UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2003

                                       OR

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

              For the transition period from ________ to _________

                         Commission file number 1-16725

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

       Delaware                      711 High Street,          42-1520346
(State or other jurisdiction of   Des Moines, Iowa 50392    (I.R.S. Employer
incorporation or organization)        (Address of         Identification Number)
                                  principal executive
                                       offices)
                                 (515) 247-5111
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

   Title  of  each  class        Name  of  each   exchange  on  which registered
Common Stock, par value $0.01                 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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

Indicate by check mark if disclosure of delinquent  filers  pursuant Item 405 of
Regulation S-K (ss. 229.405 of this chapter) is not contained  herein,  and will
not be contained,  to the best of Registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. |X|

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

As of February  19, 2004,  there were  outstanding  320,782,545 shares of Common
Stock, $0.01 par value per share of the Registrant.

The aggregate market value of the shares of the Registrant's  common equity held
by  non-affiliates  of the Registrant was  $10,483,888,115  based on the closing
price of $32.25 per share of Common Stock on the New York Stock Exchange on June
30, 2003.

                       Documents Incorporated by Reference

The information  required to be furnished pursuant to Part III of this Form 10-K
is set forth in,  and is hereby  incorporated  by  reference  herein  from,  the
Registrant's  definitive  proxy statement for the annual meeting of shareholders
to be held on May 18, 2004, to be filed by the  Registrant  with the  Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the year ended December 31, 2003.

                         PRINCIPAL FINANCIAL GROUP, INC.
                                TABLE OF CONTENTS

PART I.........................................................................4

Item 1.  Business..............................................................4
Item 2.  Properties...........................................................22
Item 3.  Legal Proceedings....................................................22
Item 4.  Submission of Matters to a Vote of Security Holders..................23
Executive Officers of the Registrant..........................................23

PART II.......................................................................24

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and
         Issuer Purchases of Equity Security..................................24
Item 6.  Selected Financial Data..............................................25
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations................................................27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........97
Item 8.  Financial Statements and Supplementary Data.........................105
   Report of Independent Auditors............................................105
   Consolidated Statements of Financial Position.............................106
   Consolidated Statements of Operations.....................................107
   Consolidated Statements of Stockholders' Equity...........................109
   Consolidated Statements of Cash Flows.....................................110
   Notes to Consolidated Financial Statements................................112
Item 9.  Change in and Disagreements with Accountants on Accounting and
         Financial Disclosure................................................212
Item 9A. Controls and Procedures.............................................212

PART III.....................................................................212

Item 10.  Directors and Executive Officers of the Registrant.................212
Item 11.  Executive Compensation.............................................212
Item 12.  Security Ownership of Certain Beneficial Owners and Management and
          Related Stockholder Matters........................................212
Item 13.  Certain Relationships and Related Transactions.....................213
Item 14.  Principal Accountant Fees and Services.............................213

PART IV......................................................................213

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K....213

Signatures...................................................................215

   Report of Independent Auditors on Schedules...............................216
   Schedule I - Summary of Investments - Other Than Investments in Related
                Parties......................................................217
   Schedule II - Condensed Financial Information of Registrant (Parent Only).218
   Schedule III - Supplementary Insurance Information........................223
   Schedule IV - Reinsurance.................................................224
   Exhibit Index.............................................................225

                                       2

                   NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Annual  Report on Form 10-K,  including  the  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations,  contains statements
which constitute  forward-looking  statements  within the meaning of the Private
Securities  Litigation  Reform Act of 1995,  including  statements  relating  to
trends in operations and financial  results and the business and the products of
the Registrant and its subsidiaries, as well as other statements including words
such as "anticipate,"  "believe,"  "plan,"  "estimate,"  "expect,"  "intend" and
other  similar  expressions.  Forward-looking  statements  are made  based  upon
management's current expectations and beliefs concerning future developments and
their potential effects on the Company. Such forward-looking  statements are not
guarantees of future performance.

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

                                       3

PART I

ITEM 1.  BUSINESS

The  Principal  Financial  Group is a leading  provider of  retirement  savings,
investment  and insurance  products and services  with $144.9  billion in assets
under management and  approximately  fifteen million  customers  worldwide as of
December 31, 2003.  We were  organized  as an  individual  life insurer in 1879,
formed a mutual  insurance  holding  company in 1998,  and  Principal  Financial
Group, Inc. was organized on April 18, 2001, as a Delaware business corporation.

Under  the terms of  Principal  Mutual  Holding  Company's  Plan of  Conversion,
effective  October 26, 2001 (the "Date of  Demutualization"),  Principal  Mutual
Holding  Company  converted from a mutual  insurance  holding company to a stock
company  subsidiary  of Principal  Financial  Group,  Inc., a Delaware  business
corporation.  All membership  interests in Principal Mutual Holding Company were
extinguished  on that date and eligible  policyholders  received,  in aggregate,
260.8  million  shares of common  stock,  $1,177.5  million of cash,  and $472.6
million of policy credits as compensation.

In addition,  on October 26,  2001,  we completed  our initial  public  offering
("IPO") in which we issued  100.0  million  shares of common stock at a price of
$18.50 per  share,  prior to the  underwriters'  exercise  of the  overallotment
option. Net proceeds from the IPO were $1,753.9 million,  of which $64.2 million
was retained by  Principal  Financial  Group,  Inc.,  and  $1,689.7  million was
contributed  to Principal  Life.  Proceeds  were net of offering  costs of $96.5
million and a related tax benefit of $0.4 million.

Our U.S. and international  operations concentrate primarily on asset management
and  accumulation.  In addition,  we offer a broad range of individual and group
life  insurance,  group  health  insurance,   individual  and  group  disability
insurance and residential mortgage loan origination and servicing.

We focus on providing  retirement  products and services to businesses and their
employees.  We provided  services to more 401(k)  plans in the U.S. in 2002 than
any other bank, mutual fund or insurance company, according to surveys conducted
by CFO magazine.  We also had the leading market share in 2002 within the 401(k)
market  for  businesses  with less than 500  employees  based on number of plans
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 U.S. and  internationally.  We
believe our  expertise and  leadership  in serving the U.S.  pension plan market
give us a unique competitive advantage in the U.S., as well as in countries with
a trend toward private sector defined contribution pension systems.

OUR OPERATING SEGMENTS

We organize our businesses into the following operating segments:

o        U.S. Asset Management and Accumulation;

o        International Asset Management and Accumulation;

o        Life and Health Insurance; and

o        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.

                                       4

The  following  table  summarizes  our  operating  revenues for our products and
services,  which  are  described  in each of the  subsequent  operating  segment
discussions:

                                                          FOR THE YEAR ENDED DECEMBER 31,
                                                 2003                 2002                  2001
                                           ------------------ ---------------------- -------------------
                                                                  (IN MILLIONS)
                                                                                   
U.S. Asset Management and
    Accumulation:
Full-service accumulation.................       $1,099.5              $1,076.5             $1,116.6
Full-service payout.......................          862.5               1,191.8              1,214.8
Investment-only...........................          905.9                 886.4                918.1
                                           ------------------ ---------------------- -------------------
    Total pension.........................        2,867.9               3,154.7              3,249.5

Individual annuities......................          354.9                 303.8                263.3
Mutual funds..............................          121.1                 113.8                108.3
Other and eliminations....................           36.3                  32.2                 19.0
                                           ------------------ ---------------------- -------------------
    Total U.S. Asset Accumulation.........        3,380.2               3,604.5              3,640.1

Principal Global Investors................          313.4                 216.4                194.9

Eliminations..............................          (42.6)                (40.4)               (35.2)
                                           ------------------ ---------------------- -------------------
    Total U.S. Asset Management and
      Accumulation........................        3,651.0               3,780.5              3,799.8

International Asset Management and
    Accumulation..........................          412.1                 357.9                508.4

Life and Health Insurance:
Life insurance............................        1,607.7               1,629.6              1,658.7
Health insurance..........................        2,104.4               2,058.3              2,061.3
Disability insurance......................          302.2                 258.9                226.4
                                           ------------------ ---------------------- -------------------
    Total Life and Health Insurance.......        4,014.3               3,946.8              3,946.4

Mortgage Banking:
Mortgage loan production..................          694.3                 562.9                354.4
Mortgage loan servicing...................          702.5                 590.1                403.0
                                           ------------------ ---------------------- -------------------
    Total Mortgage Banking................        1,396.8               1,153.0                757.4

Corporate and Other.......................            8.8                 (15.1)               101.7
                                           ------------------ ---------------------- -------------------
Total operating revenues..................       $9,483.0              $9,223.1             $9,113.7
                                           ================== ====================== ===================
Total operating revenues..................       $9,483.0              $9,223.1             $9,113.7
Net realized/unrealized capital losses,
    including recognition of front-end
    revenues and certain market
    value adjustments to fee
    revenues..............................          (78.8)               (400.6)              (527.4)
Other after-tax adjustments...............            -                     -                    6.3
                                           ------------------ ---------------------- -------------------
Total GAAP revenues.......................       $9,404.2              $8,822.5             $8,592.6
                                           ================== ====================== ===================

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

Our U.S. Asset Management and Accumulation segment consists of:

                                       5

o    asset accumulation  operations which provide retirement savings and related
     investment  products and services to businesses,  their employees and other
     individuals; and

o    Principal Global Investors, our U.S.-based asset manager.

For financial  results for the U.S. Asset Management and  Accumulation  segment,
see Item 8. "Financial  Statements and Supplementary Data, Notes to Consolidated
Financial Statements, Note 19 Segment Information".

U.S. ASSET ACCUMULATION

Our asset  accumulation  activities  in the U.S.  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:

o     To businesses of all sizes with a concentration  on small and medium-sized
      businesses, which we define as businesses with fewer than 1,000 employees.
      We offer  products and services for defined  contribution  pension  plans,
      including  401(k)  and  403(b)  plans,   defined  benefit  pension  plans,
      non-qualified  executive  benefit plans, and employee stock ownership plan
      ("ESOP")  consulting  services.  For more basic investment needs, we offer
      SIMPLE IRA and payroll deduction plans;

o     To large institutional  clients, we also offer  investment-only  products,
      including guaranteed investment contracts and funding agreements; and

o     To employees of businesses and other individuals,  we offer the ability to
      accumulate   funds  for  retirement  and  savings  through  mutual  funds,
      individual annuities and bank products.

We organize our U.S. asset accumulation operations into four product and service
categories: pension, mutual funds, individual annuities and Principal Bank.

Our pension  products and services  are further  grouped into three  categories:
full-service accumulation, full-service payout and investment-only.

PENSION PRODUCTS

We offer a wide variety of investment  and  administrative  products for defined
contribution  pension plans,  including 401(k) and 403(b) plans, defined benefit
pension plans,  non-qualified  executive benefit plans, and ESOPs. 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.

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 December  31,  2003,  we provided  full-service  accumulation  products to
32,139 defined  contribution  pension plans,  of which 25,794 were 401(k) plans,
covering 2.3 million plan  participants,  and to 2,976 defined  benefit  pension
plans,   covering   260,816  plan   participants.   As  of  December  31,  2003,
approximately 68% of our full-services  accumulation account values were managed
by  Principal  Global  Investors.   Third-party  asset  managers  provide  asset
management services with respect to the remaining 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

                                       6

services to defined contribution plan customers through Principal  Advantage,  a
new qualified plan product based on our mutual fund,  Principal  Investors Fund.
We offer  investments  covering the full range of stable  value,  equity,  fixed
income and  international  investment  options  managed by our affiliated  asset
manager, Principal Global Investors, 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.
Generally,  plan sponsors  restrict their purchases to insurance  companies with
superior or excellent  financial quality ratings because the Department of Labor
has  mandated  that  annuities  be  purchased  only from the "safest  available"
insurers.

Premium received from full-service  payout products are generally in the form of
single payments.  As a result, the level of new premiums 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.  Our affiliated  asset manager,
Principal Global Investors, manages full-service payout account values.

INVESTMENT-ONLY. The three primary products for which we provide investment-only
services are: guaranteed investment contracts ("GICs");  funding agreements; and
other investment-only products.

GICs 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.  Our
investment-only  products  contain  provisions  disallowing  or  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.  We no longer
issue puttable GICs.

Deposits to  investment-only  products are  predominantly  in the form of single
payments.  As a result,  the level of new deposits can fluctuate from one fiscal
quarter to another.  Assets invested in GICs 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.  Our affiliated  asset
manager, Principal Global Investors, manages investment-only account values.

PENSION 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 16% of businesses with less than 100 employees,
and 47% of businesses with between 100 and 500 employees,  offered a 401(k) plan
in 2002,  according to the Spectrem Group.  The same study indicates that 83% of

                                       7

employers  with between 500 and 1000 employees and 93% of employers with 1000 or
more employees offered a 401(k) plan in 2002.

FULL-SERVICE  ACCUMULATION.  We sell our full-service  accumulation products and
services  nationally,  primarily  through a captive  retirement  services  sales
force.   As  of  December  31,  2003,   over  100   retirement   services  sales
representatives  in over  40  offices,  operating  as a  wholesale  distribution
network,   maintained   relationships  with  over  11,000  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  December  31,  2003,  we  had a  separate  staff  of  over  140  service
representatives  located in our local 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 have  also  recently  established  a number  of  marketing  and
distribution  relationships to increase the sales of our  accumulation  products
with firms such as Frank Russell Investment Management Company, A.G. Edwards and
AON.

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  through  broker/dealer  distribution  channels.   Principal
Advantage   gives   us   access   to   National    Association   of   Securities
Dealers-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.

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 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 approximately
10 specialized  home office sales  consultants as of December 31, 2003,  working
through  consultants and brokers that  specialize in this type of business.  Our
home office sales  consultants  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.  Principal  Connection  is our 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.

We market GICs 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  GICs  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 U.S. 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
quarter to another.

                                       8

MUTUAL FUNDS

We have been  providing  mutual funds to customers  since 1969.  We offer mutual
funds to individuals and  businesses,  for use within variable life and variable
annuity  contracts  and for use in  employer-sponsored  pension  plans  and as a
rollover investment option.

PRODUCTS

We were ranked in the top quartile  among U.S.  mutual fund managers in terms of
total mutual fund assets under management as of November 30, 2003,  according to
the Investment Company Institute. The value of our mutual fund assets we managed
was $12.1  billion as of December 31, 2003. We provide  accounting,  compliance,
corporate governance,  product development and transfer agency functions for all
mutual funds we organize.  As of November 30, 2003,  our mutual fund  operations
served approximately 782,800 mutual fund shareholder accounts.

PRINCIPAL  MUTUAL  FUNDS.  Principal  Mutual  Funds is a family of mutual  funds
offered to individuals and businesses,  with 22 mutual funds and $3.5 billion in
assets under management as of December 31, 2003. We report the results for these
funds in this segment under "Mutual Funds".

PRINCIPAL VARIABLE CONTRACTS FUND. Principal Variable Contracts Fund is a series
mutual fund which, as of December 31, 2003,  provided 24 investment  options for
use as funding choices in variable annuity and variable life insurance contracts
issued by Principal Life. As of December 31, 2003, this fund had $3.0 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 series mutual fund,
which as of December 31, 2003, offered 46 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 Segment-U.S. Asset
Accumulation-Pension   Services   and   Products-Pension   Products-Full-service
Accumulation."  This fund also  offers a retail  class of shares to  individuals
primarily  for IRA  rollovers.  As of December  31,  2003,  this retail class of
shares had $1.3 billion in assets under management;  $0.2 billion of this retail
class invests in other share  classes of Principal  Investors  Funds.  All other
share  classes of Principal  Investors  Funds,  including  seed money,  had $4.5
billion  of assets  under  management.  We report  the  results  for this  fund,
excluding the retail class of shares, under "Pension".  We report the results of
the retail class of shares in this segment under "Mutual Funds."

MUTUAL FUND MARKETS AND DISTRIBUTION

Our  markets  for retail  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 retail  mutual funds are sold  primarily  through our  affiliated  financial
representatives,    independent   brokers   registered   with   our   securities
broker-dealer  Princor Financial Services Corporation,  ("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.

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.

                                       9

PRODUCTS

We offer both fixed and variable  annuities to  individuals  and pension  plans.
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 immediate,  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. For most  contracts,  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. Our  affiliated  asset manager,  Principal
Global Investors, manages fixed annuity account values.

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  Global  Investors,  or  leading  third-party  asset  managers.  As of
December 31, 2003, 71% of our $3.0 billion in variable  annuity account balances
was  allocated to investment  sub-accounts  and our general  account,  which are
managed by Principal Global Investors and 29% to investment sub-accounts managed
by third-party  asset managers.  The customers bear the investment risk and have
the  right  to  allocate   their  assets  among  various   separate   investment
sub-accounts.  The  value  of the  annuity  fluctuates  in  accordance  with the
experience of the investment sub-accounts chosen by the customer. 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.

INDIVIDUAL ANNUITY 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 receive distributions of 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 50%, 63%, and 74% of annuity sales for the
years ended December 31, 2003, 2002 and 2001, respectively.  The remaining sales
were made through brokerage general agencies,  banks,  Principal  Connection and
unaffiliated   broker-dealer  firms.  Although  our  percentage  of  sales  from
affiliated financial  representatives has declined,  they continued to be strong
in 2003.  The decline is a result of focused  efforts to increase  sales through
non-affiliated distribution channels.

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  include  checking  and savings  accounts,  money market
accounts,  certificates of deposit,  consumer loans,  first mortgage loans, home
equity loans,  credit cards,  debit cards, and a college savings program.  As of
December 31, 2003,  Principal Bank had 107,731 customers and $2,012.3 million in
assets,  primarily  generated by checking  account,  money  market  accounts and
certificates of deposit.

                                       10

We market our Principal Bank products and services to our existing customers and
external  prospects,  through  Principal  Connection and other means such as the
Internet, direct mail, and targeted advertising. Through Principal Bank, we also
pursue asset retention strategies with our customers who seek to transfer assets
from our other asset accumulation products by offering them our banking products
and services.

U.S. ASSET MANAGEMENT

PRINCIPAL GLOBAL INVESTORS

In 1999, we established  Principal Global Investors to consolidate our extensive
investment  management  expertise and to focus on marketing our asset management
services  to  third-party  institutional  clients.  Principal  Global  Investors
provides  asset  management   services  to  our  U.S.  and  international  asset
accumulation  businesses and third-party  institutional  clients, as well as our
other U.S.-based  segments.  Principal Global Investors provides a full range of
asset  management  services with emphasis on three  primary asset  classes:  (1)
equity  investments;   (2)  fixed  income  investments;   and  (3)  real  estate
investments.

As  of  December  31,  2003,  Principal  Global  Investors,  together  with  its
affiliates,  Principal Real Estate Investors, Spectrum Asset Management and Post
Advisory Group, managed $113.3 billion in assets. Our third-party  institutional
assets were $24.7  billion as of December 31, 2003,  compared to $3.5 billion on
January 1, 1999, the date Principal Global Investors was established.

PRODUCTS

Principal Global Investors  provides a full range of asset management  services,
with  emphasis on three asset  classes  through a range of  investment  vehicles
including   separate   accounts,    mutual   funds,    institutional   accounts,
collateralized debt securities and Principal Life's general account:

EQUITY INVESTMENTS.  Principal Global Investors manages equity portfolios, which
represented  $20.8 billion in assets as of December 31, 2003.  Principal  Global
Investors  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 December 31, 2003,  75% of Principal
Global  Investors  equity assets under  management were derived from our pension
products,  19% from other  products of the Principal  Financial  Group,  and the
remaining 6% from third-party institutional clients.

FIXED INCOME INVESTMENTS.  Principal Global Investors, along with Spectrum Asset
Management and Post Advisory Group, manages $66.1 billion in fixed income assets
as of December 31, 2003.  Principal Global Investors,  Spectrum Asset Management
and Post  Advisory  Group  provide our clients  with access to  investment-grade
corporate debt,  mortgage-backed,  asset-backed  and commercial  mortgage-backed
securities,  high  yield  and  municipal  bonds,  private  and  syndicated  debt
instruments  and  preferred  securities.  As of December 31, 2003,  50% of these
assets were derived from our pension  products,  22% from other  products of the
Principal Financial Group, and the remaining 28% from third-party  institutional
clients.

REAL ESTATE  INVESTMENTS.  Principal  Global  Investors,  through its  affiliate
Principal Real Estate  Investors,  manages a commercial real estate portfolio of
$24.4 billion of assets as of December 31, 2003. Principal 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 Global
Investors  had $0.4 billion of assets under  management as of December 31, 2003,
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 December 31, 2003, 50%
of the commercial real estate  portfolio was derived from our pension  products,
30% from other products of the Principal  Financial Group, and the remaining 20%
from third-party institutional clients.

                                       11

U.S. ASSET MANAGEMENT MARKETS AND DISTRIBUTION

Principal Global Investors  employed over 60 institutional  sales,  relationship
management and client service  professionals as of December 31, 2003, who worked
with  consultants  and  directly  with large  investors  to  acquire  and retain
third-party  institutional  clients.  For the  year  ended  December  31,  2003,
approximately  60% of new institutional  clients were originated  through direct
client contact by Principal Global Investors  representatives,  with the balance
derived from contact with consultants or other intermediaries.

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

Our  International  Asset  Management  and  Accumulation   segment  consists  of
Principal  International and the discontinued  operations of BT Financial Group.
Principal International has subsidiaries in Argentina,  Chile, Mexico, Hong Kong
and  India  and joint  ventures  in  Brazil,  Japan  and  Malaysia.  We focus on
countries with favorable  demographics and a trend toward private sector defined
contribution  pension systems. We entered these countries through  acquisitions,
start-up operations and joint ventures.

On October 31, 2002, we sold  substantially all of BT Financial Group to Westpac
Banking  Corporation  ("Westpac").  As of December  31, 2003,  we have  received
proceeds of A$958.9  million  Australian  dollars ("A$") (U.S.  $537.4 million )
from Westpac,  with future contingent  proceeds in 2004 of up to A$150.0 million
(approximately  U.S. $115.0 million ). The contingent  proceeds will be based on
Westpac's  future  success in growing retail funds under  management.  We do not
anticipate receiving the contingent proceeds.

The decision to sell BT Financial Group was made with a view toward focusing our
resources,  executing  on core  strategic  priorities  and  meeting  shareholder
expectations.  Changing  market  dynamics since our  acquisition of BT Financial
Group, including industry  consolidation,  led us to conclude that the interests
of our  shareholders,  BT Financial Group clients and staff would be best served
under Westpac's ownership.

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

As of December 31, 2002, we accrued for an estimated  after-tax loss on disposal
of $208.7  million.  For the year ended  December 31,  2003,  we  recognized  an
after-tax  gain of $21.8  million,  primarily due to additional tax benefits and
additional proceeds received upon completion of the sale to Westpac. These gains
were  recorded  in  the  income  (loss)  from  discontinued  operations  in  the
consolidated statements of operations.

BT Financial  Group is accounted for as a discontinued  operation and therefore,
the results of  operations  (excluding  corporate  overhead) and cash flows have
been  removed  from  our  results  of  continuing  operations  for  all  periods
presented.  Corporate  overhead allocated to BT Financial Group does not qualify
for discontinued  operations  treatment under Statement of Financial  Accounting
Standards  No. 144,  ACCOUNTING  FOR THE  IMPAIRMENT  OR DISPOSAL OF  LONG-LIVED
ASSETS, and therefore is still included in our results of continuing operations.

The results of operations  (excluding corporate overhead) for BT Financial Group
are  reported  as  other  after-tax   adjustments  in  our  International  Asset
Management and Accumulation segment. For financial results for the International
Asset Management and Accumulation segment see Item 8. "Financial  Statements and
Supplementary Data, Notes to Consolidated Financial Statements,  Note 19 Segment
Information".

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,  long-term

                                       12

mutual funds and life insurance.  We operate through  subsidiaries in Argentina,
Chile,  Mexico,  Hong Kong and India and joint  ventures  in  Brazil,  Japan and
Malaysia.

PRODUCTS, MARKETS AND DISTRIBUTION

ASIA/PACIFIC REGION

HONG KONG.  Our  subsidiary  in Hong Kong is actively  competing  in the defined
contribution   pension  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.  On January 31,
2004, our wholly-owned  subsidiary,  Principal Asset  Management  Company (Asia)
Limited, purchased a 100% ownership of Dao Heng Fund Management ("DHFM") in Hong
Kong from Guoco Group Limited. The acquisition of DHFM increases our presence in
the Hong Kong defined contribution pension market.

INDIA.  Our subsidiary in India competes in the mutual fund market  managing and
administering  funds for both individuals and  corporations.  In addition to the
current  mutual fund  business,  we are  positioning  to compete in the emerging
pension and long-term  savings market in India. We sell our mutual funds through
regional offices and regional bank offices located throughout India.

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

JAPAN. We own 50% of  ING/Principal  Pensions  Company,  Ltd., which sells a new
defined  contribution  pension plan as a result of  legislation  adopted in June
2001.  This  company  targets  small  and  medium-sized  businesses  and  offers
full-service  record-keeping and plan administration.  Our joint venture partner
is ING  Insurance  International  B.V.,  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.

MALAYSIA.  We own 30% of  Commerce  Asset  Fund  Managers  Sendirian  Berhad and
Commerce Trust Berhad, two mutual fund and asset management companies. Our joint
venture  partner is Commerce  Asset  Holdings,  a large  Malaysian  bank holding
company.  The company  markets mutual funds through  wholesale bank channels and
its own sales force.

LATIN AMERICA

ARGENTINA. We own a life insurance company and a retirement annuity company (our
"Companies").  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.  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.  While recent  adverse  economic and  political  events in Argentina are
expected  to  impact  our  ongoing  operations,  we have  been  positioning  our
Companies to work through this  environment  since mid-2001 and expect to manage
revenues and expenses accordingly.

                                       13

BRAZIL. We own 46% of BrasilPrev  Seguros e Previdencia S.A.  ("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,  retirement and asset accumulation  products.
BrasilPrev  provides  defined  contribution   products  and  annuities  for  the
retirement needs of employers and individuals.  Banco do Brasil's employees sell
directly  to  individual  clients  through  its  bank  branches.   In  addition,
BrasilPrev   reaches  corporate  clients  through  two  wholesale   distribution
channels:  (1) a wholesale  distribution  channel distributes products through a
network of independent  brokers who sell to the public,  and (2) another 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  of 69 captive  agents and 386  independent
agents as of  December  31,  2003.  We utilize  sales  representatives  who sell
through  brokers,  and we also  market  life  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
September 30, 2003,  according to the Superintendencia de Valores y Seguros, the
Chilean regulatory agency for insurance companies. We also own 100% of Principal
Creditos Hipotecarios S.A. Through this business, we originate, sell and service
mortgage  loans  in  Chile.   In  November  2001,  we  acquired  70%  of  Tanner
Administradora  de  Fondos  Mutuos  S.A.,  a  well-known  Chilean  Mutual  Funds
Administrator,   as  part  of  our  strategy  to  enter  the  Voluntary  Defined
Contribution Market in 2002.

MEXICO.  We own Principal  Mexico Compania de Seguros S.A. de C.V.,  ("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.,   ("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  1,700
sales representatives as of December 31, 2003, who sell directly to individuals.
As  of  December  31,  2003,   Principal   Pensiones  used  138  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.  In May 2002, we
acquired  100% of Zurich Afore S.A. de C.V.  from Zurich  Financial  Services to
strengthen our competitive  position in the Mexican pension market.  On February
28, 2003, we acquired AFORE Tepeyac S.A. de C.V. from Mapfre American Vida, Caja
Madrid and Mapfre Tepeyac . On July 31, 2003, we acquired S.I.  Genera,  S.A. de
C.V.  (Genera) a mutual fund company that manages and administers funds for both
individuals  and  corporations,  from  Vector,  Casa de Bolsa,  S.A.  de C.V. We
distribute Genera's products and services through a sales force of approximately
50 employees who are distributed throughout the major cities in the country.

LIFE AND HEALTH INSURANCE SEGMENT

Our Life and  Health  Insurance  segment  offers (1)  individual  and group life
insurance (2) group health  insurance and (3)  individual  and group  disability
insurance throughout the U.S.

For  financial  results  for the Life and Health  Insurance  segment see Item 8.
"Financial  Statements and Supplementary  Data, Notes to Consolidated  Financial
Statements, Note 19 Segment Information".

INDIVIDUAL AND GROUP LIFE INSURANCE

We began as an individual life insurer in 1879. We began as a group life insurer
in 1941.  Our U.S.  operations  served  approximately  654,000  individual  life
policyholders  with $89.9  billion of individual  life  insurance in force as of
December 31, 2003. Group life operations  provided  products and services to 2.5
million  covered lives with $73.7 billion of group life insurance in force as of
December 31, 2003.

                                       14

We offer a wide array of individual and group life  insurance  products aimed at
serving our customers' financial needs throughout their lives.

PRODUCTS AND SERVICES

Our individual and group life insurance products include: universal and variable
universal life insurance, traditional life insurance and group life insurance.

UNIVERSAL  AND  VARIABLE  UNIVERSAL  LIFE  INSURANCE.   Universal  and  variable
universal life insurance products offer life insurance protection for which both
the premium and the death benefit may be adjusted by the  policyholder.  For the
year ended December 31, 2003, 74% of individual life insurance  annualized first
year  sales have come from  universal  and  variable  universal  life  insurance
products.  Universal and variable  universal  life  insurance  represents 32% of
individual  life insurance  premium and deposits for the year ended December 31,
2003 and 27% of  individual  life  insurance  in force as of December  31, 2003.
Variable universal life insurance products  represented 55% of our universal and
variable universal life insurance deposits for the year ended December 31, 2003.
We credit deposits,  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.  Some of our universal  life and variable  universal
life  insurance  contracts  contain what are  commonly  referred to as "no-lapse
guarantee provisions". A no-lapse guarantee keeps the contract in force, even if
the  contractholder's  account balance is insufficient to cover all the contract
charges,  provided  that the  contractholder  has  continually  paid a specified
minimum premium. Our profitability is based on charging sufficient  asset-based,
premium-based and risk-based fees to cover the cost of insurance and expenses.

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 17% and 9%,
respectively,  of our individual life insurance  annualized first year sales for
the year ended December 31, 2003 and 50% and 23% of individual life insurance in
force as of December 31, 2003.  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.  Sales of
participating  products consist primarily of premium increase adjustments on our
adjustable  life  products.   Participating  policyholders  may  receive  policy
dividends  as  declared  by the  board of  directors  of  Principal  Life if the
combined result of experience  factors,  including 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.

GROUP LIFE INSURANCE.  Group life insurance  provides  coverage to employees and
their dependents for a specified  period.  As of December 31, 2003, we had $73.7
billion of group life insurance in force  covering 2.5 million  lives.  We carry
both traditional  group life insurance that does not provide for accumulation of
cash values and group  universal  life,  which does provide 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 91% and 9%,  respectively,  of our total group life insurance
in force as of December 31,  2003.  As of January 1, 2004,  we no longer  market
group  universal  life insurance to new employer  groups.  According to the 2002
LIMRA  International,  Inc. Sales and In Force Reports,  we were ranked first in
the U.S. in terms of the number of life insurance  contracts in force and second
in terms of the number of contracts sold.

                                       15

GROUP HEALTH INSURANCE

We began offering group health insurance in 1941. We offer a wide array of group
health insurance  products including  medical,  dental and vision insurance.  In
addition,  we offer administrative  services on a fee-for-service basis to large
employers in the U.S. As of December 31, 2003, we provided products and services
to over 596,000 medical covered  members,  1,348,000  dental/vision  members and
1,663,000  administrative  services only members on a duplicated basis.  Members
may be counted multiple times if they have more than one product.

PRODUCTS AND SERVICES

Our  U.S.  group  health  insurance  products  and  services  include:   medical
insurance, dental and vision insurance and fee-for-service.

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.  Through  our
wholly-owned  subsidiary,  HealthRisk  Resource  Group,  Inc., we also negotiate
discounts  with  providers  on claims  for  which we have no other  pre-arranged
discount.

GROUP  DENTAL AND VISION  INSURANCE.  Group  dental and vision  insurance  plans
provide partial reimbursement for dental and vision expenses. As of December 31,
2003,  we had over 33,000 group dental and vision  insurance  policies in force.
According to the 2002 LIMRA  International,  Inc. Sales and Inforce Reports,  we
were the sixth largest  group dental  insurer in terms of in force premium based
on  total   indemnity   and  PPO   plans   and  third  in  terms  of  number  of
contracts/employer  groups in force based on total  indemnity and PPO plans.  In
addition to indemnity and PPO dental,  we offer a prepaid dental plan in Arizona
through our Dental-Net, Inc. subsidiary.

FEE-FOR-SERVICE.  We offer administration of group disability,  medical,  dental
and vision services on a fee-for-service basis to larger self-insured employers.

INDIVIDUAL AND GROUP DISABILITY INSURANCE

We began  as an  individual  disability  insurer  in  1952.  We began as a group
disability  insurer in 1941. Our U.S.  operations  served  approximately  82,000
individual  disability  policyholders  as of December 31, 2003. Group disability
provided  products and services to  approximately  800,000 covered members as of
December 31, 2003.

We offer a wide array of  individual  and group  disability  insurance  products
aimed at serving our customers' financial needs throughout their lives.

PRODUCTS AND SERVICES

INDIVIDUAL  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.  Individual
disability  income  represents 42% of total disability  premium.  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.  Our  individual  disability
business was ranked  seventh in the U.S. as of December  31,  2002,  in terms of
premium in force,  according  to the 2002  LIMRA  International,  Inc.  In Force
Report.

GROUP DISABILITY  INSURANCE.  Group disability  insurance  provides a benefit to
insured  employees who become disabled.  Our group  disability  products include
both short-term and long-term disability. Long-term disability represents 34% of
total  disability  premium while short-term  disability  represents 24% of total

                                       16

disability premium. 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.  Our group
disability  business was ranked  seventh in the U.S. as of December 31, 2002, in
terms of number of  contracts/employer  groups in force,  according  to the 2002
LIMRA International, Inc. In Force Reports.

LIFE AND HEALTH MARKETS AND DISTRIBUTION

We sell our individual life and individual  disability income 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. We have also recently established a number of marketing and
distribution  alliances to increase the sales of individual  insurance  products
with firms such as: AXA,  Highland  Capital,  AG  Edwards,  Wells  Fargo,  Piper
Jaffrey,  and BISYS.  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.  A single large  individual life insurance
case of  approximately  $10.0 million was sold in 2002.  No comparable  case was
sold in 2001 nor in 2003. Small and medium-sized  business sales represented 64%
of  individual  life sales and 49% of individual  disability  sales for the year
ended December 31, 2003, 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 72% of individual life
insurance  sales  based on first  year  annualized  premium  for the year  ended
December 31, 2003. We had 926 affiliated financial representatives in 30 offices
as of December 31, 2003.  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.   Non-affiliated   financial
representatives  comprised 80% of individual disability sales for the year ended
December 31, 2003.

We market our group  life,  disability,  medical,  dental  and vision  insurance
products to small and  medium-sized  businesses  to  complement  our  retirement
services 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 fee-for-service  products in all
50 states and the  District of  Columbia.  We sell vision  coverage in 49 states
plus the  District  of  Columbia.  We have  chosen to market  our group  medical
insurance  in 35 states and the  District  of  Columbia,  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  and   fee-for-service   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 two independent  wholesale  organizations,
Rogers Benefit Group and Excelsior Benefits,  dedicated to marketing group life,
health  and  disability  insurance  products.  We have  also  formed a number of
strategic distribution alliances with national brokerages and regional brokerage
agencies.

As of December 31, 2003, we had 96 medical and non-medical sales representatives
and 62 service  representatives in 53 offices. Our medical and non-medical sales
representatives accounted for 67%, 61%, and 64% of our group insurance sales for
the  years  ended  December  31,  2003,  2002  and  2001,  respectively.   These
representatives act as a unique combination of wholesalers and brokers. They are
an integral 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

                                       17

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
33%, 39%, and 36% of our group  insurance sales for the years ended December 31,
2003, 2002 and 2001, respectively.

Excelsior  Benefits is a relatively new marketing  organization  specializing in
group medical programs, and group life, disability, and dental plans. We entered
into our  relationship  with Excelsior  Benefits  beginning in November 2003. As
such, they accounted for less than 1% of sales in 2003.

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 U.S. Through our wholly-owned subsidiary, Principal Residential Mortgage,
Inc.,  ("Principal  Residential  Mortgage"),  we originate,  purchase,  sell and
service mortgage loans. We principally  originate "A" quality home mortgages and
do not originate subprime mortgages to any material degree, nor do we service or
purchase any subprime mortgage loans. "A" quality loans are generally defined as
loans eligible for sale to the Federal National Mortgage  Association,  ("Fannie
Mae"),  Federal Home Loan Mortgage  Corporation,  ("Freddie  Mac") and using the
Government National Mortgage Association,  ("Ginnie Mae") Program.  According to
INSIDE MORTGAGE FINANCE, based on the unpaid principal balance of $118.7 billion
in mortgage loans in its servicing portfolio, Principal Residential Mortgage was
ranked as the eleventh largest mortgage  servicer in the U.S. as of December 31,
2003, and was ranked  twelfth in production  with $58.7 billion of new loans for
the year ended December 31, 2003.

For financial results for Mortgage Banking see Item 8. "Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements,  Note 19 Segment
Information".

LOAN PRODUCTION

Our loan  production  strategy  is to manage  our three  distribution  channels:
correspondent  lending,  wholesale  lending and Principal  Residential  Mortgage
Direct,  in a manner that is consistent  with our loan  servicing  strategy.  We
obtain new customers through each of our three distribution  channels,  with the
majority being obtained through our correspondent  lending and wholesale lending
operations.

We originate and purchase conventional mortgage loans, mortgage loans insured by
the Federal  Housing  Administration,  ("FHA"),  and  mortgage  loans  partially
guaranteed by the  Department  of Veterans  Affairs,  ("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 $322,700 for loans  delivered  before  January 1,
2004,  and $333,700 for loans  delivered  after  January 1, 2004, 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.

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

                                       18

origination,  which are  originated  or  purchased  by us, are  required to have
private mortgage insurance.  Insurance premium is paid either 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 $322,700 for loans  delivered  before  January 1, 2004 and $333,700 for
loans  delivered  after  January  1,  2004.  We  generally  use the  guidelines,
techniques and technology tools provided by our investors 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.

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.
Substantially all of our FHA-insured and  VA-guaranteed  mortgage loans sold are
securitized  through  the  Ginnie  Mae  program.  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.

CORRESPONDENT  LENDING.  As of December  31,  2003,  we had  contracts  with 702
lending  institutions  across the U.S. to purchase prime credit quality loans on
an ongoing basis. According to INSIDE MORTGAGE FINANCE, as of December 31, 2003,
we were  the  eighth  largest  correspondent  lender  in the U.S.  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 our Internet  website  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 entering  into  numerous
alliances with third-party  service providers to further  streamline  processes,
improve productivity and provide outstanding customer service.

WHOLESALE.  Our wholesale  channel  originates or purchases prime credit quality
loans through 14 regional offices that worked directly with 4,432  participating
mortgage  loan brokers  across the U.S. as of December 31, 2003.  Mortgage  loan
brokers  are  approved  only  after a review of their  reputation  and  mortgage
lending  expertise  and  financial  condition.  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
systems,  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.

PRINCIPAL  RESIDENTIAL  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 encourage a growing percentage of our customers to choose us for
all of their home financing needs.

RETAIL ORIGINATION. On February 4, 2003, Principal Residential Mortgage signed a
definitive  agreement  to sell the assets of the retail field  mortgage  lending
branches  to  American  Home  Mortgage,  Inc.  ("American  Home  Mortgage"),  an
independent  retail  mortgage  banking  company.  American  Home  Mortgage  paid
Principal  Residential  Mortgage a guaranteed  profit margin on its  application
pipeline that existed on February 4, 2003 and purchased the assets of the branch
network and assumed related liabilities.

