registered or certified mail, to the Company and the Guarantor by
      the Fiscal Agent or to the Company, the Guarantor and the Fiscal Agent by
      the Holders of at least 25% in principal amount of the Outstanding
      Securities of the series, a written notice specifying such default or
      breach and requiring it to be remedied and stating that such notice is a
      "Notice of Default" hereunder;

           (4) a default under any mortgage, agreement, Fiscal Agency Agreement
      or instrument under which there may be issued, or by which there may be
      secured, guaranteed or evidenced any Debt of the Company or the Guarantor
      (including this Agreement) whether such Debt

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      now exists or shall hereafter be created, in an aggregate principal
      amount then outstanding of $75,000,000 or more, which default (a)
      shall constitute a failure to pay a portion of the principal of such
      Debt when due and payable after the expiration of an applicable grace
      period with respect thereto or (b) shall result in such Debt becoming
      or being declared due and payable prior to the date on which it would
      otherwise become due and payable, and such acceleration shall not be
      rescinded or annulled, or such Debt shall not be paid in full within
      a period of 30 days after there has been given, by registered or
      certified mail, to the Company and the Guarantor by the Fiscal Agent
      or to the Company, the Guarantor and the Fiscal Agent by the Holders
      of at least 25% in aggregate principal amount of the Outstanding
      Securities of that series a written notice specifying such event of
      default and requiring the Company or the Guarantor, as the case may
      be, to cause such acceleration to be rescinded or annulled or to pay
      in full such Debt and stating that such notice is a "Notice of
      Default" hereunder; (it being understood however, that the Fiscal
      Agent shall not be deemed to have knowledge of such default under
      such agreement or instrument unless either (A) a Responsible Officer
      of the Fiscal Agent shall have actual knowledge of such default or
      (B) a Responsible Officer of the Fiscal Agent shall have received
      written notice thereof from the Company, from the Guarantor, from any
      Holder, from the holder of any such indebtedness or from the trustee
      under any such agreement or other instrument); provided, however,
      that if such default under such agreement or instrument is remedied
      or cured by the Company or the Guarantor, as the case may be, or
      waived by the holders of such indebtedness, then the Event of Default
      hereunder by reason thereof shall be deemed likewise to have been
      thereupon remedied, cured or waived without further action upon the
      part of either the Fiscal Agent or any of such Holders;

           (5) the Company or the Guarantor, pursuant to or within the meaning
      of any Bankruptcy Law, (A) commences a voluntary case or proceeding, (B)
      consents to the entry of an order for relief against it in an involuntary
      case or proceeding, (C) consents to the appointment of a Receiver of it or
      for all or substantially all of its property, (D) makes a general

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     assignment for the benefit of its creditors, (E) makes an admission in
     writing of its inability to pay its debts generally as they become due or
     (F) takes corporate action in furtherance of any such action; or

           (6) a court of competent jurisdiction enters an order or decree under
      any Bankruptcy Law that (A) is for relief against the Company or the
      Guarantor, in an involuntary case, (B) adjudges the Company or the
      Guarantor as bankrupt or insolvent, or approves as properly filed a
      petition seeking reorganization, arrangement, and adjustment or
      composition of or in respect of the Company, or appoints a Receiver of the
      Company or the Guarantor, or for all or substantially all of its property,
      or (C) orders the liquidation of the Company or the Guarantor and the
      decree remains unstayed and in effect for 60 days.

           The Company or the Guarantor shall deliver to the Fiscal Agent,
within 90 days after the occurrence thereof, written notice in the form of an
Officers' Certificate of any event which is or with the giving of notice or the
lapse of time would become an event which is or with the giving of notice or the
lapse of time would become an Event of Default, its status and what action the
Company or the Guarantor is taking or proposes to take with respect thereto.

           As used in this Agreement, the term "Bankruptcy Law" means Title 11,
U.S. Code, or any similar federal or state bankruptcy, insolvency,
reorganization or other law for the relief of debtors. As used in this
Agreement, the term "Receiver" means any receiver, Fiscal Agent, assignee,
liquidator or similar official under any Bankruptcy Law.

           SECTION 7.2. Acceleration; Rescission and Annulment. If an Event of
Default with respect to the Securities of either series at the time outstanding
occurs and is continuing, the Fiscal Agent or the Holders of at least 25% in
aggregate principal amount of all of the Outstanding Securities of that series
by written notice to the Company and the Guarantor (and if given by the Holders,
to the Fiscal Agent), may declare the principal of (and premium, if any) and
accrued interest, if any, on all the Securities of that series to be due and
payable and upon any such declaration such principal (and premium, if any) and
interest, if any, shall be immediately due and payable.

                                      -82-
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           At any time after such a declaration of acceleration with respect
to Securities of either series has been made and before a judgement or decree
for payment of the money due has been obtained by the Fiscal Agent as herein-
after in this Article provided, the Holders of a majority in aggregate principal
amount of the Outstanding Securities of that series, by written notice to the
Fiscal Agent, may rescind and annul such declaration and its consequences if

           (1) the Company has paid or deposited with the Fiscal Agent a sum
      sufficient to pay

                (A)   in  Dollars,  all  overdue  interest  on  all
           Securities  of  that  series  and  any  Additional
           Amounts,

                (B) in Dollars, the principal of (and premium, if any, on) any
           Securities of that series which have become due otherwise than by
           such declaration of acceleration and any interest thereon at the rate
           or rates prescribed therefor in such Securities,

                (C) to the extent that payment of such interest is lawful,
           interest upon overdue interest at the rate or rates prescribed
           therefor in such Securities and any Additional Amounts payable, and

                (D) all sums paid or advanced by the Fiscal Agent hereunder and
           the reasonable compensation, expenses, disbursements and advances of
           the Fiscal Agent, its agents and counsel;

      and

           (2) all existing Defaults and Events of Default with respect to
      Securities of that series, other than the non-payment of the principal
      (and premium, if any) of Securities of that series which have become due
      solely by such declaration of acceleration, have been cured or waived as
      provided in Section 7.7. No such rescission shall affect any subsequent
      default or impair any right consequent thereon.

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           SECTION 7.3. Collection of Indebtedness and Suits for Enforcement by
Fiscal Agent. Each of the Company and the Guarantor covenants that if:

           (1) default is made in the payment of any interest on any Security
      when such interest or any Additional Amounts becomes due and payable and
      such default continues for a period of 30 days, or

           (2) default is made in the payment of the principal of (or premium,
      if any, on) any Security at the maturity thereof,

the Company or the Guarantor will, upon demand of the Fiscal Agent, pay to it,
for the benefit of the Holders of such Securities, the whole amount then due and
payable on such Securities for principal, premium, if any, and interest and any
Additional Amounts, and, to the extent that payment of such interest shall be
legally enforceable, interest on any overdue principal, premium, if any, and on
any overdue interest and any Additional Amounts, at the rate or rates prescribed
therefor in such Securities, and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Fiscal
Agent, its agents and counsel.

           If an Event of Default with respect to Securities of either series
occurs and is continuing, the Fiscal Agent may in its discretion proceed to
protect and enforce its rights and the rights of the Holders of Securities of
such series by such appropriate judicial proceedings as the Fiscal Agent shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Agreement or in aid of
the exercise of any power granted herein, or to secure any other proper remedy.

           SECTION 7.4. Fiscal Agent May File Proofs of Claim. The Fiscal Agent
may file such proofs of claim and other papers or documents and take such
actions as may be necessary or advisable in order to have the claims of the
Fiscal Agent and the Holders of Securities allowed in any judicial proceedings
relating to the Company, the Guarantor, their creditors or their property. In
particular, the Fiscal Agent shall be authorized to collect and receive any
moneys or other property payable or deliverable on any such

                                      -84-
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claims and to distribute the same; and any custodian, receiver, assignee, Fiscal
Agent, liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Fiscal Agent and, in the event that the Fiscal Agent shall consent to the making
of such payments directly to the Holders, to pay to the Fiscal Agent any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Fiscal Agent, its agents and counsel, and any other amounts due the Fiscal
Agent under Section 9.5.

           No provision of this Agreement shall be deemed to authorize the
Fiscal Agent to authorize or consent to or accept or adopt on behalf of any
Holder of a Security any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof or to
authorize the Fiscal Agent to vote in respect of the claim of any Holder of a
Security in any such proceeding; provided, however, that the Fiscal Agent may,
on behalf of the Holders, vote for the election of a Fiscal Agent in bankruptcy
or similar official and be a member of a creditors' or other similar committee.

           SECTION 7.5. Fiscal Agent May Enforce Claims without Possession of
Securities. All rights of action and claims under this Agreement or the
Securities may be prosecuted and enforced by the Fiscal Agent, in its own name
as an express trust, without the possession of any of the Securities or coupons
or the production thereof in any proceeding relating thereto and any recovery of
judgment shall, after provision for the reasonable fees and expenses of the
Fiscal Agent and its counsel, be for the ratable benefit of the Holders of the
Securities in respect to which judgment was recovered.

           SECTION 7.6. Delay or Omission Not Waiver. No delay or omission by
the Fiscal Agent or any Holder of any Securities to exercise any right or remedy
accruing upon an Event of Default shall impair any such right or remedy or
constitute a waiver of or acquiescence in any such Event of Default. Every right
and remedy given by this Article or by law to the Fiscal Agent or to the Holders
of Securities may be exercised from time to time, and as often as may be deemed
expedient, by the Fiscal Agent or by the Holders of Securities.

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           SECTION 7.7. Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of Outstanding Securities of either series by written
notice to the Fiscal Agent may waive on behalf of the Holders of all Securities
of such series a past Default or Event of Default with respect to that series
and its consequences except (i) a Default or Event of Default in the payment of
the principal of, premium, if any, or interest or any Additional Amounts on any
Security of such series or (ii) in respect of a covenant or provision hereof
which pursuant to Section 10.2 cannot be amended or modified without the consent
of the Holder of each Outstanding Security of such series affected. Upon any
such waiver, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured, for every purpose of this
Agreement.

           SECTION 7.8. Control by Majority. The Holders of a majority in
aggregate principal amount of the Outstanding Securities of each series affected
(with each such series voting as a class) shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Fiscal Agent or exercising any trust or power conferred on it with respect
to Securities of that series; provided, however, that (i) the Fiscal Agent may
refuse to follow any direction that conflicts with law or this Agreement (ii)
the Fiscal Agent may refuse to follow any direction that is unduly prejudicial
to the rights of the Holders of Securities of such series not consenting or of
any other series for which the Fiscal Agent is fiscal agent, or that would in
the good faith judgment of the Fiscal Agent have a substantial likelihood of
involving the Fiscal Agent in personal liability and (iii) the Fiscal Agent may
take any other action deemed proper by the Fiscal Agent which is not
inconsistent with such direction. Prior to the taking of any action hereunder,
the Fiscal Agent shall be entitled to reasonable indemnification satisfactory to
the Fiscal Agent against all losses and expenses caused by taking or not taking
such action.

           SECTION 7.9. Limitation on Suits by Holders. No Holder of any
Security of either series shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Agreement, or for the appointment of
a receiver or Fiscal Agent, or for any other remedy hereunder, unless:

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           (1) the Holder has previously given written notice to the Fiscal
      Agent of a continuing Event of Default with respect to the Securities of
      that series;

           (2) the Holders of at least 25% in aggregate principal amount of the
      Outstanding Securities of that series have made a written request to the
      Fiscal Agent to institute proceedings in respect of such Event of Default
      in its own name as Fiscal Agent hereunder;

           (3) such Holder or Holders have offered to the Fiscal Agent indemnity
      satisfactory to the Fiscal Agent against any loss, liability or expense to
      be, or which may be, incurred by the Fiscal Agent in pursuing the remedy;

           (4) the Fiscal Agent for 60 days after its receipt of such notice,
      request and the offer of indemnity has failed to institute any such
      proceedings; and

           (5) during such 60 day period, the Holders of a majority in aggregate
      principal amount of the Outstanding Securities of that series have not
      given to the Fiscal Agent a direction inconsistent with such written
      request.

           No one or more Holders shall have any right in any manner whatever by
virtue of, or by availing of any provision of this Agreement to affect, disturb
or prejudice the rights of any other of such Holders, or to obtain or to seek to
obtain priority or preference over any other of such Holders or to enforce any
right under this Agreement, except in the manner herein provided and for the
equal and ratable benefit of all of such Holders.

           SECTION 7.10. Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Agreement, the right of any Holder of a Security to
receive payment of principal of, premium, if any, and, subject to Sections 3.5
and 3.7, interest on the Security and any Additional Amounts, on or after the
respective due dates expressed in the Security (or, in case of redemption, on
the redemption dates), or, subject to Section 7.9, to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.

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           SECTION 7.11. Application of Money Collected. If the Fiscal Agent
collects any money pursuant to this Article, it shall pay out the money in the
following order, at the date or dates fixed by the Fiscal Agent and, in case of
the distribution of such money on account of principal, premium, if any, or
interest, and any Additional Amounts upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:

           FIRST: to the Fiscal Agent for amounts due under Section 9.5;

           SECOND: to Holders of Securities in respect of which or for the
      benefit of which such money has been collected for amounts due and unpaid
      on such Securities for principal of, premium, if any, and interest or any
      Additional Amounts, ratably, without preference or priority of any kind,
      according to the amounts due and payable on such Securities for principal,
      premium, if any, and interest, respectively; and

           THIRD: to the Company.

           The Fiscal Agent may fix a record date and payment date for any
payment to Holders pursuant to this Section 7.11. At least 15 days before such
record date, the Fiscal Agent shall mail to each Holder, the Company and the
Guarantor a notice that states the record date, the payment date and the amount
to be paid.

           SECTION 7.12. Restoration of Rights and Remedies. If the Fiscal Agent
or any Holder of a Security has instituted any proceeding to enforce any right
or remedy under this Agreement and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Fiscal Agent
or to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Fiscal Agent and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Fiscal Agent and the Holders of Securities shall
continue as though no such proceeding had been instituted.

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           SECTION 7.13. Riqhts and Remedies Cumulative. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities in the last paragraph of Section 3.6, no right or
remedy herein conferred upon or reserved to the Fiscal Agent or the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any existing right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

           SECTION 7.14. Waiver of Usury, Stay or Extension Laws. Each of the
Company and the Guarantor covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any usury, stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Agreement; and each of the Company and the
Guarantor (to the extent that it may lawfully do so) hereby expressly waives all
benefit or advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Fiscal Agent,
but will suffer and permit the execution of every such power as though no such
law had been enacted.

           SECTION 7.15. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Agreement or in any suit against the Fiscal
Agent for any action taken or omitted by it as Fiscal Agent, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorney's fees, against any party
litigant in the suit having due regard to the merits and good faith of the
claims or defenses made by the party litigant provided that this Section shall
not be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company, by the Guarantor or by
the Fiscal Agent.

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           SECTION 7.16. Judgment Currency. If, for the purpose of obtaining a
judgment in any court with respect to any obligation of the Company or the
Guarantor hereunder or under any Security, it shall become necessary to convert
into any other currency or currency unit any amount in the currency or currency
unit due hereunder or under such Security, then such conversion shall be made by
the Exchange Rate Agent at the Market Exchange Rate as in effect on the date of
entry of the judgment (the "Judgment Date"). If pursuant to any such judgment,
conversion shall be made on a date (the "Substitute Date") other than the
Judgment Date and there shall occur a change between the Market Exchange Rate as
in effect on the Judgment Date and the Market Exchange Rate as in effect on the
Substitute Date, each of the Company and the Guarantor agrees to pay such
additional amounts (if any) as may be necessary to ensure that the amount paid
is equal to the amount in such other currency or currency unit which, when
converted at the Market Exchange Rate as in effect on the Judgment Date, is the
amount due hereunder or under such Security. Any amount due from the Company or
the Guarantor, under this Section 7.16 shall be due as a separate debt and is
not to be affected by or merged into any judgment being obtained for any other
sums due hereunder or in respect of any Security. In no event, however, shall
the Company or the Guarantor be required to pay more in the currency or currency
unit due hereunder under such Security at the Market Exchange Rate as in effect
on the Judgment Date than the amount of currency or currency unit stated to be
due hereunder or under such Security so that in any event the Company's and the
Guarantor's obligations hereunder or under such Security will be effectively
maintained as obligations in such currency or currency unit, and the Company or
the Guarantor shall be entitled to withhold (or be reimbursed for, as the case
may be) any excess of the amount actually realized upon any such conversion on
the Substitute Date over the amount due and payable on the Judgment Date.

                                  ARTICLE VIII

                                   REDEMPTION

           SECTION 8.1. Applicability of Article. Securities of either series
which are redeemable before their maturity shall be redeemable in accordance
with their terms and in accordance with this Article.

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           SECTION 8.2. Election to Redeem; Notice to Fiscal Agent. The election
of the Company to redeem any Securities shall be evidenced by a Board
Resolution. In case of any redemption at the election of the Company of less
than all the Securities of either series (including any such redemption
affecting only a single Security), the Company shall, at least 30 days prior to
the Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Fiscal Agent), notify the Fiscal Agent of such Redemption
Date, of the principal amount of Securities of such series to be redeemed and,
if applicable, of the tenor of the Securities to be redeemed. In the case of any
redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities, the Company shall furnish
the Fiscal Agent with an Officer's Certificate evidencing compliance with such
restriction.

           SECTION 8.3. Selection by Fiscal Agent of Securities to Be Redeemed.
If less than all the Securities of either series are to be redeemed (unless all
the Securities of such series and of a specified tenor are to be redeemed or
unless such redemption affects only a single Security), the particular
Securities to be redeemed shall be selected not more than 60 days or less than
30 days prior to the Redemption Date by the Fiscal Agent, from the Outstanding
Securities of such series not previously called for redemption, by such method
as the Fiscal Agent shall deem fair and appropriate and which may provide for
the selection for redemption of a portion of the principal amount of any
Security of such series, provided that the unredeemed portion of the principal
amount of any Security shall be in an authorized denomination (which shall not
be less than the minimum authorized denomination) for such Security. If less
than all the Securities of such series and of a specified tenor are to be
redeemed (unless such redemption affects only a single Security), the particular
Securities to be redeemed shall be selected not more than 60 days or less than
30 days prior to the Redemption Date by the Fiscal Agent, from the Outstanding
Securities of such series and specified tenor not previously called for
redemption in accordance with the preceding sentence.

           The Fiscal Agent shall promptly notify the Company in writing of the
Securities selected for redemption as aforesaid and, in case of any Securities
selected for

                                      -91-
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partial redemption as aforesaid, the principal amounts thereof to be redeemed.

          The provisions of the two preceding paragraphs shall not apply with
respect to any redemption affecting only a single Security, whether such
Security is to be redeemed in whole or in part. In the case of any such
redemption in part, the unredeemed portion of the principal amount of the
Security shall be in an authorized denomination (which shall not be less than
the minimum authorized denomination) for such Security.

          For all purposes of this Agreement, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amounts of such Securities which has been or is to be
redeemed.

          SECTION 8.4. Notice of Redemption. Notice of redemption shall be given
by first-class mail, postage prepaid, mailed not less than 30 nor more than 60
days prior to the Redemption Date, to each Holder of Securities to be redeemed,
at his address appearing in the Security Register.

          All notices of redemption shall state:

                 (1) the Redemption Date,

                 (2) the Redemption Price and the amount of any accrued and
           unpaid interest payable on the Redemption Date,

                 (3) the CUSIP or other identifying number of such Securities to
           be redeemed,

                 (4) if less than all the Outstanding Securities of any series
           consisting of more than a single Security are to be redeemed, the
           identification (and, in the case of partial redemption of any such
           Securities, the principal amounts) of the particular Securities to be
           redeemed and, if less than all the Outstanding Securities of any
           series consisting of a single Security are to be redeemed, the
           principal amount of the particular Security to be redeemed,

                                      -92-
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                 (5) that on the Redemption Date the Redemption Price (together
           with any accrued and unpaid interest payable on the Redemption Date)
           will become due and payable upon each such Security to be redeemed
           and, if applicable, that interest thereon will cease to accrue on and
           after said date,

                 (6) the place or places where such Securities are to be
           surrendered for payment of the Redemption Price, and accrued
           interest, if any, and

                 (7) that the redemption is for a sinking fund, if such is the
           case.

           Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Fiscal Agent in the name and at the expense of the Company and shall be
irrevocable.

           SECTION 8.5. Deposit of Redemption Price. On or before any Redemption
Date, the Company shall deposit with the Fiscal Agent or with a Paying Agent an
amount of money sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an Interest Payment Date) accrued interest on, all the
Securities which are to be redeemed on that date.

           SECTION 8.6. Securities Payable on Redemption Date. Notice of
redemption having been given as aforesaid, the Securities so to be redeemed
shall, on the Redemption Date, become due and payable at the Redemption Price
applicable thereto, and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. Upon surrender of any such Security for
redemption in accordance with said notice, such Security shall be paid by the
Company at the Redemption Price, together with accrued interest to the
Redemption Date; provided, however, that installments of interest whose Stated
Maturity is on or prior to the Redemption Date will be payable to the Holders of
such Securities, or one or more Predecessor Securities, registered as such at
the close of business on the relevant

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Record Date according to their terms and the provisions of Section 3.7.

           If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium shall, until
paid, bear interest from the Redemption Date at the rate prescribed therefor in
the terms of the Security.

           SECTION 8.7. Securities Redeemed in Part. Any Security which is to be
redeemed only in part shall be surrendered at a Place of Payment therefor (with,
if the Company or the Fiscal Agent so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Fiscal Agent
duly executed by, the Holder thereof or his attorney duly authorized in
writing), and the Company shall execute, the Guarantor shall execute the
notation of the Guarantee pursuant to Article XIII or the Guarantee endorsed on,
and the Fiscal Agent shall authenticate and deliver to the Holder of such
Security without service charge, a new Security or Securities of the same series
and of like tenor, of any authorized denomination as requested by such Holder,
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Security so surrendered.

           SECTION 8.8. Optional Redemption.

           The Securities shall be redeemable, in whole or in part at any time,
at the option of the Company on any date (a "Redemption Date"), at a Redemption
Price equal to the sum of (1) 100% of the principal amount of the Securities to
be redeemed plus accrued interest thereon to the Redemption Date and (2) the
Make-Whole Amount, if any, with respect to such Securities (the "Redemption
Price").

           From and after the date notice has been given as provided in Section
8.4, if funds for the redemption of any Securities called for redemption shall
have been made available on such Redemption Date, such Securities will cease to
bear interest on the date fixed for such redemption specified in such notice and
the only right of the Holders of those Securities, as the case may be, will be
to receive payment of the Redemption Price.

           As used in this Agreement, the term "Make-Whole Amount" means, in
connection with any optional redemption or

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accelerated payment of any Security, the excess, if any of (1) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated payment)
that would have been payable in respect of such dollar if such redemption or
accelerated payment had not been made, determined by discounting, on a semi-
annual basis, such principal and interest at the Reinvestment Rate (determined
on the third Business Day preceding the date such notice of redemption is given
or declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment had not been made, over (2) the aggregate principal amount of the
Securities being redeemed or paid.

           As used in this Agreement, the term "Reinvestment Rate" means, with
respect to the 7.95% Notes, 20 basis points and with respect to the 8.20% Notes,
25 basis points, plus the arithmetic mean of the yields under the respective
headings "This Week" and "Last Week" published in the Statistical Release under
the caption "Treasury Constant Maturities" for the maturity (rounded to the
nearest month) corresponding to the remaining life to maturity, as of the
payment date, of the principal being redeemed or paid. If no maturity exactly
corresponds to such maturity, yields for the two published maturities most
closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.

           As used in this Agreement, the term "Statistical Release" means the
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve System and which establishes yields on
actively traded U.S. government securities adjusted to constant maturities, or,
if such statistical release is not published at the time of any determination
under the Fiscal Agency Agreement, then such other reasonably comparable index
which shall be designated by the Company.

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           SECTION 8.9. Optional Redemption Due to Changes in Tax Treatment. If
as the result of any change in or any amendment to the laws, regulations or
published tax rulings of Australia, or of any political subdivision or taxing
authority thereof or therein, affecting taxation, or any change in the official
administration, application or interpretation by any Australian court or
tribunal, government or government authority of such laws, regulations or
published tax rulings either generally or in relation to any particular
Securities (or the Guarantee thereof), which change or amendment becomes
effective on or after the original issue date of the Securities and Guarantee or
which change in official administration, application or interpretation shall not
have been available to the public prior to such issue date, the Company or the
Guarantor would be required to pay any Additional Amounts pursuant to Section
5.6 of this Agreement in respect of interest on the next succeeding Interest
Payment Date (assuming, in the case of the Guarantor, a payment in respect of
such interest was required to be made by the Guarantor under the Guarantee
thereof on such Interest Payment Date), on which the Guarantor would be
unable, for reasons outside its control, to procure payment by the Company, and
the obligation to pay Additional Amounts cannot be avoided by the use of reason-
able measures available to the Company or the Guarantor, the Company or the
Guarantor may, at either of their options, redeem all (but not less than all)
the Securities of either series in respect of which such Additional Amounts
would be so payable at any time, upon notice as provided in Sections 8.2 and
8.4, at a Redemption Price equal to 100 percent of the principal amount thereof
plus all accrued and unpaid interest to the date fixed for redemption; provided,
however, that (a) no such notice of redemption may be given earlier than 60
days prior to the earliest date on which the Company or the Guarantor, as the
case may be, would be obligated to pay such Additional Amounts were a payment in
respect of the Securities or the Guarantee thereof then due, and (b) at the time
any such redemption notice is given, such obligation to pay such Additional
Amounts must remain in effect.

           Prior to any redemption of any Securities pursuant to this Section,
the Company or a Successor Person shall provide the Fiscal Agent with an Opinion
of Counsel that the conditions precedent to the right of the Company or a
Successor Person to redeem such Securities pursuant to this Section have
occurred and a certificate signed by an

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Authorized Officer stating that the obligation to pay Additional Amounts with
respect of such Securities, cannot be avoided by taking measures that the
Company or the Guarantor, as the case may be, believes are reasonable. Such
Opinion of Counsel shall be based on the laws and application and interpretation
thereof in effect on the date of such opinion or to become effective on or
before the next succeeding Interest Payment Date.

                                   ARTICLE IX

                                  FISCAL AGENT

           SECTION 9.1. Duties of Fiscal Agent. (a) The Fiscal Agent acts under
this Agreement solely as agent of the Company and does not assume any obligation
or relationship of agency or trust for or with the Holders of the Securities;
all funds held by the Fiscal Agent for the payment of principal of or interest
on, and any other amounts with respect to, the Securities need not be segre-
gated from other funds, except as required by law, and shall be applied as set
forth herein and in the Securities. The Fiscal Agent need perform only those
duties that are specifically set forth in this Agreement and no others.

           (b) In the absence of gross negligence or willful misconduct on its
part, the Fiscal Agent may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Fiscal Agent and conforming to the requirements of
this Agreement. However, the Fiscal Agent shall examine the certificates and
opinions to determine whether or not they conform to the requirements of this
Agreement, but need not verify the accuracy of the contents thereof.

           (c) The Fiscal Agent shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proven that the Fiscal
Agent was grossly negligent or acted with willful misconduct in ascertaining the
pertinent facts.

           (d) No provision of this Agreement shall require the Fiscal Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for

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believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.