                                       19

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  and others,  holds  escrow  funds,  contacts  delinquent
borrowers,  supervises foreclosures and property dispositions and performs other
miscellaneous duties related to loan 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 servicing rights,  also on a non-recourse basis to us,
on prime quality mortgage loans originated by other lenders. Our purchases focus
primarily on the acquisition of Fannie Mae, Freddie Mac and Ginnie Mae servicing
rights  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  and other  products to home owners.
Servicing  contracts  acquired  accounted  for  19%  of our  mortgage  servicing
portfolio as of December 31, 2003.

The weighted-average interest rate in our servicing portfolio as of December 31,
2003 was 5.95%.  As of December 31, 2003,  fixed rate loans comprised 95% of the
servicing  portfolio and the  weighted-average  interest rate of the  fixed-rate
loans was 6.01%.

In  November  1999,  we  established  a  wholly-owned   reinsurance  subsidiary,
Principal Mortgage  Reinsurance  Company ("PMRC"),  which reinsures a portion of
the primary mortgage insurance on loans that we originate or purchase. In return
for our  participation  in the mortgage  insurance risk, we receive a portion of
the mortgage insurance premium.

In July 2002, we established a wholly-owned  subsidiary,  Principal  Residential
Mortgage  Servicing,  LLC  ("PRMS")  to  provide  a  source  of  financing  from
third-party  entities which is collateralized by mortgage  servicing rights held
by PRMS. In 2003, PRMS entered into a borrowing arrangement with an unaffiliated
entity.  As of December  31,  2003,  $300.0  million was  outstanding  under the
borrowing arrangement.

CORPORATE AND OTHER SEGMENT

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

For financial results for Corporate and Other see Item 8. "Financial  Statements
and  Supplementary  Data, Notes to Consolidated  Financial  Statements,  Note 19
Segment Information".

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

                                       20

have more  resources  than we do. There were over 8,256 mutual funds in the U.S.
as of December 31, 2002,  according to the  Investment  Company  Institute  2002
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  Investment  Management and T. Rowe Price, some 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 life and health insurance  business,  our competitors
include other  insurers such as UNUM,  Guardian,  The  Northwestern  Mutual Life
Insurance  Company,  Manulife,  Blue Cross and Blue  Shield  organizations,  and
health  maintenance  organizations  such as United  HealthCare  and  Aetna.  The
mortgage  banking  industry is also highly  competitive  and  fragmented  and we
compete with other mortgage  bankers,  commercial banks, such as Countrywide and
Wells  Fargo,  savings  and  loan  associations,  credit  unions  and  insurance
companies.

We believe we distinguish ourselves from our competitors through our:

o        full-service platform;

o        strong customer relationships;

o        focus on financial performance; and

o        performance-oriented culture.

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:

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 Ratings                     AA ("Very Strong") with a stable           Third highest of 24 rating levels
                                      outlook
Moody's Investors Service         Aa3 ("Excellent") with a stable outlook    Fourth highest of 21 rating levels
Standard & Poor's Rating Services AA ("Very Strong") with a stable outlook   Third highest of 21 rating levels

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

                                       21

assets,  the adequacy of its policy  reserves,  the experience and competency of
its management and other factors.

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.

EMPLOYEES

As of December  31,  2003,  we had 14,976  employees.  None of our  employees is
subject to collective  bargaining  agreements  governing  employment with us. We
believe that our employee relations are satisfactory.

INTERNET WEBSITE

Our Internet website can be found at  www.principal.com.  We make available free
of charge on or through our  Internet  website,  access to our annual  report on
Form 10-K,  quarterly  reports on Form 10-Q,  current  reports on Form 8-K,  and
amendments  to those  reports  filed or furnished  pursuant to Section  13(a) or
15(d) of the Exchange Act as soon as reasonably  practicable after such material
is filed with or  furnished to the  Securities  and  Exchange  Commission.  Also
available free of charge on our Internet  website and in print to any requesting
shareholder  is our code of business  conduct and ethics,  corporate  governance
guidelines charters for the audit, human resources and nominating and governance
committees  of our  board  of  directors.  Also  see Item  10.,  "Directors  and
Executive Officers of the Registrant".

ITEM 2.  PROPERTIES

We own 27  properties  in our home  office  complex in Des  Moines,  Iowa and in
various other locations. Of these 27 properties,  11 are office buildings, 2 are
warehouse  facilities,  13 are  parking  lots and ramps,  and 1 is a  park/green
space.  Of the office and warehouse  space, we occupy  approximately  93% of the
2.88 million square feet of space in these  buildings.  The balance of the space
in these buildings is rented to commercial  tenants.  Of the parking  properties
there are approximately  6,918 stalls. We lease office space for various offices
located throughout the U.S. and  internationally.  We believe that our owned and
leased properties are suitable and adequate for our current business operations.

ITEM 3.  LEGAL PROCEEDINGS

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

Principal  Life  was a  defendant  in two  class-action  lawsuits  that  alleged
improper sales practices.  A number of persons and entities who were eligible to
be class members excluded themselves from the class (or "opted out"), as the law
permits them to do. Some of those who opted out from the class filed  individual
lawsuits making claims similar to those addressed by the class-action  lawsuits.
The two  class-action  lawsuits and the majority of the opt-out claims have been
settled and  dismissed  with  prejudice.  The remaining  opt-out  claims are not
expected to have a material impact on our business,  financial  condition or net
income.

                                       22

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

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

No matter was  submitted to a vote of security  holders of  Principal  Financial
Group, Inc. during the fourth quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE REGISTRANT

The  following  information  is furnished  with respect to each of the executive
officers of the  Company,  each of whom is elected by and serves at the pleasure
of the Board of Directors.

J. BARRY GRISWELL, 54, has been Chairman,  President and Chief Executive Officer
of the Company and  Principal  Life since 2002, a director of the Company  since
2001,  and a Principal  Life director  since 1998.  Prior  thereto,  he had been
President  and Chief  Executive  Officer of the Company  since  April 2001,  and
President  and Chief  Executive  Officer of Principal  Life since  January 2000.
Prior to January 2000, Mr. Griswell held the following  positions with Principal
Life:  President from 1998-2000 and Executive Vice President from 1996-1998.  He
is a Chartered Life Underwriter,  a Chartered  Financial  Consultant and a LIMRA
Leadership  Institute  Fellow.  He is Chair of the  Executive  Committee  of the
Board.

JOHN E. ASCHENBRENNER,  54, who heads the Life and Health Insurance and Mortgage
Banking  segments of our operations has been President,  Insurance and Financial
Services,  since December 2003.  Prior to that time, he served as Executive Vice
President  of the Company  since April 2001,  and  Executive  Vice  President of
Principal Life since January 2000.  Prior thereto,  he was Senior Vice President
of  Principal  Life  from  1996-December  1999.  Mr.  Aschenbrenner  serves as a
director of the 24 mutual  funds that  comprise the  Principal  Family of Mutual
Funds.

MICHAEL H. GERSIE,  55, has been Executive  Vice  President and Chief  Financial
Officer of the Company since April 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,  50, has been Senior Vice  President  and Chief  Actuary of the
Company  since  April  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.

JULIA M. LAWLER, 44, has been Senior Vice President and Chief Investment Officer
of the Company since July 2002.  From  2000-2002,  she was President of the Real
Estate Equity Group of Principal Global Investors,  LLC. From 1999-2000, she was
Vice President-Capital Markets. From 1998-1999, she was Director-Capital Markets
of Principal Life.

JAMES P.  MCCAUGHAN,  50, has been  President,  Global Asset  Management,  since
December 2003.  Prior to that time, he served as Executive Vice President of the
Company and global head of asset management for Principal  Financial Group since
April 2002. From 2000-2002, he was CEO of the Americas division of Credit Suisse
Asset  Management in New York, New York.  From  1998-1999,  he was President and
Chief Operating Officer of Oppenheimer Capital in New York, New York.

MARY A. O'KEEFE,  47, who heads Corporate  Relations and Strategic  Development,
has been Senior Vice  President of the Company since April 2001, and Senior Vice
President of Principal  Life since January 1998.  From  1994-1997,  she was Vice
President--Corporate Relations of Principal Life.

GARY P.  SCHOLTEN,  46, has been Senior  Vice  President  and Chief  Information
Officer  of the  Company  since  November  2002.  From  1998-2002,  he was  Vice
President of retail information services of Principal Life.

                                       23

KAREN E. SHAFF, 49, has been Executive Vice President and General Counsel of the
Company and of Principal Life since February 2004. Prior thereto, she was Senior
Vice  President and General  Counsel of the Company since April 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.

NORMAN R.  SORENSEN,  58, has been  President of Principal  International,  Inc.
since 1998,  Senior Vice  President of the Company since April 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.

LARRY D. ZIMPLEMAN, 52, has been, President of Retirement and Investor Services,
since December 2003. Prior thereto, he served as head of our International Asset
Accumulation  business since January 2003, our U. S. Asset Accumulation business
since  February  2002, and Executive Vice President of the Company and Principal
Life since August 2001.  Previously,  Mr. Zimpleman was Senior Vice President of
Principal Life from June  1999-August  2001, and Vice President from  1998-1999.
Mr.  Zimpleman  serves  as  Chairman  of the  Board  and a  director  of each of
Principal's 24 Mutual Funds.

PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the New York Stock Exchange ("NYSE") under the
symbol "PFG" on October 23, 2001.  Prior to such date,  there was no established
public  trading  market for our common stock.  On February 19, 2004,  there were
approximately 585,801 stockholders of record of our common stock.

The following table presents the high and low prices for our common stock on the
NYSE for the periods indicated and the dividends  declared per share during such
periods.

                                       24

                                         HIGH                   LOW                DIVIDENDS
                                    -----------------     -----------------     -----------------
                                                                            
2003
First quarter................            $31.20                $25.21                 -
Second quarter...............            $34.67                $27.03                 -
Third quarter................            $34.10                $30.13                 -
Fourth quarter...............            $34.36                $30.70                $0.45

2002
First quarter................            $27.05                $22.00                 -
Second quarter...............            $31.50                $25.00                 -
Third quarter................            $30.70                $25.15                 -
Fourth quarter...............            $31.49                $22.50                $0.25

We  declared an annual  cash  dividend of $0.45 per common  share on October 24,
2003, and paid such dividend on December 8, 2003, to  shareholders  of record on
the close of business on November 7, 2003.  We declared an annual cash  dividend
of $0.25 per  common  share on  October  25,  2002,  and paid such  dividend  on
December 9, 2002, to shareholders of record on the close of business on November
8, 2002. Future dividend  decisions will be based on and affected by a number of
factors,  including our operating  results and  financial  requirements  and the
impact of regulatory  restrictions.  See Item 7,  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources"  for a discussion  of regulatory  restrictions  on Principal
Life's ability to pay us dividends.

ITEM 6.  SELECTED FINANCIAL DATA

The  following  table  sets  forth  certain  selected  historical   consolidated
financial  information  of  Principal  Financial  Group,  Inc.  We  derived  the
consolidated  financial  information  for each of the years ended  December  31,
2003,  2002 and 2001  and as of  December  31,  2003 and 2002  from our  audited
consolidated financial statements and notes to the financial statements included
in this Form 10-K. We derived the  consolidated  financial  information  for the
years ended  December 31, 2000 and 1999 and as of December  31,  2001,  2000 and
1999 from our audited  consolidated  financial  statements  not included in this
Form 10-K. The following summary of consolidated  financial information has been
prepared in accordance with U.S. GAAP.

In order to fully understand our consolidated financial information,  you should
also read Item 7. "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and our audited consolidated financial statements and
the notes to the financial  statements  included in this Form 10-K.  The results
for past accounting periods are not necessarily  indicative of the results to be
expected for any future accounting period.

                                       25

                                                            AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------------------------------
                                                 2003(1)       2002(1)       2001(1)         2000(1)          1999(1)
                                               ------------   -----------   -----------   ------------    ------------
                                                                ($ IN MILLIONS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations........    $  3,634.1      $ 3,881.8     $ 4,122.3     $  3,996.4      $  3,937.6
  Fees and other revenues..................       2,416.2        1,990.8       1,600.7        1,300.6         1,191.8
  Net investment income....................       3,419.6        3,304.7       3,383.6        3,157.6         3,055.3
  Net realized/unrealized capital gains
    (losses)...............................         (65.7)        (354.8)       (514.0)         139.6           404.5
                                               ------------   -----------   -----------   ------------    ------------
    Total revenues.........................    $  9,404.2      $ 8,822.5     $ 8,592.6     $  8,594.2      $  8,589.2
                                               ============   ===========   ===========   ============    ============
Income from continuing operations, net of
  related income taxes.....................    $    727.9      $   619.9     $   380.7     $    611.7      $    745.2
Income (loss) from discontinued operations,
  net of related income taxes (2)..........          21.8         (196.7)        (11.2)           8.5            (3.1)
                                               ------------   -----------   -----------   ------------    ------------
Income before cumulative effect of
  accounting changes.......................         749.7          423.2         369.5          620.2           742.1
Cumulative effect of accounting
  changes, net of related income taxes (3).          (3.4)        (280.9)        (10.7)           -               -
                                               ------------   -----------   -----------   ------------    ------------
Net income.................................    $    746.3      $   142.3     $   358.8     $    620.2      $    742.1
                                               ============   ===========   ===========   ============    ============
EARNINGS PER SHARE DATA(4):
Income from continuing operations per share:
  Basic....................................    $      2.23     $     1.77    $     1.05           N/A             N/A
  Diluted..................................    $      2.23     $     1.77    $     1.05           N/A             N/A
Net income per share:
  Basic....................................    $      2.29     $     0.41    $     0.99           N/A             N/A
  Diluted..................................    $      2.28     $     0.41    $     0.99           N/A             N/A

Common shares outstanding at year-end
  (in millions)............................         320.7          334.4         360.1            N/A             N/A
Weighted-average common shares
  outstanding for the year (in millions)...         326.0          350.2         362.4            N/A             N/A
Weighted-average common shares and
  potential common shares outstanding for
  the year for computation of diluted
  earnings per share (in millions).........         326.8          350.7         362.4            N/A             N/A

Cash dividends per share...................    $      0.45     $     0.25          N/A            N/A             N/A

BALANCE SHEET DATA:
Total assets...............................    $107,754.4      $89,861.3     $88,350.5     $ 84,404.9      $ 83,953.2

Long-term debt.............................    $  2,767.3      $ 1,332.5     $ 1,378.4     $  1,336.5      $  1,492.9

Common stock(5)............................    $      3.8      $     3.8     $     3.8     $      -        $      -
Additional paid-in capital(6)..............       7,153.2        7,106.3       7,072.5            -               -
Retained earnings (deficit)(7).............         630.4           29.4         (29.1)       6,312.5         5,692.3
Accumulated other comprehensive
  income (loss)............................       1,171.3          635.8         147.5          (60.0)         (139.4)
Treasury stock, at cost....................      (1,559.1)      (1,118.1)       (374.4)           -               -
                                               ------------   -----------   -----------   ------------    ------------
    Total stockholders' equity.............    $  7,399.6      $ 6,657.2     $ 6,820.3     $  6,252.5      $  5,552.9
                                               ============   ===========   ===========   ============    ============
OTHER SUPPLEMENTAL DATA:

Assets under management ($ in billions)....    $    144.9      $   111.1     $   120.2     $    117.5      $    116.6

Number of employees (actual)...............        14,976         15,038        17,138         17,473          17,129

- ---------

                                       26

(1)  For a discussion of items materially  affecting the  comparability of 2003,
     2002, and 2001, please see Item 7. "Management's Discussion and Analysis of
     Financial  Condition  and Results of  Operations -  Transactions  Affecting
     Comparability  of Results of  Operations  and  Demutualization  and Initial
     Public Offering."

     Our  consolidated  financial  information for 2000 and 1999 was affected by
     the following transactions that affect year-to-year comparability:

     o    On  February  1, 2002,  we sold our  remaining  stake of 15.1  million
          shares of Coventry  Health Care.  We accounted  for our  investment in
          Coventry  using the  equity  method  prior to its  sale.  Our share of
          Coventry's net income was $2.1 million,  $20.2 million,  $20.6 million
          and $19.1 million for the years ended December 31, 2002,  2001,  2000,
          and 1999, respectively.

(2)  On October 31, 2002,  we sold  substantially  all of BT Financial  Group to
     Westpac  Banking  Corporation.  BT Financial  Group is  accounted  for as a
     discontinued operation and therefore,  the results of operations (excluding
     corporate  overhead)  and cash flows have been removed from our income from
     continuing operations for all periods presented.

(3)  See  Item  8.  "Financial  Statements  and  Supplementary  Data-  Notes  to
     Consolidated  Financial  Statements,  Note  1,  Nature  of  Operations  and
     Significant  Accounting  Policies" for a description  of recent  accounting
     changes.

(4)  Earnings per share  information  for 2001  represents  unaudited  pro forma
     earnings  per  common  share for the year  ended  December  31,  2001.  For
     purposes  of   calculating   pro  forma  per  diluted  share   information,
     weighted-average  shares  outstanding  were used. For the period January 1,
     2001 through  October 25, 2001, we estimated  360.8  million  common shares
     were outstanding.  This consists of 260.8 million shares issued to eligible
     policyholders in our demutualization and the 100.0 million shares issued in
     our initial public  offering  ("IPO") which closed on October 26, 2001. For
     the period  October 26, 2001  through  December  31,  2001,  actual  shares
     outstanding were used in the weighted-average share calculation.

(5)  During 2001, we issued 260.8 million shares of common stock as compensation
     in the demutualization, 100.0 million shares of common stock in our IPO and
     15.0  million  shares  of  common  stock as a  result  of the  exercise  of
     over-allotment  options  granted  to  underwriters  in the IPO.  All shares
     issued have a $0.01 per share par value.

(6)  As of December 31, 2001, represents: a) additional paid-in capital from the
     demutualization  resulting from the  reclassification  of residual retained
     earnings of Principal  Mutual Holding  Company,  net of common stock issued
     ($5,047.7 million);  b) net proceeds,  net of common stock issued, from the
     sale of 100.0 million shares of common stock in our IPO ($1,752.9 million);
     c) net  proceeds,  net  of  common  stock  issued,  from  the  exercise  of
     over-allotment options granted to underwriters in the IPO ($265.2 million);
     and d) common stock issued and held in a rabbi trust ($6.7 million).

(7)  As of December 31, 2001, represents a $29.1 million net loss for the period
     October 26, 2001 through December 31, 2001. Retained earnings as of October
     26, 2001, were  reclassified  to additional  paid-in capital as a result of
     our demutualization.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following  analysis  discusses  our  financial  condition as of December 31,
2003,  compared  with  December  31,  2002,  and  our  consolidated  results  of
operations  for the years ended  December 31, 2003,  2002 and 2001,  and,  where
appropriate,  factors  that may  affect our future  financial  performance.  The
discussion should be read in conjunction with our audited consolidated financial
statements  and the  related  notes to the  financial  statements  and the other
financial information included elsewhere in this Form 10-K.

                                       27

FORWARD-LOOKING INFORMATION

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

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

OVERVIEW

We provide financial products and services through the following segments:

o    U.S.  Asset  Management  and  Accumulation,  which  consists  of our  asset
     accumulation  operations  which provide  products and  services,  including
     retirement  savings and related investment  products and services,  and our
     asset management  operations  conducted through Principal Global Investors.
     We provide a  comprehensive  portfolio of asset  accumulation  products and
     services to businesses and individuals in the U.S., with a concentration on
     small and medium-sized businesses, which we define as businesses with fewer
     than 1,000  employees.  We offer to  businesses  products  and services for
     defined  contribution  pension  plans,  including  401(k) and 403(b) plans,
     defined benefit pension  plans,non-qualified  executive  benefit plans, and
     employee stock ownership plan consulting services. We also offer annuities,
     mutual  funds  and bank  products  and  services  to the  employees  of our
     business customers and other individuals.

o    International   Asset  Management  and  Accumulation,   which  consists  of
     Principal   International,   offers   retirement   products  and  services,
     annuities,  long-term mutual funds and life insurance through  subsidiaries
     in  Argentina,  Chile,  Mexico,  Hong Kong and India and joint  ventures in
     Brazil,  Japan,  and  Malaysia.  Prior to October 31, 2002,  the  operating
     segment included BT Financial  Group, an Australia based asset manager.  We

                                       28

     sold  substantially all of BT Financial Group,  effective October 31, 2002.
     See "Transactions Affecting Comparability of Results of Operations."

o    Life and Health Insurance, which provides life insurance,  health insurance
     as well as  disability  insurance  throughout  the U.S. Our life  insurance
     products include universal and variable  universal life,  traditional life,
     and group life. Our health insurance  products  include medical  insurance,
     dental and vision insurance,  and administrative  services.  Our disability
     insurance products include individual and group disability insurance.

o    Mortgage  Banking,  which engages in originating,  purchasing,  selling and
     servicing residential mortgage loans in the U.S.

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

ECONOMIC FACTORS AND TRENDS

The  declining  interest rate  environment  and poor  performance  in the equity
markets in 2002 slowed our growth in asset accumulation  account values for that
year in our U.S. Asset Management and Accumulation segment.  Improvements in the
equity markets in 2003  contributed to a significant  increase in account values
by the end of 2003.

In our International  Asset and Accumulation  segment,  we continued to grow our
existing  business  through  organic growth in our existing  subsidiaries  and a
combination of joint ventures and strategic acquisitions.

During  2002 and 2003,  sales of life  insurance  have  continued  to shift from
traditional  insurance  products to universal and variable universal products in
our Life and Health Insurance  segment.  While health  insurance  membership has
declined  over  the past few  years,  premium  revenue  has  grown  due to price
increases and, to some degree, due to the impact of reinsurance.

Declining interest rates in 2002 resulted in increases in the production of both
purchase and refinance  mortgage  loans in our Mortgage  Banking  segment.  This
trend continued  through all of 2002 and much of 2003.  However,  interest rates
increased  during  the third and fourth  quarters  resulting  in a  decrease  in
mortgage loan production in the fourth quarter of 2003.

PROFITABILITY

Our profitability depends in large part upon our:

o    amount of assets under management;

o    spreads we earn on our policyholders' general account balances;

o    ability to generate fee revenues by providing administrative and investment
     management services;

o    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;

                                       29

o    ability to  effectively  monitor and price  residential  mortgage  loans we
     originate,  purchase,  and  sell and to  manage  the  expenses  we incur in
     servicing residential mortgage loans;

o    ability to  effectively  hedge the effect of interest  rate  changes on our
     residential mortgage servicing rights;

o    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;

o    ability to  effectively  hedge  fluctuations  in foreign  currency  to U.S.
     dollar exchange rates; and

o    ability to manage our operating expenses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The   increasing   complexity  of  the  business   environment   and  applicable
authoritative  accounting guidance requires us to closely monitor our accounting
policies.  We have identified five critical accounting policies that are complex
and require significant judgment and estimates about matters that are inherently
uncertain.  A summary of our critical accounting policies is intended to enhance
the reader's ability to assess our financial condition and results of operations
and the  potential  volatility  due to  changes  in  estimates  and  changes  in
guidance.  We have  discussed the  identification,  selection and  disclosure of
critical accounting estimates and policies with the Audit Committee of the Board
of Directors.

VALUATION OF INVESTED ASSETS

FIXED MATURITIES,  AVAILABLE-FOR-SALE.  Fixed maturity securities include bonds,
mortgage-backed securities and redeemable preferred stock. We classify our fixed
maturity securities as either  available-for-sale  or trading and,  accordingly,
carry them at fair value.  Since many of the fixed maturity  securities  that we
invest in are private  market  assets,  there are not readily  available  market
quotes to  determine  the fair market  value.  These  assets are valued  using a
spread pricing matrix.  When utilizing a spread pricing  matrix,  securities are
valued  through a  discounted  cash flow  method  where each bond is  assigned a
credit and liquidity spread, which is added to the current U.S. Treasury rate to
discount the cash flows of the security.  Our spread pricing matrix uses the OTR
Treasury curve, which is pulled from Bloomberg as of the valuation date. Capital
Management  Sciences  ("CMS")  has been  contracted  to serve as an  independent
source of credit spreads to be used in the corporate private placement valuation
process.  The credit  spreads  are based on weekly  indices  of the public  bond
market and vary by industry,  credit quality,  and average  investment life. The
liquidity spread is based on the average pick-up a private  placement can expect
to earn over a  comparable  public  bond  because of  illiquidity.  The  spreads
assigned  to each  security  change  from month to month based on changes in the
market.  An interest rate  increase in the range of 20 to 100 basis points,  and
holding  credit  spreads  constant,  produces  total values of $33.0 billion and
$31.8 billion,  as compared to the recorded  amount of $33.3 billion  related to
our fixed maturity, available-for-sale assets held by the Principal Life General
Account.

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

There  are a number  of  significant  risks and  uncertainties  inherent  in the
process of monitoring impairments and determining if an impairment is other than
temporary.  These  risks  and  uncertainties  include:  (1) the  risk  that  our
assessment  of an issuer's  ability to meet all of its  contractual  obligations
will change based on changes in the credit  characteristics  of that issuer; (2)
the risk that the economic  outlook will be worse than  expected or have more of
an impact  on the  issuer  than  anticipated;  (3) the risk that our  investment

                                       30

professionals are making decisions based on fraudulent or misstated  information
in the  financial  statements  provided  by  issuers;  and (4) the risk that new
information  obtained by us or changes in other facts and circumstances  lead us
to change our intent to hold the  security  to  maturity or until it recovers in
value.  Any of these  situations  could  result in a charge  to net  income in a
future   period.   At  December   31,   2003,   we  had   $4,289.2   million  in
available-for-sale  fixed  maturity  securities  with  gross  unrealized  losses
totaling  $155.0  million.  Included in the gross  unrealized  losses are losses
attributable  to both  movements in market  interest  rates as well as temporary
credit  issues.  Also  included  in the  $155.0  million  is  $24.8  million  in
unrealized  losses that are  attributable to fixed maturity  securities that are
part of a fair value hedging  relationship.  As such, the $24.8 million has been
recorded in net income versus other  comprehensive  income.  Net income would be
reduced by  approximately  $84.6  million,  on an  after-tax  basis,  if all the
non-hedged  securities  were deemed to be other than  temporarily  impaired.  In
2003, we recognized  $21.1 million in gains on the sales of impaired  securities
and an  additional  $52.1  million  in  impairment  losses  on  assets  that had
previously been impaired.

MORTGAGE LOANS. Mortgage loans consist primarily of commercial mortgage loans on
real  estate.  At December  31,  2003,  commercial  mortgage  loans  represented
$9,630.4  million.  Commercial  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.  Commercial mortgage loans
held for sale are carried at the lower of cost or fair value, less cost to sell,
and reported as mortgage loans in the statements of financial position.

Commercial  mortgage loans on real estate are considered impaired when, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to contractual  terms of the loan  agreement.  When we
determine 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/unrealized capital loss on our consolidated
statements of operations.  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 us to absorb estimated probable credit losses.

The  determination  of the  calculation  and the adequacy of the  mortgage  loan
reserve and mortgage  impairments  are subjective.  Our periodic  evaluation and
assessment of the adequacy of the allowance for losses and the need for mortgage
impairments  is based on known  and  inherent  risks in the  portfolio,  adverse
situations that may affect the borrower's  ability to repay, the estimated value
of the  underlying  collateral,  composition  of  the  loan  portfolio,  current
economic conditions and other relevant factors. Our reserving  methodology looks
at several  factors  that  define five  current  economic  conditions  or states
ranging from best to worst with positive and negative biases.  The determination
of the current economic state looks at factors  including  industry  delinquency
statistics, portfolio drift based on an internal rating model, the growth in our
internal  watch list,  national real estate space  absorption,  vacancy  levels,
national  employment  growth  expectations,  projected  Gross Domestic  Product,
projected  consumer  spending  growth,  and the capital  market  assessment  and
outlook.  At December 31, 2003, our  determination of the current economic state
was average with a negative  bias.  This economic state coupled with the current
portfolio  statistics  produced a reserve for the Principal Life General Account
totaling $48.6 million.  Holding all other portfolio criteria  constant,  if the
economic  state had been  determined  to be the best one at December  31,  2003,
Principal Life's General Account reserve would have been $9.7 million and if the
economic  state had been  determined  to be the worst one,  the  Principal  Life
General  Account  mortgage loan reserve would have totaled $155.5  million.  The
evaluation  of our loan specific  reserve  component is also  subjective,  as it
requires  estimating  the amounts and timing of future cash flows expected to be
received on impaired  loans.  Our financial  position is sensitive to changes in
estimated cash flows from mortgages, the value of the collateral, and changes in
the economic environment in general.

INSURANCE RESERVES

                                       31

Reserves are  liabilities  representing  estimates of the amounts that will come
due, at some point in the future, to our  contractholders.  U.S. GAAP,  allowing
for some degree of managerial  judgment,  prescribes the methods of establishing
reserves.

Future  policy  benefits  and claims  include  reserves  for  certain  insurance
products that are computed  using  assumptions of mortality,  morbidity,  lapse,
investment   performance  and  expense.  These  assumptions  are  based  on  our
experience and are periodically  reviewed  against industry  standards to ensure
actuarial  credibility.  Once these  assumptions  are made for a given policy or
group of policies,  they will not be changed over the life of the policy  unless
we  recognize a loss on the entire  line of  business.  Our  reserve  levels are
reviewed  throughout the year using  internal  analysis,  the annual audit,  and
annual statutory asset adequacy  analysis.  To the extent  experience  indicates
potential loss  recognition,  we recognize  losses on certain lines of business.
The ultimate accuracy of the assumptions on these long-tailed insurance products
cannot be  determined  until the  obligation  of the entire block of business on
which the assumptions were made is extinguished.  Short-term variances of actual
results  from  the  assumptions  used in the  computation  of the  reserves  are
reflected  in current  period net income and can impact  quarter-to-quarter  net
income.

Future  policy  benefits  and claims also  include  reserves  for  incurred  but
unreported  health claims.  We record this liability and  corresponding  benefit
expense for claims that are incurred but not yet reported.  We recognize  claims
costs in the period the service was  provided to our  members.  However,  claims
costs incurred in a particular  period are not known with certainty  until after
we  receive,  process  and pay the  claims.  We  determine  the  amount  of this
liability using actuarial  methods based on historical claim payment patterns as
well as  emerging  medical  cost  trends  to  determine  our  estimate  of claim
liabilities.  We also  look  back to assess  how our  prior  periods'  estimates
developed.  To the extent appropriate,  changes in such development are recorded
as a change to current period claim expense. For the years ending 2003, 2002 and
2001, the amount of the claim reserve  adjustment  made in that period for prior
period  estimates  was  within  a  reasonable  range  given  our  normal  claims
fluctuations.

DEFERRED POLICY ACQUISITION COSTS ("DPAC")

Commissions and other costs (underwriting, issuance and agency expenses, premium
credits,  conversion  bonuses and first-year  bonus interest) 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.
Maintenance  costs and acquisition  costs that are not deferrable 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.

Excluding  non-participating  term life insurance policies,  the deferred policy
acquisition  cost asset is  amortized  in relation  to the gross  profits of the
underlying policies,  over the expected lifetime of these policies. At issue, we
develop an estimate of the expected future gross profits.  These estimated gross
profits contain assumptions relating to mortality,  morbidity,  investment yield
and  expenses.  As actual  experience  emerges,  the gross profits may vary from
those  expected  either in  magnitude  or  timing.  For our  universal  life and
investment  contracts,  we are  required by  accounting  practice to reflect the
actual gross profits of the underlying policies. In addition, we are required to
revise  our  assumptions  regarding  future  experience  as soon as the  current
assumptions  become no longer  actuarially  credible.  Both actions,  reflecting

                                       32

actual experience and changing future estimates, can cause changes in the amount
of the asset and the pattern of future amortization.

We utilize a mean reversion method (reversion to the mean assumption),  a common
industry practice,  to determine the future equity market growth rate assumption
used for the  amortization  of deferred policy  acquisition  costs on investment
contracts  pertaining to individual variable annuities and group annuities which
have separate account equity investment options.  This practice assumes that the
expectation for long-term appreciation is not changed by minor short-term market
fluctuations.   We   periodically   update  these  estimates  and  evaluate  the
recoverability of deferred policy acquisition costs. When appropriate, we revise
our  assumptions  of the  estimated  gross profits of these  contracts,  and the
cumulative  amortization is re-estimated and adjusted by a cumulative  charge or
credit to current operations.

The total DPAC asset  balance as of December 31,  2003,  was $1.6  billion.  The
impact of a 1% reduction in the long term investment performance rate assumption
on  separate  accounts  in our  deferred  policy  acquisition  cost models is an
estimated $6.2 million  reduction in the deferred policy  acquisition cost asset
as of December 31, 2003. Also, removing the mean reversion  methodology from the
deferred policy acquisition cost asset calculation has no impact on the December
31, 2003, asset.  Positive equity market  performance during 2003 resulted in an
observed reversion to the mean as of the end of 2003.

BENEFIT PLANS

The reported expense and liability  associated with these plans requires the use
of  assumptions.  We annually  review our retirement  and other-post  retirement
benefit plan  assumptions for the discount rate, the long-term rate of return on
plan assets, and the compensation increase rate.

The assumed  discount rate is determined by projecting  future benefit  payments
and  discounting  those cash flows using rates based on the Bloomberg AA Finance
yield to maturity curves. For 2003 year-end,  we set the discount rate at 6.25%.
A 0.25% decrease in the discount rate would increase pension benefits  Projected
Benefit  Obligation  ("PBO") and the 2004 Net Periodic  Pension Cost ("NPPC") by
approximately $49.2 million and $8.4 million,  respectively. A 0.25% decrease in
the discount rate would  increase  other  post-retirement  benefits  Accumulated
Postretirement  Benefit  Obligation  ("APBO") and the 2004 Net Periodic  Benefit
Cost ("NPBC") by approximately  $8.3 million and $0.6 million,  respectively.  A
0.25%  increase  in the  discount  rate  would  result in  decreases  in benefit
obligations  and  expenses  at a level  generally  commensurate  with that noted
above.

The  assumed  long-term  rate of return on plan assets is  generally  set at the
long-term rate expected to be earned based on the long-term investment policy of
the plans and the various classes of the invested funds.  Historical  returns of
multiple  asset classes were analyzed to develop a risk-free real rate of return
and risk premiums for each asset class.  The risk premiums take into account the
long-term level of risk of the asset class. The overall  long-term rate for each
asset class was developed by combining a long-term inflation component, the risk
free real rate of return,  and the associated risk premium.  A weighted  average
rate was developed based on long-term  returns for each asset class,  the plan's
target asset allocation  policy,  and the tax structure of the trusts.  For 2004
NPPC and  2004  NPBC  for  other-post  retirement  benefits,  an 8.5% and  7.31%
weighted average long-term rate of return assumption will be used, respectively.
A 0.25%  decrease in the  long-term  rate of return would  increase 2004 NPPC by
approximately  $2.5 million and the 2004 NPBC by approximately  $0.9 million.  A
0.25%  increase  in this rate would  result in a decrease to expense at the same
levels.  The expected return on plan assets is based on the fair market value of
plan assets as of September 30, 2003.

                                       33

The target asset mix of the pension plan is:

                                     Minimum - Maximum
Asset Class                               Ranges
- ------------                       ---------------------------
U.S. stock..............                  40%-60%
Fixed income............                  20%-30%
Real estate.............                   3%-10%
Non-U.S. stock..........                   5%-15%
Non-U.S. fixed income...                   0%-7%
Other...................                   0%-7%

The compensation  increase rate assumption is generally set at a rate consistent
with current and expected  long-term  compensation and salary policy,  including
inflation.

The pension plans' gains/losses are amortized using a straight-line amortization
method  over the  average  remaining  service  period  of  employees.  Actuarial
gains/losses are amortized over approximately 9 years for pension costs and over
approximately 14 years for benefit costs.

Prior service costs are amortized on a weighted average basis over approximately
5 years for pension costs and over approximately 10 years for benefit costs.

MORTGAGE LOAN SERVICING RIGHTS

Mortgage loan servicing  rights represent the value of purchasing or originating
the right to receive cash flows from servicing mortgage loans.  Servicing rights
are  recorded  at the time of sale of the  underlying  mortgage  loans where the
related  servicing is  retained.  The total cost of the  mortgage  loans,  which
includes the cost to acquire the servicing  rights, is allocated to the mortgage
loans and the servicing rights based on their relative  estimated fair values at
the date of sale.  To reduce the impact of  interest  rate  fluctuations  on net
income,  we hedge changes in the estimated fair value of our mortgage  servicing
rights with derivative  financial  instruments.  For mortgage  servicing  rights
designated  as a hedged item in a fair value hedge under  Statement of Financial
Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES ("SFAS 133"), as amended,  the carrying value of the mortgage
servicing  rights is  adjusted  for  changes  in fair value  resulting  from the
application of hedge accounting. Capitalized servicing rights are carried at the
lower of cost or estimated  fair value.  The  capitalized  value is amortized in
proportion  to,  and  over  the  period  of,  estimated  net  servicing  income.
Amortization  is analyzed  periodically  and is  adjusted to reflect  changes in
prepayment speeds.

Capitalized  mortgage  loan  servicing  rights  are  periodically  assessed  for
impairment based on the estimated fair value of those rights under SFAS No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL  ASSETS AND  EXTINGUISHMENTS
OF  LIABILITIES   ("SFAS  140").  For  purposes  of  performing  our  impairment
evaluation,  we  stratify  the  servicing  portfolio  on the  basis  of  certain
predominant risk characteristics, including loan type, note rate, and rate type.
To the extent that the carrying value of the servicing rights exceeds  estimated
fair value for any stratum, a valuation  allowance is established,  which may be
adjusted  in the  future as the  estimated  fair value of the  servicing  rights
increase or decrease.  Changes in the valuation  allowance are recognized in the
consolidated  statements of operations during the period in which the impairment
or recovery occurs.

Fair values are estimated  using  estimates of discounted  future net cash flows
over the expected lives of the underlying loans using loan prepayment,  discount
rate,  ancillary fee income and other assumptions we believe market participants
would  use to value  such  assets.  The  reasonableness  of our  assumptions  is
confirmed through comparisons against qualified mortgage servicing rights trades
that were  completed in the prior  quarter and  quarterly  independent  surveys.
Independent appraisals of the fair value of our servicing portfolio are obtained
periodically  during the year and are used to evaluate the reasonableness of our
fair  value  conclusions.  Due to the  continuing  lack of an  active  servicing
market, we obtained  additional  evidence to support our estimated fair value at

                                       34

December 31, 2003.  Based on this  information,  we performed an analysis of our
mortgage servicing rights portfolio,  which resulted in an additional impairment
charge of $141.3 million in December 2003.

During the second quarter of 2003, we established a policy of further evaluating
our mortgage servicing rights valuation allowance by identifying portions of the
allowance that represent a permanent impairment (i.e., direct write-downs). Each
quarter,  we will recognize a direct write-down when the gross carrying value is
not expected to be recovered in the foreseeable  future.  We estimate the amount
of direct  write-downs  based on an analysis of the  mortgage  servicing  rights
valuation  allowance  related to loans  that have  prepaid.  Direct  write-downs

reduce the gross  carrying  value and the  valuation  allowance  of the mortgage
servicing rights,  thereby precluding subsequent recapture of previous valuation
allowances.  The direct  write-downs  have no impact on net income or  financial
position  in  the  period  of  adjustment  but  may  result  in a  reduction  of
amortization  expense and reduced recovery of impairments in periods  subsequent
to adjustment.

We must exercise certain judgments and make estimates in the application of this
policy. We have some discretion in determining  interest rate assumptions to use
in its estimates,  but we are guided by the benchmark  curve of LIBOR/Swap  term
structure,  the volatility of interest rates derived from historical  volatility
in LIBOR/Swap  rates, and the addition of mortgage spread to the modeled 10-year
swap rate to derive the mortgage refinancing rate.