        SECTION 9.2. Rights of Fiscal Agent. (a) In the absence of gross
negligence or willful misconduct, the Fiscal Agent may rely and shall be
protected in acting or refraining from acting upon any document reasonably
believed by it to be genuine and to have been signed or presented by the proper
person. The Fiscal Agent need not investigate any fact or matter stated in the
document.

        (b) Before the Fiscal Agent acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel. The Fiscal Agent shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel.

        (c) The Fiscal Agent shall not be liable for any action it takes or
omits to take in good faith without gross negligence or willful misconduct which
(i) is taken pursuant to any Company Order addressed and delivered to the Fiscal
Agent or (ii) the Fiscal Agent otherwise believes to be authorized or within
its rights or powers.

        (d) The Fiscal Agent may consult with counsel reasonably acceptable to
the Fiscal Agent, which may be counsel to the Company and the advice of such
counsel as to matters of law shall be full and complete authorization and
protection in respect of any action taken, omitted or suffered by it hereunder
in good faith without gross negligence or willful misconduct and in accordance
with the advice or opinion of such counsel.

        (e) The Fiscal Agent shall not be bound and shall have no duty to
ascertain or inquire as to the performance or observance of any covenants,
conditions or agreements on the part of the Company under this Agreement; but
the Fiscal Agent may require of the Company full information and advice as to
the performance or the covenants, conditions and agreements aforesaid.

        (f) The Fiscal Agent shall not be required to give any bond or surety in
respect of the execution of its trusts and powers or in respect of this
Agreement.

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   105

        SECTION 9.3. Individual Rights of Fiscal Agent. The Fiscal Agent in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company with the same rights the Fiscal Agent
would have if it were not Fiscal Agent. Any Agent may do the same with like
rights.

        SECTION 9.4. Fiscal Agent's Disclaimer. The Fiscal Agent makes no
representation as to the validity or adequacy of this Agreement or the
Securities, shall not be accountable for the Company's use of the proceeds from
the sale of the Securities or the use or application of any money received by
any Paying Agent other than the Fiscal Agent, and shall not be responsible for
any statement in the Securities other than the Fiscal Agent's certificate of
authentication.

        SECTION 9.5. Compensation and Indemnity. The Company shall from time to
time pay to the Fiscal Agent compensation for its services as agreed in writing
by the Company from time to time. The Fiscal Agent's compensation shall not be
limited by any law on compensation of a Fiscal Agent of an express trust. The
Company shall reimburse the Fiscal Agent, within 45 days after receiving request
therefor, for all reasonable out-of-pocket disbursements, fees and expenses
incurred by the Fiscal Agent in connection with the performance of its duties
under this Agreement, including the services rendered by it, under this
Agreement, and, without limitation, those incurred in connection with the
enforcement of any remedy hereunder or the interpretation of any provision
hereunder. Such expenses may include the reasonable compensation and
out-of-pocket expenses of the Fiscal Agent's agents and outside counsel.

        The Company shall defend and indemnify the Fiscal Agent for, and hold
the Fiscal Agent harmless against, any loss or liability incurred by it in
connection with its acting as Fiscal Agent under this Agreement. The Fiscal
Agent shall promptly notify the Company of any claim for which the Fiscal Agent
may seek indemnity. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.

        Notwithstanding any of the foregoing, the Company need not reimburse any
expense or indemnify against any loss or liability incurred by the Fiscal Agent
in connection with the Fiscal Agent's gross negligence or willful misconduct.

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        SECTION 9.6. Replacement of Fiscal Agent. A resignation or removal of
the Fiscal Agent and appointment of a successor Fiscal Agent shall become
effective only upon the successor Fiscal Agent's acceptance of appointment as
provided in this Section.

        The Fiscal Agent may resign at any time by giving 60 days' prior written
notice thereof to the Company. Either the Company or the Holders of a majority
in principal amount of the Securities may remove the Fiscal Agent at any time by
giving written notice thereof to the Fiscal Agent and, in the case where removal
is at the election of the Holders of a majority in principal aggregate amount of
the Securities, the Company.

        If the Fiscal Agent resigns or is removed or if a vacancy exists in the
office of Fiscal Agent for any reason, the Company shall promptly appoint a
successor Fiscal Agent.

        If a successor Fiscal Agent does not take office within 60 days after
the retiring Fiscal Agent resigns or is removed, the retiring Fiscal Agent or
the Company will appoint a successor Fiscal Agent.

        If the Fiscal Agent fails to comply with Section 9.8, the Company will
promptly appoint a successor Fiscal Agent.

        A successor Fiscal Agent shall deliver a written acceptance of its
appointment to the retiring Fiscal Agent and to the Company. Thereupon, the
retiring Fiscal Agent shall transfer all property held by it as Fiscal Agent to
the successor Fiscal Agent, the resignation or removal of the retiring Fiscal
Agent shall become effective, and the successor Fiscal Agent shall have all the
rights, powers and duties of the Fiscal Agent under this Agreement. The
successor Fiscal Agent shall mail a notice of its succession to Holders.

        SECTION 9.7. Successor Fiscal Agent, Agents by Merger, Etc. If the
Fiscal Agent or any Agent consolidates with, merges or converts into, or
transfers all or substantially all of its fiscal agency business to, another
corporation, the successor corporation without any further act shall be the
successor Fiscal Agent or Agent, as the case may be.

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   107

        SECTION 9.8. Eligibility. The Fiscal Agent shall have a combined capital
and surplus of at least $100 million as set forth in its most recent annual
report to its shareholders.

        SECTION 9.9. Notice of Defaults. If a Default occurs and is continuing
with respect to the Securities of either series and if it is known to a
Responsible Officer of the Fiscal Agent, the Fiscal Agent shall, within 90 days
after it occurs, transmit by mail to the Holders of Securities of such series
notice of all Defaults known to it unless such Default shall have been cured or
waived; provided, however; that except in the case of a Default in payment on
the Securities of either series, the Fiscal Agent may withhold the notice if and
so long as the board of directors, the executive committee or a committee of its
Responsible Officers in good faith determines that withholding such notice is
in the interests of Holders of Securities of that series; and provided, further,
that in the case of any Default of the character specified in Section 7.1(3)
with respect to Securities of such series, no such notice to Holders shall be
given until at least 30 days after the occurrence thereof.

                                    ARTICLE X

                       AMENDMENTS, SUPPLEMENTS AND WAIVERS

        SECTION 10.1. Without Consent of Holders. The Company, the Guarantor and
the Fiscal Agent may, at any time and from time to time, amend, supplement or
modify this Agreement or either series of the Securities without the consent of
any Holder for the purpose of:

                (1) adding to the covenants of the Company or the Guarantor for
        the benefit of the Holders of such series; or

                (2) surrendering any right or power conferred on the Company or
        the Guarantor; or

                (3) securing the Securities of such series; or

                (4) evidencing the succession of another entity to the Company
        or the Guarantor and the assumption by any such successor of the
        covenants and obligations of

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   108

        the Company or the Guarantor herein and in the Securities or the
        Guarantee of such series as permitted by this Agreement and the
        Securities; or

                (5) modifying the restrictions on, and procedures for, resale
        and other transfers of the Securities of such series to the extent
        required by any change in applicable law or regulation, or the
        interpretation thereof, or in the practices relating to the resale or
        transfer of restricted securities generally; or

                (6) accommodating the issuance, if any, of the Securities of
        such series in global or definitive form and matters related thereto
        which do not materially adversely affect the interest of any Holder; or

                (7) curing any ambiguity or correcting or supplementing any
        defective provision herein or in the Securities of such series in a
        manner which does not materially adversely affect the interests of any
        Holder; or

                (8) effecting any amendment which the Company, the Guarantor and
        the Fiscal Agent may determine is necessary or desirable and which shall
        not materially adversely affect the interest of any Holder.

        SECTION 10.2. With Consent of Holders. The Company, the Guarantor and
the Fiscal Agent may amend, supplement or modify this Agreement and either
series of the Securities (i) with the written consent of the Holders of at least
a majority in aggregate principal amount of such series of the Securities then
outstanding or (ii) upon the adoption of a resolution, at meetings of Holders of
such series of the Securities held pursuant to Article X at which, in each case,
a quorum is present, by the Holders of not less than a majority in principal
amount of the Securities of the applicable series. In addition, the Holders of a
majority in aggregate principal amount of the Securities of either series may
waive compliance by the Company or the Guarantor with any provision of this
Agreement and either series of the Securities, either by written consent or by
affirmative vote at meetings of Holders as described above. Without the written
consent or affirmative vote of each Holder affected, no amendment, supplement,
modification or waiver under this Section may:

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   109

                (1) change the Stated Maturity date of the principal of, or the
        dates for payment of interest on, any Security;

                (2) reduce the principal amount of, or interest rate on, any
        Security;

                (3) change the place or currency of payment of principal of, or
        interest on, any Security;

                (4) change the Guarantor's obligations under Section 5.2 hereof;

                (5) impair any right to institute suit for the enforcement of
        any payment on or with respect to any Security;

                (6) reduce the percentage in principal amount of Securities, the
        consent of whose Holders is required to amend, supplement or modify this
        Agreement or the Securities or to make, take or give any request,
        demand, authorization, direction, notice, consent, waiver (including
        waiver of future compliance or past failure to perform) or other action
        provided thereby to be made, taken or given;

                (7) reduce the percentage of aggregate principal amount of
        outstanding Securities that constitutes the quorum at any meeting of
        Holders at which a resolution is adopted;

                (8) modify the rank of the Securities or any ranking provision
        of any Security in a manner adverse to the Holder; or

                (9) change the redemption price payable upon any optional
        redemption of any Security in a manner adverse to the Holders.

        It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof. The Company may establish, by delivery of an Officers' Certificate to
the Fiscal Agent, a record date for determining Holders of record entitled
to give any consent or waiver.

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   110

        After an amendment or supplement under this Section becomes effective,
the Fiscal Agent shall mail to Holders a notice briefly describing the amendment
or supplement. Any failure of the Fiscal Agent to mail each such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any supplemental agreement.

        SECTION 10.3. Revocation and Effect of Consents. Until an amendment,
supplement or waiver becomes effective, a written consent to it by a Holder of a
Security is a continuing consent by the Holder and every subsequent Holder of a
Security or portion of a Security that evidences the same debt as the consenting
Holder's Security, even if notation of the consent is not made on any Security.
However, any such Holder or subsequent Holder may revoke the written consent as
to such Security or portion of a Security if a Responsible Officer of the Fiscal
Agent receives the notice of revocation before the date the amendment,
supplement or waiver becomes effective. An amendment, supplement or waiver
becomes effective in accordance with its terms and thereafter binds every
Holder. Notwithstanding the foregoing, if a record date has been established for
the purpose of determining Holders entitled to consent, such written notice of
revocation must be signed by the Holder of record as of the record date or his
duly appointed proxy.

        SECTION 10.4. Notation on or Exchange of Securities. The Fiscal Agent
may place an appropriate notation relating to an amendment, supplement or waiver
on any Security thereafter authenticated. The Company in exchange for all
Securities may issue, and the Fiscal Agent shall authenticate, new Securities of
the same series that reflect the amendment, supplement or waiver.

        SECTION 10.5. Fiscal Agent to Sign Amendments, Etc. In executing, or
accepting the additional obligations created by any supplemental agreement
permitted by this Article or the modifications thereby of the obligations
created by this Agreement, the Fiscal Agent shall be entitled to receive, and
(subject to the rights and limitations of Article X) shall be fully protected in
relying upon, an Opinion of Counsel and an Officers' Certificate stating that
the execution of such supplemental agreement is authorized or permitted by this
Agreement.

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   111

        The Fiscal Agent shall sign any amendment or supplement authorized
pursuant to this Article, provided that the Fiscal Agent receives an Opinion of
Counsel stating that the amendment or supplement does not adversely affect the
rights of the Fiscal Agent. If the amendment or supplement does adversely affect
the Fiscal Agent's rights, the Fiscal Agent may, but need not, sign it.

                                   ARTICLE XI

                               MEETINGS OF HOLDERS

        SECTION 11.1. Purposes for Which Meetings May Be Called. A meeting of
Holders of either series of the Securities may be called at any time and from
time to time pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Agreement to be made, given or taken by Holders of the Securities.

        SECTION 11.2. Call, Notice and Place of Meetings. The Company may at any
time, and at the written request and direction of the Holders of at least 25% of
the aggregate principal amount of the Securities of either series at any time,
the Fiscal Agent shall on behalf of such Holders, transmit a notice of a meeting
of Holders of the Securities of the specified series for any purpose specified
in Section 11.1 hereof. Each such meeting shall be held at such time and at such
place in New York, New York or Des Moines, Iowa as the Company or the Holders
calling such meeting shall determine. Notice of any such meeting of Holders of
the Securities of the applicable series, setting forth the time and the place of
such meeting and, in general terms, the action proposed to be taken at such
meeting, shall be given by the Company to the Fiscal Agent and the Holders of
the Securities of the applicable series, or by the Fiscal Agent (on behalf and
at the direction of the Holders calling the meeting) to the Company and the
Holders of the applicable series of the Securities, not less than 30 nor more
than 60 days prior to the date fixed for the meeting. If the Fiscal Agent shall
not have given notice of any meeting as directed by the requisite Holders within
21 days after receiving such direction, such Holders may call a meeting of the
Holders of the applicable series of the Securities generally by giving written
notice thereof to the Company,

                                     -105-

   112

the Fiscal Agent and the Holders of the applicable series of the Securities in
the manner described above.

        SECTION 11.3. Persons Entitled to Vote at Meetings. To be entitled to
vote at any meeting of Holders of Securities of a particular series, a Person
shall be (i) a Holder of the Securities of the applicable series or (ii) a
Person appointed by an instrument in writing as proxy for a Holder or Holders of
one or more of the Securities of the applicable series. The only Persons who
shall be entitled to be present or to speak at any meeting of Holders shall be
the Persons entitled to vote at such meeting and their counsel, any
representatives of the Fiscal Agent and its counsel, and any representatives of
the Company and the Guarantor, and their counsel.

        SECTION 11.4. Quorum. At any meeting of the Holders of Securities of a
particular series, a majority in aggregate principal amount of the applicable
series of the Securities shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of the applicable series of the
Securities, be dissolved. In any other case the meeting may be adjourned for a
period of not less than 10 days as determined by the chairman of the meeting
prior to the adjournment of such meeting. In the absence of a quorum at any such
adjourned meeting, such adjourned meeting may be further adjourned for a period
of not less than 10 days as determined by the chairman of the meeting prior to
the adjournment of such adjourned meeting. Notice of the reconvening of any
adjourned meeting shall be given as provided in Section 11.2, except that such
notice need be given only once not less than five days prior to the date on
which the meeting is scheduled to be reconvened.

        Any action taken at any meeting of Holders of the Securities of a
particular series duly held in accordance with this Section, if taken by the
Holders of an aggregate principal amount of the applicable series of the
Securities required for such action by this Agreement, shall be binding on all
the Holders of the applicable series of the Securities whether or not present or
represented at the meeting.

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   113

        SECTION 11.5. Action by Written Consent. Any action required or
permitted to be taken by the Holders of either series of the Securities may be
effected by consent in writing by such Holders of the Securities.

        SECTION 11.6. Determination of Voting Rights; Conduct and Adjournment of
Meetings. (a) Notwithstanding any other provisions of this Agreement, the
Company may make such reasonable regulations as it may deem advisable for any
meeting of Holders of the Securities in regard to proof of the holding of the
Securities and of the appointment of proxies and in regard to the appointment
and duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall deem appropriate. Such
regulations may provide that written instruments appointing proxies, regular on
their face, may be presumed valid and genuine without other proof.

        (b) The Company shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Holders of the Securities, in which case the Holders of the Securities calling
the meeting shall in like manner appoint a temporary chairman. A permanent
chairman and a permanent secretary of the meeting shall be elected by vote of
the Persons entitled to vote a majority in principal amount of the Securities
represented at the meeting.

        (c) At any meeting each Holder of a Security of the applicable series or
proxy therefor shall be entitled to one vote for each $1,000 principal amount of
the Securities of the applicable series held or represented by such Holder;
provided that no vote shall be cast or counted at any meeting in respect of any
Security ruled by the chairman of the meeting to be not outstanding or otherwise
not entitled to vote. The chairman of the meeting shall have no right to vote,
except as a Holder of a Security of the applicable series or proxy.

        (d) Any meeting of Holders of the Securities duly called pursuant to
Section 11.2 at which a quorum is present may be adjourned from time to time by
Persons entitled to vote a majority in principal amount of the Securities of the
applicable series represented at the meeting, and such meeting may be held as so
adjourned without further notice.

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   114

        SECTION 11.7. Counting Votes and Recording Action of Meetings. The vote
upon any resolution submitted to any meeting of Holders of the Securities shall
be by written ballots on which shall be subscribed the signatures of the Holders
of the Securities or their representatives by proxy and the principal amounts
and serial numbers, if applicable, of the Securities held or represented by
them. The permanent chairman of the meeting shall appoint two inspectors of
votes who shall count all votes cast at the meeting for or against any
resolution and who shall make and file with the secretary of the meeting their
verified written reports in triplicate of all votes cast at the meeting. A
record, at least in triplicate, of the proceedings of each meeting of Holders of
the Securities shall be prepared by the secretary of the meeting and there shall
be attached to said record the original reports of the inspectors of votes on
any vote by ballot taken at such meeting and affidavits by one or more persons
having knowledge of the facts setting forth a copy of the notice of the meeting
and showing that said notice was given as provided in Section 11.2 and, if
applicable, Section 11.4 hereof. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to each of the Company and the Fiscal Agent, the latter
to have attached thereto the ballots voted at the meeting. Any record so signed
and verified shall be presumptive evidence of the matters therein stated.

                                   ARTICLE XII

                                    GUARANTEE

        SECTION 12.1. Guarantee.

        The Guarantor hereby unconditionally guarantees to each Holder of a
Security authenticated and delivered by the Fiscal Agent, and to the Fiscal
Agent on behalf of such Holder, the due and punctual payment of the principal of
(and premium, if any) and interest on such Security when and as the same shall
become due and payable, whether at the Stated Maturity or by acceleration, call
for redemption, purchase or otherwise, in accordance with the terms of such
Security and of this Fiscal Agency Agreement. In case of the failure of the
Company punctually to make any such payment, the Guarantor hereby agrees to
cause such payment to be made punctually when and as the same shall become due

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and payable, whether at the Stated Maturity or by acceleration, call for
redemption, purchase or otherwise, and as if such payment were made by the
Company.

        All payments pursuant to the Guarantee shall be made without withholding
or deduction for, or on account of, any present or future taxes, duties,
assessments or governmental charges of whatever nature imposed or levied by or
on behalf of the Commonwealth of Australia or any political subdivision or
taxing authority thereof or therein, unless such taxes, duties, assessments or
governmental charges are required by Australia or any political subdivision or
taxing authority thereof or therein to be withheld or deducted. In that event,
the Guarantor will pay such additional amounts of, or in respect of, payments
pursuant to the Guarantee ("Additional Amounts") as will result (after deduction
of such taxes, duties, assessments or governmental charges and any additional
taxes, duties, assessments or governmental charges payable in respect of such)
in the payment to the Holder of each Security of the amounts which would have
been payable in respect of the Guarantee had no such withholding or deduction
been required, except that no Additional Amounts shall be so payable for or on
account of:

        (1) any tax, duty, assessment or other governmental charge which would
    not have been imposed but for the fact that such Holder: (A) was a resident,
    domiciliary or national of, or engaged in business or maintained a permanent
    establishment or was physically present in, Australia or otherwise had some
    connection with Australia other than the mere ownership of, or receipt of
    payment under such Security or Guarantee; (B) presented such Security or
    Guarantee for payment in Australia, unless such Security or Guarantee could
    not have been presented for payment elsewhere; or (C) presented such
    Security or Guarantee, as the case may be, more than thirty (30) days after
    the date on which the payment in respect of such Security first became due
    and payable or provided for, whichever is later, except to the extent that
    the Holder would have been entitled to such Additional Amounts if it had
    presented such Security or Guarantee for payment on any day within such
    period of thirty (30) days;

        (2) any estate, inheritance, gift, sales, transfer, personal property or
    similar tax, assessment

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or other governmental charge or any withholding or deduction on account of such
taxes;

        (3) any tax, assessment or other governmental charge which is payable
    otherwise than by withholding or deduction from payments pursuant to the
    Guarantee;

        (4) any tax, assessment or other governmental charge that is imposed or
    withheld by reason of the failure to comply by the Holder or the beneficial
    owner of such Security with a request of the Company or the Guarantor
    addressed to such Holder or beneficial owner, as the case may be, (A) to
    provide information concerning the nationality, residence or identity of
    such Holder or such beneficial owner or (B) to make any declaration or other
    similar claim or satisfy any information or reporting requirement, which, in
    the case of (A) or (B), is required or imposed by a statute, treaty,
    regulation or administrative practice of Australia or any political
    subdivision or taxing authority thereof or therein as a precondition to
    exemption from all or part of such withholding, deduction, tax, assessment
    or other governmental charge;

        (5) any withholding, deduction, tax, assessment or other governmental
    charge which is imposed or withheld by reason of such Holder being an
    associate of the Company or the Guarantor for the purposes of Section 128(F)
    of the Income Tax Assessment Act 1936 of Australia;

        (6) a determination by the Commissioner of Taxation that Australian
    interest withholding tax is payable in respect of the amount in the
    circumstances where the Holder or such entity, or a person on behalf of the
    Holder or such entity, is party to or participated in a scheme to avoid
    Australian interest withholding tax, being a scheme which the Company
    neither was party to nor participated in; or

        (7) any combination of items (l), (2), (3), (4), (5) and (6);

nor shall Additional Amounts be paid with respect to any payments pursuant to
the Guarantee to any such Holder who is a fiduciary or partnership or other than
the sole beneficial

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owner of such payment to the extent such payment would be required by the laws
of Australia or any political subdivision or taxing authority thereof or therein
to be included in the income for tax purposes of a beneficiary or settlor with
respect to such fiduciary or a member of such partnership or a beneficial owner,
any of whom would not have been entitled to such Additional Amounts had it been
the Holder of the Security.

        Whenever in this Agreement there is mentioned, in any context, any
payments pursuant to the Guarantee, such mention shall be deemed to include
mention of the payment of Additional Amounts provided for in this Section to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof pursuant to the provisions of this Section, and any express
mention of the payment of Additional Amounts in any provisions hereof shall not
be construed as excluding Additional Amounts in those provisions hereof where
such express mention is not made.

        At least 10 days prior to each date on which any payment pursuant to the
Guarantee is due and payable, if the Guarantor will be obligated to pay
Additional Amounts with respect to such payment, the Guarantor will deliver to
the Fiscal Agent and the Paying Agent an Officer's Certificate stating the fact
that such Additional Amounts will be payable and the amounts so payable and will
set forth such other information necessary to enable the Fiscal Agent and such
Paying Agent to pay such Additional Amounts to the Holders on the payment date;
provided, however, that if 10 days prior to each date on which any such payment
is due and payable the amount of such payment has not yet been determined, the
Guarantor shall notify the Fiscal Agent of such amount promptly after such
amount has been determined.

        The Guarantor hereby agrees that its obligations hereunder shall be
unconditional, irrespective of (i) the validity, regularity or enforceability of
any Security or this Fiscal Agency Agreement, (ii) the absence of any action to
enforce the same, (iii) any creation, exchange, release or non-perfection of any
Lien on any collateral for, or any release or amendment or waiver of any term of
any other Guarantee of, or any consent to departure from any requirement of any
other Guarantee, of all or any of the Securities, (iv) the election by the
Fiscal Agent or any of the Holders in any proceeding under Chapter 11 of Title
11 of the United States Code (the "Bankruptcy Code") of the

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application of Section 1111(b)(2) of the Bankruptcy Code, (v) any borrowing or
grant of a security interest by the Company, as debtor-in-possession, under
Section 364 of the Bankruptcy Code, (vi) the disallowance, under Section 502 of
the Bankruptcy Code, of all or any portion of the claims of the Fiscal Agent or
any of the Holders for payment of any of the Securities, (vii) any waiver or
consent by the Holder of any Security or by the Fiscal Agent with respect to any
provisions thereof or of this Fiscal Agency Agreement, (viii) the obtaining of
any judgment against the Company or any action to enforce the same or (ix) any
other circumstances which might otherwise constitute a legal or equitable
discharge or defense of a guarantor. For purposes of clauses (iv), (v) and (vi)
of the foregoing sentence, references to sections of the Bankruptcy Code shall
be deemed to include any equivalent or like provisions of Australian or Iowa law
which might be applicable to the Company or the Guarantor, as the case may be.
The Guarantor hereby waives the benefits of diligence, presentment, demand of
payment, any requirement that the Fiscal Agent or any of the Holders protect,
secure, perfect or insure any security interest in or other Lien on any property
subject thereto or exhaust any right or take any action against the Company or
any other Person or any collateral, filing of claims with a court in the event
of insolvency or bankruptcy of the Company, any right to require a proceeding
first against the Company, protest or notice with respect to any Security or the
indebtedness evidenced thereby and all demands whatsoever, and covenants, that
this Guarantee will not be discharged in respect of any Security except by
complete performance of the obligations contained in such Security and in this
Guarantee. The Guarantor hereby agrees that, in the event of a default in
payment of principal (or premium, if any) or interest on any Security, whether
at its Stated Maturity or by acceleration, call for redemption, purchase or
otherwise, legal proceedings may be instituted by the Fiscal Agent on behalf of,
or by, the Holder of such Security, subject to the terms and conditions set
forth in this Fiscal Agency Agreement, directly against the Guarantor to enforce
its Guarantee without first proceeding against the Company. The Guarantor agrees
that if, after the occurrence and during the continuance of an Event of Default,
the Fiscal Agent or any of the Holders are prevented by applicable law from
exercising their respective rights to accelerate the maturity of the Securities,
to collect interest on the Securities or to enforce or exercise any other right
or remedy with respect to the Securities, or

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the Fiscal Agent or the Holders are prevented from taking any action to realize
on any collateral, the Guarantor agrees to pay to the Fiscal Agent for the
account of the Holders, upon demand therefor, the amount that would otherwise
have been due and payable had such rights and remedies been permitted to be
exercised by the Fiscal Agent or any of the Holders.

        No provision of any Guarantee or Security or of the Fiscal Agency
Agreement shall alter or impair the Guarantee of the Guarantor, which
is absolute and unconditional, of the due and punctual payment of the
principal (and premium, if any) and interest on the Security upon which such
Guarantee is endorsed.

        The Guarantor shall be subrogated to all rights of the Holders of the
Securities upon which the Guarantee is endorsed against the Company in respect
of any amounts paid by the Guarantor on account of such Security pursuant to the
provisions of the Guarantee or this Fiscal Agency Agreement; provided, however,
that the Guarantor shall not, without the consent of the Holders of all the
Outstanding Securities, be entitled to enforce or to receive any payments
arising out of, or based upon, such right of subrogation until the principal of
(and premium, if any) and interest on all Securities issued hereunder shall have
been paid in full.

        Each Guarantee shall remain in full force and effect and continue to be
effective should any petition be filed by or against the Company for liquidation
or reorganization, should the Company become insolvent or make an assignment for
the benefit of creditors or should a receiver or trustee be appointed for all or
any significant part of the assets of the Company and shall, to the fullest
extent permitted by law, continue to be effective or be reinstated, as the case
may be, if at any time payment and performance of the Securities is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee on the Securities, whether as a "voidable preference,"
"fraudulent transfer" or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Securities shall, to the fullest
extent permitted by law, be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.