We develop  prepayment models internally by examining the historical  prepayment
experience of our  portfolio,  given the historical  interest rate  environment.
Servicing  cost   assumptions   are  derived  from  budgeted   costs,   interest
differential,   and  foreclosure  losses  based  on  historical  evidence,   and
amortization  based on expected  non-discounted  cash flows.  Servicing  revenue
assumptions  are derived from  historical  experience and include  principal and
interest float,  escrow float,  prepayment  float, late charges  collected,  and
ancillary income.

The key  economic  assumptions  used in  estimating  the fair value of  mortgage
servicing  rights at the date of loan sale for sales completed in 2003, 2002 and
2001 were as follows:

                                            2003              2002               2001
                                       ---------------  -----------------  -------------------

Weighted-average life (years)...........     6.78             6.42               7.84
Weighted-average prepayment speed.......    10.20%           11.91%              9.48%
Yield to maturity discount rate.........     6.48%            6.75%              7.45%

Prepayment   speed  is  the  constant   prepayment  rate  that  results  in  the
weighted-average life disclosed above.

At December  31, 2003,  key  economic  assumptions  and the  sensitivity  of the
current  estimated fair value of the mortgage  servicing rights to immediate 10%
and 20%  adverse  changes  in those  assumptions  were as  follows  (dollars  in
millions):

Estimated fair value of mortgage servicing rights.....................$1,959.4
Expected weighted-average life (in years).............................     5.7
Prepayment speed *....................................................    13.40%
   Decrease in estimated fair value of 10% adverse change.............$   88.4
   Decrease in estimated fair value of 20% adverse change.............$  168.9
Yield to maturity discount rate *.....................................     7.45%
   Decrease in estimated fair value of 10% adverse change.............$  111.6
   Decrease in estimated fair value of 20% adverse change.............$  223.2

*  Represents the  weighted-average  prepayment  speed and discount rate for the
   life of the  mortgage  servicing  rights  asset  using  our  Option  Adjusted
   Spread/Monte Carlo simulation of 160 interest rate paths.

                                       35

These  sensitivities  are hypothetical  and should be used with caution.  As the
figures  indicate,  changes in estimated  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  estimated  fair  value may not be
linear.  Also,  in the above  table,  the effect of a variation  in a particular
assumption  on the estimated  fair value of the  servicing  rights is calculated
independently without changing any other assumption.  In reality, changes in one
factor may result in changes in another,  which might magnify or counteract  the
sensitivities.  For example,  changes in prepayment speed estimates could result
in changes in the discount rate.

TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS

ACQUISITIONS

We acquired the following businesses, among others, during the past three years:

DAO HENG FUND  MANAGEMENT.  On January 31, 2004,  our  wholly-owned  subsidiary,
Principal Asset Management Company (Asia) Limited, purchased a 100% ownership of
Dao Heng  Fund  Management  ("DHFM")  in Hong  Kong  from  Guoco  Group  Limited
("Guoco").  The  acquisition  of DHFM  increases  our  presence in the Hong Kong
defined contribution pension market.

MOLLOY  COMPANIES.  On December 17, 2003,  we signed an agreement to acquire the
Molloy  Companies.  The  Molloy  Companies  offer  companies  and  organizations
consultative,  administrative  and claims  services for insured and  self-funded
health plans through top benefit brokers and consultants.  Effective  January 2,
2004,  the  operations of the Molloy  Companies will be reported in our Life and
Health segment.

MW POST ADVISORY GROUP. On August 21, 2003, we agreed to purchase  approximately
68% of MW Post Advisory Group ("Post  Advisory") for $101.6  million.  Effective
October  15,  2003,  we owned 23% of Post  Advisory  and agreed to  purchase  an
additional  45% on January 5, 2004.  As part of our U.S.  Asset  Management  and
Accumulation  segment, we account for Post Advisory using the full consolidation
method of accounting since,  although we are only a minority owner from a voting
share perspective prior to January 5, 2004, the terms of the acquisition provide
us with control of Post Advisory  effective  October 15, 2003.  Our assets under
management increased  approximately $3.9 billion at October 31, 2003 as a result
of the acquisition.

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

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

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

AFORE TEPEYAC S.A. DE C.V. On February 28, 2003,  we purchased a 100%  ownership
of AFORE Tepeyac S.A. de C.V.  ("AFORE  Tepeyac") in Mexico from Mapfre American

                                       36

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

BENEFIT  CONSULTANTS,  INC. On January 1, 2003, we acquired Benefit Consultants,
Inc.  ("BCI  Group")  headquartered  in  Appleton,  Wisconsin.  BCI  Group  is a
full-service  consulting,  actuarial and administration firm that specializes in
administering qualified and nonqualified retirement benefit plans with a primary
focus on  employee  stock  ownership  plans.  Effective,  January 1,  2003,  the
operations  of  BCI  Group  are  reported  in  our  U.S.  Asset  Management  and
Accumulation  segment.  We have  integrated BCI Group  operations into Principal
Life and refer to it as employer securities group.

ZURICH  AFORE S.A. DE C.V. On May 31,  2002,  we  purchased a 100%  ownership of
Zurich  AFORE S.A. de C.V.  ("Zurich  AFORE") in Mexico  from  Zurich  Financial
Services for MX$468.4 million (approximately U.S. $49.0 million). The operations
of Zurich AFORE have been  integrated into Principal  International,  Inc., as a
part of our International Asset Management and Accumulation segment.

SPECTRUM  ASSET  MANAGEMENT.  On  October  1, 2001,  Spectrum  Asset  Management
("Spectrum") became an affiliate of Principal Global Investors.  The acquisition
was accounted for using the purchase method and the results of operations of the
acquired  business have been included in our financial  statements from the date
of acquisition.  In October 2002, we purchased the remaining 20% of Spectrum. We
included revenues of $11.0 million,  $5.9 million and $0.8 million for the years
ended  December  31,  2003,  2002 and 2001,  respectively,  in our  consolidated
results of operations.

DISPOSITIONS

We entered into disposition  agreements or disposed of the following businesses,
among others, during the past three years:

BT  FINANCIAL  GROUP.  On October  31,  2002,  we sold  substantially  all of BT
Financial Group to Westpac Banking Corporation  ("Westpac").  As of December 31,
2003, we have received  proceeds of A$958.9  million  Australian  dollars ("A$")
(U.S. $537.4 million) from Westpac,  with future contingent  proceeds in 2004 of
up to A$150.0  million  (approximately  U.S.  $115.0  million).  The  contingent
proceeds will be based on Westpac's future success in growing retail funds under
management. We do not anticipate receiving the contingent proceeds.

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

As of December 31, 2002, we accrued for an estimated  after-tax loss on disposal
of $208.7  million.  For the year ended  December 31,  2003,  we  recognized  an
after-tax  gain of $21.8  million,  primarily due to additional tax benefits and
additional proceeds received upon completion of the sale to Westpac. These gains
were  recorded  in  the  income  (loss)  from  discontinued  operations  in  the
consolidated statements of operations.

BT Financial  Group is accounted for as a discontinued  operation and therefore,
the results of  operations  (excluding  corporate  overhead) and cash flows have
been  removed  from  our  results  of  continuing  operations  for  all  periods
presented.  Corporate  overhead allocated to BT Financial Group does not qualify
for  discontinued  operations  treatment  under  SFAS  144,  ACCOUNTING  FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED  ASSETS, and therefore is still included in
our results of continuing operations.

The results of operations  (excluding corporate overhead) for BT Financial Group
are  reported  as  other  after-tax   adjustments  in  our  International  Asset
Management and  Accumulation  segment.  Selected  financial  information for the
discontinued operations is as follows:

                                       37

                                                       FOR THE YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------
                                                  2003              2002               2001
                                              --------------    --------------    ---------------
                                                      (IN MILLIONS, EXCEPT AS INDICATED)

Total assets under management ($ in
  billions)..............................         $   -              $   -             $  21.6
                                              ==============    ==============    ===============
Total revenues ..........................         $   -              $ 139.7           $ 220.9
                                              ==============    ==============    ===============
Loss from continuing operations, net of
  related income taxes (corporate
  overhead)..............................         $   -              $  (2.6)          $  (3.6)

Income (loss) from discontinued
  operations:
Income (loss) before income taxes........             -                 17.7             (15.6)
Income taxes (benefits)..................             -                  5.7              (4.4)
                                              --------------    --------------    ---------------
Income (loss) from discontinued
  operations (1).........................             -                 12.0             (11.2)
Income (loss) on disposal, net of related
  income taxes (2).......................            21.8             (208.7)              -
                                              --------------    --------------    ---------------
Income (loss) from discontinued
  operations, net of related income
  taxes..................................            21.8             (196.7)            (11.2)

Cumulative effect of accounting changes,
  net of related income taxes............             -               (255.4)              -
                                              --------------    --------------    ---------------
Net income (loss)........................         $  21.8            $(454.7)          $ (14.8)
                                              ==============    ==============    ===============

- -----------------
(1) The 2002 summary  results of  operations  information  is for the ten months
    ended  October  31,  2002,  the  date  of sale of BT  Financial  Group  and,
    accordingly, there is no statement of operations data to present for 2003.

(2) Net of related  income tax  benefits of $14.6  million and $89.6  million in
    2003 and 2002, respectively.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the  purchaser,  Westpac for,  among other  things,  the costs  associated  with
potential  late  filings  made by BT  Financial  Group in New  Zealand  prior to
Westpac's  ownership,  up to a maximum of  A$250.0  million  Australian  dollars
(approximately  U.S.  $190.0  million as of  December  31,  2003).  New  Zealand
securities regulations allow Australian issuers to issue their securities in New
Zealand  provided that certain  documents are  appropriately  filed with the New
Zealand Registrar of Companies.  Specifically,  the regulations require that any
amendments to  constitutions  and compliance  plans be filed in New Zealand.  In
April 2003, the New Zealand Securities Commission ("the Commission") opined that
such late filings would result in certain New Zealand  investors  having a right
to return of their  investment  plus  interest at 10% per annum from the date of
investment.  Consequently,  the  Commission has advised that it has initiated an
inquiry  into the  matter,  both  with  regard to BT  Financial  Group and other
similar  issuers.  We view these potential late filings as a technical matter as
we believe  investors  received the information  that is required to be provided
directly to them. In addition,  we believe this technical  issue may affect many
in the industry and result in a favorable  legislative or judicial  solution.  A
relevant  legislative  solution  and  judicial  action  are both  pending in New
Zealand.  Although we cannot  predict  the outcome of this matter or  reasonably
estimate  losses,  we do not believe that it would result in a material  adverse
effect on our business or financial position.  It is possible,  however, that it
could have a material  adverse  effect on net income in a particular  quarter or
annual period.

                                       38

COVENTRY  HEALTH CARE. On February 1, 2002, we sold our remaining  stake of 15.1
million shares of Coventry  Health Care,  Inc.  ("Coventry")  common stock and a
warrant,  exercisable  for 3.1  million  shares of  Coventry  common  stock.  We
received proceeds of $325.4 million, resulting in a net realized capital gain of
$183.0 million, or $114.5 million net of income taxes.

We reported our  investment  in Coventry in our  Corporate and Other segment and
accounted  for it using  the  equity  method  prior to its  sale.  Our  share of
Coventry's  net income was $2.1  million  and $20.2  million for the years ended
December 31, 2002 and 2001, respectively.

PT ASURANSI JIWA PRINCIPAL INDONESIA.  On September 25, 2001, we disposed of all
the stock of PT Asuransi Jiwa Principal Indonesia,  our subsidiary in Indonesia.
We currently  have no business  operations  in  Indonesia.  We received  nominal
proceeds,  which resulted in a realized capital loss of $6.7 million in 2001. We
included  nominal  revenues and net loss from our operations in Indonesia in our
consolidated  results of  operations  for the year ended  December 31, 2001.  We
received an additional $1.4 million in 2003 pursuant to the 2001 sale agreement,
resulting in a $0.9 million after-tax realized capital gain.

OTHER TRANSACTIONS

SALE OF RETAIL  FIELD  MORTGAGE  LENDING  BRANCH  OFFICES.  On February 4, 2003,
Principal  Residential Mortgage signed a definitive agreement to sell the assets
of the retail field mortgage  lending  branches to American Home Mortgage,  Inc.
("American Home  Mortgage"),  an independent  retail mortgage  banking  company.
American  Home  Mortgage has paid  Principal  Residential  Mortgage a guaranteed
profit  margin on its  application  pipeline that existed as of February 4, 2003
and  has  purchased  the  assets  of the  branch  network  and  assumed  related
liabilities.

REINSURANCE   TRANSACTION.   Effective  January  1,  2002,  we  entered  into  a
reinsurance  agreement to reinsure group medical  insurance  contracts.  We have
amended the contract.  Effective  January 1, 2003, the  reinsurance  contract is
reported under the deposit method of accounting. This reduces ceded premiums and
claims and increases operating expenses with no impact to net income.

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.

In January 2002, the Argentine government ended its tie of the Argentine peso to
the U.S. dollar, creating a dual currency system with an official fixed exchange
rate of 1.4 pesos to 1.0 U.S.  dollar for import and export  transactions  and a
"free" floating exchange rate for other transactions,  subsequently floating the
Argentine peso in February 2002. The devaluation  did not materially  impact our
consolidated results of operations.

Foreign currency  exchange rate  fluctuations  create variances in our financial
statement  line  items but have not had a  material  impact on our  consolidated
income from  continuing  operations.  Our  consolidated  income from  continuing
operations was negatively impacted $4.7 million,  $7.7 million, and $2.7 million
for the years ended December 31, 2003, 2002, and 2001, respectively, as a result
of  fluctuations  in foreign  currency  to U.S.  dollar  exchange  rates.  For a
discussion of our  approaches to foreign  currency  exchange rate risk, see Item
7A. "Quantitative and Qualitative Disclosures about Market Risk."

DEMUTUALIZATION AND INITIAL PUBLIC OFFERING

Effective  October 26, 2001,  Principal Mutual Holding Company  converted from a
mutual insurance holding company to a stock company. All membership interests in

                                       39

Principal  Mutual Holding  Company were  extinguished  on that date and eligible
policyholders  received,  in aggregate,  260.8  million  shares of common stock,
$1,177.5 million of cash and $472.6 million of policy credits as compensation.

In addition,  on October 26,  2001,  we completed  our initial  public  offering
("IPO") in which we issued  100.0  million  shares of common stock at a price of
$18.50 per  share,  prior to the  underwriters'  exercise  of the  overallotment
option. Net proceeds from the IPO were $1,753.9 million,  of which $64.2 million
was retained by  Principal  Financial  Group,  Inc.,  and  $1,689.7  million was
contributed  to Principal  Life.  Proceeds  were net of offering  costs of $96.5
million and a related tax benefit of $0.4 million.

Costs relating to the demutualization,  excluding costs relating to the IPO were
$2.0  million  and  $18.6  million,  net of  income  taxes,  in 2002  and  2001,
respectively. 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 advisors of the
Insurance  Commissioner  of the State of Iowa and the New York  State  Insurance
Department,  other regulatory authorities and internal allocated costs for staff
and related costs associated with the demutualization.

PENSION EXPENSE

The 2004 pension  expense for  substantially  all of our  employees  and certain
agents is expected to be approximately $56.4 million. This is a decrease of $3.8
million from the 2003 pension  expense of $60.2  million,  primarily  due to the
plan's liability experience, an increase in the plan's turnover assumption,  and
the plan's asset  performance.  The 2002 pension  expense was $6.5 million.  The
discount rate used to determine  the 2004 expense was 6.25%,  which is down from
the 6.5%  discount  rate  used to  calculate  the  2003  expense.  The  expected
long-term return on assets assumption used for the 2004 pension expense remained
at 8.5%.

RECENT ACCOUNTING CHANGES

INTEREST RATE LOCK COMMITMENTS

In October 2003, the Financial  Accounting  Standards Board (the "FASB") added a
project  to its  agenda to  clarify  SFAS No.  133,  ACCOUNTING  FOR  DERIVATIVE
INSTRUMENTS  AND HEDGING  ACTIVITIES  ("SFAS 133"),  as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN  DERIVATIVE  INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES -
AN AMENDMENT OF FASB STATEMENT NO. 133 ("SFAS 138") and SFAS No. 149,  AMENDMENT
OF FASB STATEMENT 133 ON DERIVATIVE  INSTRUMENTS  AND HEDGING  ACTIVITIES,  with
respect  to  determining  the  fair  value of  interest  rate  lock  commitments
("IRLC"). Specifically, the FASB project will address what information should be
used to  determine  the fair value of an IRLC and whether an IRLC should ever be
reported as an asset by the issuer.  In December 2003,  the SEC staff  announced
that it intends to release a Staff  Accounting  Bulletin that will require IRLCs
issued after April 1, 2004,  be accounted  for as written  options that would be
reported as a liability  until  expiration  or  termination  of the  commitment.
Neither the FASB nor the SEC has issued  final  technical  guidance in this area
and as such it is not possible to know for certain the impact of this guidance.

QUALIFIED SPECIAL-PURPOSE ENTITIES

In June 2003,  the FASB issued an  exposure  draft,  QUALIFYING  SPECIAL-PURPOSE
ENTITIES AND ISOLATION OF  TRANSFERRED  ASSETS AN AMENDMENT OF FASB STATEMENT NO
140 . The exposure draft proposed additional restrictions on the activities of a
qualifying  special purpose entity  ("QSPE").  We are monitoring  changes to the
exposure draft, which may impact the status our QSPE's.

VARIABLE INTEREST ENTITIES

The FASB  issued  Interpretation  No. 46,  CONSOLIDATION  OF  VARIABLE  INTEREST
ENTITIES  ("FIN 46"),  in January  2003.  FIN 46 applies to certain  entities in
which  equity  investors  do  not  have  the  characteristics  of a  controlling
financial interest, or do not have sufficient equity at risk for the entities to
finance their activities without additional  subordinated financial support from

                                       40

other parties.  FIN 46 requires the  consolidation of variable interest entities
("VIEs") in which an  enterprise,  known as the primary  beneficiary,  absorbs a
majority of the entity's  expected  losses,  receives a majority of the entity's
expected  residual  returns,  or both, as a result of ownership,  contractual or
other financial interests in the entity.

The guidance was  effective  immediately  for all VIEs created after January 31,
2003, and effective July 1, 2003, for all VIEs created before  February 1, 2003.
In October 2003, the FASB released  Staff  Position FIN 46-6,  EFFECTIVE DATE OF
FASB  INTERPRETATION NO. 46,  CONSOLIDATION OF VARIABLE INTEREST ENTITIES,  that
allows the deferral of FIN 46 for all VIEs created or acquired prior to February
1,  2003,  until the end of the first  interim  or annual  period  ending  after
December  15,  2003,  if certain  conditions  are met. We invested in one VIE in
April 2003,  and effective July 1, 2003,  consolidated  VIEs created or acquired
prior to February 1, 2003, for which we are the primary beneficiary.

At July 1, 2003, our consolidated financial statements were adjusted to record a
cumulative effect of adopting FIN 46, as follows (in millions):

                                                                                        ACCUMULATED OTHER
                                                                                          COMPREHENSIVE
                                                                      NET LOSS               INCOME
                                                                  ------------------ ----------------------

Adjustment for intercompany gains and carrying value of assets
  consolidated.................................................         $(6.1)              $ 14.1
Income tax impact..............................................           2.7                 (5.0)
                                                                  ------------------ ----------------------
Total..........................................................         $(3.4)              $  9.1
                                                                  ================== ======================

On December 24, 2003, the FASB issued a revision to FIN 46,  Interpretation  No.
46 (Revised 2003):  CONSOLIDATION OF VARIABLE  INTEREST ENTITIES ("FIN 46R"), to
clarify some of the provisions of FIN 46 and to exempt certain entities from its
requirements. Under FIN 46R, special effective date provisions apply to entities
that have fully or  partially  applied  FIN 46 prior to  issuance of FIN 46R. We
plan to adopt FIN 46R effective  January 1, 2004 and do not anticipate that this
will have a material impact on our consolidated statements of operations.

As of July 1, 2003, we  consolidated  a  residential  mortgage loan funding VIE,
three  grantor  trusts  and  several  other  immaterial  VIEs in  which  we have
determined we are the primary  beneficiary.  The  incremental  impact on certain
financial  data,  after  consideration  of our  previous  investment  for  these
consolidated VIEs, is as follows:

                                                                AS OF
                                                           DECEMBER 31, 2003
                                                       -----------------------
                                                             (IN MILLIONS)

Total assets......................................              $  2,164.3
                                                       =======================

Total short-term debt.............................              $    615.0
Total long-term debt..............................                 1,458.0
Total other liabilities...........................                    95.4
                                                       -----------------------
Total liabilities.................................                 2,168.4
Total equity......................................                    (4.1)
                                                       -----------------------
  Total liabilities and equity....................              $  2,164.3
                                                       =======================

On July 7, 2003, the American  Institute of Certified Public  Accountants issued
Statement  of Position  ("SOP")  03-1,  ACCOUNTING  AND  REPORTING  BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL  LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS.  This SOP addresses an insurance  enterprise's  accounting for certain
fixed  and  variable  contract  features  not  covered  by  other  authoritative
accounting  guidance.  This SOP is effective for financial statements for fiscal

                                       41

years  beginning  after  December 15,  2003.  This SOP is not expected to have a
material impact to our consolidated financial statements.

RESULTS OF OPERATIONS

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

                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------
                                                           2003           2002           2001
                                                        -----------    ------------    -----------
                                                                         (IN MILLIONS)
                                                                              
INCOME STATEMENT DATA:
Revenues:
  Premiums and other considerations....................  $ 3,634.1      $ 3,881.8      $ 4,122.3
  Fees and other revenues..............................    2,416.2        1,990.8        1,600.7
  Net investment income................................    3,419.6        3,304.7        3,383.6
  Net realized/unrealized capital losses...............      (65.7)        (354.8)        (514.0)
                                                        -----------    ------------    -----------
    Total revenues.....................................    9,404.2        8,822.5        8,592.6

Expenses:
  Benefits, claims and settlement expenses.............    4,861.3        5,216.9        5,482.1
  Dividends to policyholders...........................      307.9          316.6          313.7
  Operating expenses...................................    3,281.3        2,623.2        2,332.7
                                                        -----------    ------------    -----------
    Total expenses.....................................    8,450.5        8,156.7        8,128.5
                                                        -----------    ------------    -----------
Income from continuing operations before income taxes..      953.7          665.8          464.1
Income taxes...........................................      225.8           45.9           83.4
                                                        -----------    ------------    -----------
  Income from continuing operations, net of related
    income taxes.......................................      727.9          619.9          380.7
Income (loss) from discontinued operations, net of
    related income taxes...............................       21.8         (196.7)         (11.2)
                                                        -----------    ------------    -----------
Income before cumulative effect of accounting changes..      749.7          423.2          369.5
Cumulative effect of accounting change, net of related
    income taxes.......................................       (3.4)        (280.9)         (10.7)
                                                        -----------    ------------    -----------
    Net income.........................................  $   746.3      $   142.3      $   358.8
                                                        ===========    ============    ===========

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Premiums and other  considerations  decreased $247.7 million, or 6%, to $3,634.1
million for the year ended December 31, 2003, from $3,881.8 million for the year
ended December 31, 2002. The decrease  reflected a $326.5 million  decrease from
the U.S. Asset  Management  and  Accumulation  segment,  primarily a result of 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 pension plan  terminations  in the
market,  the interest rate environment and our ability to attract new sales. The
decrease was  partially  offset by a $45.6  million  increase  from the Life and
Health Insurance segment,  primarily related to increased group disability sales
and favorable retention.

Fees and other revenues  increased  $425.4 million,  or 21%, to $2,416.2 million
for the year ended December 31, 2003,  from $1,990.8  million for the year ended
December 31, 2002. The increase was primarily due to a $188.3  million  increase
from the  Mortgage  Banking  segment  primarily  resulting  from an  increase in
mortgage  loan  production  volume and  growth in the  mortgage  loan  servicing
portfolio during the first half of 2003. In addition,  U.S. Asset Management and
Accumulation fees and other revenues  increased $185.2 million primarily related
to an  increase in  management  and  performance  fees,  growth in assets  under
management and growth in account  values,  which was due to growth in the equity
markets and net cash flows.

Net investment  income increased $114.9 million,  or 3%, to $3,419.6 million for
the year ended  December  31,  2003,  from  $3,304.7  million for the year ended
December 31, 2002. The increase was primarily a result of a $4,854.4 million, or
10%,  increase in average invested assets and cash,  excluding the impact of the

                                       42

implementation  of FIN 46.  Partially  offsetting the increase was a decrease in
average  investment  yields.  The yield on average  invested assets and cash was
6.4% for the year ended  December 31, 2003,  compared to 6.9% for the year ended
December 31, 2002.

Net  realized/unrealized  capital losses  decreased  $289.1 million,  or 81%, to
$65.7 million for the year ended December 31, 2003,  from $354.8 million for the
year ended December 31, 2002.  The decrease is due to a $199.8 million  decrease
in other than  temporary  declines in the value of certain  fixed  maturity  and
equity  securities,  a $164.2  million  increase in gains related to the mark to
market and sales of certain seed money investments,  a $93.0 million decrease in
losses related to credit impaired sales, and $25.4 million increase in gains due
to the  strengthening  of the foreign currency  exchange rates.  These items are
partially  offset by a $183.0  million  capital  gain related to the sale of our
investment in Coventry in 2002 and $53.7 million less gains on the sale of other
fixed maturity securities in 2003.

The following  table  highlights  the  contributors  to net  realized/unrealized
capital gains and losses for the year ended December 31, 2003.

                                                        FOR THE YEAR ENDED DECEMBER 31, 2003
                                 -----------------------------------------------------------------------------
                                                      NET REALIZED                           NET REALIZED/
                                                         GAINS                                 UNREALIZED
                                                      (LOSSES) ON           HEDGING          CAPITAL GAINS
                                   IMPAIRMENTS          DISPOSAL          ADJUSTMENTS           (LOSSES)
                                 ----------------  -----------------   -----------------   -------------------
                                                                  (IN MILLIONS)

Fixed maturity securities (1)...  $  (152.6)          $    (9.1)         $   (62.3)         $  (224.0)
Equity securities (2)...........       (4.6)                8.9                -                  4.3
Mortgage loans on real
  estate (3)....................       (2.2)                -                  -                 (2.2)
Real estate.....................      (11.5)                4.8                -                 (6.7)
Derivatives.....................        -                   -                107.2              107.2
Other (4).......................        -                 121.2              (65.5)              55.7
                                 ----------------  -----------------   -----------------   -------------------
  Total.........................  $  (170.9)          $   125.8          $   (20.6)         $   (65.7)
                                 ================  =================   =================   ===================

- -----------------------
(1) Impairments  include  $21.1  million in recoveries on the sale of previously
    impaired assets and $173.7 million of impairment  losses. Net realized gains
    (losses) on disposal  includes  gross  realized  gains of $55.7  million and
    gross realized losses of $64.8 million.
(2) Impairments  include $6.2 million in  recoveries  on the sale of  previously
    impaired assets and $10.8 million of impairment  losses.  Net realized gains
    (losses) on disposal includes gross realized gains of $9.8 million and gross
    realized losses of $0.9 million.
(3) Includes  $36.2  million in  realized  losses due to sale,  foreclosure,  or
    impairment  write-downs  of  commercial  mortgage  loans  offset  by a $34.0
    million decrease in commercial mortgage valuation allowance.
(4) Net realized gains  (losses) on disposal  includes $85.9 million for mark to
    market  gains on seed money and $35.2  million  related to foreign  currency
    gains.

Benefits,  claims and settlement  expenses  decreased $355.6 million,  or 7%, to
$4,861.3 million for the year ended December 31, 2003, from $5,216.9 million for
the year ended  December 31, 2002.  The decrease was  primarily  due to a $390.6
million  decrease  from the U.S.  Asset  Management  and  Accumulation  segment,
primarily  reflecting the decline in reserves resulting from a decrease in sales
of single premium group annuities with life contingencies.

Dividends to policyholders  decreased $8.7 million, or 3%, to $307.9 million for
the year  ended  December  31,  2003,  from  $316.6  million  for the year ended
December 31, 2002. The decrease was due to a $6.0 million decrease from the Life
and Health  Insurance  segment,  resulting from changes in the  individual  life
insurance  dividend  scale and a decrease  in the  dividend  interest  crediting
rates. In addition,  the decrease was  attributable  to a $2.7 million  decrease

                                       43

from the U.S.  Asset  Management  and  Accumulation  segment,  resulting  from a
decrease in dividends for our participating  pension  full-service  accumulation
products.

Operating expenses increased $658.1 million, or 25%, to $3,281.3 million for the
year ended December 31, 2003, from $2,623.2  million for the year ended December
31, 2002. The increase was primarily due to a $404.3  million  increase from the
Mortgage Banking segment  primarily  resulting from impairments of mortgage loan
servicing  rights and, to a lesser  extent,  due to growth in the mortgage  loan
servicing portfolio.  The increase also reflected a $178.5 million increase from
the U.S. Asset Management and  Accumulation  segment,  primarily  reflecting the
full  consolidation  of our newly  acquired  Post  Advisory  subsidiary,  higher
incentive compensation accruals and increases in employee benefit costs.

Income  taxes  increased  $179.9  million to $225.8  million  for the year ended
December 31, 2003,  from $45.9 million for the year ended December 31, 2002. The
effective  income tax rate was 24% for the year ended  December 31, 2003, and 7%
for the year ended  December 31, 2002.  The  effective  income tax rates for the
years ended December 31, 2003 and 2002 were lower than the corporate  income tax
rate of 35%  primarily  due to  income  tax  deductions  allowed  for  corporate
dividends  received.  The increase in the effective tax rate to 24% in 2003 from
7% in 2002 was primarily  due to the favorable  settlement of an IRS audit issue
in 2002.

As a result of the  foregoing  factors and the  inclusion of income or loss from
discontinued  operations and the cumulative effect of accounting changes, net of
related income taxes,  net income increased $604.0 million to $746.3 million for
the year  ended  December  31,  2003,  from  $142.3  million  for the year ended
December 31, 2002. The income or loss from  discontinued  operations was related
to our sale of BT Financial  Group. The cumulative  effect of accounting  change
was related to our  implementation  of FIN 46 in 2003 and SFAS No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS ("SFAS 142") in 2002.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Premiums and other  considerations  decreased $240.5 million, or 6%, to $3,881.8
million for the year ended December 31, 2002, from $4,122.3 million for the year
ended December 31, 2001. The decrease  reflected a $183.0 million  decrease from
the International Asset Management and Accumulation  segment primarily resulting
from decreased sales of single premium annuities with life  contingencies due to
the sale of a large  group  annuity  contract  in 2001  and to a lesser  extent,
prolonged  government  retention of potential  annuitants in 2002 in Mexico.  In
addition,  the decrease  reflected a $37.7  million  decrease  from the Life and
Health Insurance segment,  primarily related to the reclassification of revenues
from our group  universal life  insurance  product from premiums to fee revenues
and the shift in customer preference from individual  traditional life insurance
products to individual universal and variable universal life insurance products,
partially offset by strong disability insurance sales in 2002.

Fees and other revenues  increased  $390.1 million,  or 24%, to $1,990.8 million
for the year ended December 31, 2002,  from $1,600.7  million for the year ended
December 31, 2001. The increase was primarily due to a $326.9  million  increase
from the  Mortgage  Banking  segment  primarily  resulting  from  mortgage  loan
production  fee revenues,  reflecting  the increase in mortgage loan  production
volume.

Net investment  income  decreased $78.9 million,  or 2%, to $3,304.7 million for
the year ended  December  31,  2002,  from  $3,383.6  million for the year ended
December  31,  2001.  The  decrease  was  primarily  related  to a  decrease  in
investment  yields.  The yield on average  invested assets and cash was 6.9% for
the year ended  December 31, 2002,  compared to 7.7% for the year ended December
31, 2001.  This  reflects a decrease in  investment  gains on real estate due to
lower sales of certain real estate held-for-sale,  compared to an unusually high
volume of sales during 2001. In addition,  the decrease  reflects  lower average
investment  yields due in part to a lower  interest  rate  environment  and to a
lesser  extent,  due to a decrease in commercial  mortgage loan  prepayment  fee
income. The decrease was partially offset by a $3,565.1 million, or 8%, increase
in average invested assets and cash.

Net  realized/unrealized  capital losses  decreased  $159.2 million,  or 31%, to
$354.8 million for the year ended December 31, 2002, from $514.0 million for the
year ended December 31, 2001. The decrease was due to the $183.0 million capital

                                       44

gain  realized  as the  result  of the sale of our  investment  in  Coventry  in
February 2002 and the $38.4 million loss on the sale of our  operations in Spain
in 2001, a $79.7 million decrease in losses on fixed maturity  securities sales,
and a $58.5  million  decrease  in  losses  on equity  securities  sales.  These
decreases were  partially  offset by an increase of $109.9 million in other than
temporary impairments of fixed maturity securities,  a $19.7 million increase in
the other than temporary declines in the value of equity securities, an increase
of $54.1 million in mark to market losses on certain seed money investments, and
an increase of $28.0 million in losses on derivatives.

The following  table  highlights  the  contributors  to net  realized/unrealized
capital gains and losses for the year ended December 31, 2002.

                                                       FOR THE YEAR ENDED DECEMBER 31, 2002
                                 -----------------------------------------------------------------------------
                                                      NET REALIZED                           NET REALIZED/
                                                         GAINS                                 UNREALIZED
                                                      (LOSSES) ON           HEDGING          CAPITAL GAINS
                                   IMPAIRMENTS          DISPOSAL          ADJUSTMENTS           (LOSSES)
                                 ----------------  -----------------   -----------------   -------------------
                                                                  (IN MILLIONS)

Fixed maturity securities (1)...  $  (326.4)          $   (42.0)         $     6.1          $  (362.3)
Equity securities (2)...........      (30.6)                1.9                -                (28.7)
Mortgage loans on real
  estate (3)....................      (10.3)                -                  -                (10.3)
Real estate.....................        -                   9.3                -                  9.3
Derivatives.....................        -                   -                (73.3)             (73.3)
Other...........................        -                  94.8               15.7              110.5
                                 ----------------  -----------------   -----------------   -------------------
  Total.........................  $  (367.3)          $    64.0          $   (51.5)         $  (354.8)
                                 ================  =================   =================   ===================

- -----------------------
(1)  Impairment  losses  include  $2.9  million  in  recoveries  on the  sale of
     previously  impaired  assets and $329.3 million of impairment  losses.  Net
     realized gains (losses) on disposal includes gross realized gains of $152.5
     million and gross realized losses of $194.5 million.
(2)  Impairments include $30.6 million of impairment losses and no recoveries on
     the sale of previously  impaired  assets.  Net realized  gains  (losses) on
     disposal  includes  gross realized gains of $4.1 million and gross realized
     losses of $2.2 million.
(3)  Includes  $14.7  million in realized  losses due to sale,  foreclosures  or
     impairment  write-downs  of  commercial  mortgage  loans  offset  by a $4.4
     million decrease in commercial mortgage valuation allowance.

Benefits,  claims and settlement  expenses  decreased $265.2 million,  or 5%, to
$5,216.9 million for the year ended December 31, 2002, from $5,482.1 million for
the year ended  December 31, 2001.  The decrease was  partially  due to a $149.5
million  decrease  from the  International  Asset  Management  and  Accumulation
segment due to higher reserve changes and policy and contract  benefit  payments
recognized in 2001 due to the sale of a large group annuity  contract,  and to a
lesser extent, prolonged government retention of potential annuitants in 2002 in
Mexico.  The decrease was also due to a $57.6 million decrease from the Life and
Health Insurance segment, primarily due to amounts received from a reinsurer and
lower  death  claims.  In  addition,  the  decrease  was due to a $52.8  million
decrease from the U.S. Asset  Management  and  Accumulation  segment,  primarily
reflecting a decrease in interest  credited to customers and a decrease in sales
of single premium group annuities with life contingencies.

Dividends to policyholders increased $2.9 million to $316.6 million for the year
ended  December 31, 2002,  from $313.7  million for the year ended  December 31,
2001.  The increase was  attributable  to a $2.9 million  increase from the U.S.
Asset  Management  and  Accumulation  segment,  resulting  from an  increase  in
dividends for our participating pension full-service accumulation products.

Operating expenses increased $290.5 million, or 12%, to $2,623.2 million for the
year ended December 31, 2002, from $2,332.7  million for the year ended December
31, 2001.  The increase was largely due to a $355.9  million  increase  from the

                                       45

Mortgage  Banking segment  primarily  resulting from growth in the mortgage loan
servicing portfolio, an increase in impairment of capitalized mortgage servicing
rights net of servicing  hedge  activity  and an increase in the  mortgage  loan
production volume. The increase was partially offset by a $43.1 million decrease
from the Corporate and Other  segment,  primarily due to expenses  recognized in
2001 related to our demutualization,  federal income tax interest related to the
settlement of an IRS audit issue in 2002,  offset  partially by an increase to a
loss contingency reserve established for sales practices litigation in 2002.

Income taxes  decreased  $37.5  million,  or 45%, to $45.9  million for the year
ended  December 31,  2002,  from $83.4  million for the year ended  December 31,
2001. The effective income tax rate was 7% for the year ended December 31, 2002,
and 18% for the year ended December 31, 2001. The effective income tax rates for
the years ended December 31, 2002 and 2001 were lower than the corporate  income
tax rate of 35%  primarily  due to income tax  deductions  allowed for corporate
dividends  received.  Our effective income tax rate was also reduced in 2001 due
to  additional  tax  benefits  related  to excess tax over book  capital  losses
realized from the sales of our operations in Spain and Indonesia.  The effective
tax rate decreased to 7% in 2002 from 18% in 2001 primarily due to the favorable
settlement of an IRS audit issue in 2002.

As a result of the foregoing factors and the inclusion of loss from discontinued
operations and the cumulative effect of accounting change, net of related income
taxes, net income  decreased  $216.5 million,  or 60%, to $142.3 million for the
year ended  December 31, 2002,  from $358.8  million for the year ended December
31, 2001.  The loss from  discontinued  operations was related to our sale of BT
Financial Group. The cumulative  effect of accounting  change was related to our
implementation of SFAS 142 in 2002 and SFAS 133 in 2001.