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        No stockholder, officer, director, employer or incorporator, past,
present or future, of the Guarantor, as such, shall have any personal liability
under any Guarantee by reason of his, her or its status as such stockholder,
officer, director, employer or incorporator.

        SECTION 12.2. Execution and Delivery of Guarantee.

        The Guarantee to be endorsed on the Securities shall include the terms
of the Guarantee set forth in Section 12.1 and any other terms that may be set
forth in the form established pursuant to Section 2.8. The Guarantor hereby
agrees to execute the Guarantee, in a form established pursuant to Section 2.8,
to be endorsed on each Security authenticated and delivered by the Fiscal Agent.

        The Guarantee shall be executed on behalf of the Guarantor by any two of
the Guarantor's Chairman of the Board, Vice Chairman of the Board, President or
Vice Presidents, attested by its Secretary, Assistant Secretary or any of its
Vice Presidents. The signature of any or all of these officers on the Guarantee
may be manual or facsimile and may be pursuant to a duly executed power of
attorney.

        A Guarantee bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Guarantor shall bind the
Guarantor, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of the Security on
which such Guarantee is endorsed or did not hold such offices at the date of
such Guarantee.

        The delivery of any Security by the Fiscal Agent, after the
authentication thereof hereunder, shall constitute due delivery of the Guarantee
endorsed thereon on behalf of the Guarantor. The Guarantor hereby agrees that
its Guarantee set forth in Section 12.1 shall remain in full force and effect
notwithstanding any failure to endorse a Guarantee on any Security.

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                                  ARTICLE XIII

                             ASSUMPTION BY GUARANTOR

        SECTION 13.1. Mandatory Assumption by Guarantor upon Failure to
Consummate Acquisition. The Guarantor has agreed that if the sale and purchase
of the Sale Shares pursuant to the Acquisition Agreement does not occur before
August 25, 2000, the Guarantor shall assume all of the obligations of the
Company under this Agreement and the Securities in accordance with the
Assumption Agreement a copy of which is attached as Annex E.

        SECTION 13.2. Optional Assumption by Guarantor. (a) With the consent of
the Company, the Guarantor may assume the obligations of the Company under this
Agreement and the Securities without the consent of the Holders, provided that:
(i) the Guarantor shall expressly assume the due and punctual payment of the
principal of, premium (if any) and interest on the Securities and the due and
punctual performance of all the Company's covenants and conditions under this
Agreement and the Securities, (ii) immediately after giving effect to such
assumption by the Guarantor of the obligations of the Company under this
Agreement or the Securities, no Default shall exist in the performance of any of
the covenants and conditions under this Agreement or the Securities, and (iii)
the Guarantor shall have delivered and Officer's Certificate and an Opinion of
Counsel, each stating that such assumption complies with this Agreement and that
all conditions precedent herein provided for relating to such transaction have
been complied with.

        (b) Upon assumption by the Guarantor as stated in the above paragraph,
the Guarantor shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the Issuer of the Securities and party
to this Agreement, and the Company shall be relieved of any further obligation
under the Securities and this Agreement.

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                                   ARTICLE XIV

                       DEFEASANCE AND COVENANT DEFEASANCE

        SECTION 14.1. Option of Company and Guarantor to Effect Defeasance or
Covenant Defeasance. The Company or the Guarantor may elect, at their option at
any time, to have Section 14.2 or Section 14.3 applied to any Securities or any
series of Securities, as the case may be, upon compliance with the conditions
set forth below in this Article. Any such election shall be evidenced by a Board
Resolution.

        SECTION 14.2. Defeasance and Discharge. Upon the exercise by either the
Company or the Guarantor of their option (if any) to have this Section applied
to any Securities or any series of Securities, as the case may be, the Company
and the Guarantor shall be deemed to have been discharged from their respective
obligations with respect to such Securities as provided in this Section on and
after the date the conditions set forth in Section 14.4 are satisfied
(hereinafter called "Defeasance"). For this purpose, such Defeasance means that
the Company and the Guarantor shall be deemed to have paid and discharged the
entire indebtedness represented by such Securities and to have satisfied all
their other obligations under such Securities and this Fiscal Agency Agreement
insofar as such Securities are concerned (and the Fiscal Agent, at the expense
of the Company and the Guarantor, shall execute proper instruments acknowledging
the same), subject to the following which shall survive until otherwise
terminated or discharged hereunder: (1) the rights of Holders of such Securities
to receive, solely from the trust fund described in Section 14.4 and as more
fully set forth in such Section, payments in respect of the principal of and any
premium and interest on such Securities when payments are due, (2) the
obligations of the Company and the Guarantor with respect to such Securities
under Sections 2.9(b), 3.4, 3.5 and 3.6, and with respect to the payment of
Additional Amounts, if any, on such Securities as contemplated by Section 5.6,
(3) the rights, powers, trusts, duties and immunities of the Fiscal Agent
hereunder and (4) this Article. Subject to compliance with this Article, the
Company or the Guarantor may exercise their option (if any) to have this Section
applied to any Securities notwithstanding the prior exercise of its option (if
any) to have Section 14.3 applied to such Securities.

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        SECTION 14.3. Covenant Defeasance. Upon exercise by either the Company
or the Guarantor of their option (if any) to have this Section applied to any
Securities or any series of Securities, as the case may be, (1) the Company and
the Guarantor shall be released from their obligations under Section 6.1(4),
Sections 5.7 and 5.8, and any covenants provided pursuant to Section 10.1(l) for
the benefit of the Holders of such Securities and (2) the occurrence of any
event specified in Sections 7.1(3) (with respect to any of Section 6.1(4),
Section 5.7 and 5.8, and any such covenants provided pursuant to Section
10.1(l)) shall be deemed not to be or result in an Event of Default, in each
case with respect to such Securities as provided in this Section on and after
the date the conditions set forth in Section 14.4 are satisfied (hereinafter
called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means
that, with respect to such Securities, the Company and the Guarantor may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such specified Section (to the extent so specified
in the case of Section 7.1(3)), whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or by reason of any reference in
any such Section to any other provision herein or in any other document, but the
remainder of this Fiscal Agency Agreement and such Securities shall be
unaffected thereby.

        SECTION 14.4. Conditions to Defeasance or Covenant Defeasance. The
following shall be the conditions to application of either Section 14.2 or
Section 14.3 to the then Outstanding Securities:

                (a) The Company shall irrevocably have deposited or caused to be
        deposited with the Fiscal Agent (or another fiscal agent satisfying the
        requirements of Section 9.8 who shall agree to comply with the
        provisions of this Article XIV applicable to it) as trust funds in trust
        for the purpose of making the following payments, specifically pledged
        as security for, and dedicated solely to, the benefit of the Holders of
        such Securities, (A) money in an amount, or (B) U.S. Government
        Obligations which through the scheduled payment of principal and
        interest in respect thereof in accordance with their terms will provide,
        not later than one day before the due date of any payment, money in an
        amount, or (C) a combination thereof, sufficient, in the opinion of an

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        internationally recognized firm of independent public accountants
        expressed in a written certification thereof delivered to the Fiscal
        Agent, to pay and discharge, and which shall be applied by the Fiscal
        Agent (or other qualifying fiscal agent) to pay and discharge, the
        principal of and each instalment of interest, including Additional
        Amounts, if any, on the Securities on the Stated Maturity of such
        principal or instalment of interest in accordance with the terms of this
        Fiscal Agent and of such Securities. For this purpose, "U.S. Government
        Obligations" means securities that are (x) direct obligations of the
        United States of America for the payment of which its full faith and
        credit is pledged or (y) obligations of a Person controlled or
        supervised by and acting as an agency or instrumentality of the United
        States of America the payment of which is unconditionally guaranteed as
        a full faith and credit obligation by the United States of America,
        which, in either case, are not callable or redeemable at the option of
        the issuer thereof, and shall also include a depository receipt issued
        by a bank (as defined in Section 3(a)(2) of the Securities Act) as
        custodian with respect to any such U.S. Government Obligation or a
        specific payment of principal of or interest on any such U.S.
        Government Obligation held by such custodian for the account of the
        holder of such depository receipt, provided that (except as required by
        law) such custodian is not authorized to make any deduction from the
        amount payable to the holder of such depository receipt from any amount
        received by the custodian in respect of the U.S. Government Obligation
        or the specific payment of principal of or interest on the U.S.
        Government Obligation evidenced by such depository receipt.

                (b) In the case of an election under Section 14.2, the Company
        shall have delivered to the Fiscal Agent (i) an Opinion of U.S. Counsel
        stating that (x) the Company has received from, or there has been
        published by, the United States Internal Revenue Service a ruling, or
        (y) since the date of this Fiscal Agency Agreement there has been a
        change in the applicable United States Federal income tax law, in either
        case to the effect that, and based thereon such opinion shall confirm
        that, the Holders of the Outstanding Securities will not recognize
        income, gain or loss for United States Federal income tax or other

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        tax purposes as a result of such deposit, defeasance and discharge and
        will be subject to United States Federal income tax on the same amounts,
        in the same manner and at the same times as would have been the case if
        such deposit, defeasance and discharge had not occurred, (ii) an Opinion
        of Australian Counsel stating that the Company has received a ruling
        from a relevant Australian taxing authority to the effect that holders
        of the Securities will not recognize income, gain or loss for Australian
        income tax purposes as a result of such deposit, defeasance and
        discharge and will be subject to Australian income tax on the same
        amounts, in the same manner and at the times as would have been the case
        if such deposit, defeasance and discharge had not occurred, and (iii) an
        Opinion of U.S. Counsel, in the event the defeasance trust is governed
        by U.S. law, or Australian Counsel, in the event the defeasance trust is
        governed by Australian law, to the effect that, under the laws in the
        United States or Australia, as the case may be, in effect at the time of
        such deposit, payments made from the defeasance trust would not require
        the payment of Additional Amounts if the provisions of Section 5.6 above
        were applicable to such payments.

                (c) In the case of an election under Section 14.3, the Company
        shall have delivered to the Fiscal Agent (i) an Opinion of U.S. Counsel
        (which may be based upon an Internal Revenue Service ruling) to the
        effect that the Holders of the Outstanding Securities will not recognize
        income, gain or loss for United States Federal income tax or other tax
        purposes as a result of such deposit and covenant defeasance and will be
        subject to United States Federal income tax on the same amounts, in the
        same manner and at the same times as would have been the case if such
        deposit and covenant defeasance had not occurred, (ii) an Opinion of
        Australian Counsel (which may be based on a ruling from the relevant
        Australian taxing authority) to the effect that the holders of the
        Securities will not recognize income, gain or loss for Australian income
        tax purposes as a result of such deposit and defeasance and will be
        subject to Australian income tax on the same amounts, in the same manner
        and at the same times as would have been the case if such deposit and
        covenant defeasance had not occurred, and (iii) an Opinion of U.S. and
        Australian Counsel to the effect

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   126

        that, under the respective laws in the U.S. and Australia in effect at
        the time of such deposit, payments made from the defeasance trust would
        not require the payment of Additional Amounts if the provisions of
        Section 5.6 above were applicable to such payments.

                (d) The Company shall have delivered to the Fiscal Agent an
        Officer's Certificate to the effect that the Securities of the
        applicable series if then listed on any securities exchange, will not be
        delisted as a result of such deposit.

                (e) No Event of Default or event which with notice or lapse of
        time or both would become an Event of Default shall have occurred and be
        continuing on the date of such deposit or, insofar as subsections 7.1(5)
        and (6) are concerned, at any time during the period ending on the 121st
        day after the date of such deposit (it being understood that this
        condition shall not be deemed satisfied until the expiration of such
        period).

                (f) Such defeasance or covenant defeasance shall not result in a
        material breach of, or constitute a material default under, any other
        agreement or instrument evidencing Debt of the Company or a Restricted
        Subsidiary to which the Company is a party or by which it is bound.

                (g) The Company shall have delivered to the Fiscal Agent an
        Officers' Certificate and an Opinion of Counsel, each stating that all
        conditions precedent provided for relating to either the defeasance
        under Section 14.2 or the covenant defeasance under Section 14.3 (as the
        case may be) have been complied with.

                (h) The Company shall have delivered to the Fiscal Agent an
        Opinion of Counsel to the effect that such defeasance or covenant
        defeasance shall not result in the trust arising from such deposit to be
        subject to regulation as an investment company under the United States
        Investment Company Act of 1940, as amended, or such trust shall be
        qualified under such act.

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        SECTION 14.5. Deposited Money and U.S. Government Obligations to Be Held
in Trust; Miscellaneous Provisions. All money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Fiscal Agent or other
qualifying fiscal agent (solely for purposes of this Section and Section 14.6,
the Fiscal Agent and any such other fiscal agent are referred to collectively as
the "Fiscal Agent") pursuant to Section 14.4 in respect of any Securities shall
be held in trust and applied by the Fiscal Agent, in accordance with the
provisions of such Securities and this Fiscal Agency Agreement, to the payment,
either directly or through any such Paying Agent (including the Company or the
Guarantor acting as its own Paying Agent) as the Fiscal Agent may determine, to
the Holders of such Securities, of all sums due and to become due thereon in
respect of principal and any premium and interest, but money so held in trust
need not be segregated from other funds except to the extent required by law.

        The Company or the Guarantor shall pay and indemnify the Fiscal Agent
against any tax, fee or other charge imposed on or assessed against the U.S.
Government Obligations deposited pursuant to Section 14.4 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of Outstanding Securities.

        Anything in this Article to the contrary notwithstanding, the Fiscal
Agent shall deliver or pay to the Company or the Guarantor from time to time
upon Company Request any money or U.S. Government Obligations held by it as
provided in Section 14.4 with respect to any Securities which, in the opinion of
a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Fiscal Agent, are in excess of
the amount thereof which would then be required to be deposited to effect the
Defeasance or Covenant Defeasance, as the case may be, with respect to such
Securities.

        SECTION 14.6. Reinstatement. If the Fiscal Agent or the Paying Agent is
unable to apply any money in accordance with this Article with respect to any
Securities by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the obligations under this Fiscal Agency Agreement and such Securities from
which

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the Company and the Guarantor have been discharged or released pursuant to
Section 14.2 or 14.3 shall be revived and reinstated as though no deposit had
occurred pursuant to this Article with respect to such Securities, until such
time as the Fiscal Agent or Paying Agent is permitted to apply all money held in
trust pursuant to Section 14.5 with respect to such Securities in accordance
with this Article; provided, however, that if the Company or the Guarantor makes
any payment of principal of or any premium or interest on any such Security
following such reinstatement of its obligations, the Company and the Guarantor
shall be subrogated to the rights (if any) of the Holders of such Securities to
receive such payment from the money so held in trust.

                                   ARTICLE XV

                                  MISCELLANEOUS

        SECTION 15.1. Notices. Any notice or communication to the Company, the
Guarantor or the Fiscal Agent by any other party to this Agreement shall be duly
given if sent by telecopier or in writing and delivered in person or mailed by
first class mail, postage prepaid, addressed as follows:

    If to the Company:

        Principal Financial Group (Australia) Holdings
          Pty Limited
        Chifley Tower
        2 Chifley Square
        Sydney, New South Wales 2000 Australia

        Attention:      Secretary
        Telephone:      61-2-9259-2112
        Facsimile:      61-2-9253-9767

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    If to the Guarantor:

        Principal Financial Services, Inc.
        711 High Street
        Des Moines, Iowa 50392-2300

        Attention:      General Counsel
        Telephone:      515-247-5872
        Facsimile:      515-248-8617

    If to the Fiscal Agent:

        U.S. Bank Trust National Association
        100 Wall Street
        Suite 1600
        New York, New York 10005

        Attention:      Corporate Trust Services
        Telephone:      212-361-2458
        Facsimile:      212-809-5459

        The Company, the Guarantor or the Fiscal Agent by notice to the other
may designate additional or different addresses for subsequent notices or
communications.

        Any notice or communication to a Holder shall be mailed by first-class
mail, postage prepaid, to its address as shown on the register kept by the
Registrar. Failure to mail a notice or communication to a Holder or any defect
in it shall not affect its sufficiency with respect to other Holders. If the
Company mails a notice or communication to Holders, it shall mail a copy to the
Fiscal Agent and each Agent at the same time.

        If a notice or communication is mailed in the manner provided above
within the time prescribed it is duly given, whether or not the addressee
receives it.

        SECTION 15.2. Governing Law. This Agreement and the Securities shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to the principles of conflicts of law thereof.

        SECTION 15.3. No Recourse against Others. No director, officer,
employee, member or policyholder, as such, of the Company, the Guarantor or
Principal Life shall

                                     -123-

   130
have any liability for any obligation of the Company or the Guarantor under the
Securities or the Agreement or for any claim based on, in respect of or by
reason of such obligations or their creation. Each Holder by accepting a
Security waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Securities.

        SECTION 15.4. Duplicate Originals. The parties may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Agreement.

        SECTION 15.5. Headings and Table of Contents. The Article and Section
headings herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.

        SECTION 15.6. Successor and Assiqns. All covenants and agreements in
this Agreement by each of the Company and the Guarantor shall bind its successor
and assigns, whether so expressed or not.

        SECTION 15.7. Separability. In case any provision of this Agreement or
the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.

        SECTION 15.8. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday
or a day on which banking institutions are not required to be open either in New
York City, in Des Moines, Iowa or the city where the principal corporate office
of the Fiscal Agent is located. If a payment date is a Legal Holiday at a place
of payment, payment may be made at such place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.

                                     -124-

   131

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.

                           PRINCIPAL FINANCIAL GROUP
                            (AUSTRALIA) HOLDINGS PTY LIMITED

                           By:  /s/ DENNIS P. FRANCIS
                                ------------------------------------
                                Name:  Dennis P. Francis
                                Title: Director

                           By:  /s/ DAVID FALLOW
                                ------------------------------------
                                Name:  David Fallow
                                Title: Director

                           PRINCIPAL FINANCIAL SERVICES, INC.
                             as Guarantor

                           By:  /s/ THOMAS J. GRAF
                                ------------------------------------
                                Name:  Thomas J. Graf
                                Title: Senior Vice President

                           By:  /s/ MICHAEL H. GERSIE
                                ------------------------------------
                                Name:  Michael H. Gersie
                                Title: Senior Vice President

                           U.S. BANK TRUST NATIONAL ASSOCIATION
                             as Fiscal Agent

                           By:
                                ------------------------------------
                                Name:
                                Title:

   132

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.

                           PRINCIPAL FINANCIAL GROUP
                             (AUSTRALIA) HOLDINGS PTY LIMITED

                           By:
                                ----------------------------------
                                Name:
                                Title:

                           By:
                                ----------------------------------
                                Name:
                                Title:

                           PRINCIPAL FINANCIAL SERVICES, INC.
                             as Guarantor

                           By:
                                ----------------------------------
                                Name:
                                Title:

                           By:
                                ----------------------------------
                                Name:
                                Title:

                           U.S. BANK TRUST NATIONAL ASSOCIATION
                             as Fiscal Agent

                           By:  /s/ Marlene J. Fahey
                                ----------------------------------
                                Name:  Marlene J. Fahey
                                Title: Vice President

   133

                                                                       Annex A-l

                         FORM OF TRANSFER CERTIFICATE --
                          RESTRICTED GLOBAL SECURITY TO
                     TEMPORARY REGULATION S GLOBAL SECURITY

                    REGULATION S GLOBAL SECURITY CERTIFICATE
                 (for transfers pursuant to Section 3.5(b)(iii)
                         of the Fiscal Agency Agreement)

U.S. Bank Trust National Association, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:   Principal Financial Group (Australia)
      Holdings Pty Limited
      [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
      [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Association, as Fiscal Agent. Capitalized terms used but
not defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to U.S.$_________ aggregate principal amount of
[7.95% Notes][8.20% Notes] which are evidenced by the Restricted Global Security
(CUSIP No.________) and held with the U.S. Depositary in the name of [insert
name of transferor] (the "Transferor"). The Transferor has requested a transfer
of such beneficial interest in the [7.95% Notes][8.20% Notes] to a Person who
will take delivery thereof in the form of an equal aggregate principal amount of
[7.95% Notes][8.20% Notes] evidenced by the Temporary Regulation S Global
Security (CUSIP No.__________), which amount, immediately after such transfer,
is to be held with the U.S. Depositary through Euroclear or Cedelbank or both.

        In connection with such request and in respect of such [7.95%
Notes][8.20% Notes], the Transferor does hereby

                                     A-1-1

   134

certify that such transfer has been effected pursuant to and in accordance with
Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended
(the "Securities Act"), and accordingly the Transferor does hereby further
certify that:

                (i)   the offer of the [7.95% Notes][8.20% Notes] was not made
        to a person in the United States;

                (ii)  either:

                        at the time the buy order was originated, the transferee
                        was outside the United States or the Transferor and any
                        person acting on its behalf reasonably believed that the
                        transferee was outside the United States, or

                        the transaction was executed in, on or through the
                        facilities of a designated offshore securities market
                        and neither the Transferor nor any person acting on its
                        behalf knows that the transaction was prearranged with a
                        buyer in the United States;

                (iii) no directed selling efforts have been made in
                      contravention of the requirements of Rule 903(b) or
                      904(b) of Regulation S, as applicable;

                (iv)  the transaction is not part of a plan or scheme to evade
                      the registration requirements of the Securities Act; and

                (v)   upon completion of the transaction, the beneficial
                      interest being transferred as described above was held
                      with the U.S. Depositary through Euroclear or Cedelbank
                      or both.

                We understand that this certificate is required in connection
with certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any

                                     A-1-2

   135

interested party in such proceeding. This certificate and the statements
contained herein are made for your benefit and the benefit of the Company and
the Guarantor and Goldman, Sachs & Co., J.P. Morgan Securities Inc., Credit
Suisse First Boston Corporation and Salomon Smith Barney Inc. as initial
purchasers of the [7.95% Notes][8.20% Notes]. Terms used in this certificate and
not otherwise defined in the Fiscal Agency Agreement have the meanings set forth
in Regulation S under the Securities Act.

Dated:                                           [Insert Name of Transferor]

                                   By:
                                       -----------------------------------------
                                       Name:
                                       Title:

(If the registered owner is a corporation, partnership or fiduciary, the title
of the Person signing on behalf of such registered owner must be stated.)

                                     A-1-3

   136

                                                                      ANNEX  A-2

                         FORM OF TRANSFER CERTIFICATE --
                          RESTRICTED GLOBAL SECURITY TO
                          REGULATION S GLOBAL SECURITY

                    REGULATION S GLOBAL SECURITY CERTIFICATE
                  (for transfers pursuant to Section 3.5(b)(iv)
                         of the Fiscal Agency Agreement)

U.S. Bank Trust National Associates, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:   Principal Financial Group (Australia)
      Holdings Pty Limited
      [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
      [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Associates, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to U.S. $__________ aggregate principal amount
of [7.95% Notes][8.20% Notes] which are evidenced by the Restricted Global
Security (CUSIP No. _________) and held with the U.S. Depositary in the name of
[insert name of transferor] (the "Transferor"). The Transferor has requested a
transfer of such beneficial interest in the [7.95% Notes][8.20% Notes] to a
Person who will take delivery thereof in the form of an equal aggregate
principal amount of [7.95% Notes][8.20% Notes] evidenced by the Regulation S
Global Security (CUSIP No. ___________).

        In connection with such request and in respect of such Notes, the
Transferor does hereby certify that:

        (i)     with respect to transfers made in reliance on Regulation S under
                the Securities Act of 1933, as amended (the "Securities Act");

                                     A-2-1

   137
        1.      the offer of the [7.95% Notes][8.20% Notes] was not made to a
                person in the United States;

        2.      either:

                a       at the time the buy order was originated, the transferee
                        was outside the United States or the Transferor and any
                        person acting on its behalf reasonably believed that the
                        transferee was outside the United States, or

                b.      the transaction was executed in, on or through the
                        facilities of a designated offshore securities market
                        and neither the Transferor nor any person acting on its
                        behalf knows that the transaction was prearranged with a
                        buyer in the United States;

        3.      no directed selling efforts have been made in contravention of
                the requirements of Rule 903(b) or 904(b) of Regulation S, as
                applicable; and

        4.      the transaction is not part of a plan or scheme to evade the
                registration requirements of the Securities Act; or

        (ii)    with respect to transfers made in reliance on Rule 144 under the
                Securities Act, the [7.95% Notes][8.20% Notes] are being
                transferred in a transaction permitted by Rule 144 under the
                Securities Act.

        We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceeding. This
certificate and the statements contained herein are made for your benefit and
the benefit of the Company and the Guarantor and Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith
Barney

                                      A-2-2

   138

Inc. as initial purchasers of the [7.95% Notes][8.20% Notes]. Terms used in this
certificate and not otherwise defined in the Fiscal Agency Agreement have the
meanings set forth in Regulation S under the Securities Act.

Dated:                                  [Insert Name of Transferor]

                                By:
                                   -------------------------------------
                                   Name:
                                   Title:

(If the registered owner is a corporation, partnership or fiduciary, the title
of the Person signing on behalf of such registered owner must be stated.)

                                      A-2-3

   139

                                                                         ANNEX B

                         FORM OF TRANSFER CERTIFICATE --
                    TEMPORARY REGULATION S GLOBAL SECURITY OR
                   REGULATION S GLOBAL SECURITY TO RESTRICTED
                                 GLOBAL SECURITY

                     RESTRICTED GLOBAL SECURITY CERTIFICATE
                  (for transfers pursuant to Section 3.5(b)(v)
                         of the Fiscal Agency Agreement)

U.S. Bank Trust National Associates, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Associates, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to U.S.$ ________________ aggregate principal
amount of [7.95% Notes][8.20% Notes] which are evidenced by the Temporary
Regulation S Global Security or the Regulation S Global Security (CUSIP No.
_______________) and held with the U.S. Depositary through Euroclear or
Cedelbank or both in the name of [insert name of transferor] (the "Transferor")
during the Restricted Period. The Transferor has requested a transfer of such
beneficial interest in the Notes to a Person that will take delivery thereof in
the form of an equal principal amount of [7.95% Notes][8.20% Notes] evidenced by
the Restricted Global Security (CUSIP No. _____________).

        In connection with such request and in respect of such [7.95%
Notes][8.20% Notes], the Transferor does hereby certify that such transfer has
been effected pursuant to and in accordance with Rule 144A under the United
States

                                       B-1

   140
Securities Act of 1933, as amended, and accordingly the Transferor does hereby
further certify that the [7.95% Notes][8.20% Notes] are being transferred to a
person that the Transferor reasonably believes is purchasing the [7.95%
Notes][8.20% Notes] for its own account, or for one or more accounts with
respect to which such Person exercises sole investment discretion, and such
Person and each such account is a "qualified institutional buyer" within the
meaning of Rule 144A and the [7.95% Notes][8.20% Notes] have been transferred in
a transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States.

        We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceeding. This
certificate and the statements contained herein are made for your benefit and
the benefit of the Company and the Guarantor and Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith
Barney Inc. as initial purchasers of the [7.95% Notes][8.20% Notes].