RESULTS OF OPERATIONS BY SEGMENT

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

The following  table presents  segment  information as of or for the years ended
December 31, 2003, 2002 and 2001:

                                       46

                                                                       AS OF OR FOR YEAR ENDED DECEMBER 31,
                                                               --------------------------------------------------
                                                                   2003                2002             2001
                                                               --------------     --------------   --------------
                                                                                   (IN MILLIONS)
                                                                                          
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation...................      $  3,651.0         $  3,780.5       $  3,799.8
International Asset Management and Accumulation..........           412.1              357.9            508.4
Life and Health Insurance................................         4,014.3            3,946.8          3,946.4
Mortgage Banking.........................................         1,396.8            1,153.0            757.4
Corporate and Other(1)...................................             8.8              (15.1)           101.7
                                                               --------------     --------------   --------------
  Total segment operating revenues.......................         9,483.0            9,223.1          9,113.7
Net realized/unrealized capital losses, including
  recognition  of front-end fee revenues and certain
  market value adjustments to fee revenues (3)...........           (78.8)            (400.6)          (527.4)
Investment income generated from IPO proceeds(2).........             -                  -                6.3
                                                               --------------     --------------   --------------
  Total revenue per consolidated statements of
    operations............................................      $ 9,404.2         $  8,822.5       $  8,592.6
                                                               ==============     ==============   ==============

OPERATING EARNINGS (LOSS) BY SEGMENT,  NET OF RELATED
  INCOME TAXES:
U.S. Asset Management and Accumulation ..................      $    433.8         $    370.9           $353.8
International Asset Management and Accumulation..........            34.9               19.5              2.3
Life and Health Insurance................................           241.2              233.1            201.2
Mortgage Banking.........................................            53.2              142.9            126.7
Corporate and Other .....................................           (12.5)             (17.0)            38.1
                                                               --------------     --------------   --------------
  Total segment  operating  earnings,  net of related
    income taxes.........................................           750.6              749.4            722.1
Net realized/unrealized capital losses, as adjusted(3)...           (51.6)            (243.9)          (321.0)
Other after-tax adjustments(4)...........................            47.3             (363.2)           (42.3)
                                                               --------------     --------------   --------------
  Net income per consolidated statements of operations...      $    746.3         $    142.3       $    358.8
                                                               ==============     ==============   ==============
ASSETS BY SEGMENT:
U.S. Asset Management and Accumulation(5)................      $ 83,904.8         $ 70,371.9       $ 68,543.8
International Asset Management and Accumulation..........         3,011.4            2,202.5          4,956.9
Life and Health Insurance................................        12,171.8           11,356.3         10,776.2
Mortgage Banking(6)......................................         5,558.8            3,740.1          2,718.8
Corporate and Other(7)...................................         3,107.6            2,190.5          1,354.8
                                                               --------------     --------------   --------------
  Total consolidated assets..............................      $107,754.4         $ 89,861.3       $ 88,350.5
                                                               ==============     ==============   ==============

- -----------------------
(1)  Includes   inter-segment   eliminations   primarily   related  to  internal
     investment  management  fee revenues,  commission fee revenues paid to U.S.
     Asset  Management  and  Accumulation  agents  for  selling  Life and Health
     Insurance  segment  insurance  products,  internal  interest  paid  to  our
     Mortgage Banking segment for escrow accounts  deposited with our U.S. Asset
     Management  and  Accumulation  segment and real estate joint venture rental
     income.  In 2001,  the Corporate and Other segment  reported  rental income
     from real estate joint ventures for office space used by other segments.

(2)  Interest income  generated from IPO proceeds is reported in other after-tax
     adjustments on the operating earnings statement.

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

                                       47

                                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                                        ------------------------------------------------
                                                                            2003             2002              2001
                                                                        --------------   --------------   --------------
                                                                                        (IN MILLIONS)

Net realized/unrealized capital losses................................      $(65.7)       $  (354.8)       $  (514.0)
Certain market value adjustments to fee revenues......................       (17.7)           (31.8)           (14.9)
Recognition of front-end fee revenues.................................         4.6            (14.0)             1.5
                                                                        -------------    --------------   --------------
  Net realized/unrealized capital losses, including recognition of
    front-end fee revenues and certain market value adjustments
    to fee revenues...................................................       (78.8)          (400.6)          (527.4)
Amortization of deferred policy acquisition costs
  related to net realized capital gains (losses)......................         5.1             35.4             18.6
Capital gains distributed.............................................        (4.5)           (12.7)             -
Minority interest capital gains.......................................        (0.1)             -                -
                                                                        -------------    --------------   --------------
  Net  realized/unrealized  capital losses,  including recognition of
    front-end fee revenues and certain market value  adjustments
    to fee revenues,  net of related amortization of deferred policy
    acquisition costs, capital gains distributed,  and minority
    interest capital gains............................................       (78.3)          (377.9)          (508.8)
Income tax effect.....................................................        26.7            134.0            187.8
                                                                        -------------    --------------   --------------
  Net realized/unrealized capital losses, as adjusted.................      $(51.6)       $  (243.9)       $  (321.0)
                                                                        =============    ==============   ==============

(4)For the year ended December 31, 2003,  other  after-tax  adjustments of $47.3
   million  included (1) the  positive  effects of: (a) a decrease in income tax
   reserves  established for contested IRS tax audit matters ($28.9 million) and
   (b) a change in the estimated  loss on disposal of BT Financial  Group ($21.8
   million) and (2) the negative  effect of a  cumulative  effect of  accounting
   change related to the  implementation of FIN 46 ($3.4 million).  For the year
   ended  December 31,  2002,  other  after-tax  adjustments  of $363.2  million
   included (1) the negative  effects of: (a) a cumulative  effect of accounting
   change related to our implementation of SFAS 142 ($280.9 million); (b) a loss
   from the discontinued  operations of BT Financial Group ($196.7 million); (c)
   an increase to a loss  contingency  reserve  established  for sales practices
   litigation ($21.6 million);  and (d) expenses related to our  demutualization
   ($2.0 million) and (2) the positive  effect of the settlement of an IRS audit
   issue ($138.0 million). For the year ended December 31, 2001, other after-tax
   adjustments  of $42.3  million  included  (1) the  negative  effects  of: (a)
   expenses  related to our  demutualization  ($18.6  million);  (b) the loss on
   discontinued  operations  of  BT  Financial  Group  ($11.2  million);  (c)  a
   cumulative   effect  of  change  in  accounting   principle  related  to  our
   implementation  of SFAS 133 ($10.7 million);  and (d) an increase to our loss
   contingency reserve for sales practices litigation ($5.9 million) and (2) the
   positive effect of investment  income  generated from the proceeds of our IPO
   ($4.1 million).

(5)U.S.  Asset  Management  and  Accumulation  separate  account  assets include
   shares  of the  Principal  Financial  Group  stock  allocated  to a  separate
   account, a result of our  demutualization.  The value of the separate account
   was $833.9  million,  $1.0  billion,  and $1.3  billion at December 31, 2003,
   2002, and 2001, respectively.  Activity of the separate account was reflected
   in both separate account assets and separate account  liabilities and did not
   impact our results of operations.

(6)As a  result  of the  implementation  of FIN  46,  effective  July  1,  2003,
   Mortgage   Banking  assets  include  the  full   consolidation  of  Principal
   Residential  Mortgage  Capital  Resources,  LLC  ("PRMCR"),  which provides a
   source of funding for our residential  mortgage loan  production.  PRMCR held
   $2.0 billion in mortgage loans held for sale as of December 31, 2003.

(7)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.

                                       48

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT

ASSET ACCUMULATION TRENDS

Our sales of pension and other asset  accumulation  products and services in the
U.S.  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.  Recent trends in the work
environment include a more mobile workforce and the desire of employers to shift
the market risk of  retirement  investments  to  employees  by offering  defined
contribution   plans  rather  than  defined  benefit  plans.  These  trends  are
increasing  the demand for defined  contribution  pension  arrangements  such as
401(k) plans, mutual funds or variable annuities.  The "baby-boom" generation of
U.S.  workers has reached an age at which saving for  retirement is critical and
it continues to seek tax-advantaged  investment  products for retirement.  Also,
the Economic  Growth and Tax Relief  Reconciliation  Act of 2001 had many of its
provisions become effective in 2002, which increased allowed contribution limits
and a number of other  opportunities to save for retirement.  Considering  these
trends,  asset  accumulation  account values  increased as of December 31, 2003,
primarily due to significant  additional gross new deposits,  strong performance
of the equity  markets  and  retention  of assets  from  existing  clients.  The
declining  interest rate  environment and poor performance in the equity markets
in 2002 slowed our growth in asset  accumulation  account  values for that year.
The interest  rate  environment  continued its low trend in 2003 while the S & P
500 posted a 26.4% gain  resulting in a  significant  increase in total  account
values by the end of 2003.

The following table provides a summary of U.S. Asset Accumulation account values
as of December 31, 2003, 2002 and 2001:

                                     U.S. ASSET ACCUMULATION
AS OF                                  TOTAL ACCOUNT VALUES
- ---------------------------       -------------------------------
                                            (IN BILLIONS)

December 31, 2003 .........                 $    91.7
December 31, 2002 .........                      73.8
December 31, 2001 .........                      71.0

ASSET MANAGEMENT TRENDS

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 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  $10.1
billion during 2003.

The following table provides a summary of Principal Global Investors' affiliated
and third-party assets under management as of December 31, 2003, 2002 and 2001:

                                                          PRINCIPAL GLOBAL INVESTORS
                                   -------------------------------------------------------------------------

                                    AFFILIATED ASSETS         THIRD-PARTY ASSETS        TOTAL ASSETS UNDER
AS OF                                UNDER MANAGEMENT          UNDER MANAGEMENT             MANAGEMENT
- ---------------------------        ---------------------    -----------------------    ---------------------
                                                                (IN BILLIONS)

December 31, 2003..........                $ 88.6                   $  24.7                  $113.3
December 31, 2002..........                  77.7                      14.6                    92.3
December 31, 2001..........                  77.8                       7.9                    85.7

U.S. ASSET MANAGEMENT AND ACCUMULATION SEGMENT SUMMARY FINANCIAL DATA

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

                                       49

                                                       FOR THE YEAR ENDED DECEMBER 31,
                                            ---------------------------------------------------
                                                2003              2002               2001
                                            --------------    --------------    ---------------
                                                               (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues(1):
 Premiums and other considerations......     $     420.0       $     746.5       $       766.3
 Fees and other revenues................           833.7             681.2               633.1
 Net investment income..................         2,397.3           2,352.8             2,400.4
                                            --------------    --------------    ---------------
   Total operating revenues.............         3,651.0           3,780.5             3,799.8

Expenses:
 Benefits, claims and settlement
   expenses, including dividends to
   policyholders........................         2,146.6           2,539.9             2,589.8
 Operating expenses.....................           934.5             773.4               773.7
                                            --------------    --------------    ---------------
   Total expenses.......................         3,081.1           3,313.3             3,363.5
                                            --------------    --------------    ---------------
Pre-tax operating earnings..............           569.9             467.2               436.3
Income taxes............................           136.1              96.3                82.5
                                            --------------    --------------    ---------------
Operating earnings......................           433.8             370.9               353.8

Net realized/unrealized capital losses,
   as adjusted..........................           (82.1)           (250.5)             (164.7)
Other after-tax adjustments.............            (1.7)              -                 (10.8)
                                            --------------    --------------    ---------------
U.S. GAAP REPORTED:
Net income..............................     $     350.0       $     120.4       $       178.3
                                            ==============    ==============    ===============

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

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Premiums and other  considerations  decreased $326.5 million,  or 44%, to $420.0
million for the year ended  December 31, 2003,  from $746.5 million for the year
ended December 31, 2002. The decrease  primarily  resulted from a $353.9 million
decrease in pension  full-service payout sales of single premium group annuities
with life  contingencies,  which are typically used to fund defined benefit plan
terminations. The premium income received from these contracts fluctuates due to
the  variability  in the  number  and size of  pension  plan  terminations,  the
interest rate environment and the ability to attract new sales.

Fees and other revenues increased $152.5 million,  or 22%, to $833.7 million for
the year  ended  December  31,  2003,  from  $681.2  million  for the year ended
December 31, 2002.  Principal Global Investors fees and other revenues increased
$96.8 million  primarily due to increased  management and performance  fees from
the full consolidation of our newly acquired Post Advisory subsidiary, increased
revenues  from  Spectrum  due to  growth  in  assets  under  management  and the
inclusion of our asset  management  offshore  operations.  Pension  full-service
accumulation  fees and other revenue increased $50.0 million primarily due to an
increase in revenue from  improvements  in the equity markets and net cash flow,
which have led to higher account values, and increased revenue from our employer
securities group acquisition, BCI Group.

Net investment  income  increased $44.5 million,  or 2%, to $2,397.3 million for
the year ended  December  31,  2003,  from  $2,352.8  million for the year ended
December 31, 2002. The increase reflects a $3,096.6 million,  or 9%, increase in
average  invested  assets and cash for the segment.  The increase was  partially
offset by a decrease in the  average  annualized  yield on  invested  assets and
cash, which was 6.3% for the year ended December 31, 2003,  compared to 6.7% for
the year ended  December 31, 2002.  This reflects lower yields on fixed maturity
securities  and  commercial  mortgages  due in  part to a  lower  interest  rate
environment.

                                       50

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased  $393.3  million,  or 15%,  to  $2,146.6  million  for the year  ended
December 31, 2003,  from $2,539.9  million for the year ended December 31, 2002.
The decrease  primarily  resulted from a $351.8 million  decrease in our pension
full-service  payout  business as a result of decreased  sales of single premium
group annuities with life contingencies. Also contributing to the decrease was a
$56.0  million  decrease  in  pension  full-service  accumulation  business  due
primarily  to  declining  business  from our  participating  block  and to lower
interest credited on our non-participating deposit type business.

Operating expenses  increased $161.1 million,  or 21%, to $934.5 million for the
year ended  December 31, 2003,  from $773.4  million for the year ended December
31, 2002.  The increase  primarily  resulted from a $104.9  million  increase in
Principal Global Investors  operating  expenses due to the full consolidation of
our  newly  acquired  Post  Advisory  subsidiary,  the  inclusion  of our  asset
management offshore operations and higher incentive  compensation  accruals.  In
addition,  pension full-service  accumulation operating expenses increased $41.3
million  due to  higher  non-deferrable  compensation  related  costs  including
incentive  compensation costs and increases in employee benefit costs,  expenses
from employer securities group and increased amortization of DPAC in 2003.

Income taxes  increased  $39.8  million,  or 41%, to $136.1 million for the year
ended  December 31,  2003,  from $96.3  million for the year ended  December 31,
2002. The effective  income tax rate for this segment was 24% for the year ended
December 31, 2003,  and 21% for the year ended  December 31, 2002. The effective
income tax rates for the years ended December 31, 2003 and 2002, were lower than
the  corporate  income  tax rate of 35%,  as a result of income  tax  deductions
allowed  for  corporate  dividends  received,  for  which an  estimated  benefit
recognition  rate decreased  during 2003 compared to 2002, and other  tax-exempt
income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $62.9
million,  or 17%, to $433.8 million for the year ended  December 31, 2003,  from
$370.9 million for the year ended December 31, 2002.

Net realized/unrealized  capital losses, as adjusted,  decreased $168.4 million,
or 67%,  to $82.1  million for the year ended  December  31,  2003,  from $250.5
million  for the year ended  December  31,  2002.  The  decrease is due to lower
capital losses related to other than temporary  declines in the value of certain
fixed maturity securities for the year ended December 31, 2003.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments  for the year ended December 31, 2003, net income  increased  $229.6
million to $350.0  million from $120.4  million for the year ended  December 31,
2002.  Other  after-tax  adjustments for the year ended December 31, 2003, had a
negative  impact on net income of $1.7  million  due to a  cumulative  effect of
accounting change related to our implementation of FIN 46.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Premiums and other  considerations  decreased  $19.8  million,  or 3%, to $746.5
million for the year ended  December 31, 2002,  from $766.3 million for the year
ended  December 31, 2001. The decrease  primarily  resulted from a $59.5 million
decrease in pension  full-service payout sales of single premium group annuities
with life  contingencies,  which are typically used to fund defined benefit plan
terminations. The premium income received from these contracts fluctuates due to
the  variability  in the  number  and size of  pension  plan  terminations,  the
interest  rate  environment,  and the  ability to attract  new sales.  Partially
offsetting  this  decrease  was a $39.7  million  increase in premium  primarily
resulting from higher individual payout annuity sales.

Fees and other revenues  increased  $48.1 million,  or 8%, to $681.2 million for
the year  ended  December  31,  2002,  from  $633.1  million  for the year ended
December 31, 2001. Pension fees and other revenues increased $27.2 million.  The
increase  primarily  resulted from higher fee income generated from improved net
cash flows in 2002 and a reduction of losses due to market value fee adjustments
on our  participating  business  recognized in the prior year. The increase also
resulted from netting the change in unearned revenue for selected  products with

                                       51

the related unlocking of DPAC in operating expenses.  Prior to the third quarter
of 2002,  the impact  was  reported  separately  in fees and other  revenue  and
operating expenses.  In addition,  Principal Global Investors recognized a $19.3
million increase in fees and other revenue. This increase was primarily due to a
reclassification  of market  value and hedging  activities  from net  investment
income to fees and other  revenue and an increase in investment  management  and
transaction fees.

Net investment  income  decreased $47.6 million,  or 2%, to $2,352.8 million for
the year ended  December  31,  2002,  from  $2,400.4  million for the year ended
December 31, 2001.  The decrease was  primarily due to a decrease in the average
annualized  yield on invested assets and cash, which was 6.7% for the year ended
December 31, 2002,  compared to 7.3% for the year ended  December 31, 2001.  The
decrease was partially offset by a $2,129.3 million,  or 6%, increase in average
invested assets and cash.

Benefits, claims and settlement expenses,  including dividends to policyholders,
decreased $49.9 million,  or 2%, to $2,539.9 million for the year ended December
31, 2002,  from  $2,589.8  million for the year ended  December  31,  2001.  The
decrease  primarily  resulted from a $97.0 million decrease in pension benefits,
claims and  settlement  expenses.  This  decrease  was largely due a decrease in
interest   credited  to  customers  from  our   full-service   accumulation  and
investment-only  businesses  resulting from a lower interest rate environment in
2002. Also  contributing to the overall  decrease was a decrease in full-service
payout  sales  of  single  premium  group  annuities  with  life  contingencies.
Partially offsetting this decrease was a $44.2 million increase, which primarily
resulted from an increase in reserves  resulting from higher  individual  payout
annuity sales.

Operating  expenses  decreased $0.3 million to $773.4 million for the year ended
December 31, 2002, from $773.7 million for the year ended December 31, 2001. The
decrease was  primarily  due to a $22.5  million  decrease in pension  operating
expenses.  This decrease was largely due to operational  efficiencies  including
lower  staff  levels  in  addition  to an  increase  in  capitalization  of DPAC
resulting from an increase in sales of selected products. Offsetting the overall
decrease was a $12.9 million increase in Principal  Global  Investors  operating
expenses due to an increase in employee costs  resulting from the acquisition of
Spectrum  in the  fourth  quarter  of 2001  and  higher  incentive  compensation
accruals in 2002. In addition,  individual  annuity operating expenses increased
$7.3 million mainly due to an increase in DPAC  amortization  resulting from the
decline in the stock market and an increase in corporate expense  allocations in
2002.  Also  contributing  to the increase  was a $6.4  million  increase in our
mutual fund operating  expenses.  This increase  primarily  relates to increased
commission  expense generated from sales of variable life and annuity contracts.
Of this  increase,  $2.6  million  relates to sales  within the  segment  and is
eliminated at an operating segment level.

Income taxes  increased  $13.8  million,  or 17%, to $96.3  million for the year
ended  December 31,  2002,  from $82.5  million for the year ended  December 31,
2001. The effective  income tax rate for this segment was 21% for the year ended
December 31, 2002,  and 19% for the year ended  December 31, 2001. The effective
income tax rates for the year ended December 31, 2002 and 2001,  were lower than
the  corporate  income tax rate of 35%  primarily  due to income tax  deductions
allowed for corporate dividends received and other tax-exempt income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $17.1
million,  or 5%, to $370.9  million for the year ended  December 31, 2002,  from
$353.8 million for the year ended December 31, 2001.

Net realized/unrealized capital losses, as adjusted, increased $85.8 million, or
52%, to $250.5 million for the year ended December 31, 2002, from $164.7 million
for the year ended  December 31,  2001.  The increase  includes  capital  losses
related to other than temporary  declines in the value of certain fixed maturity
securities for the year ended December 31, 2002.

As a result of the foregoing  factors,  net income  decreased $57.9 million,  or
32%, to $120.4 million for the year ended December 31, 2002, from $178.3 million
for the year ended  December 31, 2001. For the year ended December 31, 2001, net
income  included the negative  effect of other  after-tax  adjustments  totaling
$10.8 million related to a cumulative effect of accounting change related to our
implementation of SFAS 133.

                                       52

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT

ASSET ACCUMULATION TRENDS

Our  international  asset  management  and  accumulation   businesses  focus  on
countries with a trend toward privatization of public retirement pension systems
requiring  employees who join the labor force to contribute to a private pension
plan.  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 long-term mutual
funds to businesses and individuals. 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.

The following table provides a summary of Principal  International  assets under
management as of December 31, 2003, 2002 and 2001:

                                        PRINCIPAL INTERNATIONAL
                                          TOTAL ASSETS UNDER
AS OF                                        MANAGEMENT
- ---------------------------      ---------------------------------
                                            (IN BILLIONS)

December 31, 2003 .........                 $     7.5
December 31, 2002 .........                       4.4
December 31, 2001 .........                       3.7

INTERNATIONAL ASSET MANAGEMENT AND ACCUMULATION SEGMENT SUMMARY FINANCIAL DATA

The following table presents certain summary financial data of the International
Asset Management and Accumulation segment for the years indicated:

                                       53

                                                       FOR THE YEAR ENDED DECEMBER 31,
                                           ----------------------------------------------------
                                                2003               2002               2001
                                           ---------------    --------------    ---------------
                                                              (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating revenues(1):
 Premiums and other considerations......    $     195.1        $     161.9       $     344.9
 Fees and other revenues................           77.3               56.4              46.1
 Net investment income..................          139.7              139.6             117.4
                                           ---------------    --------------    ---------------
   Total operating revenues.............          412.1              357.9             508.4

Expenses:
Benefits, claims and settlement
 expenses...............................          268.0              243.8             407.5
Operating expenses......................          104.1               87.5             101.2
                                           ---------------    --------------    ---------------
   Total expenses.......................          372.1              331.3             508.7
                                           ---------------    --------------    ---------------
Pre-tax operating earnings (loss).......           40.0               26.6              (0.3)
Income taxes (benefits).................            5.1                7.1              (2.6)
                                           ---------------    --------------    ---------------
Operating earnings .....................           34.9               19.5               2.3

Net realized/unrealized capital gains
 (losses), as adjusted..................            2.5               12.4             (29.2)
Other after-tax adjustments.............           21.8             (473.0)            (11.2)
                                           ---------------    --------------    ---------------
U.S. GAAP REPORTED:
Net income (loss).......................    $      59.2        $    (441.1)      $     (38.1)
                                           ===============    ==============    ===============
OTHER DATA:
Operating earnings (loss):
 Principal International................    $      34.9        $      22.1       $       5.9
 BT Financial Group.....................            -                 (2.6)             (3.6)

Net income (loss):
 Principal International................    $      37.4        $      13.6       $     (23.3)
 BT Financial Group.....................           21.8             (454.7)            (14.8)

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

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Premiums and other  considerations  increased  $33.2 million,  or 21%, to $195.1
million for the year ended  December 31, 2003,  from $161.9 million for the year
ended  December 31, 2002.  An increase of $47.3 million in Chile was primarily a
result of record sales of single premium  annuities with life  contingencies  in
2003 following a year of decreased  sales due to market  contraction.  Partially
offsetting this increase was a decrease of $13.4 million in Mexico primarily due
to prolonged government  retention of potential  annuitants in 2003,  additional
premiums on a large group annuity  contract in 2002, as well as the weakening of
the Mexican peso versus the U.S. dollar.

Fees and other revenues  increased  $20.9 million,  or 37%, to $77.3 million for
the year ended December 31, 2003, from $56.4 million for the year ended December
31, 2002.  An increase of $14.5  million in Mexico was  primarily a result of an
increase in the number of retirement plan participants due to the acquisition of
Zurich AFORE in May 2002 and AFORE  Tepeyac in February  2003.  In addition,  an
increase  of $3.0  million in  Argentina  was  primarily  a result of  increased
surrender fees.

Net investment  income  increased  $0.1 million,  to $139.7 million for the year
ended  December 31, 2003,  from $139.6  million for the year ended  December 31,
2002.

                                       54

Benefits,  claims and settlement  expenses  increased $24.2 million,  or 10%, to
$268.0 million for the year ended December 31, 2003, from $243.8 million for the
year ended December 31, 2002. A $33.3 million  increase in Chile was primarily a
result  of  higher  reserve  expenses  due to  record  sales of  single  premium
annuities with life  contingencies  in 2003 following a year of decreased  sales
due to market  contraction.  The increase was partially offset by a $7.4 million
decrease in Mexico due to lower reserve expenses related to additional  premiums
on a large group  annuity  contract in 2002 and the  cancellation  of a personal
accident product in 2003.

Operating  expenses  increased $16.6 million,  or 19%, to $104.1 million for the
year ended December 31, 2003, from $87.5 million for the year ended December 31,
2002. An increase of $8.3 million in Chile was primarily the impact of unlocking
of the value of business acquired ("VOBA")  amortization stemming from declining
interest  rates.  An increase of $5.7 million in Mexico was primarily due to the
acquisition  of Zurich AFORE in May 2002 and AFORE  Tepeyac in February 2003 and
increased  marketing  expenses  in 2003,  offset  partially  by a net  impact of
unlocking  of DPAC and  VOBA.  In  addition,  an  increase  of $2.8  million  in
Argentina  was  primarily due to the unlocking of DPAC stemming from an increase
in lapses.  Operating  expenses incurred by BT Financial Group were $4.0 million
for the year  ended  December  31,  2002.  These  expenses  represent  corporate
overhead  allocated  to BT Financial  Group and do not qualify for  discontinued
operations treatment.

Income tax expense decreased $2.0 million,  or 28%, to $5.1 million for the year
ended December 31, 2003, from $7.1 million for the year ended December 31, 2002.
A decrease of $3.0 million in Mexico was primarily due to income tax adjustments
related to inflation.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $15.4
million,  or 79%, to $34.9  million for the year ended  December 31, 2003,  from
$19.5 million for the year ended December 31, 2002.

Net realized/unrealized  capital gains, as adjusted,  decreased $9.9 million, or
80%, to $2.5 million for the year ended  December 31, 2003,  from $12.4  million
for the year ended  December  31,  2002. A decrease of $5.7 million in Argentina
was  primarily  related to losses  realized on the  remeasurement  of assets and
liabilities  denominated in currencies other than the Argentine peso. A decrease
of $5.3 million in Chile resulted  primarily from losses realized on the sale of
fixed maturity securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $500.3 million to $59.2 million of net income
for the year ended  December 31, 2003,  from $441.1  million of net loss for the
year ended  December 31, 2002.  For the year ended December 31, 2003, net income
included the  positive  effect of other  after-tax  adjustments  totaling  $21.8
million, related to the change in the estimated loss on disposal of BT Financial
Group.  For the year ended  December  31, 2002,  net loss  included the negative
effect of other after-tax  adjustments totaling $473.0 million,  related to: (1)
the cumulative  effect of accounting  change, a result of our  implementation of
SFAS 142 ($276.3  million) and (2) the loss from  discontinued  operations of BT
Financial Group ($196.7 million).

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Premiums and other  considerations  decreased $183.0 million,  or 53%, to $161.9
million for the year ended  December 31, 2002,  from $344.9 million for the year
ended  December 31, 2001. A decrease of $145.0  million in Mexico was the result
of decreased sales of single premium annuities with life contingencies primarily
due to the sale of a large group annuity contract in 2001 and to a lesser extent
prolonged  government  retention of potential  annuitants in 2002. A decrease of
$23.9  million in Argentina  was primarily due to the weakening of the Argentine
peso  versus  the  U.S.  dollar  and of the  general  economic  environment.  In
addition,  a decrease  of $13.5  million in Chile was  primarily a result of the
weakening  of the  Chilean  peso versus the U.S.  dollar and to a lesser  extent
decreased  sales of single  premium  annuities  with life  contingencies  due to
market contraction.

Fees and other revenues  increased  $10.3 million,  or 22%, to $56.4 million for
the year ended December 31, 2002, from $46.1 million for the year ended December
31,  2001.  An increase of $9.5 million in Mexico was a result of an increase in

                                       55

the number of retirement  plan  participants  due to the  acquisition  of Zurich
AFORE in May 2002.  In  addition,  an increase of $1.9  million in Hong Kong was
primarily due to an increase in assets under management.

Net investment income increased $22.2 million, or 19%, to $139.6 million for the
year ended  December 31, 2002,  from $117.4  million for the year ended December
31, 2001.  The  increase  was  primarily  related to a $217.3  million,  or 18%,
increase in average invested assets and cash, excluding our equity investment in
subsidiaries.  The increase  was  partially  offset by a decrease in  investment
yields. The annualized yield on average invested assets and cash,  excluding our
equity  investment  in  subsidiaries,  was 9.5% for the year ended  December 31,
2002, compared to 9.6% for the year ended December 31, 2001.

Benefits,  claims and settlement  expenses decreased $163.7 million,  or 40%, to
$243.8 million for the year ended December 31, 2002, from $407.5 million for the
year ended December 31, 2001. A $134.5 million decrease in Mexico was the result
of higher reserve changes and policy and contract benefit payments recognized in
2001 due to the sale of a large group annuity  contract with life  contingencies
and to a lesser extent prolonged government retention of potential annuitants in
2002. A decrease of $20.4  million in  Argentina  was  primarily  related to the
weakening  of the  Argentine  peso  versus the U.S.  dollar  and of the  general
economic  environment.  In  addition,  a decrease  of $8.1  million in Chile was
primarily a result of the weakening of the Chilean peso versus the U.S.  dollar,
partially offset by higher interest credited to customers.

Operating  expenses  decreased  $13.7 million,  or 14%, to $87.5 million for the
year ended  December 31, 2002,  from $101.2  million for the year ended December
31, 2001.  An $11.0 million  decrease in Argentina was primarily  related to the
weakening  of the  Argentine  peso  versus the U.S.  dollar  and of the  general
economic  environment.  Operating  expenses  incurred by BT Financial Group were
$4.0 million for the year ended  December 31, 2002 and $5.5 million for the year
ended December 31, 2001. These expenses  represent  corporate overhead allocated
to BT Financial Group and do not qualify for discontinued operations treatment.

Income tax expense  increased $9.7 million to $7.1 million of income tax expense
for the year ended December 31, 2002, from a $2.6 million income tax benefit for
the year ended  December  31, 2001.  The  increase was  primarily a result of an
increase in pre-tax operating earnings.

As a result of the foregoing factors, operating earnings increased $17.2 million
to $19.5 million for the year ended December 31, 2002, from $2.3 million for the
year ended December 31, 2001.

Net realized/unrealized  capital gains, as adjusted,  increased $41.6 million to
$12.4  million  of net  realized/unrealized  capital  gains  for the year  ended
December 31, 2002, from $29.2 million of net realized/unrealized  capital losses
for the year ended  December 31, 2001. The increase was primarily due to a $21.0
million  after-tax  net realized  capital loss on the February  2001 sale of our
operations in Spain. In addition, a $17.7 million increase was primarily related
to losses  resulting  from the permanent  impairment  of certain fixed  maturity
securities in Argentina in 2001.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net loss  increased  $403.0 million to $441.1 million for the year
ended  December 31,  2002,  from $38.1  million for the year ended  December 31,
2001.  For the year ended  December  31,  2002,  net loss  included the negative
effect of other after-tax  adjustments totaling $473.0 million,  related to: (1)
the cumulative  effect of accounting  change, a result of our  implementation of
SFAS 142 ($276.3  million) and (2) the loss from  discontinued  operations of BT
Financial Group ($196.7 million). For the year ended December 31, 2001, net loss
included the  negative  effect of other  after-tax  adjustments  totaling  $11.2
million, related to the loss from discontinued operations of BT Financial Group.

                                       56

LIFE AND HEALTH INSURANCE SEGMENT

INDIVIDUAL AND GROUP LIFE INSURANCE TRENDS

Our life insurance  premiums have been  influenced by both economic and industry
trends.  In addition,  we are seeing a shift in individual  life insurance sales
from  traditional  life insurance  products to universal and variable  universal
products. Premiums related to our individual traditional life insurance products
have  declined  due to the shift in customer  preference.  Group life  insurance
premiums  declined  from 2001  through  2003 due  primarily  to some  large case
terminations.

The following table provides a summary of our individual life insurance  premium
and  deposits  and group life  insurance  premium  and fees for the years  ended
December 31, 2003, 2002 and 2001:

                                                                 LIFE INSURANCE
                             ---------------------------------------------------------------------------------------
                              INDIVIDUAL UNIVERSAL AND
                               VARIABLE UNIVERSAL LIFE               INDIVIDUAL
                                      INSURANCE              TRADITIONAL LIFE INSURANCE       GROUP LIFE INSURANCE
                             ----------------------------    ---------------------------     -----------------------
FOR THE YEAR ENDED              PREMIUM AND DEPOSITS            PREMIUM AND DEPOSITS            PREMIUM AND FEES
- -------------------------    ----------------------------    ---------------------------     -----------------------
                                                                 (IN MILLIONS)

December 31, 2003........       $         337.6                 $        710.9                  $      216.7
December 31, 2002........                 298.1                          737.2                         217.9
December 31, 2001........                 270.1                          766.2                         222.0

The  following  table  provides  a summary  of our life  insurance  policyholder
liabilities as of December 31, 2003, 2002 and 2001:

                                                                  LIFE INSURANCE
                             -----------------------------------------------------------------------------------------
                              INDIVIDUAL UNIVERSAL AND
                               VARIABLE UNIVERSAL LIFE               INDIVIDUAL
                                      INSURANCE              TRADITIONAL LIFE INSURANCE        GROUP LIFE INSURANCE
                             ----------------------------    ---------------------------     -------------------------
AS OF                        POLICYHOLDER LIABILITIES(1)      POLICYHOLDER LIABILITIES       POLICYHOLDER LIABILITIES
- -------------------------    ----------------------------    ---------------------------     -------------------------
                                                                  (IN MILLIONS)

December 31, 2003........       $       2,269.0                 $      6,011.0                  $      277.2
December 31, 2002........               1,900.9                        5,851.4                         264.9
December 31, 2001........               1,748.5                        5,712.7                         259.5

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

HEALTH INSURANCE TRENDS

Improved pricing discipline in our group medical insurance business has affected
premium growth during the past few years. In general, we reacted faster than the
industry in 2000 to rising  healthcare costs by raising our prices.  That action
depressed  sales and increased  lapses,  causing a loss of  membership.  Inforce
membership has also been impacted by the decision to exit the small case medical
business in Florida.  The decline in medical membership  reversed itself in late
2003, as membership  increased  slightly for each of the last four months of the
year. We experienced  similar patterns in our group dental  insurance  business,
which has also begun to show  slight  growth in each of the last four  months of
the year.  We  continue  to sell group  medical  business  in 35 states plus the
District  of  Columbia.  We also offer  dental  business  in 50 states  plus the
District  of  Columbia,  vision  coverage  in 49  states  plus the  District  of
Columbia,  and  fee-for-service  business in all 50 states plus the  District of
Columbia.

While membership has declined over the past few years, premium revenue has grown
due to price increases and to some degree, due to the impact of reinsurance. The
medical  reinsurance  contract was entered into in 2002 and as such  premiums in
2002 were reduced by $45.4 million of ceded  premium.  In 2003, the contract was
amended and the  accounting  treatment  was changed to the deposit  method so no
premiums  were ceded in 2003.  These  changes have  impacted  the premium  trend
during the three year period illustrated below.

                                       57

Our health  insurance  premium and fees for the years ended  December  31, 2003,
2002 and 2001 were as follows:

                                                       PREMIUM AND FEES
                                ----------------------------------------------------------------
                                                         GROUP DENTAL
                                  GROUP MEDICAL          AND VISION
FOR THE YEAR ENDED                INSURANCE(1)           INSURANCE             FEE-FOR-SERVICE
- ----------------------------    ------------------    -------------------    -------------------
                                                         (IN MILLIONS)

December 31, 2003...........         $ 1,561.7              $ 352.2              $ 142.8
December 31, 2002...........           1,532.4                343.7                129.9
December 31, 2001...........           1,524.5                350.9                121.9

- --------------------
(1)  Beginning  September 1, 2002,  we began  non-renewing  small group  medical
     business  in the state of Florida.  In  addition,  our medical  reinsurance
     contract  decreased  premiums by $45.4 million in 2002 and had no impact on
     2001 or 2003.

INDIVIDUAL AND GROUP DISABILITY INSURANCE TRENDS

Premium growth for our group and individual disability business in 2003 and 2002
is being driven by growing sales and stable persistency.  This has been a result
of more focused distribution supporting these product lines.

The following table provides a summary of our disability  insurance  premium and
fees and  policyholder  liabilities  as of or for the years ended  December  31,
2003, 2002 and 2001:

                                                        DISABILITY INSURANCE
                                -------------------------------------------------------------------------
                                INDIVIDUAL DISABILITY INSURANCE           GROUP DISABILITY INSURANCE
                                ---------------------------------     -----------------------------------
AS OF OR FOR THE YEAR             PREMIUM AND       POLICYHOLDER         PREMIUM AND       POLICYHOLDER
ENDED                                FEES           LIABILITIES             FEES           LIABILITIES
- ----------------------------    -------------    ----------------     --------------   ------------------
                                                               (IN MILLIONS)

December 31, 2003...........         $102.5        $  472.0                  $140.0           $  350.4
December 31, 2002...........           93.7           426.8                   109.9              313.1
December 31, 2001...........           83.5           381.5                    97.0              286.7

                                       58

LIFE AND HEALTH INSURANCE SEGMENT SUMMARY FINANCIAL DATA

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

                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------
                                                             2003              2002             2001
                                                          -------------    ------------    --------------
                                                                                 (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues(1):
  Premiums and other considerations.....................     $3,019.0        $ 2,973.4         $3,011.1
  Fees and other revenues...............................        338.9            313.2            256.7
  Net investment income.................................        656.4            660.2            678.6
                                                          -------------    ------------    --------------
    Total operating revenues............................      4,014.3          3,946.8          3,946.4

Expenses:
  Benefits, claims and settlement expenses..............      2,457.7          2,433.4          2,491.0
  Dividends to policyholders............................        301.0            307.0            307.0
  Operating expenses....................................        891.8            851.2            842.7
                                                          -------------    ------------    --------------
    Total expenses......................................      3,650.5          3,591.6          3,640.7
                                                          -------------    ------------    --------------
Pre-tax operating earnings..............................        363.8            355.2            305.7
Income taxes............................................        122.6            122.1            104.5
                                                          -------------    ------------    --------------
Operating earnings......................................        241.2            233.1            201.2

Net realized/unrealized capital losses, as adjusted.....        (16.6)           (50.0)           (33.8)
Other after-tax adjustments.............................          -               (4.6)             0.1
                                                          -------------    ------------    --------------
U.S. GAAP REPORTED:
Net income..............................................     $  224.6        $   178.5        $   167.5
                                                          =============    ============    ==============

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

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Premiums and other  considerations  increased $45.6 million,  or 2%, to $3,019.0
million for the year ended December 31, 2003, from $2,973.4 million for the year
ended December 31, 2002.  Disability  insurance premiums increased $38.9 million
primarily  due to increased  sales and  favorable  retention.  Health  insurance
premiums increased $38.1 million,  primarily resulting from a reduction in ceded
premium from group  medical  reinsurance,  which was a result of a change in the
accounting  treatment of the contract,  and rate  increases.  These increases in
health  insurance  premium were partially offset by a decline in insured medical
and dental members. Also, partially offsetting these increases was a decrease of
$31.4 million in life  insurance  premiums,  primarily a result of the continued
shift  from  individual   traditional  life  insurance  products  to  individual
universal and variable universal life insurance products.

Fees and other revenues  increased  $25.7 million,  or 8%, to $338.9 million for
the year  ended  December  31,  2003,  from  $313.2  million  for the year ended
December 31, 2002. Fee revenues from our life insurance business increased $13.1
million,  a result of the  continued  shift in customer  preference to fee-based
universal and variable universal life insurance products.  Fee revenues from our
health insurance business  increased $12.6 million,  primarily due to growth and
fee increases in our fee-for-service business.

Net investment  income decreased $3.8 million,  or 1%, to $656.4 million for the
year ended  December 31, 2003,  from $660.2  million for the year ended December
31, 2002. The decrease primarily relates to a decrease in the average annualized
yield on invested  assets and cash,  which was 6.7% for the year ended  December
31, 2003,  compared to 7.1% for the year ended December 31, 2002.  This reflects
lower yields on fixed maturity  securities and commercial  mortgages due in part

                                       59

to a lower  interest rate  environment.  The decrease was partially  offset by a
$508.0, or 5%, increase in average invested assets and cash for the segment.

Benefits,  claims and settlement  expenses  increased  $24.3 million,  or 1%, to
$2,457.7 million for the year ended December 31, 2003, from $2,433.4 million for
the year ended  December 31, 2002.  Disability  insurance  benefits,  claims and
settlement  expenses  increased  $16.9  million,  primarily due to growth in the
business;  however,  loss ratios  improved  over this period.  Health  insurance
benefits,  claims and settlement  expenses increased $10.2 million primarily due
to a reduction in ceded claims for group medical reinsurance related to a change
in the  accounting  treatment of the  contract and by increased  claim costs per
member. These increases were partially offset by a decrease in covered members.

Dividends to policyholders  decreased $6.0 million, or 2%, to $301.0 million for
the year  ended  December  31,  2003,  from  $307.0  million  for the year ended
December  31,  2002.  The  decrease  is  primarily  related  to  changes  in the
individual life insurance dividend scale and a decrease in the dividend interest
crediting rates resulting from the declining interest rate environment.

Operating  expenses  increased  $40.6 million,  or 5%, to $891.8 million for the
year ended  December 31, 2003,  from $851.2  million for the year ended December
31, 2002. Health insurance operating expenses increased $32.2 million, primarily
due to increased employee benefit costs,  increased premium taxes and accounting
for a group medical reinsurance contract under the deposit method of accounting.
Disability insurance operating expenses increased $26.3 million due to increases
in the loss  adjustment  expense,  employee  benefit  cost,  and  non-deferrable
expenses  associated  with growth in the business.  Partially  offsetting  these
increases  was a $17.9 million  decrease in life  insurance  operating  expenses
primarily due to decreased DPAC  amortization  related to the  implementation of
new DPAC valuation  models for the individual  universal and variable  universal
life insurance and traditional life insurance businesses.

Income  taxes  increased  $0.5  million  to $122.6  million  for the year  ended
December 31, 2003, from $122.1 million for the year ended December 31, 2002. The
effective  income tax rate for the segment was 34% for the years ended  December
31, 2003 and 2002.  The effective  income tax rates for the years ended December
31,  2003 and  2002,  were  lower  than  the  corporate  income  tax rate of 35%
primarily due to tax-exempt income.

As a result of the foregoing factors, operating earnings increased $8.1 million,
or 3%, to $241.2  million  for the year ended  December  31,  2003,  from $233.1
million for the year ended December 31, 2002.

Net realized/unrealized capital losses, as adjusted, decreased $33.4 million, or
67%, to $16.6 million for the year ended  December 31, 2003,  from $50.0 million
for the year ended December 31, 2002. The decrease  resulted from lower realized
capital losses related to other than temporary  declines in the value of certain
fixed maturity securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income increased $46.1 million,  or 26%, to $224.6 million for
the year  ended  December  31,  2003,  from  $178.5  million  for the year ended
December 31, 2002.  The other  after-tax  adjustment for the year ended December
31,  2002,  had a  negative  impact  on net  income of $4.6  million  due to the
cumulative effect of accounting  change, a result of our  implementation of SFAS
142.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Premiums and other  considerations  decreased $37.7 million,  or 1%, to $2,973.4
million for the year ended December 31, 2002, from $3,011.1 million for the year
ended  December 31, 2001.  Life  insurance  premiums  decreased  $63.2  million,
primarily  resulting  from the  reclassification  of  revenues  from  our  group
universal life insurance  product from premium to fee revenues and the continued
shift of  customer  preference  from  traditional  life  insurance  products  to
fee-based  universal and variable universal life insurance  products.  Partially
offsetting  the decrease was a $23.1 million  increase in  disability  insurance
premiums due to strong sales in 2002.

                                       60

Fees and other revenues  increased $56.5 million,  or 22%, to $313.2 million for
the year  ended  December  31,  2002,  from  $256.7  million  for the year ended
December 31, 2001. Fee revenues from our life insurance business increased $50.2
million,  primarily  due to the  reclassification  of  revenues  from our  group
universal  life product to fee revenues from premium and the continued  shift in
customer  preference,  as  previously  mentioned.  Fee revenues  from our health
insurance  business  increased  $6.3  million,  primarily  a result  of  selling
additional  services to existing  fee-for-service  customers  and related  price
increases.

Net investment income decreased $18.4 million,  or 3%, to $660.2 million for the
year ended  December 31, 2002,  from $678.6  million for the year ended December
31, 2001. The decrease primarily reflects lower investment yields due in part to
an overall lower  interest rate  environment.  The  annualized  yield on average
invested assets and cash was 7.1% for the year ended December 31, 2002, compared
to 7.6% for the year ended December 31, 2001.  Partially offsetting the decrease
was a $357.8 million,  or 4%,  increase in average  invested assets and cash for
the segment.

Benefits,  claims and settlement  expenses  decreased  $57.6 million,  or 2%, to
$2,433.4 million for the year ended December 31, 2002, from $2,491.0 million for
the year  ended  December  31,  2001.  Health  insurance  benefits,  claims  and
settlement  expenses decreased $40.8 million,  primarily due to amounts received
from a  reinsurer.  Life  insurance  benefits,  claims and  settlement  expenses
decreased $27.9 million  primarily due to lower death claims and a lower reserve
increase  related  to the  decrease  in premium on  traditional  life  insurance
business.  Partially offsetting these decreases was an $11.1 million increase in
disability  insurance  benefits,  claims and  settlement  expenses,  primarily a
result of growth in the business.

Operating expenses increased $8.5 million, or 1%, to $851.2 million for the year
ended  December 31, 2002,  from $842.7  million for the year ended  December 31,
2001.  Disability  insurance  operating  expenses  increased $4.8 million due to
expenses associated with higher sales, increased commissions on higher premiums,
and  increased  amortization  of DPAC  on a  growing  block  of  business.  Life
insurance operating expenses increased $2.5 million primarily due to an increase
in compensation  costs partially offset by an increase in the  capitalization of
DPAC  related  to  higher  sales and the  reclassifying  of fees  received  from
reinsurance ceded from fee revenue to operating  expenses.  In addition,  Health
operating  expenses  increased  $1.2  million,  primarily a result of  increased
commissions partially offset by several one-time expenses in 2001.

Income taxes  increased  $17.6  million,  or 17%, to $122.1 million for the year
ended  December 31, 2002,  from $104.5  million for the year ended  December 31,
2001. The effective  income tax rate for the segment was 34% for the years ended
December 31, 2002 and 2001.  The effective  income tax rates for the years ended
December 31, 2002 and 2001, were lower than the corporate income tax rate of 35%
primarily due to tax-exempt income.

As a  result  of the  foregoing  factors,  operating  earnings  increased  $31.9
million,  or 16%, to $233.1 million for the year ended  December 31, 2002,  from
$201.2 million for the year ended December 31, 2001.

Net realized/unrealized capital losses, as adjusted, increased $16.2 million, or
48%, to $50.0 million for the year ended  December 31, 2002,  from $33.8 million
for the year ended  December  31,  2001.  The  increase  includes an increase in
realized capital losses related to other than temporary declines in the value of
certain fixed maturity  securities  partially  offset by lower capital losses on
the sales of fixed maturity securities.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income  increased $11.0 million,  or 7%, to $178.5 million for
the year  ended  December  31,  2002,  from  $167.5  million  for the year ended
December 31, 2001.  The other  after-tax  adjustment for the year ended December
31,  2002,  had a  negative  impact  on net  income of $4.6  million  due to the
cumulative effect of accounting  change, a result of our  implementation of SFAS
142. The other after-tax  adjustment for the year ended December 31, 2001, had a
positive  impact on net income of $0.1 million due to the  cumulative  effect of
accounting change, a result of our implementation of SFAS 133.

                                       61

MORTGAGE BANKING SEGMENT

MORTGAGE BANKING TRENDS

We believe  residential  mortgages play a central role in the financial planning
activities  of  individuals  in the  U.S.  As a  result,  our  mortgage  banking
operations  complement  our portfolio of  market-driven  financial  products and
services.

Interest rate trends  significantly  impact our residential  mortgage  business.
Starting in early 2001  interest  rates  declined  resulting in increases in the
production  of  both  purchase  and  refinance  mortgage  loans  throughout  the
industry.  This trend continued  through all of 2002 and much of 2003.  However,
interest rates  increased  during the third and fourth  quarters  resulting in a
decrease in mortgage loan production in the fourth quarter of 2003.

We manage growth in the mortgage loan servicing  portfolio  through retention of
originated mortgage loan servicing and the acquisition,  and occasional sale, of
mortgage  servicing  rights.  Our servicing  portfolio grew at a compound annual
rate of 21% between  December 31, 2001 and December 31, 2003.  Growth was steady
during this period and resulted  from strong  mortgage  loan  production  net of
servicing  portfolio  prepayments,  strong  servicing  acquisitions and very few
servicing sales.

Our residential  mortgage loan production and the unpaid  principal  balances in
our residential  mortgage loan servicing  portfolio as of or for the years ended
December 31, 2003, 2002 and 2001 were as follows:

                                                 RESIDENTIAL MORTGAGE         RESIDENTIAL MORTGAGE
AS OF OR FOR THE YEAR ENDED                        LOAN PRODUCTION          LOAN SERVICING PORTFOLIO
- -------------------------------------         --------------------------    -------------------------
                                                                  (IN MILLIONS)

December 31, 2003....................               $  58,653.4                    $ 118,692.1
December 31, 2002....................                  46,811.2                      107,745.3
December 31, 2001....................                  37,771.3                       80,530.5

MORTGAGE BANKING SEGMENT SUMMARY FINANCIAL DATA

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

                                       62

                                                      FOR THE YEAR ENDED DECEMBER 31,
                                               --------------------------------------------
                                                  2003             2002            2001
                                               ------------    ------------    ------------
                                                              (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues:
  Loan servicing.........................       $   702.5       $   590.1      $   403.0
  Loan production........................           694.3           562.9          354.4
                                               ------------    ------------    ------------
    Total operating revenues.............         1,396.8         1,153.0          757.4
Expenses:
  Loan servicing.........................         1,101.2           711.8          407.3
  Loan production........................           211.3           196.4          145.0
                                               ------------    ------------    ------------
    Total expenses.......................         1,312.5           908.2          552.3
                                               ------------    ------------    ------------
Pre-tax operating earnings...............            84.3           244.8          205.1
Income taxes.............................            31.1           101.9           78.4
                                               ------------    ------------    ------------
Operating earnings.......................            53.2           142.9          126.7

Net realized/unrealized capital gains
   (losses), as adjusted.................             -               -              -
Other after-tax adjustments..............           (10.0)            -              -
                                               ------------    ------------    ------------
U.S. GAAP REPORTED:
Net income...............................       $    43.2       $   142.9      $   126.7
                                               ============    ============    ============

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Total operating revenues  increased $243.8 million,  or 21%, to $1,396.8 million
for the year ended December 31, 2003,  from $1,153.0  million for the year ended
December 31, 2002.  Residential  mortgage  loan  production  revenues  increased
$131.4 million  primarily due to an increase in mortgage loan production,  which
increased to $58.7  billion for the year ended  December  31, 2003,  compared to
$46.8 billion for the same period a year ago. In addition, an increase of $112.4
million in mortgage loan servicing  revenues reflects the growth in the mortgage
loan servicing  portfolio.  The average  balance of the servicing  portfolio was
$115.2 billion for the year ended  December 31, 2003,  compared to $95.7 billion
for the same period a year ago.

Total expenses  increased  $404.3 million,  or 45%, to $1,312.5  million for the
year ended  December 31, 2003,  from $908.2  million for the year ended December
31, 2002.  Residential mortgage loan servicing expenses increased $389.4 million
primarily due to a $273.9  million  increase in the  impairment  of  capitalized
mortgage   servicing   rights  net  of  servicing  hedge   activity,   increased
amortization  of mortgage  servicing  rights and, to a lesser extent,  increased
expenses  related  to  growth  in  the  servicing  portfolio.  The  increase  in
impairment of  capitalized  mortgage  servicing  rights  reflects the lack of an
active  market for trading  servicing  rights.  The lack of an active and robust
servicing  market  resulted  in us seeking  additional  evidence  in the form of
independent  appraisals  to  support  the  fair  value of  capitalized  mortgage
servicing  rights.  Based on this  information,  we performed an analysis of our
mortgage servicing rights portfolio,  which resulted in an additional impairment
charge of $141.3 million in December of 2003.  Mortgage loan production expenses
increased  $14.9 million,  reflecting  the increase in mortgage loan  production
volume.

Income taxes  decreased  $70.8  million,  or 69%, to $31.1  million for the year
ended  December 31, 2003,  from $101.9  million for the year ended  December 31,
2002. The effective  income tax rate for this segment was 37% for the year ended
December 31, 2003,  and 42% for the year ended  December 31, 2002. The effective
income tax rate for the year ended December 31, 2003 and 2002,  were higher than
the  corporate  income  tax rate of 35% due to state  income  taxes.  The higher
effective  tax rate of 42% for the year ended  December 31, 2002,  was primarily
due to the cumulative effect of increasing deferred tax liabilities and deferred
tax expense for a change in the state income tax apportionment  factor, a result
of our sale of substantially all of BT Financial Group.

                                       63

As a  result  of the  foregoing  factors,  operating  earnings  decreased  $89.7
million,  or 63%, to $53.2  million for the year ended  December 31, 2003,  from
$142.9 million for the year ended December 31, 2002.

For the year ended December 31, 2003, net income included the negative effect of
other  after-tax  adjustments  totaling  $10.0  million  related to a cumulative
effect of accounting change due to our implementation of FIN 46.

As a result of the foregoing  factors,  net income  decreased $99.7 million,  or
70%, to $43.2 million for the year ended December 31, 2003,  from $142.9 million
for the year ended December 31, 2002.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Total operating revenues  increased $395.6 million,  or 52%, to $1,153.0 million
for the year ended  December  31, 2002,  from $757.4  million for the year ended
December 31, 2001.  Residential  mortgage  loan  production  revenues  increased
$208.5 million  primarily due to an increase in mortgage loan production,  which
increased to $46.8  billion for the year ended  December  31, 2002,  compared to
$37.8  billion  for the same  period a year ago. A $187.1  million  increase  in
residential  mortgage  loan  servicing  revenues  reflects  an  increase  in the
residential  mortgage  loan  servicing  portfolio.  The  average  balance of the
servicing  portfolio  was $95.7  billion for the year ended  December  31, 2002,
compared to $65.8 billion for the same period a year ago. In addition,  mortgage
loan  servicing  revenues  increased due to a gain on the sale of  approximately
$300.0 million of delinquent  Government National Mortgage  Association ("GNMA")
loans during the second quarter of 2002.  This sale generated  revenues of $15.0
million in 2002 with no corresponding sale of loans in 2001.

Total expenses increased $355.9 million,  or 64%, to $908.2 million for the year
ended  December 31, 2002,  from $552.3  million for the year ended  December 31,
2001. A $304.5 million increase in residential  mortgage loan servicing expenses
resulted from increased  expenses  related to growth in the servicing  portfolio
and a $137.3 million  increase in impairment of capitalized  mortgage  servicing
rights net of servicing  hedge  activity.  Residential  mortgage loan production
expenses increased $51.4 million reflecting the increase in residential mortgage
loan production volume.

Income taxes  increased  $23.5  million,  or 30%, to $101.9 million for the year
ended  December 31,  2002,  from $78.4  million for the year ended  December 31,
2001.  The  increase  in income  taxes  primarily  resulted  from an increase in
pre-tax operating  earnings.  The effective income tax rate for this segment was
42% for the year ended  December 31, 2002,  and 38% for the year ended  December
31,  2001.  The  increase  in the  effective  tax rate to 42% for the year ended
December 31, 2002,  from 38% for the year ended December 31, 2001, was primarily
due to the cumulative effect of increasing deferred tax liabilities and deferred
tax expense for a change in the state income tax apportionment  factor, a result
of our sale of substantially all of BT Financial Group.

As a  result  of the  foregoing  factors,  operating  earnings  and  net  income
increased  $16.2 million,  or 13%, to $142.9 million for the year ended December
31, 2002, from $126.7 million for the year ended December 31, 2001.

CORPORATE AND OTHER SEGMENT

CORPORATE AND OTHER SEGMENT SUMMARY FINANCIAL DATA

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

                                       64

                                                            FOR THE YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------------
                                                           2003              2002             2001
                                                       --------------   -------------    --------------
                                                                        (IN MILLIONS)

OPERATING EARNINGS DATA:
Operating Revenues(1):
  Total operating revenues...........................     $ 8.8          $ (15.1)           $101.7

Expenses:
  Total expenses.....................................      37.6             33.4              44.2
                                                       --------------   -------------    --------------
Pre-tax operating earnings (loss)....................     (28.8)           (48.5)             57.5
Income taxes (benefits)..............................     (16.3)           (31.5)             19.4
                                                       --------------   -------------    --------------
Operating earnings (loss)............................     (12.5)           (17.0)             38.1

Net realized/unrealized capital gains (losses), as
  adjusted...........................................      44.6             44.2             (93.3)
Other after-tax adjustments..........................      37.2            114.4             (20.4)
                                                       --------------   -------------    -------------
U.S. GAAP REPORTED:
Net income (loss)....................................     $69.3         $  141.6            $(75.6)
                                                       ==============   =============    ==============

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

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Total operating  revenues increased $23.9 million to a positive $8.8 million for
the year ended  December 31, 2003,  from a negative  $15.1  million for the year
ended  December  31,  2002.  Net  investment  income  increased  $17.6  million,
reflecting  an  increase in average  invested  assets and cash as well as higher
average  annualized  investment  yields for the segment.  The higher  investment
yields were  primarily  driven by the  occurrence of unusually high earnings and
mortgage  prepayment  income  associated with the sale of certain  minority held
real estate assets in the current year.  The increase in total revenues was also
partially due to a $4.8 million decrease in inter-segment  eliminations included
in this segment, which was offset by a corresponding change in total expenses.

Total  expenses  increased  $4.2 million,  or 13%, to $37.6 million for the year
ended  December 31,  2003,  from $33.4  million for the year ended  December 31,
2002. An increase of $6.2 million related to interest  expense on the 144A debt,
largely  due to the  termination  of the  hedges  that  were in  place  in 2002.
Inter-segment  eliminations  included in this segment  decreased  $4.8  million,
resulting in an increase in total  expenses.  In  addition,  an increase of $3.7
million  related to an  increase  in the  allocation  of costs  associated  with
operating as a public  company.  Interest  expense also  increased $3.2 million,
primarily due to interest  related to federal income tax audit  activities.  The
increases  were  largely  offset  by a  decrease  of $15.0  million  related  to
corporate initiatives funded by this segment.

Income tax benefits  decreased  $15.2 million,  or 48%, to $16.3 million for the
year ended December 31, 2003, from $31.5 million for the year ended December 31,
2002. The decrease was primarily due to a decrease in pre-tax  operating loss as
well as an additional state income tax benefit that was recognized in 2002.

As a result of the foregoing factors,  operating loss decreased $4.5 million, or
26%, to $12.5 million for the year ended  December 31, 2003,  from $17.0 million
for the year ended December 31, 2002.

Net realized/unrealized  capital gains, as adjusted,  increased $0.4 million, or
1%, to $44.6  million for the year ended  December 31, 2003,  from $44.2 million
for the year ended  December  31,  2002.  Gains on the mark to market of certain
seed money  investments,  reduced  losses on sales of invested  assets,  and the
strengthening  of foreign  currency  exchange  rates in 2003 were  substantially
offset by lower gains due to the sale of our  investment in Coventry in February
2002.

                                       65

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments,  net income  decreased $72.3 million,  or 51%, to $69.3 million for
the year  ended  December  31,  2003,  from  $141.6  million  for the year ended
December 31, 2002. For the year ended December 31, 2003, net income included the
positive  effect of other after-tax  adjustments  totaling $37.2 million related
to: (1) a decrease in income tax  reserves  established  for  contested  IRS tax
audit  matters  ($28.9  million)  and (2) the  cumulative  effect of  accounting
change, a result of our  implementation  of FIN 46 ($8.3 million).  For the year
ended  December 31,  2002,  net income  included  the effect of other  after-tax
adjustments  totaling  $114.4 million related to: (1) the positive effect of the
settlement of an IRS audit issue ($138.0  million) and (2) the negative  effects
of  (a)  an  increase  in our  loss  contingency  reserve  for  sales  practices
litigation ($21.6 million) and (b) expenses related to our demutualization ($2.0
million).

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Total operating  revenues  decreased  $116.8 million to a negative $15.1 million
for the year ended  December 31, 2002,  from a positive  $101.7  million for the
year ended  December 31, 2001. Net investment  income  decreased  $62.8 million,
reflecting a decrease in  investment  gains on real estate due to lower sales of
certain real estate held-for-sale, compared to an unusually high volume of sales
experienced in 2001. In addition,  net investment income decreased $39.3 million
due to a decrease of average investment yields for the segment.  The decrease in
total  revenues  was  also  partially  due  to  a  $21.0  million   increase  in
inter-segment  eliminations  included  in this  segment,  which was  offset by a
corresponding change in total expenses.

Total expenses  decreased  $10.8 million,  or 24%, to $33.4 million for the year
ended  December 31,  2002,  from $44.2  million for the year ended  December 31,
2001.  Inter-segment  eliminations  included  in this  segment  increased  $21.0
million,  resulting in a decrease in total expenses. In addition, a $6.8 million
decrease  related to a prior  year  write-off  of a  non-invested  asset.  These
decreases  were  partially  offset  by an $11.0  million  increase  in  interest
expense,  primarily  due  to  interest  related  to  federal  income  tax  audit
activities  as well as a $6.8  million  increase  due to costs  associated  with
operating as a public company.

Income tax  benefits  increased  $50.9  million  to $31.5  million of income tax
benefit for the year ended  December 31, 2002,  from $19.4 million of income tax
expense for the year ended  December  31, 2001.  The  increase  was  primarily a
result of a decrease in pre-tax operating earnings. The increase was also due to
a decrease  in income  tax  reserves  established  for  contested  IRS tax audit
matters.

As a result of the foregoing factors,  operating loss increased $55.1 million to
$17.0 million of operating loss for the year ended December 31, 2002, from $38.1
million of operating earnings for the year ended December 31, 2001.

Net realized/unrealized capital gains, as adjusted,  increased $137.5 million to
$44.2  million  of net  realized/unrealized  capital  gains  for the year  ended
December 31, 2002, from $93.3 million of net realized/unrealized  capital losses
for the year ended December 31, 2001. The increase was primarily due to realized
capital  gains  related to the sale of our  investment  in  Coventry in February
2002, and to a lesser extent, other sales of invested assets. The increases were
partially offset by the mark to market of certain seed money investments.

As a result  of the  foregoing  factors  and the  inclusion  of other  after-tax
adjustments, net income increased $217.2 million to $141.6 million of net income
for the year ended  December  31, 2002,  from $75.6  million of net loss for the
year ended  December 31, 2001.  For the year ended December 31, 2002, net income
included  the effect of other  after-tax  adjustments  totaling  $114.4  million
related  to: (1) the  positive  effect of the  settlement  of an IRS audit issue
($138.0  million)  and (2) the  negative  effects of (a) an increase in our loss
contingency  reserve for sales  practices  litigation  ($21.6  million)  and (b)

                                       66

expenses  related  to our  demutualization  ($2.0  million).  For the year ended
December 31, 2001, net loss included the effect of other  after-tax  adjustments
totaling  $20.4  million  related to: (1) the  negative  effects of (a) expenses
related to our  demutualization  ($18.6 million) and (b) an increase in our loss
contingency  reserve for sales practices  litigation  ($5.9 million) and (2) the
positive  effect of  investment  income  generated  from the proceeds of our IPO
($4.1 million).

LIQUIDITY AND CAPITAL RESOURCES

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

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

THE HOLDING COMPANIES:  PRINCIPAL  FINANCIAL GROUP, INC. AND PRINCIPAL FINANCIAL
SERVICES, INC.

Liquidity  describes the ability of a company to generate  sufficient cash flows
to meet the  cash  requirements  of  business  operations.  Our  parent  holding
company,  Principal  Financial Group, Inc., is a Delaware business  corporation,
whose  assets  primarily  consist  of  the  outstanding  capital  stock  of  its
subsidiaries.  As a holding company, Principal Financial Group Inc.'s ability to
meet cash requirements,  including the payments of dividends on common stock and
the repurchase of stock, substantially depends upon dividends from subsidiaries,
primarily Principal Life. The payment of stockholder dividends by Principal Life
to its parent company is limited by Iowa laws.  Under Iowa laws,  Principal Life
may pay  dividends  only from the earned  surplus  arising from its business and
must receive the prior  approval of the Insurance  Commissioner  of the State of
Iowa ("the  Commissioner")  to pay a stockholder  dividend if such a stockholder
dividend  would exceed  certain  statutory  limitations.  The current  statutory
limitation is the greater of:

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

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

Iowa law gives the Commissioner  discretion to disapprove requests for dividends
in excess of these limits.  Based on this limitation and 2003 statutory results,
Principal Life could pay approximately  $701.2 million in stockholder  dividends
in 2004 without exceeding the statutory  limitation.  Principal Life was able to
pay  approximately  $746.6  million in statutory  dividends in 2003 based on its
2002 statutory  financial  results without being subject to the  restrictions on
payment of extraordinary stockholder dividends.

Total stockholder dividends paid by Principal Life to its parent company in 2002
were $590.2 million. Principal Life did not pay a dividend in 2003.

Another  source of liquidity is issuance of our common stock.  Proceeds from the
issuance of our common  stock were $18.3  million and $22.0  million in 2003 and
2002, respectively. In 2001, net proceeds from our IPO totaled $1,753.9 million,
of which we retained  $64.2 million for working  capital,  payment of dividends,
and other  general  corporate  purposes.  The  remaining  $1,689.7  million  was
contributed to Principal Life principally to fund  demutualization  compensation
to  policyholders  in the form of policy  credits and cash, and to cover certain
expenses  related to our  demutualization.  In addition,  net proceeds  from the
issuance of  additional  shares for the exercise of the  over-allotment  options
granted to the underwriters in the IPO, totaled $265.4 million,  all of which we
retained for  repurchase of shares issued in the exercise of the  over-allotment
options.

                                       67

In 2003, we paid $145.3 million in dividends to shareholders. We paid a dividend
of $0.45 per share on December 8, 2003, to shareholders of record as of November
7, 2003. In 2002,  we paid $83.8  million,  or $0.25 per share,  in dividends to
shareholders.

In the last two years, our board of directors has authorized  various repurchase
programs under which we are allowed to purchase shares of our outstanding common
stock.  Shares  repurchased  under these  programs are accounted for as treasury
stock, carried at cost and reflected as a reduction to stockholders' equity. The
repurchases  are  made  in the  open  market  or  through  privately  negotiated
transactions, from time to time, depending on market conditions.

In May 2003,  our board of directors  authorized  a repurchase  program of up to
$300.0  million of our  outstanding  common stock.  This program began after the
completion  of the  November  2002  repurchase  program,  which  authorized  the
repurchase of up to $300.0 million of our outstanding  common stock. We acquired
15.0 million and 27.0 million  shares in the open market at an aggregate cost of
$453.0  million and $750.0  million during the years ended December 31, 2003 and
2002, respectively.  As of December 31, 2003, $147.0 million remains outstanding
under the existing share repurchase authorization.

Sources of liquidity  also  include  facilities  for  short-term  and  long-term
borrowing  as  needed,   arranged  through  our  intermediate  holding  company,
Principal   Financial  Services  Inc.  ("PFSI"),   and  its  subsidiaries.   See
"Contractual Obligations and Commercial Commitments" below.

Although  we  generate  adequate  cash  flow to meet  the  needs  of our  normal
operations,  periodically  the need may  arise  to issue  debt to fund  internal
expansion, acquisitions, investment opportunities and the retirement of existing
debt and equity. In December 2003, we filed a shelf registration  statement with
the  Securities  and Exchange  Commission.  The shelf  registration  totals $3.0
billion,  with the ability to issue debt  securities,  preferred  stock,  common
stock, warrants,  stock purchase contracts and stock purchase units of Principal
Financial Group, Inc ("PFG") and trust preferred  securities of three subsidiary
trusts. If we issue  securities,  we intend to use the proceeds from the sale of
the securities  offered by this prospectus,  including the corresponding  junior
subordinated debentures issued to the trusts in connection with their investment
of all the proceeds from the sale of preferred securities, for general corporate
purposes,  including  working  capital,  capital  expenditures,  investments  in
subsidiaries,  acquisitions and refinancing of debt,  including commercial paper
and  other  short-term   indebtedness.   PFSI  unconditionally   guarantees  our
obligations  with respect to one or more series of debt securities  described in
the shelf registration statement.

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,  long-term debt
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 and long-term debt.

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   investments  are  held  to  fund  anticipated  operating  expenses,
surrenders, withdrawals and development and maintenance expenses associated with
new products and technologies.  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 December 31, 2003 and
2002, these asset classes represented  approximately 41% and 43%,  respectively,
of the value of our consolidated invested assets. See Item 7A. "Quantitative and

                                       68

Qualitative  Disclosures about Market  Risk-Interest Rate Risk" for a discussion
of duration matching.

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 and commercial mortgage loans,
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% and 95% of
Principal Life's universal and variable  universal life insurance products as of
December  31, 2003 and 2002,  respectively,  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  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.

Our GICs 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 a minimum notice period. We no longer issue puttable GICs.

The  following  table  presents U.S.  GAAP  reserves for  guaranteed  investment
contracts and funding  agreements  by  withdrawal  provisions as of December 31,
2003 and 2002:

                                       69

                                                                              AS OF DECEMBER 31,
                                                                 ------------------------------------------
                                                                        2003                   2002
                                                                 -------------------    -------------------
                                                                               (IN MILLIONS)

BOOK VALUE OUT(1)
Puttable:
  Less than 30 days' put...................................           $     -                $     -
  30 to 89 days' put.......................................                 -                      -
  90 to 180 days' put......................................                 -                      -
  More than 180 days' put..................................                 -                     55.1
  No active put provision(2)...............................                 -                      -
                                                                 -------------------    -------------------
     Total puttable........................................                 -                     55.1

Surrenderable:
  Book value out without surrender charge..................                 8.1                    9.5
  Book value out with surrender charge.....................             1,355.1                  869.5
                                                                 -------------------    -------------------
     Total surrenderable...................................             1,363.2                  879.0
                                                                 -------------------    -------------------
         Total book value out..............................             1,363.2                  934.1

MARKET VALUE OUT(3)
Less than 30 days' notice..................................                 -                      8.4
30 to 89 days' notice......................................                33.7                  116.3
90 to 180 days' notice.....................................               559.2                  981.2
More than 180 days' notice.................................             4,349.3                4,623.8
No active surrender provision..............................               149.8                  164.4
                                                                 -------------------    -------------------
     Total market value out................................             5,092.0                5,894.1

Not puttable or surrenderable..............................            15,749.3               13,312.5
                                                                 -------------------    -------------------
     Total GICs and funding agreements.....................           $22,204.5              $20,140.7
                                                                 ===================    ===================

- --------------------
(1) Book Value Out:  The amount  equal to the sum of deposits  less  withdrawals
    with interest accrued at the contractual interest rate.

(2) Contracts  currently  in  initial  lock-out  period  but which  will  become
    puttable with 90 days' notice at some time in the future.

(3) Market Value Out: The amount equal to the book value out plus a market value
    adjustment to adjust for changes in interest rates.

INTERNATIONAL OPERATIONS

We have received  approximately  U.S.  $890.0 million of total proceeds from our
sale of substantially all of BT Financial Group to Westpac. This amount includes
cash proceeds from Westpac, expected tax benefits, and a gain from unwinding the
hedged asset associated with our investment in BT Financial Group. An additional
future contingent  receipt of approximately  U.S. $115.0 million may be received
in 2004, if Westpac  experiences growth in their retail assets under management.
We do not anticipate receiving the contingent proceeds.

Our Brazilian,  Chilean and Mexican operations  produced positive cash flow from
operations  for the years ended  December  31, 2003,  2002 and 2001.  These cash
flows have been historically maintained at the local country level for strategic
expansion purposes and local capital requirements.  Our international operations
have required  infusions of capital of $90.9 million,  $95.8 million,  and $44.7
million for the years ended December 31, 2003, 2002, and 2001, primarily to fund
acquisitions  and to a  lesser  extent,  to meet the cash  outflow  and  capital
requirements of certain  operations.  These other  international  operations are

                                       70

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.

SOURCES AND USES OF CASH OF CONSOLIDATED OPERATIONS

Net cash provided by operating activities was $3,713.8 million, $5,379.6 million
and  $3,912.6  million for the years ended  December  31,  2003,  2002 and 2001,
respectively.  The  decrease  in cash  provided  in 2003 as  compared to 2002 is
primarily  due to a reduction  in funds  collected on behalf of investors in our
residential  mortgage loans and on behalf of our borrowers,  related to mortgage
banking services.  The increase in 2002 compared to 2001 is primarily related to
an increase in mortgage  banking  servicing and production  fees, an increase in
funds collected on behalf of investors in our residential  mortgage loans and on
behalf of our  borrowers,  related  to  mortgage  banking  services,  as well as
decreases  in  income  tax  payments  and cash  paid for  benefits,  claims  and
settlement expenses.

Net cash used in investing activities was $2,548.3 million, $4,078.1 million and
$3,738.0  million  for the  years  ended  December  31,  2003,  2002  and  2001,
respectively.  The  decrease  in  cash  used in 2003  for  investing  activities
compared to 2002 is due to an increase in net cash received from mortgage  loans
and available for sale securities  activity.  Offsetting this was a reduction of
cash  received  from  the  sale  of  subsidiaries,  due to the  sale  in 2002 of
substantially  all of BT Financial  Group,  as well as the sale of our shares of
Coventry stock. The increase in cash used in 2002 compared to 2001 was primarily
due to an increase during 2002 in the volume of net mortgage loans purchased and
sold.  Also  contributing  to the  increase in cash used was the decline in real
estate sales from the prior year.  Offsetting  these  increases in cash used was
the sale of substantially  all of BT Financial Group, as well as the sale of our
shares of Coventry stock.

Net cash used in financing  activities  was $511.2  million,  $824.1 million and
$404.4  million  for  the  years  ended  December  31,  2003,   2002  and  2001,
respectively.  The decrease in cash used in financing  activities  was primarily
due to an increase in  investment  contract  deposits,  net of  withdrawals,  an
increase  in bank  deposits  as well as a  reduced  amount  of cash paid for the
repurchase of shares of our common stock,  compared to the prior year. Partially
offsetting  the  decreases  was an  increase  in  repayment  of short term debt,
resulting  from  PRMCR  which  was  consolidated  in 2003 due to FIN 46,  and an
increase in the dividend payment to shareholders.  The increase in net cash used
in 2002 compared to 2001 is primarily from the non-recurrence of the impact from
the prior  year's IPO, in  addition  to the  repurchase  of shares of our common
stock and payments of dividends in 2002.  Partially  offsetting the increases in
cash used was an increase in investment contract deposits, net of withdrawals.

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

RATIO OF EARNINGS TO FIXED CHARGES

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

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

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

                                       71

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

                                                             FOR THE YEAR ENDED
                                                                DECEMBER 31,
                                                     ---------------------------
                                                       2003      2002      2001
                                                     -------   -------   -------
Ratio of earnings to fixed charges before interest
  credited on investment products..................     9.5       7.2       5.2
Ratio of earnings to fixed charges.................     2.1       1.8       1.5

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following  table presents  payments due by period for long-term  contractual
obligations as of December 31, 2003:

                                                             AS OF DECEMBER 31, 2003
                               -------------------------------------------------------------------------------------
                                                  LESS                                                    INDETER-
     CONTRACTUAL                                  THAN 1         1-3         4 - 5         AFTER 5        MINATE
     OBLIGATIONS                 TOTAL            YEAR          YEARS        YEARS          YEARS         MATURITY
- ---------------------------    -----------     ----------    ----------    ----------    ----------   --------------
                                                                  (IN MILLIONS)

Long-term debt(1).........     $  2,767.3      $   779.4     $ 1,045.7     $   174.4     $   767.8     $     -
Long-term debt
   interest...............          532.9          134.5         227.2         143.2          28.0           -
Operating leases(2).......          168.8           47.7          62.1          26.8          32.2           -
GICs and funding
   agreements(3) .........       28,902.5        4,679.3       8,020.5       5,156.2       7,716.0       3,330.5
Certificates of Deposit ..          699.7          328.7         249.9          32.5          88.6           -
Purchase obligations(4)...          212.8          169.7          37.4           5.7           -             -
Other long - term
   liabilities(5).........        1,346.1            -             -             -           182.6       1,163.5
                               -----------     ----------    ----------    ----------    ----------   --------------
   Total contractual
      obligations.........     $ 34,630.1      $ 6,139.3     $ 9,642.8     $ 5,538.8     $ 8,815.2     $ 4,494.0
                               ===========     ==========    ==========    ==========    ==========   ==============

- ---------------
(1)  The following are included in long-term debt:

     At  December  31,  2003,  PRMCR  had a $1.8  billion  credit  facility  for
     long-term  debt,  of which $1.4 billion of long-term  debt was  outstanding
     ($1,200.0  million  in medium  term  notes  and  $193.0  million  in equity
     certificates). In 2001,  $1,600.0  million in medium term notes were issued
     under this facility of which  $1,200.0  million was classified as long-term
     debt on our consolidated statement of financial position as of December 31,
     2003. The remaining  $400.0 million in medium term notes were classified as
     short-term  debt at the  time of  consolidation  in  July  2003  due to the
     maturity  date  ending  in less  than  twelve  months.  Maturities  for the
     long-term  portion  are three  years for $400.0  million and five years for
     $800.0  million.  The  three-year  medium term notes have a fixed rate. The
     five-year medium term notes pay interest based on LIBOR plus a spread.  The
     weighted  average  interest  rate on the medium  term notes  classified  as
     long-term  debt was 2.46% at December 31, 2003.  Equity  certificates  were
     issued in 2000 and 2001,  of which $193.0  million  remains as  outstanding

                                       72

     long-term  debt as of December 31,  2003.  The equity  certificates  have a
     five-year  maturity  and pay  interest  based on LIBOR  plus a spread.  The
     weighted  average  interest  rate on the equity  certificates  was 2.86% at
     December 31, 2003. All PRMCR borrowings are collateralized by the assets of
     PRMCR.

     On August  25,  1999,  we 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.  We 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.  The  long-term  debt resides in our
     wholly-owned subsidiary, PFSI.

     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 ours 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  and only to the extent that
     Principal Life has sufficient  surplus earnings to make such payments.  For
     each of the years ended December 31, 2003, 2002 and 2001, interest of $23.8
     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. We
     have elected,  and have received  approval,  to redeem on March 1, 2004 the
     entire  outstanding  $200.0 million  principal amount of surplus notes at a
     redemption price of 103.6% plus accrued interest to March 1, 2004.

     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.

     Long-term debt also includes  mortgages and other notes payable  related to
     real estate developments.  Along with certain  subsidiaries,  we had $192.5
     million  in credit  facilities  with  various  financial  institutions,  in
     addition to  obtaining  loans with  various  lenders to finance real estate
     developments. Outstanding principal balances as of December 31, 2003, range
     from $0.4 million to $99.9  million per  development  with  interest  rates
     generally ranging from 6.0% to 8.6%.  Outstanding  principal balances as of
     December  31,  2002,   range  from  $0.2  million  to  $100.9  million  per
     development  with  interest  rates  generally  ranging  from  6.0% to 8.6%.
     Outstanding debt is secured by the underlying real estate properties, which
     were  reported as real estate on our  consolidated  statements of financial
     position with a carrying  value of $319.2  million and $260.4 million as of
     December 31, 2003 and 2002, respectively.

(2)  As a lessee,  we lease office space,  data processing  equipment and office
     furniture and equipment under various operating leases.