Dated:                                  [Insert Name of Transferor]

                                By:
                                   -------------------------------------
                                   Name:
                                   Title:

(If the registered owner is a corporation, partnership or fiduciary, the title
of the Person signing on behalf of such registered owner must be stated.)

                                       B-2

   141

                                                                       ANNEX C-1

                 FORM OF CERTIFICATION TO BE GIVEN BY HOLDERS OF
                 BENEFICIAL INTEREST IN A TEMPORARY REGULATION S
                    GLOBAL SECURITY TO EUROCLEAR OR Cedelbank

                         OWNER SECURITIES CERTIFICATION

[Morgan Guaranty Trust Company
   OF NEW YORK, BRUSSELS OFFICE,
   as Operator of the Euroclear
   Clearance System] [or] [Cedelbank BANK,
   SOCIETE ANONYME]

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Association, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to U.S.$ _______________ aggregate principal
        amount of [7.95% Notes][8.20% Notes] which are evidenced by the
        Temporary Regulation S Global Security (CUSIP No. _____________) and
        held with the U.S. Depositary through Euroclear or Cedelbank or both in
        the name of [insert name of holder] (the "Holder").

        In respect of such [7.95% Notes][8.20% Notes], the Holder does hereby
certify that as of the date hereof, the above-captioned [7.95% Notes][8.20%
Notes] are beneficially owned by non-U.S. Persons and are not held for purposes
of resale directly or indirectly to a U.S. Person or to a person within the
United States or its possessions.

        As used herein, "United States" means the United States of America, its
territories and possessions, any state of the United States, and the District of
Columbia. As used herein, U.S. Person has the meaning assigned to it in Rule 902
under the Securities Act of 1933, as amended.

                                      C-1-1

   142

        We undertake to advise you immediately by tested telex on or prior to
the date on which you intend to submit your certification relating to the [7.95%
Notes][8.20% Notes] held by you for our account in accordance with your
operating procedures if any applicable statement herein is not correct on such
date, and in the absence of any such notification it may be assumed that this
certification applies as of such date.

        We understand that this certification is required in connection with
certain securities laws in the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certification is or would be relevant, we irrevocably authorize you to produce
this certification or a copy thereof to any interested party in such
proceedings. This certificate and the statements contained herein are made for
your benefit and the benefit of the Company and the Guarantor and Goldman, Sachs
& Co., J.P. Morgan Securities, Credit Suisse First Boston Corporation and
Salomon Smith Barney Inc. as the initial purchasers of the [7.95% Notes][8.20%
Notes].

Date:                            *
     -------------------, ------

- -------------------------------------
[Name of Person Making Certification]

- ------------------------
*/      To be dated no earlier than 15 days prior to the transfer or exchange
        date to which the certification relates.

                                      C-1-2

   143

                                                                       ANNEX C-2

                        FORM OF CERTIFICATION TO BE GIVEN
                  BY THE EUROCLEAR OPERATOR OR Cedelbank BANK,
                                 SOCIETE ANONYME

                       DEPOSITARY SECURITIES CERTIFICATION

U.S. Bank Trust National Association, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank National Association, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This is to certify that, based solely on certifications we have received
in writing, by tested telex or by electronic transmission from member
organizations appearing in our records as persons being entitled to a portion of
the principal amount set forth below (our "Member Organizations") substantially
to the effect set forth in the Fiscal Agency Agreement, as of the date hereof,
$________________ aggregate principal amount of the above-captioned [7.95%
Notes][8.20% Notes] are beneficially owned by non-U.S. Persons and are not held
for purposes of resale directly or indirectly to a U.S. Person or to a person
within the United States or its possessions.

        As used herein, "United States" means the United States of America, its
territories and possessions, any state of the United States, and the District of
Columbia. As used herein, U.S. Person has the meaning assigned to it in Rule 902
under the Securities Act of 1933, as amended.

                                      C-2-1

   144

        We further certify (i) that we are not making available herewith for
exchange any portion of the Temporary Regulation S Global Security excepted in
such certifications and (ii) that as of the date hereof we have not received any
notification from any of our Member Organizations to the effect that the
statements made by such Member Organizations with respect to any portion of the
part submitted herewith for exchange are no longer true and cannot be relied
upon as of the date hereof.

        We understand that this certification is required in connection with
certain securities laws of the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certification is or would be relevant, we irrevocably authorize you to produce
this certification or a copy thereof to any interested party in such
proceedings. This certificate and the statements contained herein are made for
your benefit and the benefit of the Company and the Guarantor and Goldman, Sachs
& Co., J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation and
Salomon Smith Barney Inc. as the initial purchasers of the [7.95% Notes][8.20%
Notes].

Dated:

By:
   -----------------------------------------
   [Morgan Guaranty Trust Company
   OF NEW YORK, BRUSSELS OFFICE,
   as Operator of the Euroclear Clearance System] [or]
   [Cedelbank, SOCIETE ANONYME]

                                      C-2-2

   145

                                                                       ANNEX C-3

                      FORM OF CERTIFICATION TO BE GIVEN BY
                     TRANSFEREE OF BENEFICIAL INTEREST IN A
                     TEMPORARY REGULATION S GLOBAL SECURITY
                           AFTER THE RESTRICTED PERIOD

                       TRANSFEREE SECURITIES CERTIFICATION

[Morgan Guaranty Trust Company
   OF NEW YORK, BRUSSELS OFFICE,
   as Operator of the Euroclear
   Clearance system] [or] [Cedelbank BANK,
   SOCIETE ANONYME]

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Associates, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        For purposes of acquiring a beneficial interest in the Temporary
Regulation S Global Security, the undersigned certifies that it is not a U.S.
Person as defined by Regulation S under the Securities Act of 1933, as amended.

        We undertake to advise you promptly by tested telex on or prior to the
date on which you intend to submit your certification relating to the [7.95%
Notes][8.20% Notes] held by you in which we intend to acquire a beneficial
interest in accordance with your operating procedures if any applicable
statement herein is not correct on such date, and in the absence of any such
notification it may be assumed that this certification applies as of such date.

        We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceeding. This
certificate and the statements contained herein are made for your benefit

                                      C-3-1

   146

and the benefit of the Company and the Guarantor and Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith
Barney Inc. as initial purchasers of the [7.95% Notes][8.20% Notes].

Dated:

By:
   -------------------------------------
   As, or as agent for,
   the beneficial acquiror
   of the [7.95% Notes][8.20% Notes]
   to which this certificate relates.

                                      C-3-2

   147

                                                                       ANNEX D-1

                         FORM OF TRANSFER CERTIFICATE --
                        NON-GLOBAL RESTRICTED SECURITY TO
                           RESTRICTED GLOBAL SECURITY

                     RESTRICTED GLOBAL SECURITY CERTIFICATE
                 (for transfers pursuant to Section 3.5(b) (vi)
                         of the Fiscal Agency Agreement)

U.S. Bank Trust National Association, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95 Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Association, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to $ __________________ aggregate principal
amount of Notes held in definitive form (CUSIP No. __________) by [insert name
of transferor] (the "Transferor"). The Transferor has requested a transfer of
such [7.95% Notes][8.20% Notes] to a Person that will take delivery in the form
of an equal principal amount of Notes evidenced by the Restricted Global
Security (CUSIP No. _______________).

        In connection with such request and in respect of such Notes, the
Transferor does hereby certify that such transfer has been effected pursuant to
and in accordance with Rule 144A under the United States Securities Act of 1933,
as amended, and accordingly the Transferor does hereby further certify that the
[7.95% Notes][8.20% Notes] are being transferred to a person that the Transferor
reasonably believes is purchasing the [7.95% Notes][8.20% Notes] for its own
account, or for one or more accounts with respect to

                                      D-1-1

   148

which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A and the [7.95% Notes][8.20% Notes] have been transferred in a transaction
meeting the requirements of Rule 144A and in accordance with any applicable
securities laws of any state of the United States.

        We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceeding. This
certificate and the statements contained herein are made for your benefit and
the benefit of the Company and the Guarantor and Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith
Barney Inc. as the initial purchasers of the [7.95% Notes][8.20% Notes].

Dated:                                  [Insert Name of Transferor]

                                By:
                                   -------------------------------------
                                   Name:
                                   Title:

                                      D-1-2

   149

                                                                       ANNEX D-2

                        FORM OF CERTIFICATE -- NON-GLOBAL
                   RESTRICTED SECURITY TO REGULATION S GLOBAL
                       SECURITY OR TEMPORARY REGULATION S
                                 GLOBAL SECURITY

                    REGULATION S GLOBAL SECURITY CERTIFICATE
                  (for transfers pursuant to Section 3.5(b)(vi)
                         of the Fiscal Agency Agreement)

U.S. Bank Trust National Associates, as Fiscal Agent
100 Wall Street
Suite 1600
New York, New York 10005

Re:  Principal Financial Group (Australia)
     Holdings Pty Limited
     [7.95% Notes due August 15, 2004 (the "7.95% Notes")]
     [8.20% Notes due August 15, 2009 (the "8.20% Notes")]

        Reference is hereby made to the Fiscal Agency Agreement, dated as of
August 25, 1999, among Principal Financial Group (Australia) Holdings Pty
Limited, as Issuer, Principal Financial Services, Inc., as Guarantor, and U.S.
Bank Trust National Association, as Fiscal Agent. Capitalized terms used but not
defined herein shall have the meanings given to them in the Fiscal Agency
Agreement.

        This certificate relates to $ _________________ aggregate principal
amount of [7.95% Notes][8.20% Notes] held in definitive form (CUSIP No. _______)
by [insert name of transferor] (the "Transferor"). The Transferor has requested
an exchange or transfer of such [7.95% Notes][8.20% Notes] to a Person that will
take delivery in the form of an equal principal amount of [7.95% Notes][8.20%
Notes] evidenced by the Regulation S Global Security or the Temporary Regulation
S Global Security (CUSIP No. _____________).

        In connection with such request and in respect of such [7.95%
Notes][8.20% Notes], the Transferor does hereby certify that such transfer has
been effected pursuant to and in accordance with (a) Rule 903 or Rule 904 under
the Securities Act of 1933, as amended (the "Act"), or

                                      D-2-1

   150

(b) Rule 144 under the Act, and accordingly the Transferor does hereby further
certify that:

         (i)    if the transfer has been effected pursuant to Rule 903
    or Rule 904:

                1.      the offer of the [7.95% Notes][8.20% Notes] was not made
                        to a person in the United States;

                2.      either:

                        a.      at the time the buy order was originated, the
                                transferee was outside the United States or the
                                Transferor and any person acting on its behalf
                                reasonably believed that the transferee was
                                outside the United States, or

                        b.      the transaction was executed in, on or through
                                the facilities of a designated offshore
                                securities market and neither the Transferor nor
                                any person acting on its behalf knows that the
                                transaction was prearranged with a buyer in the
                                United States;

                3.      directed selling efforts have been made in contravention
                        of the requirements of Rule 903(b) or 904(b) of
                        Regulation S, as applicable;

                4.      the transaction is not part of a plan or scheme to evade
                        the registration requirements of the Act; and

                5.      if such transfer is to occur during the Restricted
                        Period, upon completion of the transaction, the
                        beneficial interest being transferred as described above
                        was held with the Depositary through [Euroclear]
                        [Cedelbank]; or

         (ii)   if the transfer has been effected pursuant to Rule 144:

                                      D-2-2

   151

                1.      more than two years has elapsed since the date of the
                        closing of the initial placement of the [7.95%
                        Notes][8.20% Notes] pursuant to the Purchase Agreement,
                        dated August 18, 1999, between the Company and the
                        representatives of the several purchasers named therein;
                        and

                2.      the Notes have been transferred in a transaction
                        permitted by Rule 144 and made in accordance with any
                        applicable securities laws of any state of the United
                        States.

        We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceeding. This
certificate and the statements contained herein are made for your benefit and
the benefit of the Company and the Guarantor and Goldman, Sachs & Co., J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Salomon Smith
Barney Inc. as initial purchasers of the [7.95% Notes][8.20% Notes].

Dated:                                  [Insert Name of Transferor]

                                By:
                                   -------------------------------------
                                   Name:
                                   Title:

                                      D-2-3

   152

                                                                         ANNEX E

                   FORM OF PRINCIPAL FINANCIAL SERVICES, INC.
                      IRREVOCABLE ASSUMPTION OF OBLIGATIONS

                Reference is made to the Fiscal Agency Agreement, dated as of
August 25, 1999 (as amended, supplemented or otherwise modified from time to
time, the "Fiscal Agency Agreement"), among Principal Financial Group
(Australia) Holdings Pty Limited, as Issuer (the "Issuer"), Principal Financial
Services, Inc., as Guarantor, (the "Guarantor") and U.S. Bank Trust National
Association, as Fiscal Agent, (the "Fiscal Agent") and the Purchase Agreement,
dated August 18, 1999 between the Issuer, the Guarantor and Goldman, Sachs &
Co., J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation and
Salomon Smith Barney Inc. as Purchasers (the "Purchasers") relating to the
issuance and sale by the Issuer of $200,000,000 aggregate principal amount of
its 7.95% Notes due August 15, 2004 (the "7.95% Notes") and $465,000,000
aggregate principal amount of its 8.20% Notes due August 15, 2009 (the "8.20%
Notes" and together with the 7.95% Notes, the "Notes") guaranteed as to payment
of principal and interest by the Guarantor. The Fiscal Agency Agreement, the
Purchase Agreement and the Notes are herein collectively referred to as the
"Documents". Unless otherwise defined herein, capitalized terms used herein
shall have the meanings ascribed thereto in the Documents.

                For the benefit of each other and all holders of the Notes from
time to time, the Issuer and the Guarantor agree as follows:

                1.      The Issuer hereby irrevocably transfers and assigns to
        the Guarantor and the Guarantor hereby irrevocably accepts and assumes
        from the Issuer, as of the date hereof, all of the Issuer's rights and
        obligations as Issuer under the Documents.