(3)  Includes GICs,  funding  agreements  (described  below),  individual  fixed
     annuities, universal life insurance, and other investment-type contracts.

     Our  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 a
     minimum notice period. We no longer issue puttable GICs.

     Funding   agreements   include  those  issued   domestically   directly  to
     nonqualified institutional investors, as well as to three separate programs
     where the funding agreements are, or will be, issued directly or indirectly

                                       73

     to  unconsolidated  special  purpose  entities.  Claims for  principal  and
     interest under funding  agreements are afforded equal priority to claims of
     life insurance and annuity  policyholders  under  insolvency  provisions of
     Iowa Insurance Laws.

     We are authorized to issue up to $4.0 billion of funding agreements under a
     program to support  the  prospective  issuance  of medium  term notes by an
     unaffiliated entity in non-U.S.  markets.  Due to our adoption of FIN 46 in
     July 2003, we are no longer  required to  consolidate  this program.  As of
     December  31,  2003  and  2002,  $3,618.7  million  and  $3,583.5  million,
     respectively, are outstanding under this program.

     In  addition,  we are  authorized  to issue up to $7.0  billion  of funding
     agreements  under another  program to support the  prospective  issuance of
     medium  term  notes  by  an  unaffiliated   entity  in  both  domestic  and
     international  markets. The $7.0 billion represents a $3.0 billion increase
     over the  authorization  amount we had at the end of 2002. The unaffiliated
     entity  is an  unconsolidated  QSPE.  As of  December  31,  2003 and  2002,
     $5,613.4 million and $2,555.0 million,  respectively, are outstanding under
     this program.

     Principal  Life  and we have  filed  a  registration  statement  for a $4.0
     billion  retail  medium term note program  with the SEC,  under which newly
     established separate and distinct trusts will issue nonrecourse medium-term
     notes to  institutional  and  retail  investors.  Under  the  program,  the
     proceeds of each note issuance will be used to purchase a funding agreement
     from Principal Life, which will be used to secure that particular series of
     notes.  The payment terms of any particular  series of notes will match the
     payment terms of the funding agreement that secures that series.  Principal
     Life's  payment  obligations  under the funding  agreement  relating to the
     applicable series of notes will be fully and unconditionally  guaranteed by
     a guarantee  issued by us. As of December 31, 2003 and 2002,  there were no
     issued or outstanding notes under this program.

(4)  Purchase   obligations   include   material   contracts  where  we  have  a
     non-cancelable commitment to purchase goods and services.

(5)  Other long-term  liabilities  include other balance sheet  liabilities that
     are contractual, non-cancelable and long-term in nature.

CONTRACTUAL COMMITMENTS

In connection with our banking  business,  we make commitments to extend credit,
which are  agreements  to lend to a customer as long as there is no violation of
any  conditions  established in the contract.  Commitments  generally have fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since many of the  commitments  are expected to expire without being drawn upon,
the  total  commitment   amounts  do  not  necessarily   represent  future  cash
requirements.  We evaluate each  customer's  creditworthiness  on a case-by-case
basis.  The total  commitments  to fund loans were $113.0 million as of December
31, 2003.

We also have commitments to originate mortgage loans. These commitments amounted
to $3.4 billion as of December 31, 2003.

                                       74

SHORT-TERM DEBT

The  components  of  short-term  debt as of December  31, 2003 and 2002,  are as
follows:

                                                         AS OF DECEMBER 31,
                                                    ----------------------------
                                                      2003            2002
                                                    ------------    ------------
                                                            (IN MILLIONS)

PRMCR secured liquidity notes................       $   215.0       $     -
PRMCR fixed term notes.......................           400.0             -
Mortgage servicing rights financing..........           300.0             -
Commercial paper.............................           399.8           157.5
Other recourse short-term debt...............            27.0            38.6
Non-recourse short-term debt.................           276.0           368.7
                                                    ------------    ------------
   Total short-term debt.....................       $ 1,617.8       $   564.8
                                                    ============    ============

As of  December  31,  2003,  we had credit  facilities  with  various  financial
institutions in an aggregate  amount of $4.2 billion,  which consisted of a $2.2
billion PRMCR credit  facility and $2.0 billion in other credit  facilities.  We
consolidated  PRMCR in July 2003 as a result of adopting  FIN 46.  PRMCR can use
the $2.2 billion credit  facility to issue  short-term  debt. As of December 31,
2003, PRMCR had $215.0 million of short-term secured liquidity notes outstanding
under this facility.  All borrowings are  collateralized by the assets of PRMCR.
Of our other remaining credit  facilities,  as of December 31, 2003 and 2002, we
had $1.0 billion and $564.8 million of outstanding  borrowings from these credit
facilities,  with $1.0 billion and $459.5  million of assets pledged as support,
respectively.  Assets pledged consisted  primarily of mortgage servicing rights,
commercial  mortgages and  securities.  Our credit  facilities  include a $600.0
million  back-stop  facility to provide  100% support for our  commercial  paper
program, of which there were no outstanding balances as of December 31, 2003 and
2002.

PRMCR's $400.0  million  outstanding  short-term  debt in fixed term notes as of
December 31, 2003, was originally  issued under a separate  credit  facility for
long-term borrowings. Due to the maturity date of less than twelve months at the
time on  consolidation  in July 2003,  the fixed term notes were  classified  as
short-term   debt.  See  the  long-term  debt  discussion   under   "Contractual
Obligations and Commercial Commitments" for further discussion.

The weighted-average  interest rates on short-term borrowings as of December 31,
2003  and  2002,  were  2.9%  and  1.8%,  respectively.   Excluding  PRMCR,  the
weighted-average interest rates on short-term borrowings as of December 31, 2003
was 1.6%.

OFF-BALANCE SHEET ARRANGEMENTS

The FASB  issued FIN 46 in  January  2003.  FIN 46  established  new  accounting
guidance  relating to the  consolidation  of VIEs.  The guidance  was  effective
immediately  for all VIEs created after January 31, 2003,  and effective July 1,
2003,  for all VIEs created  before  February 1, 2003. In October 2003, the FASB
released Staff Position FIN 46-6,  EFFECTIVE DATE OF FASB INTERPRETATION NO. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES,  that allows the deferral of FIN 46
for all VIEs created or acquired prior to February 1, 2003, until the end of the
first  interim or annual  period  ending after  December  15,  2003,  if certain
conditions are met. We invested in one VIE in April 2003, and, effective July 1,
2003, consolidated VIEs created or acquired prior to February 1, 2003, for which
we are the primary  beneficiary.  As a result, we have consolidated PRMCR, which
previously  had  provided  an  off-balance  sheet  source  of  funding  for  our
residential mortgage loan production.

DELINQUENT RESIDENTIAL MORTGAGE LOAN FUNDING

In October 2000, our mortgage  banking segment  created a wholly-owned,  special
purpose entity, Principal Residential Mortgage Funding, LLC ("PRMF"), to provide
an  off-balance  sheet source of funding for up to $250.0  million of qualifying

                                       75

delinquent mortgage loans. The limit was increased to $550.0 million in December
2002 and to $1.05 billion in August 2003. We sell qualifying  delinquent FHA and
VA  mortgage  loans  to  PRMF  which  then  transfers  the  loans  to  Principal
Residential  Mortgage EBO Trust  ("Trust"),  an unaffiliated  Delaware  business
trust and a QSPE. The Trust funds its  acquisitions of mortgage loans by selling
participation certificates,  representing an undivided interest in the Trust, to
commercial  paper conduit  purchasers,  who are not affiliated with us or any of
our affiliates,  directors or officers. At December 31, 2003 and 2002, the Trust
held $653.4 million and $405.1 million in mortgage loans, respectively,  and had
outstanding  participation  certificates  of $618.4 million and $382.8  million,
respectively.

Residential  mortgage  loans  typically  remain  in the  Trust  until  they  are
processed  through the  foreclosure  claim  process,  are paid-off or reinstate.
Mortgage loans that reinstate are no longer  eligible to remain in the Trust and
are required to be removed at fair market value at the monthly  settlement  date
following reinstatement.

We are  retained  as the  servicer  of  the  mortgage  loans  and  also  perform
accounting  and  various  administrative  functions  on behalf  of PRMF,  in our
capacity as the managing member of PRMF. As the servicer, we receive a servicing
fee  pursuant to the  pooling and  servicing  agreement.  We may also  receive a
successful  servicing  fee only after all other  conditions  in the monthly cash
flow  distribution  are met. We  received  $34.7  million  and $23.4  million in
servicing  and   successful   servicing   fees  from  PRMF  in  2003  and  2002,
respectively.  At December 31, 2003 and 2002, our estimated residual interest in
such cash  flows was $50.9  million  and $32.7  million,  respectively,  and was
recorded in other assets on the consolidated  statements of financial  position.
The value of the residual  interest was estimated based on the net present value
of expected  cash flows from PRMF.  We are required to advance funds for payment
of interest on the  participation  certificates  and other  carrying  costs,  if
sufficient  cash is not available in the trust  collection  account to meet this
obligation.

We and the Trust are  parties  to a cost of funds  hedge  agreement.  We pay the
weighted average cost of funds on the  participation  certificates plus fees and
expenses and receive weighted average coupon of mortgage loans in the Trust less
a spread.

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business,  we have provided  guarantees to third parties
primarily related to a former subsidiary,  joint ventures and industrial revenue
bonds.  These  agreements  generally  expire from 2004 through 2019. The maximum
exposure  under these  agreements  as of December  31, 2003,  was  approximately
$190.0  million;  however,  we believe the  likelihood  is remote that  material
payments will be required and therefore  have not accrued for a liability on our
consolidated statements of financial position.  Should we be required to perform
under these  guarantees,  we generally  could recover a portion of the loss from
third parties  through  recourse  provisions  included in  agreements  with such
parties,  the sale of assets held as  collateral  that can be  liquidated in the
event that  performance  is  required  under the  guarantees  or other  recourse
generally  available to us, minimizing the impact to net income.  The fair value
of such guarantees issued after January 1, 2003, was insignificant.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the  purchaser,  Westpac,  for among other  things,  the costs  associated  with
potential  late  filings  made by BT  Financial  Group in New  Zealand  prior to
Westpac's  ownership,  up to a maximum of  A$250.0  million  Australian  dollars
(approximately  U.S.  $190.0  million as of  December  31,  2003).  New  Zealand
securities regulations allow Australian issuers to issue their securities in New
Zealand  provided that certain  documents are  appropriately  filed with the New
Zealand Registrar of Companies.  Specifically,  the regulations require that any
amendments to  constitutions  and compliance  plans be filed in New Zealand.  In
April 2003, the New Zealand Securities Commission ("the Commission") opined that
such late filings would result in certain New Zealand  investors  having a right
to return of their  investment  plus  interest at 10% per annum from the date of
investment.  Consequently,  the  Commission has advised that it has initiated an
inquiry  into the  matter,  both  with  regard to BT  Financial  Group and other
similar  issuers.  We view these potential late filings as a technical matter as
we believe  investors  received the information  that is required to be provided

                                       76

directly to them. In addition,  we believe this technical  issue may affect many
in the industry and result in a favorable  legislative or judicial  solution.  A
relevant  legislative  solution  and  judicial  action  are both  pending in New
Zealand.  Although we cannot  predict  the outcome of this matter or  reasonably
estimate  losses,  we do not believe that it would result in a material  adverse
effect on our business or financial position.  It is possible,  however, that it
could have a material  adverse  effect on net income in a particular  quarter or
annual period.

In the normal course of business, we are subject to indemnification  obligations
related to the sale of residential mortgage loans. Under these indemnifications,
we are  required  to  repurchase  certain  mortgage  loans that fail to meet the
standard  representations  and warranties  included in the sales contracts.  The
amount of our  exposure is based on the  potential  loss that may be incurred if
the repurchased  mortgage loans are processed  through the foreclosure  process.
Based on historical  experience,  total mortgage loans  repurchased  pursuant to
these  indemnification  obligations are estimated to be  approximately  0.04% of
annual  mortgage  loan  production  levels.  Total losses on the mortgage  loans
repurchased are estimated to approximate 25% of the unpaid principal  balance of
the related  mortgage  loans.  As of December  31,  2003,  $5.9 million has been
accrued for  representing the fair value of such  indemnifications  issued after
January 1, 2003, in accordance with FASB's  Interpretation  No. 45,  GUARANTOR'S
ACCOUNTING  AND  DISCLOSURE  REQUIREMENTS  FOR  GUARANTEES,  INCLUDING  INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS.

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

INVESTMENTS

We had total consolidated  assets as of December 31, 2003, of $107.8 billion, of
which $55.6 billion were  invested  assets.  The rest of our total  consolidated
assets are comprised  primarily of separate  account  assets for which we do not
bear  investment  risk.  Because we generally do not bear any investment risk on
assets held in separate accounts, the discussion and financial information below
does not include such assets. Of our invested assets, $53.6 billion were held by
our  U.S.   operations   and  the  remaining  $2.0  billion  were  held  by  our
International Asset Management and Accumulation segment.

U.S. INVESTMENT OPERATIONS

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

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

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

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

                                       77

Our  ability  to  manage  credit  risk  is  essential  to our  business  and our
profitability.  We devote considerable  resources to the credit analysis of each
new investment.  We manage credit risk through industry,  issuer and asset class
diversification.  Our Investment Committee, appointed by our board of directors,
is responsible for establishing all investment policies, reviewing and approving
all  investments.  As of  December  31,  2003,  there  are nine  members  on the
Investment  Committee,  one of whom is a member of our board of  directors.  The
remaining members are senior management  members  representing  various areas of
our company.

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

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

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

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

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

o    significant management or organizational changes;

o    significant uncertainty regarding the issuer's industry;

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

o    violation of financial covenants; and

o    other business factors that relate to the issuer.

A dedicated risk management  team is responsible  for centralized  monitoring of
the commercial mortgage portfolio.  We apply a variety of strategies to minimize
credit risk in our commercial  mortgage loan  portfolio.  When  considering  the
origination  of  new  commercial   mortgage  loans,  we  review  the  cash  flow
fundamentals  of the  property,  make a physical  assessment  of the  underlying
security,  conduct a comprehensive  market analysis and compare against industry
lending  practices.  We use a proprietary  risk rating model to evaluate all new
and a majority of existing  loans within the  portfolio.  The  proprietary  risk
model is designed to stress  projected cash flows under  simulated  economic and
market downturns.  Our lending  guidelines are designed to encourage 75% or less
loan-to-value ratios and a debt service coverage ratio of at least 1.2 times. We
analyze  investments  outside of these  guidelines  based on cash flow  quality,
tenancy  and  other  factors.  The  weighted  average   loan-to-value  ratio  at
origination for brick and mortar  commercial  mortgages in our portfolio was 67%

                                       78

and the debt  service  coverage  ratio  at loan  inception  was 2.5  times as of
December 31, 2003.

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 December 31,
2003.

Our investment  decisions and objectives are a function of the underlying  risks
and  product  profiles of each  primary  business  operation.  In  addition,  we
diversify  our product  portfolio  offerings  to include  products  that contain
features  that will protect us against  fluctuations  in interest  rates.  Those
features include adjustable crediting rates, policy surrender charges and market
value adjustments on liquidations.  For further information on our management of
interest rate risk, see Item 7A, "Quantitative and Qualitative Disclosures about
Market Risk".

OVERALL COMPOSITION OF U.S. INVESTED ASSETS

U.S. invested assets as of December 31, 2003, were predominantly of high quality
and broadly  diversified  across asset class,  individual  credit,  industry and
geographic  location.  Asset allocation is determined based on cash flow and the
risk/return  requirements of our products.  As shown in the following table, the
major  categories of U.S.  invested  assets are fixed  maturity  securities  and
commercial  mortgages.   The  remainder  is  invested  in  real  estate,  equity
securities  and other  assets.  In  addition,  policy  loans are included in our
invested  assets.  The following  discussion  analyzes the  composition  of U.S.
invested  assets,  but excludes  invested assets of the  participating  separate
accounts.

                              U.S. INVESTED ASSETS

                                                            AS OF DECEMBER 31,        AS OF DECEMBER 31,
                                                         -----------------------   ------------------------
                                                                   2003                      2002
                                                         -----------------------   ------------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                         -------------  --------   --------------  --------
                                                                          ($ IN MILLIONS)
                                                                                         
Fixed maturity securities
   Public.........................................        $  24,785.0        46%     $  22,766.8      48%
   Private........................................           11,343.0        21         10,440.3      22
Equity securities.................................              670.7         1            358.1       1
Mortgage loans
   Commercial ....................................            9,630.4        18          9,365.8      20
   Residential (1)................................            3,544.6         7          1,463.6       3
Real estate held for sale ........................              524.4         1            179.5       -
Real estate held for investment...................            1,003.6         2          1,042.1       2
Policy loans......................................              804.1         2            818.5       2
Other investments ................................            1,249.7         2          1,075.5       2
                                                         -------------  --------   --------------  --------
   Total invested assets..........................           53,555.5       100%        47,510.2     100%
                                                                        ========                   ========

Cash and cash equivalents.........................            1,619.8                      941.5
                                                         -------------             --------------
   Total invested assets and cash ................        $  55,175.3                $  48,451.7
                                                         =============             ==============

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

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

                                       79

U.S. INVESTMENT RESULTS

The following  tables  present the yield and  investment  income,  excluding net
realized/unrealized   gains  and  losses  for  our  U.S.  invested  assets.  The
annualized  yield on U.S.  invested assets and on cash and cash  equivalents was
6.3% for the year ended  December 31, 2003,  compared to 6.9% for the year ended
December 31,  2002.  We calculate  annualized  yields using a simple  average of
asset classes at the beginning  and end of the  reporting  period.  During 2002,
certain seed money investments were reclassified from equity securities to other
investments. During 2003, residential mortgage loans increased significantly due
to our  implementation of FIN 46. The asset changes impact the annualized yields
by asset class.

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

                                                        FOR THE YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------
                                                     2003                          2002
                                             ------------------------     ----------------------------
                                              YIELD        AMOUNT           YIELD           AMOUNT
                                             ---------   ------------     -----------     ------------
                                                                ($ IN MILLIONS)

Fixed maturity securities.............         6.3%      $   2,191.7         6.8%           $ 2,122.9
Equity securities.....................         8.8              45.4         4.7                 27.4
Mortgage loans - Commercial...........         7.6             722.9         7.6                721.5
Mortgage loans - Residential..........         6.8             169.4         5.5                 71.2
Real Estate...........................         6.6              91.0         7.1                 85.2
Policy loans..........................         6.7              54.5         7.0                 57.6
Cash and cash equivalents.............         1.2              15.0         2.3                 16.5
Other investments.....................        12.5             145.7        18.5                161.0
                                                         ------------                     ------------
  Total before investment expenses....         6.6           3,435.6         7.1              3,263.3

Investment expenses...................         0.3             155.7         0.2                 98.2
                                                         ------------                     ------------
  Net investment income...............         6.3%      $   3,279.9         6.9%           $ 3,165.1
                                                         ============                     ============

FIXED MATURITY SECURITIES

Fixed maturity  securities  consist of short-term  investments,  publicly traded
debt  securities,  privately  placed debt  securities and  redeemable  preferred
stock, and represented 67% of total U.S. invested assets as of December 31, 2003
and 70% as of December 31, 2002.  The fixed  maturity  securities  portfolio was
comprised,  based on carrying  amount,  of 69% in publicly traded fixed maturity
securities and 31% in privately placed fixed maturity  securities as of December
31, 2003 and December 31, 2002,  respectively.  Included in the privately placed
category as of December 31, 2003,  were $4.3 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 December 31, 2003, and December 31, 2002, as shown in the following table:

                                       80

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

                                                            AS OF DECEMBER 31,         AS OF DECEMBER 31,
                                                           ---------------------     ----------------------
                                                                   2003                      2002
                                                           ---------------------     ----------------------
                                                            CARRYING       % OF       CARRYING      % OF
                                                             AMOUNT        TOTAL       AMOUNT       TOTAL
                                                           -----------   -------     -----------   --------
                                                                          ($ IN MILLIONS)

U.S. Government and agencies...........................     $   610.9         2%      $   518.6       2%
States and political subdivisions......................         537.0         1           426.3       1
Non-U.S. governments...................................         422.4         1           380.5       1
Corporate - public.....................................      18,033.4        50        17,061.2      52
Corporate - private....................................       9,693.1        27         8,777.5      26
Residential pass-through securities....................       2,070.3         6         2,372.0       7
Commercial MBS.........................................       2,917.4         8         2,476.4       7
Collateral mortgage obligations........................         294.6         1             -         -
Asset-backed securities................................       1,548.9         4         1,239.6       4
                                                            ----------   -------     -----------   --------
    Total fixed maturities.............................     $36,128.0       100%      $33,207.1     100%
                                                           ===========   =======     ===========   ========

We held $6,831.2 million of  mortgage-backed  and asset-backed  securities as of
December 31, 2003, and $6,043.0 million as of December 31, 2002.

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

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

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

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

The  international  exposure  in our  U.S.  fixed  maturity  securities  totaled
$4,963.8  million,  or 14%, as of December 31, 2003,  comprised of corporate and
foreign  government  fixed maturity  securities.  Of the $4,963.8  million as of
December 31, 2003,  investments  totaled $1,376.2 million in the United Kingdom,
$1,242.2  million in the  continental  European  Union,  $528.2 million in Asia,
$424.2 million in South  America,  $409.8 million in Australia and $16.1 million
in Japan. The remaining  $967.1 million is invested in 12 other  countries.  All
international  fixed maturity  securities held by our U.S. operations are either
denominated in U.S.  dollars or have been swapped into U.S. dollar  equivalents.

                                       81

Our  international  investments are analyzed  internally by country and industry
credit  investment  professionals.  We control  concentrations  using issuer and
country level exposure benchmarks,  which are based on the credit quality of the
issuer and the country.  Our investment policy limits total  international fixed
maturity securities investments to 18% of total statutory general account assets
with a 4% limit in emerging  markets.  Exposure to Canada is not included in our
international  exposure  due to its  treatment  by the NAIC.  As of December 31,
2003, our investments in Canada totaled $1,325.2 million.

As of December 31, 2003,  our top ten corporate bond exposures were rated an "A"
equivalent or better by the rating agencies and represented $2,828.1 million, or
8% of our fixed  maturity  securities  portfolio  and 5% of total U.S.  invested
assets. As of December 31, 2003, no individual non-government issuer represented
more than 1% of U.S. invested assets.

Valuation  techniques  for  the  fixed  maturity  securities  portfolio  vary by
security  type and the  availability  of market data.  Pricing  models and their
underlying  assumptions  impact the amount  and timing of  unrealized  gains and
losses recognized,  and the use of different pricing models or assumptions could
produce different  financial  results.  Interactive Data Corporation  ("IDC") or
direct  broker  quotes are our sources for external  prices for our public bonds
and those private placement securities that are actively traded in the secondary
market. In cases where quoted market prices are not available,  a spread pricing
matrix is used.  When utilizing a spread pricing  matrix,  securities are valued
through a  discounted  cash flow method where each bond is assigned a credit and
liquidity  spread,  which is added to the current U.S. Treasury rate to discount
the cash flows of the security.  Our spread pricing matrix uses the OTR Treasury
curve,  which  is  pulled  from  Bloomberg  as of the  valuation  date.  Capital
Management Science ("CMS") has been contracted to serve as an independent source
of  credit  spreads  to be used in the  corporate  private  placement  valuation
process.  The credit  spreads  are based on weekly  studies  of the public  bond
market and vary by industry,  credit  quality and average  investment  life. The
liquidity  spread is based on the average yield pick-up a private  placement can
expect to earn over a comparable public bond because of illiquidity. The spreads
assigned  to each  security  change  from month to month based on changes in the
market.  Certain  market  events that could impact the  valuation of  securities
include issuer credit ratings, business climate, management changes, litigation,
and government  actions among others.  The resulting prices are then reviewed by
pricing analysts.  All loans placed on the watchlist are valued  individually by
the investment analysts or the Workout group.  Although we believe our estimates
reasonably reflect the fair value of those securities, the key assumptions about
risk premiums,  performance of underlying  collateral (if any) and other factors
involve  significant  assumptions and may not reflect those of an active market.
To the extent that bonds have longer  maturity dates,  management's  estimate of
fair value may involve greater  subjectivity  since they involve  judgment about
events well into the future. Every month, there is a comprehensive review of all
impaired  securities  and  problem  loans  by a group  consisting  of the  Chief
Investment Officer, the Portfolio Managers, and the Workout Group. The valuation
of impaired  bonds for which there is no quoted price is typically  based on the
present value of the future cash flows  expected to be received.  If the company
is likely to continue operations, the estimate of future cash flows is typically
based on the expected  operating cash flows of the company that are available to
make payments of the bonds. If the company is likely to liquidate,  the estimate
of future cash flows is based on an estimate of the liquidation value of its net
assets.

The Securities  Valuation Office ("SVO") of the NAIC evaluates most of the fixed
maturity  securities  that we and other U.S.  insurance  companies hold. The SVO
evaluates the bond investments of insurers for regulatory reporting purposes and
assigns  securities to one of six investment  categories.  The NAIC Designations
closely mirror the nationally recognized securities rating organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade by such rating  organizations.  Bonds are considered investment
grade when rated "Baa3" or higher by Moody's,  or "BBB-" or higher by Standard &
Poor's. NAIC Designations 3 through 6 are referred to as below investment grade.
Bonds  are  considered  below  investment  grade  when  rated  "Ba1" or lower by
Moody's,  or "BB+" or lower by Standard & Poor's.  As of December 31, 2003,  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%.

                                       82

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

The  following  table  presents  our total  fixed  maturity  securities  by NAIC
Designation and the equivalent ratings of the nationally  recognized  securities
rating  organizations as of December 31, 2003, and December 31, 2002, as well as
the percentage, based on estimated fair value, that each designation comprises:

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

                                                AS OF DECEMBER 31, 2003                    AS OF DECEMBER 31, 2002
                                         ---------------------------------------   ------------------------------------------
                                                                      % OF                                         % OF
                       RATING                                         TOTAL                                        TOTAL
NAIC                   AGENCY           AMORTIZED     CARRYING       CARRYING       AMORTIZED      CARRYING       CARRYING
RATING (1)           EQUIVALENT            COST        AMOUNT         AMOUNT          COST          AMOUNT         AMOUNT
- -----------     --------------------  -------------  -----------   -------------   -------------  ------------   ------------
                                                                         ($ IN MILLIONS)

1               Aaa/Aa/A...........     $  17,299.2   $18,415.1        51%          $15,377.5      $16,539.9        50%
2               Baa................        13,579.3    14,657.1        41            12,921.8       13,657.4        41
3               Ba.................         1,998.0     2,123.1         6             2,168.8        2,080.8         6
4               B..................           517.4       514.5         1               506.2          434.5         1
5               Caa and lower......           230.9       225.4         1               215.6          162.5         1
6               In or near default.           220.7       192.8         -               371.0          332.0         1
                                      -------------  -----------   -------------   -------------  ------------   ------------
                  Total fixed
                    maturities.....     $  33,845.5   $36,128.0       100%          $31,560.9      $33,207.1       100%
                                      =============  ===========   =============   =============  ============   ============

- -----------------------
(1)  Includes 151 securities with an amortized cost of $1,469.2  million,  gross
     gains of $39.1 million, gross losses of $20.7 million and a carrying amount
     of  $1,487.6  million as of December  31,  2003,  that are still  pending a
     review  and  assignment  of a rating by the SVO.  Due to the timing of when
     fixed maturity securities are purchased, legal documents are filed, and the
     review by the SVO,  there will always be securities  in our portfolio  that
     are unrated over a reporting  period.  In these  instances,  an  equivalent
     rating is assigned based on our fixed income analyst's assessment.

We believe  that our  long-term  fixed  maturity  securities  portfolio  is well
diversified  among  industry  types and between  publicly  traded and  privately
placed securities. Each year we direct the majority of our net cash inflows into
investment grade fixed maturity  securities.  Our current policy is to limit the
percentage of cash flow invested in below  investment grade assets to 7% of cash
flow.  As of December 31, 2003, we had invested 4% of new cash flow for the year
in below investment grade assets.  While the general account  investment returns
have  improved  due to the below  investment  grade asset  class,  we manage its
growth  strategically  by  limiting  it to  10%  of  the  total  fixed  maturity
securities portfolios.

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

                                       83

The following  table shows the carrying  amount of our corporate  fixed maturity
securities by Salomon industry category,  as well as the percentage of the total
corporate portfolio that each Salomon industry category comprises as of December
31, 2003, and December 31, 2002.

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

                                                          AS OF DECEMBER 31,         AS OF DECEMBER 31,
                                                      --------------------------  -------------------------
                                                                 2003                       2002
                                                      --------------------------  -------------------------
                                                         CARRYING       % OF        CARRYING        % OF
                                                          AMOUNT        TOTAL        AMOUNT         TOTAL
                                                      ------------    ----------  -------------  ----------
                                                                         ($ IN MILLIONS)
                                                                                          
INDUSTRY CLASS
Finance - Bank..........................               $  3,041.9          11%     $  2,431.5           9%
Finance - Insurance.....................                  1,718.1           6         1,006.8           4
Finance - Other.........................                  3,337.5          12         3,199.0          12
Industrial - Consumer...................                    879.4           3           958.2           4
Industrial - Energy.....................                  2,779.5          10         2,959.5          11
Industrial - Manufacturing..............                  5,729.6          21         5,882.5          23
Industrial - Other......................                    158.7           1           133.1           1
Industrial - Service....................                  4,503.0          16         3,932.7          15
Industrial - Transport..................                    967.8           4         1,058.9           4
Utility - Electric......................                  2,751.2          10         2,539.4          10
Utility - Other.........................                     67.4           -           161.4           1
Utility - Telecom.......................                  1,792.4           6         1,575.7           6
                                                      ------------    ----------  -------------  ----------
    Total...............................               $ 27,726.5         100%     $ 25,838.7         100%
                                                      ============    ==========  =============  ==========

We  monitor  any  decline in the credit  quality  of fixed  maturity  securities
through the designation of "problem securities",  "potential problem securities"
and  "restructured  securities".  We  define  problem  securities  in our  fixed
maturity  portfolio as securities:  (i) as to which  principal  and/or  interest
payments are in default or where default is perceived to be imminent in the near
term (ii)  issued by a company  that  went  into  bankruptcy  subsequent  to the
acquisition of such securities.  We define potential  problem  securities in our
fixed maturity portfolio as securities  included on an internal "watch list" for
which management has concerns as to the ability of the issuer to comply with the
present  debt  payment  terms and which may  result in the  security  becoming a
problem or being  restructured.  The  decision  whether to classify a performing
fixed maturity security as a potential problem involves  significant  subjective
judgments by our  management as to the likely  future  industry  conditions  and
developments  with respect to the issuer. We define  restructured  securities in
our fixed maturity  portfolio as securities  where a concession has been granted
to the borrower related to the borrower's financial  difficulties that would not
have otherwise been considered.  We determine that restructures  should occur in
those  instances  where greater  economic  value will be realized  under the new
terms than through  liquidation or other disposition and may involve a change in
contractual cash flows. If at the time of restructure,  the present value of the
new  future  cashflows  is  less  than  the  current  cost  of the  asset  being
restructured,  a realized  capital loss is recorded in net income and a new cost
basis is established.

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

Every month, a group of individuals  including the Chief Investment Officer, our
Portfolio  Managers,  members of our Workout  Group,  and  representatives  from
Investment  Accounting  review all  securities  where  market value is less than
seventy-five  percent of amortized cost to determine whether impairments need to

                                       84

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

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

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

The realized  losses  relating to other than temporary  impairments  were $152.6
million for the year ended  December  31,  2003.  Following  is a summary of our
material impairments taken as of the year ended December 31, 2003:

o    $30.7 million on private fixed maturity  securities  relating to an Italian
     dairy and bakery  goods  producer.  The  company  filed the  equivalent  of
     Chapter 11  bankruptcy  protection  after  disclosing  massive fraud during
     December  2003.  Prospects  for recovery  are still being  evaluated as the
     bankruptcy is in the early phase of discovery and valuation assessment.

o    $26.9 million on private fixed maturity  securities on an Australian mining
     company.  The company  filed for the  equivalent of Chapter 11 in July 2003
     due  to  persistently  low  metals  prices,  operational  difficulties  and
     unfavorable  hedge  positions.  The sale of the  company's  assets  are not
     expected to be sufficient to repay the senior debt  resulting in a complete
     write-off.

o    $14.4 million on private and public fixed maturity securities relating to a
     U.S.  merchant power producer.  This power producer filed Chapter 11 during
     July 2003.  These  impairments  are based on publicly quoted prices for the
     public securities and estimated recovery values for the private securities.

o    $11.8  million  on  public  fixed  maturity   securities  secured  by  four
     electricity  generating units totaling 1.370MW in the northeast U.S. Output
     from these  plants  was sold  under  long-term  contract  to a  financially
     troubled U.S.  merchant  power  producer.  These  impairments  are based on
     publicly quoted prices for the public securities.  We also sold some of our
     position in this credit and  recognized a realized loss on the sale of $5.9
     million.

o    $10.2 million on private fixed maturity securities secured by energy assets
     and a related  company  guarantee.  The related company filed Chapter 11 in
     2001 after  disclosing  massive  fraud.  These  impairments  are based upon
     publicly quoted prices and estimated recovery values of the assets.

o    $9.3 million on private fixed maturity  securities on an aircraft leased by
     a U.S. airline. Aircraft collateral values have declined with the financial
     weakness in the airline  sector.  We also sold some of our position in this
     credit and recognized a realized loss on the sale of $4.6 million.

o    $9.2 million on preferred securities issued by a corporation which provides
     services for the insurance  retail and brokerage  business.  Impairment was
     necessary   as  the  company   reviews   potential   options   including  a

                                       85

     restructuring  of its balance  sheet,  infusion of new priority  capital or
     sale of the  enterprise.  The impairment  value was  determined  through an
     analysis of enterprise value.

o    $8.5 million on private fixed  maturity  securities  secured by credit card
     receivables.  The  receivables  are being  liquidated  following the forced
     liquidation  of the  servicer.  These  impairments  are based upon recovery
     values of the assets.

o    $7.4 million on private and public fixed maturity  securities relating to a
     U.S.  merchant power producer.  This power producer  experienced  financial
     duress due to weak power  prices,  high natural gas prices and  significant
     leverage.  These  impairments  are based on publicly  quoted prices for the
     public securities and estimated recovery values for the private securities.

In  July  2002,  Worldcom  Inc.  filed  a  voluntary  petition  for  Chapter  11
reorganization with the U.S. Bankruptcy Court. We recognized realized losses for
other  than  temporary  impairments  during  the  second  quarter  of 2002.  Our
remaining  investment  in WorldCom  Inc.  is  classified  in our  problem  fixed
maturity  securities  portfolio in the amount of $9.0 million as of December 31,
2003.

For the year ended  December 31, 2003, we realized $64.8 of losses upon disposal
of bonds excluding hedging adjustments.  Included in this $64.8 million is $18.3
million related to sales of credit impaired assets.  The largest of these losses
is $5.9  million  related to a U.S.  merchant  power  producer  and $4.6 million
related to an airline as referred to in the impairment  discussion  above.  Also
included  within the $18.3  million of losses is a $3.3 million loss on the sale
of our entire position in a Mexican mining  company,  and a $3.1 million loss on
the sale of a U.S.  petroleum  industry services company that we had impaired in
2002. The Mexican issuer was under financial  duress due to low commodity prices
and liquidity concerns.  The U.S. issuer filed Chapter 11 bankruptcy  protection
during June 2003, after taking large accounting  write-offs that  precipitated a
severe  liquidity  crisis.  The  remaining  losses were  incurred as part of our
general  portfolio  repositioning   activities.  We  generally  intend  to  hold
securities in unrealized loss positions  until they mature or recover.  However,
we do sell bonds under certain circumstances such as when new information causes
us to change our assessment of whether a bond will recover or perform  according
to its contractual  terms, in response to external events (such as a merger or a
downgrade) that result in investment guideline violations (such as single issuer
or overall portfolio credit quality limits), in response to extreme catastrophic
events  (such as  September  11,  2001) that  result in  industry or market wide
disruption, or to take advantage of tender offers. Sales generate both gains and
losses.

The following tables present our fixed maturity securities available-for-sale by
industry  category and the associated  gross  unrealized  gains and losses as of
December 31, 2003, and December 31, 2002.

                                       86

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

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

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

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

                                       87

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

                                                                AS OF DECEMBER 31, 2002
                                               ------------------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED       CARRYING
                                                  COST          GAINS         LOSSES (1)        AMOUNT
                                               ------------  ------------  ---------------  ---------------
                                                                       (IN MILLIONS)
                                                                                
Finance - Bank..........................       $   2,303.1    $     162.4    $    34.0      $   2,431.5
Finance - Insurance.....................             955.9           55.1          4.2          1,006.8
Finance - Other.........................           3,019.5          185.9          6.4          3,199.0
Industrial - Consumer...................             903.8           59.3          4.9            958.2
Industrial - Energy.....................           2,898.0          192.6        131.1          2,959.5
Industrial - Manufacturing..............           5,603.3          335.1         55.9          5,882.5
Industrial - Other......................             125.6            8.2          0.7            133.1
Industrial - Service....................           3,652.3          296.5         16.1          3,932.7
Industrial - Transport..................           1,049.3           70.0         60.4          1,058.9
Utility - Electric......................           2,556.2          107.1        123.9          2,539.4
Utility - Other.........................             159.9            4.8          3.3            161.4
Utility - Telecom.......................           1,472.8          129.7         26.8          1,575.7
                                               ------------  ------------  ---------------  ---------------
   Total corporate securities...........          24,699.7        1,606.7        467.7         25,838.7
U.S. Government and agencies............             499.2           19.4          -              518.6
States and political subdivisions.......             399.2           33.0          5.9            426.3
Non-U.S. governments....................             329.9           53.7          3.1            380.5
Mortgage-backed and other
  asset-backed securities...............           5,535.9          419.9         14.5          5,941.3
                                               ------------  ------------  ---------------  ---------------
   Total fixed maturity securities,
      available-for-sale................       $  31,463.9    $   2,132.7    $   491.2      $  33,105.4
                                               ============  ============  ===============  ===============

The total unrealized losses on our fixed maturity securities  available-for-sale
were $151.6  million and $491.2 million as of December 31, 2003 and December 31,
2002,  respectively.  Of the  $151.6  million in gross  unrealized  losses as of
December 31, 2003, $1.6 million is attributed to securities  scheduled to mature
in one year or less,  $24.3 million is  attributed  to  securities  scheduled to
mature  between one to five years,  $48.9  million is  attributed  to securities
scheduled to mature  between five to ten years,  $54.7  million is attributed to
securities  scheduled to mature after ten years, and $22.1 million is related to
mortgage-backed and other asset-back securities.  The gross unrealized losses as
of December 31, 2003 were  concentrated  primarily  in the  Industrial-Consumer,
Mortgage-backed and other asset-backed security, Industrial-Transportation,  and
Industrial-Manufacturing sectors. The gross unrealized losses as of December 31,
2002 were  concentrated  primarily in the  Industrial-Energy,  Utility-Electric,
Industrial-Transportation, Industrial-Manufacturing, and Finance-Bank sectors.

The following tables present our fixed maturity securities available-for-sale by
investment  grade and below investment grade and the associated gross unrealized
gains and losses as of December 31, 2003, and December 31, 2002.