                2.      The Issuer makes no representation or warranty and
        assumes no responsibility with respect to any statement, warranties or
        representations made in or in connection with any, or with respect to
        the execution, legality, validity, enforceability, genuineness,
        sufficiency or value of the Documents or any other instrument or
        document furnished pursuant thereto, other than that the Issuer has not
        created any adverse claim upon the interest being assigned by them

                                       E-1

   153

        hereunder and that such interest is free and clear of any such adverse
        claim.

                3.      The Guarantor (a) represents and warrants that it is
        legally authorized to enter into this Assumption and that this
        Assumption constitutes a valid and enforceable agreement and (b) agrees
        that it will be bound by the provisions of the Documents and will
        perform in accordance with their respective terms all the obligations
        which by the terms of the Documents are required to be performed by it
        as if it were the Issuer thereunder.

                4.      From and after the date hereof, (a) the Guarantor, to
        the extent provided in this Assumption, shall have the rights and
        obligations of the Issuer under the Documents and shall be bound by the
        provisions thereof, (b) the Issuer shall, to the extent provided in this
        Assumption, relinquish its rights and be released from its obligations
        under the Documents and (c) references in the Documents to the Issuer
        shall become references to the Guarantor.

                5.      THIS ASSUMPTION SHALL BE GOVERNED BY AND CONSTRUED IN
        ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

                IN WITNESS WHEREOF, the parties hereto have caused this
Assumption to be executed as of ______________________________.

                                PRINCIPAL FINANCIAL GROUP (AUSTRALIA)
                                HOLDINGS PTY LIMITED

                                By:
                                   ---------------------------------------------
                                        Name:
                                        Title:

                                PRINCIPAL FINANCIAL SERVICES, INC.

                                By:
                                   ---------------------------------------------
                                        Name:
                                        Title:

                                       E-2

   154

ACCEPTED:

U.S. BANK TRUST NATIONAL ASSOCIATION
        as Fiscal Agent

By:
   ---------------------------------------------
        Name:
        Title:

                                       E-3

   1
                                                                    EXHIBIT 21.1

                   PRINCIPAL FINANCIAL GROUP MEMBER COMPANIES

                                    30-May-01

ADMAR CORPORATION
         Incorporated:  California
ANDUEZA & PRINCIPAL CREDITOS HIPOTECARIOS S.A.
         Incorporated:  Chile
BENEFIT FIDUCIARY CORPORATION
         Incorporated:  Rhode Island
BOSTON INSURANCE TRUST, INC.
         Incorporated:  Massachusetts
BRASILPREV PREVIDENCIA PRIVADA S.A.
         Incorporated:  Brazil
BT (QUEENSLAND) PTY LTD
         Incorporated:  Australia
BT AUSTRALIA (HOLDINGS) PTY LTD
         Incorporated:  Australia
BT AUSTRALIA CORPORATE SERVICES PTY LTD
         Incorporated:  Australia
BT AUSTRALIA PTY LTD
         Incorporated:  Australia
BT FINANCE & INVESTMENTS PTY LTD
         Incorporated:  Australia
BT FINANCE PTY LTD
         Incorporated:  Australia
BT FINANCIAL GROUP (NZ) LTD
         Incorporated:  New Zealand
BT FINANCIAL GROUP PTY LTD
         Incorporated:  Australia
BT FUNDS MANAGEMENT (INTERNATIONAL) LTD
         Incorporated:  Australia
BT FUNDS MANAGEMENT (NZ) LTD
         Incorporated:  New Zealand
BT FUNDS MANAGEMENT LTD
         Incorporated:  Australia
BT HOTEL LTD
         Incorporated:  Australia
BT INVESTMENTS (AUSTRALIA) LTD
         Incorporated:  Delaware
BT LIFE LTD
         Incorporated:  Australia
BT NOMINEES PTY LTD
         Incorporated:  Australia
BT PORTFOLIO SERVICES (AUSTRALIA) LTD
         Incorporated:  Australia
BT PORTFOLIO SERVICES (NZ) LTD
         Incorporated:  New Zealand
BT REGISTRIES (WA) PTY LTD
         Incorporated:  Australia
BT REGISTRIES PTY LTD
         Incorporated:  Australia
BT SECURITIES LTD
         Incorporated:  Australia
BT TACTICAL ASSET MANAGEMENT PTY LTD
         Incorporated:  Australia
CHIFLEY SERVICES PTY LTD
         Incorporated:  Australia

   2

DELAWARE CHARTER GUARANTEE & TRUST COMPANY
         Incorporated:  Delaware
DENTAL-NET, INC.
         Incorporated:  Arizona
EMPLOYERS DENTAL SERVICES, INC.
         Incorporated:  Arizona
EQUITY FC, LTD.
         Incorporated: Iowa
EXECUTIVE BENEFIT SERVICES, INC.
         Incorporated:  North Carolina
HEALTHRISK RESOURCE GROUP, INC.
         Incorporated: Iowa
IDBI PRINCIPAL ASSET MANAGEMENT COMPANY
         Incorporated:  India
IDBI-PRINCIPAL TRUSTEE COMPANY LIMITED
         Incorporated:  India
ING-PRINCIPAL PENSIONS CO., LTD
         Incorporated:  Japan
INVISTA CAPITAL MANAGEMENT, LLC
         Incorporated:  Delaware
ONISTON PTY LTD
         Incorporated:  Australia
PATRICIAN ASSOCIATES, INC.
         Incorporated:  California
PETULA ASSOCIATES, LTD.
         Incorporated: Iowa
PFG DO BRASIL LTDA
         Incorporated:  Brazil
PPI EMPLOYEE BENEFITS CORPORATION
         Incorporated:  Connecticut
PRINCIPAL AFORE, S.A. DE C.V.
         Incorporated:  Mexico
PRINCIPAL ASSET MANAGEMENT COMPANY (ASIA) LTD.
         Incorporated:  Hong Kong
PRINCIPAL ASSET MARKETS, INC.
         Incorporated: Iowa
PRINCIPAL BANK
         Incorporated:  Federal
PRINCIPAL CAPITAL FUTURES TRADING ADVISOR, LLC
         Incorporated:  Delaware
PRINCIPAL CAPITAL INCOME INVESTORS, LLC
         Incorporated:  Delaware
PRINCIPAL CAPITAL MANAGEMENT (ASIA) LTD
         Incorporated: Asia
PRINCIPAL CAPITAL MANAGEMENT (EUROPE) LTD
         Incorporated:  United Kingdom
PRINCIPAL CAPITAL MANAGEMENT (IRELAND) LTD
         Incorporated:  Ireland
PRINCIPAL CAPITAL MANAGEMENT (SINGAPORE) LTD
         Incorporated:  Singapore
PRINCIPAL CAPITAL MANAGEMENT, LLC
         Incorporated:  Delaware
PRINCIPAL CAPITAL REAL ESTATE INVESTORS, LLC
         Incorporated:  Delaware
PRINCIPAL CAPITAL TRUST
         Incorporated:  Delaware
PRINCIPAL COMMERCIAL ACCEPTANCE, LLC
         Incorporated:  Delaware

   3

PRINCIPAL COMMERCIAL FUNDING, LLC
         Incorporated:  Delaware
PRINCIPAL COMPANIA DE SEGUROS DE VIDA CHILE S.A.
         Incorporated:  Chile
PRINCIPAL CONSULTING (INDIA) PRIVATE LIMITED
         Incorporated:  India
PRINCIPAL DELAWARE NAME HOLDING COMPANY, INC.
         Incorporated:  Delaware
PRINCIPAL DEVELOPMENT ASSOCIATES, INC.
         Incorporated:  California
PRINCIPAL DEVELOPMENT INVESTORS, L.L.C.
         Incorporated:  Delaware
PRINCIPAL ENTERPRISE CAPITAL, LLC
         Incorporated:  Delaware
PRINCIPAL FC, LTD.
         Incorporated: Iowa
PRINCIPAL FINANCIAL ADVISORS, INC.
         Incorporated: Iowa
PRINCIPAL FINANCIAL GROUP (AUSTRALIA) HOLDINGS PTY LTD
         Incorporated:  Australia
PRINCIPAL FINANCIAL GROUP (MAURITIUS) LTD.
         Incorporated:  Mauritius
PRINCIPAL FINANCIAL GROUP INVESTMENTS (AUSTRALIA) PTY LTD
         Incorporated:  Australia
PRINCIPAL FINANCIAL GROUP, INC. (DELAWARE DOMICILE)
         Incorporated:  Delaware
PRINCIPAL FINANCIAL GROUP, INC. (IOWA DOMICILE)
         Incorporated: Iowa
PRINCIPAL FINANCIAL SERVICES (AUSTRALIA), INC.
         Incorporated: Iowa
PRINCIPAL FINANCIAL SERVICES (NZ), INC.
         Incorporated: Iowa
PRINCIPAL FINANCIAL SERVICES, INC.
         Incorporated: Iowa
PRINCIPAL GENERATION PLANT, LLC
         Incorporated:  Delaware
PRINCIPAL HEALTH CARE, INC.
         Incorporated: Iowa
PRINCIPAL HOLDING COMPANY
         Incorporated: Iowa
PRINCIPAL HOTELS AUSTRALIA PTY LTD
         Incorporated:  Australia
PRINCIPAL HOTELS HOLDINGS PTY LTD
         Incorporated:  Australia
PRINCIPAL INSURANCE COMPANY (HONG KONG) LIMITED
         Incorporated:  Hong Kong
PRINCIPAL INTERNATIONAL (ASIA) LIMITED
         Incorporated:  Hong Kong
PRINCIPAL INTERNATIONAL ARGENTINA, S.A.
         Incorporated:  Argentina
PRINCIPAL INTERNATIONAL DE CHILE S.A.
         Incorporated:  Chile
PRINCIPAL INTERNATIONAL HOLDING COMPANY, LLC
         Incorporated:  Delaware
PRINCIPAL INTERNATIONAL, INC.
         Incorporated: Iowa
PRINCIPAL INVESTORS CORPORATION
         Incorporated:  New Jersey

   4

PRINCIPAL IOWA NEWCO, INC.
         Incorporated: Iowa
PRINCIPAL LIFE COMPANIA DE SEGUROS, S.A.
         Incorporated:  Argentina
PRINCIPAL LIFE INSURANCE COMPANY
         Incorporated: Iowa
PRINCIPAL MANAGEMENT CORPORATION
         Incorporated: Iowa
PRINCIPAL MEXICO COMPANIA DE SEGUROS, S.A. DE C.V.
         Incorporated:  Mexico
PRINCIPAL MORTGAGE REINSURANCE COMPANY
         Incorporated:  Vermont
PRINCIPAL MUTUAL HOLDING COMPANY
         Incorporated: Iowa
PRINCIPAL NET LEASE INVESTORS, L.L.C.
         Incorporated:  Delaware
PRINCIPAL PENSIONES, S.A. DE C.V.
         Incorporated:  Mexico
PRINCIPAL PORTFOLIO SERVICES, INC.
         Incorporated: Iowa
PRINCIPAL PRODUCT NETWORK, INC.
         Incorporated:  Delaware
PRINCIPAL RESIDENTIAL MORTGAGE FUNDING, LLC
         Incorporated:  Delaware
PRINCIPAL RESIDENTIAL MORTGAGE, INC.
         Incorporated: Iowa
PRINCIPAL RETIRO COMPANIA DE SEGUROS DE RETIRO, S.A.
         Incorporated:  Argentina
PRINCIPAL SPECTRUM ASSOCIATES, INC.
         Incorporated:  California
PRINCIPAL TRUST COMPANY (ASIA) LIMITED
         Incorporated: Asia
PRINCIPAL WHOLESALE MORTGAGE, INC.
         Incorporated: Iowa
PRINCOR FINANCIAL SERVICES CORPORATION
         Incorporated: Iowa
PROFESSIONAL PENSIONS, INC.
         Incorporated:  Connecticut
PT ASURANSI JIWA PRINCIPAL INDONESIA
         Incorporated:  Indonesia
PT JASA PRINCIPAL INDONESIA
         Incorporated:  Indonesia
PT PRINCIPAL ASSET MANAGEMENT INDONESIA
         Incorporated:  Indonesia
QV1 PTY LTD
         Incorporated:  Australia
SIEFORE PRINCIPAL, S.A. DE C.V.
         Incorporated:  Mexico
THE ADMAR GROUP, INC.
         Incorporated:  Florida
ZAO PRINCIPAL INTERNATIONAL
         Incorporated:  Russia

   1
                                                                    Exhibit 23.1

                         Consent of Independent Auditors

We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 2, 2001, except for Note 16 to the
consolidated financial statements as to which the date is April 30, 2001, in the
Registration Statement (Form S-1) and related Prospectus of Principal Financial
Group, Inc. dated June 8, 2001.

                                                           /s/ Ernst & Young LLP

Des Moines, Iowa
June 6, 2001

   1

                                                                   EXHIBIT 23.3

                          [LETTERHEAD OF MILLIMAN USA]

                                                                    June 8, 2001

Re: Principal Mutual Holding Company

                            CONSENT OF MILLIMAN USA

         We, Milliman USA, formerly named Milliman & Robertson, Inc., consent to
the use in the Registration Statement on Form S-1, as Annex A to the Prospectus,
of the opinion letter of Mr. McCarthy dated March 31, 2001. We also consent to
the references made to Mr. McCarthy, to such opinion letter and to Milliman USA
or Milliman & Robertson, Inc. under the following captions in the Prospectus:
"The Demutualization - Payment of Consideration to Eligible Policyholders" and
"Experts", copies of which have been provided to us for our review.

                                                   Milliman USA

                                                   By: /s/ DANIEL J. MCCARTHY
                                                      --------------------------

                                                      Daniel J. McCarthy, F.S.A.
                                                      June 8, 2001