                                       88

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

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

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

                                                                AS OF DECEMBER 31, 2002
                                               ------------------------------------------------------------
                                                                GROSS          GROSS
                                                AMORTIZED     UNREALIZED     UNREALIZED       CARRYING
                                                  COST          GAINS         LOSSES           AMOUNT
                                               ------------  ------------  ---------------  ---------------
                                                                       (IN MILLIONS)
                                                                                
Investment Grade:
   Public...................................   $  19,981.5    $ 1,431.1      $    70.8      $  21,341.8
   Private..................................       8,220.8        606.6           73.6          8,753.8
Below Investment Grade:
   Public...................................       1,612.9         41.5          229.4          1,425.0
   Private..................................       1,648.7         53.5          117.4          1,584.8
                                               ------------  ------------  ---------------  ---------------
Total fixed maturity securities,
   available-for-sale.......................   $  31,463.9    $ 2,132.7      $   491.2      $  33,105.4
                                               ============  ============  ===============  ===============

                                       89

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

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

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

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

                                                                      AS OF DECEMBER 31, 2002
                                        ------------------------------------------------------------------------------------
                                                  PUBLIC                      PRIVATE                       TOTAL
                                        -----------------------------  --------------------------  -------------------------
                                                         GROSS                          GROSS                      GROSS
                                          CARRYING     UNREALIZED       CARRYING      UNREALIZED     CARRYING     UNREALIZED
                                           AMOUNT        LOSSES          AMOUNT        LOSSES         AMOUNT       LOSSES
                                        ------------ ----------------  ------------ -------------  ------------  -----------
                                                                           (IN MILLIONS)

Three months or less..................   $     695.4   $  16.9          $  345.7     $  21.1         $1,041.1    $    38.0
Greater than three to six months......         242.2      13.0             225.8        14.2            468.0         27.2
Greater than six to nine months.......         188.6      11.5             149.2        12.6            337.8         24.1
Greater than nine to twelve months....         174.9       6.1             105.7         2.1            280.6          8.2
Greater than twelve to twenty-four
   months.............................         167.3      20.1             148.3        11.6            315.6         31.7
Greater than twenty-four to thirty-
   six months.........................           9.2       0.3              48.1         6.0             57.3          6.3
Greater than thirty-six months........          46.4       2.9             150.6         6.0            197.0          8.9
                                        ------------ ----------------  -----------  -------------   -----------  -----------
   Total fixed maturities, available-
       for-sale.......................   $   1,524.0   $  70.8          $1,173.4     $  73.6         $2,697.4    $   144.4
                                        ============ ================  ===========  =============   ===========  ===========

                                       90

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

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

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

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

                                                                      AS OF DECEMBER 31, 2002
                                        ------------------------------------------------------------------------------------

                                                  PUBLIC                      PRIVATE                       TOTAL
                                        --------------------------- ----------------------------- --------------------------
                                                         GROSS                         GROSS                      GROSS
                                          CARRYING     UNREALIZED       CARRYING      UNREALIZED    CARRYING     UNREALIZED
                                           AMOUNT        LOSSES          AMOUNT         LOSSES       AMOUNT        LOSSES
                                        ------------ ----------------  ------------ ------------- ------------  ------------
                                                                           (IN MILLIONS)

Three months or less..................   $     149.9   $      16.5     $   123.1     $      12.2   $     273.0  $      28.7
Greater than three to six months......          93.3          22.6         121.1            12.6         214.4         35.2
Greater than six to nine months.......         135.6          33.1         124.0            19.3         259.6         52.4
Greater than nine to twelve months....         129.1          39.1           -               -           129.1         39.1
Greater than twelve to twenty-four
   months.............................         178.2         107.9          98.1            31.8         276.3        139.7
Greater than twenty-four to thirty-
   six months.........................          28.0           6.3          28.9             1.6          56.9          7.9
Greater than thirty-six months........          39.1           3.9         104.9            39.9         144.0         43.8
                                        ------------ ----------------  ------------ ------------- ------------  ------------
   Total fixed maturities, available-
       for-sale.......................   $     753.2   $     229.4     $   600.1     $     117.4   $   1,353.3  $     346.8
                                        ============ ================  ============ ============= ============  ============

Of total gross unrealized  losses as of December 31, 2003 and December 31, 2002,
$76.4 million and $144.4  million were related to investment  grade  securities,
respectively.   Gross  unrealized  losses  related  to  below  investment  grade
securities  were $75.2  million and $346.8  million as of December  31, 2003 and
December 31, 2002, respectively.

                                       91

The following tables present the carrying amount and gross unrealized  losses on
fixed maturity securities available-for-sale, where the estimated fair value has
declined and  remained  below  amortized  cost by 20% or more as of December 31,
2003, and December 31, 2002.

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

                                                                      AS OF DECEMBER 31, 2003
                                       ---------------------------------------------------------------------------------------------
                                              PROBLEM, POTENTIAL
                                                PROBLEM, AND                   ALL OTHER FIXED MATURITY
                                               RESTRUCTURED                        SECURITIES                         TOTAL
                                       --------------------------------     ---------------------------    -------------------------
                                                             GROSS                         GROSS                           GROSS
                                          CARRYING          UNREALIZED      CARRYING      UNREALIZED        CARRYING     UNREALIZED
                                           AMOUNT            LOSSES          AMOUNT         LOSSES            AMOUNT        LOSSES
                                       --------------   ---------------     ----------  ---------------    ------------ ------------
                                                                                 (IN MILLIONS)

Three months or less..................   $      30.9     $      34.6        $  -         $     -            $    30.9    $    34.6
Greater than three to six months......           -               -             -               -                  -            -
Greater than six to nine months.......           -               -             -               -                  -            -
Greater than nine to twelve months....           0.5             0.1           -               -                  0.5          0.1
Greater than twelve months............           3.6             1.5           7.7             2.2               11.3          3.7
                                       --------------   ---------------     ----------  ---------------    ------------ ------------
   Total fixed maturity securities,
       available-for-sale.............   $      35.0     $      36.2        $  7.7       $     2.2          $    42.7    $    38.4
                                       ==============   ===============     ==========  ===============    ============ ============

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

                                                                      AS OF DECEMBER 31, 2002
                                       ---------------------------------------------------------------------------------------------
                                              PROBLEM, POTENTIAL
                                                PROBLEM, AND                   ALL OTHER FIXED MATURITY
                                               RESTRUCTURED                        SECURITIES                         TOTAL
                                       --------------------------------     ---------------------------    -------------------------
                                                             GROSS                            GROSS                        GROSS
                                          CARRYING          UNREALIZED         CARRYING      UNREALIZED        CARRYING  UNREALIZED
                                           AMOUNT            LOSSES            AMOUNT         LOSSES            AMOUNT    LOSSES
                                       --------------   ---------------     -----------  ---------------   ------------ ------------
                                                                                 (IN MILLIONS)

Three months or less..................   $      98.1     $    34.6           $  60.9     $      29.9        $ 159.0     $    64.5
Greater than three to six months......          81.8          52.6              82.3            37.2          164.1          89.8
Greater than six to nine months.......          86.3          79.0               2.5             0.9           88.8          79.9
Greater than nine to twelve months....           -             -                 -               -              -             -
Greater than twelve months............          52.7          46.7               1.4             1.0           54.1          47.7
                                       --------------   ---------------     -----------  ---------------   ------------ ------------
   Total fixed maturity securities,
       available-for-sale.............   $     318.9     $   212.9           $ 147.1     $      69.0        $ 466.0     $   281.9
                                       ==============   ===============     ===========  ===============   ============ ============

Gross  unrealized  losses on fixed maturity  securities where the estimated fair
value  has been 20% or more  below  amortized  cost  were  $38.4  million  as of
December  31,  2003 and  $281.9  million  as of  December  31,  2002.  The gross
unrealized  losses  attributed to those  securities  considered to be "problem",
"potential  problem" or "restructured"  were $36.2 million and $212.9 million as
of December 31, 2003, and December 31, 2002, respectively.

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

                                       92

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

                                                                       AS OF DECEMBER 31,      AS OF DECEMBER 31,
                                                                     ---------------------   ---------------------
                                                                              2003                    2002
                                                                     ---------------------   ---------------------
                                                                                     ($ IN MILLIONS)

Total fixed maturity securities (public and private)............            $   36,128.0            $  33,207.1
                                                                            ============            ===========

Problem fixed maturity securities...............................            $      152.5            $     262.0
Potential problem fixed maturity securities.....................                   230.1                  508.4
Restructured fixed maturity securities..........................                    39.9                  103.9
                                                                            ------------            -----------
   Total problem, potential problem and restructured fixed
     maturity securities........................................            $      422.5            $     874.3
                                                                            ============            ===========
   Total problem, potential problem and restructured fixed
     maturity securities as a percent of total fixed maturity
     securities.................................................                      1%                     3%

MORTGAGE LOANS

Mortgage  loans  comprised  25% and 23% of  total  U.S.  invested  assets  as of
December 31, 2003, and December 31, 2002,  respectively.  Mortgage loans consist
of  commercial  and  residential  loans.  Commercial  mortgage  loans  comprised
$9,630.4  million as of December 31, 2003,  and $9,365.8  million as of December
31,  2002,  or 73% and 86% of total  mortgage  loan  investments,  respectively.
Residential  mortgages  comprised  $3,544.6  million as of December 31, 2003 and
$1,463.6  million as of December 31, 2002, or 27% and 14% of total mortgage loan
investments,  respectively.  Principal Residential Mortgage,  Inc. and Principal
Bank hold the majority of residential  loans.  Principal  Residential  Mortgage,
Inc.  holds  residential  loans  as part  of its  securitization  inventory  and
Principal  Bank holds  residential  loans to comply with federal  thrift charter
requirements.  As a result of our  implementation  of FIN 46,  effective July 1,
2003,  residential mortgage loans include the full consolidation of PRMCR, which
provides a source of funding for our residential mortgage loan production. PRMCR
held $2.0 billion in mortgage loans held for sale as of December 31, 2003.

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

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

o    enhancing total returns; and

o    providing strategic portfolio diversification.

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

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

California  accounted for 16% of our  commercial  mortgage loan  portfolio as of
December 31, 2003. 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.

                                       93

The report assesses the building's  design  specifications,  whether it has been
upgraded to meet seismic  building  codes and the maximum loss that is likely to
result from a variety of different  seismic events. We also obtain a report that
assesses  by  building  and  geographic  fault  lines  the  amount  of loss  our
commercial  mortgage  loan  portfolio  might  suffer  under a variety of seismic
events.

Our commercial loan portfolio is highly diversified by borrower.  As of December
31, 2003,  39% of the U.S.  commercial  mortgage loan portfolio was comprised of
mortgage  loans with principal  balances of less than $10.0  million.  The total
number of  commercial  mortgage  loans  outstanding  as of December 31, 2003 and
December  31, 2002 was 1,447 and 1,529,  respectively.  The average loan size of
our commercial mortgage portfolio was $6.7 million as of December 31, 2003.

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

We state commercial  mortgage loans at their unpaid principal  balances,  net of
discount accrual and premium amortization,  valuation allowances and write downs
for impairment.  We provide a valuation  allowance for commercial mortgage loans
based on past loan loss  experience  and for  specific  loans  considered  to be
impaired.  Mortgage  loans  are  considered  impaired  when,  based  on  current
information  and events,  it is probable  that all amounts due  according to the
contractual terms of the loan agreement may not be collected.  When we determine
that a loan is impaired, we either establish a valuation allowance or adjust the
cost basis of that loan and record a loss for the excess of the  carrying  value
of the mortgage  loan over its  estimated  fair value.  Estimated  fair value is
based on either the present  value of expected  future cash flows  discounted at
the loan's original  effective interest rate, the loan's observable market price
or the fair  value of the  collateral.  We record  increases  in such  valuation
allowances as realized investment losses and, accordingly, we reflect the losses
in  our  consolidated  results  of  operations.   Such  decreases  in  valuation
allowances  aggregated  $34.0  million for the year ended  December 31, 2003 and
$7.1 million for the year ended December 31, 2002.

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

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

                                       94

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

                              U.S. INVESTED ASSETS
                     COMMERCIAL MORTGAGE VALUATION ALLOWANCE

                                                                   AS OF DECEMBER 31,        AS OF DECEMBER 31,
                                                                 ---------------------     ---------------------
                                                                        2003                      2002
                                                                 ---------------------     ---------------------
                                                                                 ($ IN MILLIONS)

Beginning balance..........................................          $          83.6           $          90.7
Provision..................................................                      1.3                      33.5
Release....................................................                    (35.3)                    (40.6)
                                                                     ---------------           ---------------
Ending balance.............................................          $          49.6           $          83.6
                                                                     ===============           ===============
Valuation allowance as % of carrying value before reserves.                       1%                        1%

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

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

                                                                   AS OF DECEMBER 31,        AS OF DECEMBER 31,
                                                                  ---------------------     --------------------
                                                                          2003                      2002
                                                                  ---------------------     --------------------
                                                                                 ($ IN MILLIONS)

Total commercial mortgages ................................            $      9,630.4           $        9,365.8
                                                                       ==============           ================
Problem commercial mortgages(1)............................            $         45.9           $           77.2
Potential problem commercial mortgages ....................                      99.3                       50.4
Restructured commercial mortgages .........................                      65.3                       46.9
                                                                       --------------           ----------------
   Total problem, potential problem and
     restructured commercial mortgages ....................            $        210.5           $          174.5
                                                                       ==============           ================
   Total problem, potential problem and restructured
     commercial mortgages as a percent of total commercial.                        2%                         2%

- --------------------
(1) Problem commercial  mortgages include no mortgage loans in foreclosure as of
    December 31, 2003, compared to $0.4 million on December 31, 2002.

EQUITY REAL ESTATE

We hold commercial equity real estate as part of our investment portfolio. As of
December 31, 2003,  and  December 31, 2002,  the carrying  amount of equity real
estate  investment was $1,528.0  million and $1,221.6  million,  or 3% and 2% of
U.S.  invested assets,  respectively.  We own real estate,  real estate acquired
upon foreclosure of commercial mortgage loans and interests, both majority owned
and non-majority owned, in real estate joint ventures.

Equity real estate is categorized as either "real estate held for investment" or
"real estate held for sale".  Real estate held for investment  totaled  $1,003.6
million as of December 31, 2003,  and $1,042.1  million as of December 31, 2002.
The carrying value of real estate held for investment is generally  adjusted for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and accordingly, are reflected in our
consolidated results of operations.  For the periods ended December 31, 2003 and
December 31, 2002, there were no such impairment adjustments.

                                       95

The carrying  amount of real estate held for sale as of December  31, 2003,  and
December  31,  2002,  was $524.4  million and $179.5  million,  net of valuation
allowances of $19.1 million and $19.3 million, respectively.  Once we identify a
real estate  property to be sold and commence a plan for marketing the property,
we classify  the property as held for sale.  We establish a valuation  allowance
subject to periodical revisions,  if necessary,  to adjust the carrying value of
the  property  to reflect the lower of its  current  carrying  value or the fair
value, less associated selling costs.

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

Equity real estate is distributed  across geographic regions of the country with
larger  concentrations  in the South  Atlantic,  West South  Central and Pacific
regions of the United States as of December 31, 2003. By property type, there is
a concentration in office buildings that  represented  approximately  33% of the
equity real estate portfolio as of December 31, 2003.

OTHER INVESTMENTS

Our other investments totaled $1,249.7 million as of December 31, 2003, compared
to $1,075.5  million as of December 31,  2002.  With the adoption of SFAS 133 on
January 1, 2001,  derivatives  were reflected on our balance sheet and accounted
for $736.4  million in other  investments as of December 31, 2003. The remaining
invested  assets  include  minority  interests  in  unconsolidated  entities and
properties owned jointly with venture partners and operated by the partners.

INTERNATIONAL INVESTMENT OPERATIONS

As of December 31, 2003, our international  investment operations consist of the
investments  of  Principal  International  comprised of $2.0 billion in invested
assets.  Principal  Global  Investors  works with each  Principal  International
affiliate to develop investment policies and strategies that are consistent with
the products they offer. Due to the regulatory constraints in each country, each
company maintains its own investment  policies,  which are approved by Principal
Global  Investors.   Each  international  affiliate  is  required  to  submit  a
compliance  report  relative to its  strategy  to  Principal  Global  Investors.
Principal Global Investors employees and international  affiliate company credit
analysts jointly review each corporate credit annually.

OVERALL COMPOSITION OF INTERNATIONAL INVESTED ASSETS

As shown in the following table, the major categories of international  invested
assets as of December 31, 2003,  and  December  31,  2002,  were fixed  maturity
securities and residential mortgage loans:

                                       96

                          INTERNATIONAL INVESTED ASSETS

                                                             AS OF DECEMBER 31,        AS OF DECEMBER 31,
                                                           ---------------------     ---------------------
                                                                   2003                      2002
                                                           ---------------------     ---------------------
                                                            CARRYING      % OF        CARRYING      % OF
                                                             AMOUNT       TOTAL        AMOUNT       TOTAL
                                                           -----------  --------     ------------  -------
                                                                           ($ IN MILLIONS)
                                                                                         
Fixed maturity securities
   Public.........................................         $  1,334.8        66%      $    998.6      67%
   Private........................................               89.8         5             81.7       6
Equity securities.................................               41.8         2             20.6       1
Mortgage loans
   Residential....................................              333.1        16            252.5      17
Real estate held for investment...................                9.5         -              7.4       1
Other investments ................................              213.3        11            124.6       8
                                                           -----------  --------     ------------  -------
   Total invested assets..........................            2,022.3       100%         1,485.4     100%
                                                                        ========                   =======
Cash and cash equivalents.........................               73.1                       97.1
                                                           -----------               ------------
   Total invested assets and cash ................         $  2,095.4                 $  1,582.5
                                                           ===========               ============

USE OF NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS TO U.S. GAAP

We use a  non-GAAP  financial  measure  that  management  believes  is useful to
investors  because  it  illustrates  a  current  trend in our  Life  and  Health
Insurance  segment.  We have provided  reconciliations of the non-GAAP financial
measure  premium  and  deposits,  to the  most  directly  comparable  U.S.  GAAP
financial  measure,  premium and other  considerations.  The premium and deposit
measure is used to highlight a shift in  individual  life  insurance  sales from
traditional  life  insurance  products to universal and variable  universal life
insurance products. Traditional life insurance products generate premium revenue
under U.S. GAAP, while universal and variable  universal life insurance products
do not generate premium revenue under U.S. GAAP.

                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------
                                                      2003         2002          2001
                                                   -----------   ----------   ------------
                                                              ($ IN MILLIONS)

PREMIUM AND DEPOSITS:
UNIVERSAL AND VARIABLE UNIVERSAL LIFE
 INSURANCE
   Premium and deposits...................         $   337.6     $  298.1     $    270.1
   Less: deposits.........................             352.9        309.5          279.0
                                                   -----------   ----------   ------------
   GAAP premium and other considerations..         $   (15.3)    $  (11.4)    $     (8.9)
                                                   ===========   ==========   ============
TRADITIONAL LIFE INSURANCE
  Premium and deposits....................         $   710.9     $  737.2     $    766.2
  Less: deposits..........................               -            -              -
                                                   -----------   ----------   ------------
   GAAP premium and other considerations..         $   710.9     $  737.2     $    766.2
                                                   ===========   ==========   ============

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK EXPOSURES AND RISK MANAGEMENT

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

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

                                       97

o    rebalance our existing asset or liability portfolios;

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

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

INTEREST RATE RISK

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

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

As of  December  31,  2003,  the  difference  between  the asset  and  liability
durations on our primary duration managed portfolio was .03 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
indicate that total  duration  gaps between the asset and  liability  portfolios
should be within  0.25  years.  The value of the  assets in this  portfolio  was
$30,005.3 million as of December 31, 2003.

For products such as whole life  insurance and term life insurance that are less
sensitive  to interest  rate risk,  and for other  products  such as  individual
single  premium  deferred  annuities,  we manage  interest  rate risk based on a
modeling process that considers the target average life,  maturities,  crediting
rates and  assumptions of  policyholder  behavior.  As of December 31, 2003, the
weighted-average  difference between the asset and liability  durations on these
portfolios was -.22 years.  This duration gap indicates that as of this date the
sensitivity  of the fair value of our assets to interest rate  movements is less
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 the  duration-monitored  portfolios  was  $13,114.2  million as of
December 31, 2003.

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 the non  duration-managed  portfolios  was  $5,198.9
million as of December 31, 2003.

Using the  assumptions  and data in effect as of December 31, 2003,  we estimate
that a 100 basis point immediate,  parallel increase in interest rates increases
the net fair  value of our  portfolio  by $20.4  million.  The  following  table
details the estimated changes by risk management strategy:

                                       98

                                                                        AS OF
                    RISK MANAGEMENT                               DECEMBER 31, 2003             NET FAIR VALUE
                        STRATEGY                                VALUE OF TOTAL ASSETS               CHANGE
- ---------------------------------------------------           --------------------------     ---------------------
                                                                                  (IN MILLIONS)

Primary duration-managed...........................                   $   30,005.3                $       (9.0)
Duration-monitored.................................                       13,114.2                        29.4
Non duration-managed...............................                        5,198.9                         N/A
                                                              --------------------------     ---------------------
   Total...........................................                   $   48,318.4                $       20.4
                                                              ==========================     =====================

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

We measure  pipeline  interest  rate risk  exposure  by  adjusting  the  at-risk
pipeline in light of the theoretical  optionality of each applicant's rate/price
commitment. The at-risk pipeline, which consists of closed loans and rate locks,
is then refined at the product type level to express each product's  sensitivity
to  changes in market  interest  rates in terms of a single  current  coupon MBS
duration ("benchmark interest rate"). Suitable hedges are selected and a similar
methodology  applied to this hedge position.  The variety of hedging instruments
allows us to match the  behavior of the  financial  instrument  with that of the
different types of loans originated. Financial risk is limited by requiring that
the net  position  value will not change in excess of an amount  established  by
Senior  Management  of the  Mortgage  Banking  segment  given  an  instantaneous
pre-determined  price  change  in  the  benchmark  security.  Price  sensitivity
analysis is performed at least once daily. The  pre-determined  risk limits will
be reviewed  periodically and updated as needed. The face amount of the loans in
the pipeline as of December 31, 2003, was $4.2 billion. Due to the impact of our
hedging  activities,  we estimate that a 100 basis point immediate and sustained
increase in the benchmark  interest  rates  decreases the December 31, 2003, net
position value by $8.1 million.

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

The fair value of the servicing asset declines as interest rates decrease due to
possible  mortgage  loan  servicing  rights  impairment  that  may  result  from
increased current and projected future prepayment activity.  The change in value
of the servicing asset due to interest rate movements is partially offset by the
use of financial  instruments,  including  derivative  contracts  that typically
increase in aggregate  value when  interest  rates  decline.  Financial  risk is
limited by requiring that the net position value will not change in excess of an
amount established by Senior Management of the Mortgage Banking segment given an
instantaneous  pre-determined  change  in the  level of  interest  rates.  Price
sensitivity  analysis is performed at least once weekly. The pre-determined risk
limits will be reviewed  periodically and updated as needed.  Based on values as

                                       99

of  December  31,  2003,  a 100 basis point  immediate  parallel  and  sustained
decrease in interest  rates  produces a $130.1  million  decline in value of the
servicing  asset of our  Mortgage  Banking  segment,  net of the impact of these
hedging vehicles,  due to the differences between fair values and U.S. GAAP book
values.

CASH FLOW VOLATILITY

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

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

DERIVATIVES

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

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

We have increased our credit exposure  through credit default swaps by investing
in subordinated  tranches of a synthetic  collateralized  debt  obligation.  The
outstanding  notional  amount as of December 31, 2003 was $500.0 million and the
mark to market value was $13.7 million. We also invested in credit default swaps
creating  replicated assets with a notional of $363.3 million and mark to market
value of $31.5 million as of December 31, 2003.

We  also  offer  a  guaranteed  fund  as an  investment  option  in our  defined
contribution  plans in Hong Kong. This fund contains an embedded option that has
been  bifurcated  and accounted for separately in realized  gains  (losses).  We
recognized a $0.1 million pre-tax loss for the year ended December 31, 2003.

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

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

                                      100

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

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

o    diversifying our risk across numerous approved counterparties;

o    limiting exposure to A+ credit or better;

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

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

o    daily monitoring of counterparty credit ratings.

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

The  notional  amounts  used to express  the extent of our  involvement  in swap
transactions  represent  a  standard  measurement  of the  volume  of  our  swap
business.  Notional amount is not a quantification of market risk or credit risk
and it may not  necessarily be recorded on the balance sheet.  Notional  amounts
represent those amounts used to calculate  contractual flows to be exchanged and
are not paid or received,  except for contracts such as currency  swaps.  Actual
credit exposure  represents the amount owed to us under derivative  contracts as
of the valuation date. The following  tables present our position in, and credit
exposure to,  derivative  financial  instruments  as of December  31, 2003,  and
December 31, 2002:

                                      101

               DERIVATIVE FINANCIAL INSTRUMENTS - NOTIONAL AMOUNTS

                                                             AS OF DECEMBER 31,          AS OF DECEMBER 31,
                                                           ------------------------    ------------------------
                                                                    2003                        2002
                                                           ------------------------    ------------------------
                                                             NOTIONAL       % OF        NOTIONAL       % OF
                                                              AMOUNT        TOTAL        AMOUNT        TOTAL
                                                           -----------   ----------    ------------ -----------
                                                                            ($ IN MILLIONS)

Interest rate swaps.............................           $ 8,158.9         26%        $ 9,719.2         18%
Swaptions ......................................             5,642.5         18           9,772.5         18
Mortgage-backed forwards and options............             4,892.3         16          17,494.9         33
U.S. Treasury futures (LIBOR)...................             4,380.0         14           2,225.0          4
Foreign currency swaps..........................             2,823.4          9           3,217.0          6
Interest rate lock commitments..................             2,242.4          7           8,198.1         15
Interest rate floors............................             1,650.0          5           1,650.0          3
Credit default swaps ...........................               863.3          3             705.2          1
Bond forwards...................................               467.2          1             363.7          1
Currency forwards...............................               282.0          1               0.2          -
Call options....................................                30.0          -              30.0          -
U.S. Treasury futures...........................                27.8          -             271.1          1
Bond options....................................                17.5          -               -            -
Other...........................................                 1.5          -               -            -
Principal only swaps............................                 -            -             123.6          -
Treasury rate guarantees........................                 -            -              63.0          -
                                                           -----------   ----------    ------------ -----------
   Total........................................           $31,478.8        100%        $53,833.5        100%
                                                           ===========   ==========    ============ ===========

               DERIVATIVE FINANCIAL INSTRUMENTS - CREDIT EXPOSURES

                                                              AS OF DECEMBER 31,           AS OF DECEMBER 31,
                                                           ------------------------    ------------------------
                                                                    2003                         2002
                                                           ------------------------    ------------------------
                                                              CREDIT        % OF          CREDIT       % OF
                                                             EXPOSURE       TOTAL        EXPOSURE      TOTAL
                                                           -----------   ----------    ------------ -----------
                                                                                 ($ IN MILLIONS)

Foreign currency swaps..........................            $ 637.1         75%          $ 195.0        68%
Interest rate swaps.............................               89.6         10              48.4        17
Bond forwards...................................               52.2          6                -          -
Credit default swaps............................               45.9          5               8.9         3
Swaptions ......................................               29.2          3              31.4        11
Call options....................................                6.6          1               0.4         -
Interest rate floors............................                1.9          -               1.7         1
Currency forwards...............................                0.3          -               -           -
                                                           -----------   ----------    ------------ -----------
   Total........................................            $ 862.8        100%          $ 285.8       100%
                                                           ===========   ==========    ============ ===========

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

                                      102

                                                                         AS OF DECEMBER 31, 2003
                                             -----------------------------------------------------------------------------
                                                                                  FAIR VALUE (NO ACCRUED INTEREST)
                                                                                ------------------------------------------
                                                                  WEIGHTED
                                                                  AVERAGE        -100 BASIS                  +100 BASIS
                                                NOTIONAL           TERM            POINT                       POINT
                                                 AMOUNT           (YEARS)          CHANGE      NO CHANGE       CHANGE
                                             --------------   ----------------  ------------  ------------  -------------
                                                                            ($ IN MILLIONS)

Interest rate swaps..................        $  8,158.9            6.04(1)      $  224.6       $   25.8       $  (147.6)
Swaptions............................           5,642.5            1.05(4)         317.4          161.2           150.9
Mortgage-backed forwards and options.           4,892.3            0.09(5)        (111.1)         (11.6)          116.2
U.S. Treasury futures (LIBOR)........           4,380.0            0.93(3)          (8.6)          (1.5)            5.6
Interest rate lock commitments.......           2,242.4            0.10(6)          41.6           11.6           (65.2)
Interest rate floors.................           1,650.0            2.50(2)          51.9           23.5             9.9
Bond forwards........................             467.2            2.83(5)          81.8           52.1            24.6
U.S. Treasury futures................              27.8            0.22(3)          (1.7)          (0.1)            1.5
Bond options.........................              17.5            2.79(5)          (0.9)          (0.6)            -
                                             --------------                     ------------  ------------  --------------
   Total.............................        $ 27,478.6                         $  595.0       $  260.4       $    95.9
                                             ==============                     ============  ============  ==============

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

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

DEBT ISSUED AND OUTSTANDING

As of December 31, 2003, the aggregate fair value of long-term debt was $2,889.2
million,  which  includes  debt related to our  implementation  of FIN 46. A 100
basis point,  immediate,  parallel decrease in interest rates would increase the
fair value of debt by approximately $60.1 million.

                                                                              AS OF DECEMBER 31, 2003
                                                          --------------------------------------------------------------
                                                                        FAIR VALUE (NO ACCRUED INTEREST)
                                                          --------------------------------------------------------------
                                                             -100 BASIS                                +100 BASIS
                                                            POINT CHANGE           NO CHANGE          POINT CHANGE
                                                          ---------------------- --------------    ---------------------
                                                                                (IN MILLIONS)

4.55% notes payable, due 2004......................        $      414.5           $    404.8          $      399.0
7.95% notes payable, due 2004......................               208.0                206.7                 205.5
Variable rate equity certificates, due 2005 (1)....                44.0                 44.0                  44.0
Variable rate notes payable, due 2006 (2)..........               800.0                800.0                 800.0
Variable rate equity certificates, due 2006 (3)....               149.0                149.0                 149.0
8.2% notes payable, due 2009.......................               577.4                550.8                 525.7
7.875% surplus notes payable, due 2024.............               208.9                206.0                 193.7
8% surplus notes payable, due 2044.................               117.3                105.9                  95.4
Non-recourse mortgages and notes payable...........               357.6                350.3                 343.3
Other mortgages and notes payable..................                72.6                 71.7                  70.8
                                                          ---------------------- --------------    ---------------------
   Total long-term debt............................        $    2,949.3           $  2,889.2          $    2,826.4
                                                          ====================== ==============    =====================

- -----------------------
(1)  Represents $44.0 million at 165 basis points over 1 month LIBOR.

                                      103

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

EQUITY RISK

Equity  risk is the risk  that we will  incur  economic  losses  due to  adverse
fluctuations  in a particular  common stock.  As of December 31, 2003,  the fair
value of our equity securities was $712.5 million. A 10% decline in the value of
the equity securities would result in an unrealized loss of $71.3 million. As of
December 31, 2003, a 10% immediate and sustained  decline in the equity  markets
would result in a decrease of asset-based fee revenues of $41.1 million over the
next year.

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 December 31, 2003, was $2,588.7  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 December 31, 2003, the fair value of our foreign currency
denominated fixed maturity  securities was $313.4 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
December  31,  2003,  was  $234.7  million.  With  regard  to our  international
operations,  we  attempt  to do as  much  of our  business  as  possible  in the
functional  currency  of the country of  operation.  At times,  however,  we are
unable to do so, and in these  cases,  we use foreign  exchange  derivatives  to
hedge the resulting risks.

We estimate that as of December 31, 2003, a 10% immediate  unfavorable change in
each of the foreign currency exchange rates to which we are exposed would result
in no material change to the net fair value of our foreign currency  denominated
instruments  identified  above,  including  the currency  swap  agreements.  The
selection of a 10% immediate  unfavorable  change in all currency exchange rates
should not be construed  as a  prediction  by us of future  market  events,  but
rather as an illustration of the potential impact of such an event.

EFFECTS OF INFLATION

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

                                      104

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors...............................................105
Audited Consolidated Financial Statements
   Consolidated Statements of Financial Position.............................106
   Consolidated Statements of Operations.....................................107
   Consolidated Statements of Stockholders' Equity...........................109
   Consolidated Statements of Cash Flows.....................................110
   Notes to Consolidated Financial Statements................................112

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Principal Financial Group, Inc.

We have audited the accompanying  consolidated  statements of financial position
of Principal Financial Group, Inc. ("the Company"),  as of December 31, 2003 and
2002,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 2003.  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
Financial  Group,  Inc. at  December  31,  2003 and 2002,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period  ended  December 31,  2003,  in  conformity  with  accounting  principles
generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements,  in response to
new  accounting  standards,  the Company  changed its methods of accounting  for
derivative  instruments  and  hedging  activities  effective  January  1,  2001,
discontinued operations,  goodwill and other intangible assets effective January
1, 2002, and variable interest entities effective July 1, 2003.

                                                           /s/ Ernst & Young LLP

Des Moines, Iowa
January 30, 2004

                                      105

                         PRINCIPAL FINANCIAL GROUP, INC.

                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                                                                          DECEMBER 31,
                                                                              ---------------------------------------
                                                                                     2003                2002
                                                                              -------------------- ------------------
                                                                                          (IN MILLIONS,
                                                                                      EXCEPT PER SHARE DATA)
                                                                                                 
ASSETS
Fixed maturities, available-for-sale.......................................      $   37,449.7          $34,185.7
Fixed maturities, trading..................................................             102.9              101.7
Equity securities, available-for-sale......................................             712.5              378.7
Mortgage loans.............................................................          13,508.1           11,081.9
Real estate................................................................           1,537.5            1,229.0
Policy loans...............................................................             804.1              818.5
Other investments..........................................................           1,463.0            1,200.1
                                                                              -------------------- ------------------
   Total investments.......................................................          55,577.8           48,995.6

Cash and cash equivalents..................................................           1,692.9            1,038.6
Accrued investment income..................................................             650.7              646.3
Premiums due and other receivables.........................................             719.8              459.7
Deferred policy acquisition costs..........................................           1,571.7            1,414.4
Property and equipment.....................................................             447.8              482.5
Goodwill...................................................................             184.2              106.5
Other intangibles..........................................................             121.4               88.8
Mortgage loan servicing rights.............................................           1,953.1            1,518.6
Separate account assets....................................................          43,407.8           33,501.4
Other assets...............................................................           1,427.2            1,608.9
                                                                              -------------------- ------------------
   Total assets............................................................      $  107,754.4          $89,861.3
                                                                              ==================== ==================
LIABILITIES
Contractholder funds.......................................................      $   28,902.5          $26,315.0
Future policy benefits and claims..........................................          15,474.7           14,736.4
Other policyholder funds...................................................             710.2              642.9
Short-term debt............................................................           1,617.8              564.8
Long-term debt.............................................................           2,767.3            1,332.5
Income taxes currently payable.............................................              90.0                -
Deferred income taxes......................................................           1,644.0            1,177.7
Separate account liabilities...............................................          43,407.8           33,501.4
Other liabilities..........................................................           5,740.5            4,933.4
                                                                              -------------------- ------------------
   Total liabilities.......................................................         100,354.8           83,204.1

STOCKHOLDERS' EQUITY
Common stock,  par value  $.01 per share - 2,500.0  million  shares
   authorized, 377.4 million and 376.7 million  shares  issued,  and 320.7
   million and 334.4 million shares outstanding in 2003 and 2002,
   respectively............................................................               3.8                3.8
Additional paid-in capital.................................................           7,153.2            7,106.3
Retained earnings..........................................................             630.4               29.4
Accumulated other comprehensive income.....................................           1,171.3              635.8
Treasury stock, at cost (56.7 million and 42.3 million shares in 2003 and
   2002, respectively).....................................................          (1,559.1)          (1,118.1)
                                                                              -------------------- ------------------
   Total stockholders' equity..............................................           7,399.6            6,657.2
                                                                              -------------------- ------------------
   Total liabilities and stockholders' equity..............................      $  107,754.4          $89,861.3
                                                                              ==================== ==================

SEE ACCOMPANYING NOTES.

                                      106

                         PRINCIPAL FINANCIAL GROUP, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                          2003               2002               2001
                                                   ------------------ ------------------ ------------------
                                                                          (IN MILLIONS)
                                                                                    
REVENUES
Premiums and other considerations...............       $ 3,634.1          $ 3,881.8          $ 4,122.3
Fees and other revenues.........................         2,416.2            1,990.8            1,600.7
Net investment income...........................         3,419.6            3,304.7            3,383.6
Net realized/unrealized capital losses..........           (65.7)            (354.8)            (514.0)
                                                   ------------------ ------------------ ------------------
   Total revenues...............................         9,404.2            8,822.5            8,592.6

EXPENSES
Benefits, claims, and settlement expenses.......         4,861.3            5,216.9            5,482.1
Dividends to policyholders......................           307.9              316.6              313.7
Operating expenses..............................         3,281.3            2,623.2            2,332.7
                                                   ------------------ ------------------ ------------------
   Total expenses...............................         8,450.5            8,156.7            8,128.5
                                                   ------------------ ------------------ ------------------
Income from continuing operations before
   income taxes.................................           953.7              665.8              464.1

Income taxes....................................           225.8               45.9               83.4
                                                   ------------------ ------------------ ------------------
Income from continuing operations, net of
   related income taxes.........................           727.9              619.9              380.7

Income (loss) from discontinued operations, net
   of related income taxes......................            21.8             (196.7)             (11.2)
                                                   ------------------ ------------------ ------------------
Income before cumulative effect of accounting
   changes......................................           749.7              423.2              369.5

Cumulative effect of accounting changes, net
   of related income taxes......................            (3.4)            (280.9)             (10.7)
                                                   ------------------ ------------------ ------------------
Net income......................................       $   746.3          $   142.3          $   358.8
                                                   ================== ================== ==================

                                      107

                         PRINCIPAL FINANCIAL GROUP, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
                                                                                                PRO FORMA
                                                                                               (UNAUDITED)
                                                          FOR THE YEAR       FOR THE YEAR      FOR THE YEAR
                                                             ENDED              ENDED             ENDED
                                                          DECEMBER 31,       DECEMBER 31,      DECEMBER 31,
                                                              2003              2002              2001
                                                        ----------------- ------------------ -----------------

EARNINGS PER COMMON SHARE
Basic earnings per common share:
  Income from continuing operations, net of
    related income taxes..........................           $  2.23            $ 1.77           $  1.05
  Income (loss) from discontinued operations,
    net of related income taxes...................              0.07             (0.56)            (0.03)
                                                        ----------------- ------------------ -----------------
  Income before cumulative effect of
    accounting changes............................              2.30              1.21              1.02
  Cumulative effect of accounting changes,
    net of related income taxes...................             (0.01)            (0.80)            (0.03)
                                                        ----------------- ------------------ -----------------
  Net income......................................           $  2.29            $ 0.41           $  0.99
                                                        ================= ================== =================
Diluted earnings per common share:
  Income from continuing operations, net of
    related income taxes..........................           $  2.23            $ 1.77           $  1.05
  Income (loss) from discontinued operations, net
    of related income taxes.......................              0.06             (0.56)            (0.03)
                                                        ----------------- ------------------ -----------------
  Income before cumulative effect of
    accounting changes............................              2.29              1.21              1.02
  Cumulative effect of accounting changes,
    net of related income taxes...................             (0.01)            (0.80)            (0.03)
                                                        ----------------- ------------------ -----------------
  Net income......................................           $  2.28            $ 0.41           $  0.99
                                                        ================= ================== =================

The unaudited pro forma earnings per common share information above gives effect
to the  Demutualization  and Initial  Public  Offering  completed on October 26,
2001,  as if they  occurred on January 1, 2001 (see Note 21 to the  consolidated
financial statements).

SEE ACCOMPANYING NOTES.

                                      108

                         PRINCIPAL FINANCIAL GROUP, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

BALANCES AT JANUARY 1, 2001...   $-        $    -       $6,312.5     $   (60.0)    $     -       $ 6,252.5
Demutualization transaction...    2.6       5,047.7     (6,700.4)          -             -        (1,650.1)        260,805.9
Stock issued and held in
  rabbi trusts................    -             6.7          -             -            (6.7)          -              (363.7)
Initial public offering.......    1.0       1,752.9          -             -             -         1,753.9         100,000.0
Shares issued.................    0.2         265.2          -             -             -           265.4          15,000.0
Treasury stock acquired.......    -             -            -             -          (367.7)       (367.7)        (15,300.0)
Comprehensive income:
  Net income before
    demutualization...........    -             -          387.9           -             -           387.9
  Net loss after
    demutualization...........    -             -          (29.1)          -             -           (29.1)
                                                     ------------                              ---------------
  Net income for the year.....    -             -          358.8           -             -           358.8

  Net unrealized gains........    -             -            -           451.6           -           451.6
  Provision for deferred
    income taxes..............    -             -            -          (158.1)          -          (158.1)
  Foreign currency
    translation adjustment....    -             -            -           (71.8)          -           (71.8)
  Cumulative effect of
    accounting change, net
    of related income taxes...    -             -            -           (14.2)          -           (14.2)
                                                                                               ---------------
Comprehensive income..........                                                                       566.3
                              --------- ------------ ------------ ---------------- ----------- --------------- ----------------
BALANCES AT DECEMBER 31, 2001.    3.8       7,072.5        (29.1)        147.5        (374.4)      6,820.3         360,142.2
Shares issued, net of put
  options.....................    -            22.0          -             -             -            22.0             904.9
Stock-based compensation......    -            10.5          -             -             -            10.5
Treasury stock acquired and
  sold, net...................    -             1.3          -             -          (743.7)       (742.4)        (26,627.8)
Dividends to shareholders.....    -             -          (83.8)          -             -           (83.8)
Comprehensive income:
  Net income..................    -             -          142.3           -             -           142.3
  Net unrealized gains........    -             -            -           618.8           -           618.8
  Provision for deferred
    income taxes..............    -             -            -          (217.1)          -          (217.1)
  Foreign currency
    translation adjustment....    -             -            -            86.6           -            86.6
                                                                                               ---------------
Comprehensive income..........                                                                       630.6
                              --------- ------------ ------------ ---------------- ----------- --------------- ----------------
BALANCES AT DECEMBER 31, 2002.    3.8       7,106.3         29.4         635.8      (1,118.1)      6,657.2         334,419.3
Shares issued, net of call
  options.....................    -            18.3          -             -             -            18.3             710.2
Stock-based compensation, and
  additional related tax
  benefits....................    -            25.4          -             -             -            25.4
Treasury stock acquired and
  sold, net...................    -             3.2          -             -          (441.0)       (437.8)        (14,462.0)
Dividends to shareholders.....    -             -         (145.3)          -             -          (145.3)
Comprehensive income:
  Net income..................    -             -          746.3           -             -           746.3
  Net unrealized gains........    -             -            -           703.0           -           703.0
  Provision for deferred
    income taxes..............    -             -            -          (241.3)          -          (241.3)
  Foreign currency
    translation adjustment....    -             -            -            68.6           -            68.6
  Minimum pension liability...    -             -            -            (3.9)          -            (3.9)
  Cumulative effect of
    accounting change, net
    of related income taxes...    -             -            -             9.1           -             9.1
                                                                                               ---------------
Comprehensive income..........                                                                     1,281.8
                              --------- ------------ ------------ ---------------- ----------- --------------- ----------------
BALANCES AT DECEMBER 31, 2003.   $3.8      $7,153.2     $  630.4     $ 1,171.3     $(1,559.1)     $7,399.6         320,667.5
                              ========= ============ ============ ================ =========== =============== ================

SEE ACCOMPANYING NOTES.

                                      109

                         PRINCIPAL FINANCIAL GROUP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------
                                                             2003             2002              2001
                                                       ----------------- ---------------- -----------------
                                                                          (IN MILLIONS)
                                                                                   
OPERATING ACTIVITIES
Net income............................................   $     746.3       $     142.3      $     358.8
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Loss (income) from discontinued operations, net
       of related income taxes........................         (21.8)            196.7             11.2
     Cumulative effect of accounting changes,
       net of related income taxes....................           3.4             280.9             10.7
     Amortization of deferred policy
       acquisition costs..............................         142.8             144.5            159.9
     Additions to deferred policy acquisition costs...        (349.8)           (323.4)          (261.7)
     Accrued investment income........................           5.8             (52.2)           (66.2)
     Premiums due and other receivables...............         (69.7)             25.2            (47.3)
     Contractholder and policyholder liabilities
       and dividends..................................       2,043.6           2,154.4          2,005.0
     Current and deferred income taxes................         312.3             408.4             98.8
     Net realized/unrealized capital losses...........          65.7             354.8            514.0
     Depreciation and amortization expense............         117.1             106.0            103.4
     Amortization of mortgage servicing rights........         434.9             364.9            213.0
     Stock-based compensation.........................          22.6              10.5              -
     Mortgage servicing rights valuation adjustments..         412.5             926.7            101.8
     Other............................................        (151.9)            639.9            711.2
                                                       ----------------- ---------------- -----------------
Net adjustments.......................................       2,967.5           5,237.3          3,553.8
                                                       ----------------- ---------------- -----------------
Net cash provided by operating activities.............       3,713.8           5,379.6          3,912.6

INVESTING ACTIVITIES
Available-for-sale securities:
   Purchases..........................................     (10,940.4)        (16,683.5)       (14,871.8)
   Sales..............................................       2,962.7           8,460.0          6,707.7
   Maturities.........................................       5,229.7           4,473.3          4,729.5
Net cash flows from trading securities................           -               (82.4)           (17.0)
Mortgage loans acquired or originated.................     (62,829.0)        (50,217.3)       (40,456.9)
Mortgage loans sold or repaid.........................      64,135.6          50,027.7         40,908.6
Purchase of mortgage servicing rights.................      (1,098.4)           (931.7)          (968.4)
Proceeds from sale of mortgage servicing rights.......          29.9               8.6             31.5
Real estate acquired..................................        (283.3)           (273.8)          (290.0)
Real estate sold......................................         133.3             255.7            803.8
Net change in property and equipment..................         (28.9)            (59.5)           (90.6)
Net proceeds (disbursements) from sales of
   subsidiaries.......................................          40.9             500.8             (7.9)
Purchases of interest in subsidiaries, net
   of cash acquired...................................        (136.2)            (54.5)           (11.1)
Net change in other investments.......................         235.8             498.5           (205.4)
                                                       ----------------- ---------------- -----------------
Net cash used in investing activities.................   $  (2,548.3)      $  (4,078.1)     $  (3,738.0)

                                      110

                         PRINCIPAL FINANCIAL GROUP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------
                                                             2003             2002              2001
                                                       ----------------- ---------------- -----------------
                                                                          (IN MILLIONS)
                                                                                     
FINANCING ACTIVITIES
Issuance of common stock.............................      $    18.3         $    22.0        $ 2,019.3
Payments to eligible policyholders under plan
  of conversion......................................            -                 -           (1,177.5)
Acquisition and sales of treasury stock, net.........         (453.0)           (742.4)          (367.7)
Proceeds from financing element derivatives..........          118.0               -                -
Payments for financing element derivatives...........         (107.3)              -                -
Dividends to shareholders............................         (145.3)            (83.8)             -
Issuance of long-term debt...........................           34.7              64.1            149.2
Principal repayments of long-term debt...............          (85.3)           (110.0)          (204.4)
Net proceeds (repayments) of short-term
  borrowings.........................................       (1,183.8)             53.2             52.1
Investment contract deposits.........................        9,586.0           7,014.1          5,054.9
Investment contract withdrawals......................       (8,666.2)         (7,225.7)        (6,075.1)
Net increase in banking operation deposits...........          372.7             184.4            144.8
                                                       ----------------- ---------------- -----------------
Net cash used in financing activities................         (511.2)           (824.1)          (404.4)
                                                       ----------------- ---------------- -----------------
Net increase (decrease) in cash and cash
  equivalents........................................          654.3             477.4           (229.8)

Cash and cash equivalents at beginning of year.......        1,038.6             561.2            791.0
                                                       ----------------- ---------------- -----------------
Cash and cash equivalents at end of year.............      $ 1,692.9         $ 1,038.6        $   561.2
                                                       ================= ================ =================

SCHEDULE OF NONCASH TRANSACTIONS
Policy credits to eligible policyholders under plan
  of conversion......................................                                         $   472.6
                                                                                          =================
Stock issued in exchange for membership interest.....                                         $ 5,050.3
                                                                                          =================

SEE ACCOMPANYING NOTES.

                                      111

                         PRINCIPAL FINANCIAL GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2003

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Principal  Financial  Group,  Inc.  and  its  consolidated   subsidiaries  is  a
diversified  financial  services  organization  engaged in promoting  retirement
savings and  investment  and  insurance  products  and  services in the U.S. and
selected  international markets. In addition, we offer residential mortgage loan
origination and servicing in the U.S.

DEMUTUALIZATION AND INITIAL PUBLIC OFFERING

Under  the terms of  Principal  Mutual  Holding  Company's  Plan of  Conversion,
effective  October 26, 2001 (the "Date of  Demutualization"),  Principal  Mutual
Holding Company  converted from a mutual insurance holding company ("MIHC") to a
stock  company,  subsidiary  of  Principal  Financial  Group,  Inc.,  a Delaware
business  corporation.  All  membership  interests in Principal  Mutual  Holding
Company were extinguished on that date and eligible  policyholders  received, in
aggregate,  260.8 million shares of common stock,  $1,177.5  million of cash and
$472.6 million of policy credits as compensation.

In addition,  on October 26,  2001,  we completed  our initial  public  offering
("IPO") in which we issued  100.0  million  shares of common stock at a price of
$18.50 per  share,  prior to the  underwriters'  exercise  of the  overallotment
option. Net proceeds from the IPO were $1,753.9 million,  of which $64.2 million
was retained by Principal  Financial Group and $1,689.7  million was contributed
to Principal  Life  Insurance  Company.  Proceeds were net of offering  costs of
$96.5 million and a related tax benefit of $0.4 million.

Costs relating to the demutualization, excluding costs relating to the IPO, were
$2.0  million  and  $18.6  million,  net of  income  taxes,  in 2002  and  2001,
respectively. Demutualization expenses consist primarily of printing and mailing
costs and the  aggregate  cost of engaging  independent  accounting,  actuarial,
financial,  investment banking,  legal and other consultants to advise us on the
demutualization.  In addition,  these costs include the costs of the advisors of
the Insurance Commissioner of the State of Iowa and the New York State Insurance
Department,  other regulatory authorities and internal allocated costs for staff
and related costs associated with the demutualization.

BASIS OF PRESENTATION

The  accompanying   consolidated   financial   statements,   which  include  our
majority-owned  subsidiaries  and,  subsequent  to June 30,  2003,  consolidated
variable  interest  entities  ("VIEs"),  have been prepared in  conformity  with
accounting  principles  generally accepted in the U.S. ("U.S.  GAAP"). Less than
majority-owned  entities in which we had 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.

CLOSED BLOCK

At the time the MIHC  structure was created in 1998,  Principal  Life  Insurance
Company  ("Principal  Life") formed and began  operating a closed block ("Closed
Block") for the benefit of individual participating  dividend-paying policies in
force on that date. See Note 9 for further details regarding the Closed Block.

                                      112

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of our 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued  Interpretation No.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46"), in January 2003. FIN
46  applies  to  certain  entities  in which  equity  investors  do not have the
characteristics of a controlling  financial interest,  or do not have sufficient
equity at risk for the entities to finance their activities  without  additional
subordinated   financial  support  from  other  parties.  FIN  46  requires  the
consolidation of VIEs in which an enterprise,  known as the primary beneficiary,
absorbs a majority of the entity's  expected losses,  receives a majority of the
entity's  expected  residual  returns,  or  both,  as  a  result  of  ownership,
contractual or other financial interests in the entity.

The guidance was  effective  immediately  for all VIEs created after January 31,
2003, and effective July 1, 2003, for all VIEs created before  February 1, 2003.
In October 2003, the FASB released  Staff  Position FIN 46-6,  EFFECTIVE DATE OF
FASB  INTERPRETATION NO. 46,  CONSOLIDATION OF VARIABLE INTEREST ENTITIES,  that
allows the deferral of FIN 46 for all VIEs created or acquired prior to February
1,  2003,  until the end of the first  interim  or annual  period  ending  after
December  15,  2003,  if certain  conditions  are met. We invested in one VIE in
April,  2003, and effective July 1, 2003,  consolidated VIEs created or acquired
prior to February 1, 2003, for which we are the primary beneficiary.

At July 1, 2003, our consolidated financial statements were adjusted to record a
cumulative effect of adopting FIN 46, as follows (in millions):

                                                                      NET LOSS         ACCUMULATED OTHER
                                                                                      COMPREHENSIVE INCOME
                                                                  ------------------ ----------------------

Adjustment for intercompany gains and carrying value of
  assets consolidated..........................................         $(6.1)              $ 14.1
Income tax impact..............................................           2.7                 (5.0)
                                                                  ------------------ ----------------------
  Total........................................................         $(3.4)              $  9.1
                                                                  ================== ======================

See Note 5 for the disclosures  relating to VIEs and the impact of such adoption
on our consolidated financial statements.

On December 24, 2003, the FASB issued a revision to FIN 46,  Interpretation  No.
46 (Revised 2003):  CONSOLIDATION OF VARIABLE  INTEREST ENTITIES ("FIN 46R"), to
clarify some of the provisions of FIN 46 and to exempt certain entities from its
requirements. Under FIN 46R, special effective date provisions apply to entities
that have fully or  partially  applied  FIN 46 prior to  issuance of FIN 46R. We
plan to adopt FIN 46R effective January 1, 2004, and do not anticipate that this
will have a material impact on our consolidated statements of operations.

                                      113

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

In December 2003, the FASB issued  Statement of Financial  Accounting  Standards
("SFAS") No. 132 (Revised 2003), EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS ("SFAS 132R"). SFAS 132R requires the disclosure of more
information   about  pension  plan  assets,   obligations,   benefit   payments,
contributions  and net benefit cost.  This  statement is effective for financial
statements  with  fiscal  years  ending  after  December  15,  2003,  except for
disclosure of estimated  future  benefit  payments which is effective for fiscal
years ending after June 15, 2004. We have adopted SFAS 132R for fiscal year 2003
reporting.  Refer to Note 14 for  more  information  on our  pension  and  other
postretirement benefits.

On July 7, 2003, the American  Institute of Certified Public  Accountants issued
Statement  of Position  ("SOP")  03-1,  ACCOUNTING  AND  REPORTING  BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL  LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS.  This SOP addresses an insurance  enterprise's  accounting for certain
fixed  and  variable  contract  features  not  covered  by  other  authoritative
accounting  guidance.  This SOP is effective for financial statements for fiscal
years  beginning  after  December 15,  2003.  This SOP is not expected to have a
material impact on our consolidated financial statements.

In October 2003, the FASB added a project to its agenda to clarify SFAS No. 133,
ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES  ("SFAS 133"), as
amended by SFAS No. 138,  ACCOUNTING  FOR  CERTAIN  DERIVATIVE  INSTRUMENTS  AND
CERTAIN HEDGING ACTIVITIES - AN AMENDMENT OF FASB STATEMENT NO. 133 ("SFAS 138")
and SFAS No. 149, AMENDMENT OF FASB STATEMENT 133 ON DERIVATIVE  INSTRUMENTS AND
HEDGING ACTIVITIES,  with respect to determining the fair value of interest rate
lock  commitments  ("IRLC").  Specifically,  the FASB  project will address what
information should be used to determine the fair value of an IRLC and whether an
IRLC should ever be reported as an asset by the issuer.  In December  2003,  the
SEC staff announced that it intends to release a Staff Accounting  Bulletin that
will  require  IRLCs issued  after April 1, 2004,  be  accounted  for as written
options that would be reported as a liability until expiration or termination of
the commitment. Neither the FASB nor the SEC has issued final technical guidance
in this area and as such it is not  possible  to know for  certain the impact of
this guidance.

In December  2002,  the FASB issued SFAS No.  148,  ACCOUNTING  FOR  STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE-AN  AMENDMENT OF FASB STATEMENT NO. 123
("SFAS  148"),  which is effective  for fiscal  years ending after  December 15,
2002.  SFAS 148 provides  alternative  methods of transition  for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee  compensation and requires disclosure about the effects on reported net
income of an entity's  accounting  policy  decisions with respect to stock-based
employee compensation.  In addition, SFAS 148 amends Accounting Principles Board
("APB") Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about
those effects in interim financial information.  We are applying the prospective
method of transition as prescribed by SFAS No. 123,  ACCOUNTING FOR  STOCK-BASED
COMPENSATION ("SFAS 123").

                                      114

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

SFAS 123 encourages but does not require  companies to record  compensation cost
for stock-based  employee  compensation plans based on the fair value of options
granted.  Effective  July  1,  2002,  we  adopted  the  fair  value  method  for
stock-based   compensation  as  defined  in  SFAS  123  in  accounting  for  our
stock-based  compensation  plans.  SFAS 123, which indicates that the fair value
method is the  preferable  method of  accounting,  requires  that the fair value
method for stock-based compensation be applied as of the beginning of the fiscal
year in which it is adopted for all  stock-based  awards  granted  subsequent to
such date. The financial  statements for the first two quarters of 2002 were not
restated for this change since its effects were not  materially  different  from
amounts  reported for both financial  position and results of  operations.  Such
effects for the first two  quarters  were  charged  against  income in the third
quarter of 2002 and were not  material  to the results of  operations.  Prior to
January 1, 2002, we applied the intrinsic  value method (as permitted under SFAS
123) defined in APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and
related  Interpretations,  which excluded  employee  options and stock purchases
from compensation expense.

In June 2001, the FASB issued SFAS No. 141, BUSINESS  COMBINATIONS ("SFAS 141"),
and SFAS No. 142,  GOODWILL AND OTHER INTANGIBLE  Assets ("SFAS 142").  SFAS 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations initiated after June 30, 2001, and requires separate recognition of
intangible  assets apart from goodwill,  if such intangible  assets meet certain
criteria.  SFAS 142,  effective  January 1, 2002,  prohibits the amortization of
goodwill and intangible assets with indefinite  useful lives.  Intangible assets
with finite lives will  continue to be  amortized  over their  estimated  useful
lives.  Additionally,  SFAS 142  requires  that  goodwill  and  indefinite-lived
intangible  assets be reviewed for impairment at least annually,  which we do in
the fourth quarter each year.

Our initial  adoption  of SFAS 142 on January 1, 2002,  required us to perform a
two-step  fair-value based goodwill  impairment test. The first step of the test
compared the estimated fair value of the reporting  unit to its carrying  value,
including goodwill. If the carrying value exceeded fair value, a second step was
performed,  which  compared the implied fair value of the  applicable  reporting
unit's  goodwill  with the  carrying  amount of that  goodwill,  to measure  the
goodwill  impairment,  if any.  Additionally,  we were  required  to  perform an
impairment test on our indefinite-lived  intangible assets, which consisted of a
comparison of the fair value of an intangible asset with its carrying amount.

Our  measurements  of fair value were based on evaluations of future  discounted
cash flows, product level analysis, market performance assumptions and cash flow
assumptions.  These evaluations  utilized the best information  available in the
circumstances, including reasonable and supportable assumptions and projections.
The  discounted  cash flow  evaluations  considered  earnings  scenarios and the
likelihood  of  possible   outcomes.   Collectively,   these   evaluations  were
management's best estimate of projected future cash flows.

As a result of performing  the two-step  impairment  test, we recorded  goodwill
impairments  of $196.5  million,  $20.9 million and $4.6 million,  net of income
taxes, related to our BT Financial Group,  Principal  International and Life and
Health  Insurance  operations,  respectively.   Additionally,  as  a  result  of
performing the indefinite-lived  intangible asset impairment test, we recognized
an after-tax impairment of $58.9 million to our brand name and management rights
intangible asset related to BT Financial Group.

                                      115

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

These  impairments,  recognized  January 1, 2002,  as a  cumulative  effect of a
change in  accounting  principle,  were  reported in our  operating  segments as
follows (in millions):

                                               INTERNATIONAL
                                                  ASSET
                                               MANAGEMENT AND    LIFE AND HEALTH
                                               ACCUMULATION        INSURANCE          CONSOLIDATED
                                           -------------------- ------------------ ------------------

Goodwill..................................        $321.2               $4.6               $325.8
Indefinite-lived intangibles..............          89.8                -                   89.8
Income tax impact.........................        (134.7)               -                 (134.7)
                                           -------------------- ------------------ ------------------
Total impairment, net of income taxes.....        $276.3               $4.6               $280.9
                                           ==================== ================== ==================

                                      116

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Net income  and  earnings  per share  (basic and  diluted)  for the years  ended
December 31, 2003,  2002 and 2001,  adjusted for the effects of SFAS 142 related
to non-amortization of goodwill and indefinite-lived intangibles, are as follows
(in millions, except per share data):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                     -------------------------------------------------
                                                            2003             2002           2001(1)
                                                     ----------------  ---------------- --------------

Reported net income.................................        $746.3         $ 142.3           $ 358.8
Adjustment for amortization expense:
  Goodwill (2)......................................           -               -                 9.2
  Amortization included in discontinued operations
    (see Note 3) ...................................           -               -                38.9
                                                     ---------------- ----------------- --------------
Total amortization expense .........................           -               -                48.1
Tax impacts of amortization expense ................           -               -               (14.6)
                                                     ---------------- ----------------- --------------
Adjusted net income.................................         746.3           142.3             392.3
Adjustment for cumulative effect of accounting
  changes, net of related income taxes..............           3.4           280.9              10.7
                                                     ---------------- ----------------- --------------
Adjusted income before cumulative effect of
  accounting changes................................        $749.7         $ 423.2           $ 403.0
                                                     ================ ================= ==============
Basic earnings per share:
Reported net income.................................        $  2.29        $   0.41          $   0.99
Adjustment for amortization expense:
  Goodwill..........................................           -               -                 0.02
  Amortization included in discontinued operations..           -               -                 0.11
                                                     ---------------- ----------------- --------------
Total amortization expense .........................           -               -                 0.13
Tax impacts of amortization expense ................           -               -                (0.04)
                                                     ---------------- ----------------- --------------
Adjusted net income ................................           2.29            0.41              1.08
Adjustment for cumulative effect of accounting
  changes, net of related income taxes..............           0.01            0.80              0.03
                                                     ---------------- ----------------- --------------
Adjusted income before cumulative effect of
  accounting changes................................        $  2.30        $   1.21          $   1.11
                                                     ================ ================= ==============
Diluted earnings per share:
Reported net income.................................        $  2.28        $   0.41          $   0.99
Adjustment for amortization expense:
  Goodwill..........................................           -               -                 0.02
  Amortization included in discontinued opeations...           -               -                 0.11
                                                     ---------------- ----------------- --------------
Total amortization expense .........................           -               -                 0.13
Tax impacts of amortization expense ................           -               -                (0.04)
                                                     ---------------- ----------------- --------------
Adjusted net income ................................           2.28            0.41              1.08
Adjustment for cumulative effect of accounting
  changes, net of related income taxes..............           0.01            0.80              0.03
                                                     ---------------- ----------------- --------------
Adjusted income before cumulative effect of
  accounting changes................................        $  2.29        $   1.21          $   1.11
                                                     ================ ================= ==============

- -----------------------
(1)  For  purposes of our  unaudited  basic and diluted  pro-forma  earnings per
     share calculations for the period January 1, 2001 through October 25, 2001,
     we estimated 360.8 million shares to be outstanding. For the period October
     26, 2001 through December 31, 2001, actual shares  outstanding were used in
     the weighted-average share calculation.

(2)  Includes   amortization   expenses   related  to  our   equity   investment
     subsidiaries.

                                      117

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

In August 2001,  the FASB issued SFAS No. 144,  ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144").  This Statement  supersedes SFAS No.
121,  ACCOUNTING  FOR THE  IMPAIRMENT  OF LONG-LIVED  ASSETS AND FOR  LONG-LIVED
ASSETS TO BE DISPOSED OF, and amends APB Opinion No. 30,  REPORTING  THE RESULTS
OF  OPERATIONS  - REPORTING  THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS,
AND  EXTRAORDINARY,  UNUSUAL AND INFREQUENTLY  OCCURRING EVENTS AND TRANSACTIONS
("APB  30"),  establishing  a  single  accounting  model  for  the  disposal  of
long-lived  assets.  SFAS 144 generally retains the basic provisions of existing
guidance,  but broadens  the  presentation  of any  discontinued  operations  to
include a component of an entity (rather than a segment of a business as defined
in APB 30).  We  adopted  SFAS 144 on  January  1,  2002,  which  did not have a
significant impact on our consolidated  financial  statements as of the adoption
date. On August 25, 2002, we entered into an agreement to sell substantially all
of BT Financial  Group (see Note 3). The sale of BT Financial Group is accounted
for under the provisions of SFAS 144 and consistent  with such guidance,  the BT
Financial  Group  results  and  loss  on sale  are  reported  as a  discontinued
operation.

Effective  January 1,  2001,  we adopted  SFAS 133,  as amended by SFAS 138.  As
amended,  SFAS  133  requires,  among  other  things,  that all  derivatives  be
recognized in the consolidated  statement of financial position as either assets
or  liabilities  that are  measured  at fair  value.  SFAS 133 also  establishes
special accounting for qualifying  hedges,  which allows for matching the timing
of gain or loss  recognition on the hedging  instrument  with the recognition of
the corresponding changes in value of the hedged item. Changes in the fair value
of a derivative  qualifying as a hedge are recognized in earnings or directly in
stockholders' equity depending on the instrument's intended use. For derivatives
that are not  designated  as  hedges  or that do not meet the  hedge  accounting
criteria in SFAS 133,  changes in fair value are  required to be  recognized  in
earnings in the period of change.

At January 1, 2001,  our  consolidated  financial  statements  were  adjusted to
record a cumulative effect of adopting SFAS 133, as follows (in millions):

                                                                                       ACCUMULATED OTHER
                                                                      NET LOSS        COMPREHENSIVE LOSS
                                                                  ------------------ ----------------------

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.

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.

                                      118

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

INVESTMENTS

We classify  our  investments  into one of three  categories:  held-to-maturity,
available-for-sale  or trading.  We determine the appropriate  classification of
fixed maturity  securities at the time of purchase.  Fixed  maturity  securities
include bonds,  mortgage-backed  securities and redeemable  preferred  stock. We
classify fixed maturity securities as either  available-for-sale or trading and,
accordingly,  carry them at fair value. (See Note 17 for policies related to the
determination   of  fair  value.)   Unrealized   gains  and  losses  related  to
available-for-sale  securities  are  reflected  in  stockholders'  equity net of
related deferred policy acquisition costs and applicable taxes. Unrealized gains
and losses  related to trading  securities  are  reflected  in net income as net
realized/unrealized capital gains (losses).

The cost of fixed maturity  securities is adjusted for  amortization of premiums
and accrual of discounts,  both computed using the interest method.  The cost of
fixed maturity  securities is adjusted for declines in value that are other than
temporary.  Impairments  in value deemed to be other than temporary are reported
in net income as a component of net realized/unrealized  capital gains (losses).
For loan-backed and structured securities,  we recognize 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.

Equity securities include mutual funds, common stock and nonredeemable preferred
stock. The cost of equity  securities is adjusted for declines in value that are
other than temporary. Impairments in value deemed to be other than temporary are
reported in net income as a component of net  realized/unrealized  capital gains
(losses).   Equity   securities  are  classified  as   available-for-sale   and,
accordingly, are carried at fair value. (See Note 17 for policies related to the
determination   of  fair  value.)   Unrealized   gains  and  losses  related  to
available-for-sale  securities  are  reflected  in  stockholders'  equity net of
related deferred policy acquisition costs and applicable taxes.

Real estate investments are reported at cost less accumulated depreciation.  The
initial cost bases of  properties  acquired  through loan  foreclosures  are the
lower of the fair market values of the  properties at the time of foreclosure or
the  outstanding  loan balance.  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.  We recognize  impairment  losses for
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  in net  income as net  realized/unrealized
capital gains (losses).

                                      119

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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  in net  income as net  realized/unrealized
capital gains (losses).  We measure  impairment  based upon the present value of
expected  cash flows  discounted  at the loan's  effective  interest rate or the
loan's observable  market price. If foreclosure is probable,  the measurement of
any valuation allowance is based upon the fair value of the collateral.  We have
residential  mortgage loans  held-for-sale in the amount of $2,523.5 million and
$638.9 million and  commercial  mortgage  loans  held-for-sale  in the amount of
$278.1 million and $444.2  million at December 31, 2003 and 2002,  respectively,
which  are  carried  at  lower of cost or fair  value,  less  cost to sell,  and
reported as mortgage loans in the statements of financial position.

Net realized  capital gains and losses on sales of investments are determined on
the basis of  specific  identification.  In  general,  in  addition  to realized
capital  gains and  losses on  investment  sales,  unrealized  gains and  losses
related to other than temporary  impairments,  trading securities,  market value
changes in certain  seed money  investments,  fair value hedge  ineffectiveness,
derivatives  not designated as hedges and changes in the mortgage loan allowance
are reported in net income as net  realized/unrealized  capital gains  (losses).
Unrealized  gains and losses on derivatives  within our Mortgage Banking segment
are reported as either operating  expenses or fees and other revenues  depending
on the nature of the hedge and are excluded from net realized/unrealized capital
gains  (losses).  Investment  gains and losses on sales of certain  real  estate
held-for-sale,   which  do  not  meet  the  criteria  for  classification  as  a
discontinued  operation,  are  reported  as net  investment  income and are also
excluded from net realized/unrealized capital gains (losses).

Policy loans and other  investments,  excluding  investments  in  unconsolidated
entities, are primarily reported at cost.

SECURITIZATIONS

We, along with other  contributors,  sell  commercial  mortgage loans to trusts,
which are  unconsolidated  qualified  special purpose  entities which then issue
commercial    mortgage-backed    securities.   We   retain   primary   servicing
responsibilities  and may retain  other  immaterial  interests  in the trusts by
purchasing  portions of the  securities  from the issuance.  Gain or loss on the
sales of the  loans  is  reported  as fees  and  other  revenues.  The  retained
interests  are  thereafter  carried  at fair value  with  other  fixed  maturity
investments and classified as available-for-sale.

We also sell  residential  mortgage loans and retain  servicing rights which are
retained  interests in the sold loans. Gain or loss on the sales of the loans is
reported as fees and other revenues and depends in part on the previous carrying
amounts of the loans sold and the  interests  retained  based on their  relative
estimated  fair values at the date of the  transfer.  To estimate  fair  values,
quoted market prices are used if  available.  However,  quotes are generally not
available for retained interests, so we estimate fair value based on the present
value of the future  expected cash flows using  management's  best  estimates of
assumptions we believe market participants would use to value such interests.

                                      120

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

MORTGAGE LOAN SERVICING RIGHTS

Mortgage loan servicing  rights represent the value of purchasing or originating
the right to receive cash flows from servicing mortgage loans.  Servicing rights
are  recorded  at the time of sale of the  underlying  mortgage  loans where the
related  servicing is  retained.  The total cost of the  mortgage  loans,  which
includes the cost to acquire the servicing  rights, is allocated to the mortgage
loans and the servicing rights based on their relative  estimated fair values at
the date of sale.  Cost basis of the  mortgage  servicing  rights also  includes
adjustments  resulting  from the  application of hedge  accounting.  Capitalized
servicing  rights are carried at the lower of cost or estimated fair value.  The
capitalized  value is  amortized  in  proportion  to,  and over the  period  of,
estimated net servicing income.

Capitalized  mortgage  loan  servicing  rights  are  periodically  assessed  for
impairment  based on the estimated  fair value of those rights.  Fair values are
estimated using estimates of discounted  future net cash flows over the expected
lives of the underlying  loans using loan prepayment,  discount rate,  ancillary
fee income and other  assumptions  we believe market  participants  would use to
value such assets.  The  reasonableness  of our assumptions is confirmed through
comparisons  against  qualified  mortgage  servicing  rights  trades  that  were
completed in the prior quarter and quarterly  independent  surveys.  Independent
appraisals  of  the  fair  value  of  our   servicing   portfolio  are  obtained
periodically  during the year and are used to evaluate the reasonableness of our
fair value conclusions. For purposes of performing our impairment evaluation, we
stratify  the  servicing  portfolio  on the basis of  certain  predominant  risk
characteristics,  including  loan type,  note rate and rate type.  To the extent
that the carrying value of the servicing rights exceeds estimated fair value for
any stratum, a valuation allowance is established,  which may be adjusted in the
future as the estimated fair value of the servicing rights increase or decrease.
Changes in the valuation allowance are recognized in the consolidated statements
of operations during the period in which impairment or recovery occurs.

During  2003,  we  established  a policy  of  further  evaluating  our  mortgage
servicing  rights valuation  allowance by identifying  portions of the allowance
that represent a permanent impairment (i.e., direct write-downs).  Each quarter,
we will  recognize  a direct  write-down  when the gross  carrying  value is not
expected to be recovered in the  foreseeable  future.  We estimate the amount of
direct  write-downs  based  on an  analysis  of the  mortgage  servicing  rights
valuation  allowance  related to loans  that have  prepaid.  Direct  write-downs
reduce the gross  carrying  value and the  valuation  allowance  of the mortgage
servicing rights,  thereby precluding subsequent recapture of previous valuation
allowances.  The direct  write-downs  have no impact on net income or  financial
position  in  the  period  of  adjustment  but  may  result  in a  reduction  of
amortization  expense and reduced recovery of impairments in periods  subsequent
to adjustment.

DERIVATIVES

Derivatives  are  recognized as either assets or liabilities in the statement of
financial  position and measured at fair value. If certain conditions are met, a
derivative may be specifically designated as one of the following:

(a)  a hedge of the exposure to changes in the fair value of a recognized  asset
     or liability or an unrecognized firm commitment;

(b)  a hedge of the exposure to variable cash flows of a forecasted transaction;

(c)  a  hedge  of  the  foreign  currency   exposure  of  an  unrecognized  firm
     commitment,       an       available-for-sale       security      or      a
     foreign-currency-denominated forecasted transaction.

                                      121

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Our accounting for the ongoing changes in fair value of a derivative  depends on
the intended use of the derivative and the designation as described above and is
determined  when  the  derivative  contract  is  entered  into or at the time of
redesignation  under SFAS 133. Hedge accounting is used for derivatives that are
specifically  designated in advance as hedges and that reduce our 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.

For  derivatives  hedging the  exposure to changes in fair value of a recognized
asset or liability,  the change in fair value of the derivative is recognized in
earnings in the period of change  together  with the  offsetting  change in fair
value on the hedged item  attributable  to the risk being hedged.  The effect of
such  accounting  is to reflect in earnings the extent to which the hedge is not
effective in achieving offsetting changes in fair value.

For  derivatives  hedging the  exposure to variable  cash flows,  the  effective
portion of the  derivative's  change in fair  value is  initially  deferred  and
reported  as  a  component  of  other  comprehensive   income  and  subsequently
reclassified into earnings when each variable cash flow occurs and is recognized
in earnings.  The ineffective portion of the change in fair value is reported in
earnings in the period of change.  For derivatives  that are terminated prior to
maturity,  any accumulated gain or loss is recognized in earnings immediately if
the hedged item is also terminated.  If the hedged item is not terminated,  then
the accumulated  gain or loss is amortized into earnings over the remaining life
of the hedged item.

For derivatives  hedging the foreign currency  exposure of an unrecognized  firm
commitment or an  available-for-sale  security,  the change in fair value of the
derivative is  recognized in earnings in the period of change  together with the
offsetting  change in fair value on the  hedged  item  attributable  to the risk
being hedged. The effect of such accounting is to reflect in earnings the extent
to which the hedge is not  effective  in  achieving  offsetting  changes in fair
value.

For    derivatives    hedging    the    foreign    currency    exposure   of   a
foreign-currency-denominated forecasted transaction, the change in fair value is
initially deferred and reported as a component of other comprehensive income and
subsequently  reclassified into earnings when the forecasted  transaction occurs
and is recognized  in earnings.  The  ineffective  portion of the change in fair
value is reported in earnings in the period of change.

For derivatives not designated as a hedging instrument, the change in fair value
is recognized in earnings in the period of change.

A minimum variance  technique is used to test the effectiveness of cash flow and
fair value  relationships  whereby the  profitability  distribution  of net fair
value or  cashflows  for the  hedging  and  hedged  items are  combined.  If the
coefficient of variation (standard deviation divided by mean) of the probability
distribution  is 1% or less,  then the  hedging  relationship  is  deemed  to be
effective.

                                      122

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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,  accident and health insurance and
disability   income   policies,   as  well  as  a  provision  for  dividends  on
participating  policies.  Investment  contracts  are  contractholders'  funds on
deposit  with  us  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 nonparticipating  term
life  insurance  and  disability  income  contracts  are  computed on a basis of
assumed  investment  yield,  mortality,  morbidity  and  expenses,  including  a
provision for adverse  deviation,  which generally varies by plan, year of issue
and policy  duration.  Investment  yield is based on our experience.  Mortality,
morbidity and withdrawal  rate  assumptions  are based on our experience 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.

Participating  business  represented  approximately 32%, 32% and 35% of our life
insurance in force and 72%, 74% and 76% of the number of life insurance policies
in force at  December  31,  2003,  2002 and  2001,  respectively.  Participating
business  represented  approximately 65%, 68% and 57% of life insurance premiums
for the years ended December 31, 2003, 2002 and 2001, 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 anniversary date.

Some of our  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, 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.

                                      123

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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.  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 principally 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.  Certain  group  contracts  contain
experience  premium  refund  provisions  based  on a  pre-defined  formula  that
reflects their claim experience.  Experience premium refunds are recognized over
the term of the coverage and adjusted to reflect  current  experience.  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,  annuity and
health insurance  products are associated with earned premiums and result in the
recognition of profits over the expected term 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  us to risks  arising  from  policyholder
mortality or morbidity and consist primarily of Guaranteed  Investment Contracts
("GICs"), funding agreements 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.

                                      124

                         PRINCIPAL FINANCIAL GROUP, INC.

             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.  Net
revenues are also  recognized  upon the sale of  residential  mortgage loans and
residential  mortgage loan  servicing  rights and are recorded in fees and other
revenues and  determined  using the  specific  identification  basis.  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.

DEFERRED POLICY ACQUISITION COSTS

Commissions and other costs (underwriting, issuance and agency expenses, premium
credits,  conversion  bonuses and first-year  bonus interest) 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.
Maintenance  costs and acquisition  costs that are not deferrable 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.  We utilize a mean reversion method
(reversion to the mean assumption), a common industry practice, to determine the
future market growth  assumption  used for the  amortization  of deferred policy
acquisition  costs on investment  contracts  pertaining to individual  and group
annuities which have separate accounting  investment options.  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  nonparticipating  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

We enter into  reinsurance  agreements with other companies in the normal course
of  business.  We may  assume  reinsurance  from or cede  reinsurance  to  other
companies. Assets and liabilities related to reinsurance ceded are reported on a
gross basis. Premiums and expenses are reported net of reinsurance ceded, except
for the medical  reinsurance  agreement which is accounted for using the deposit
method of  accounting.  We are  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, 2003, 2002 and 2001,  respectively,
we had  reinsured  $19.4  billion,  $17.8  billion  and  $15.6  billion  of life
insurance in force, representing 14%, 13% and 12% of total net life insurance in
force through a single  third-party  reinsurer.  To minimize the  possibility of
losses,  we evaluate  the  financial  condition  of our  reinsurers  and monitor
concentrations of credit risk.

                                      125

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

The effects of reinsurance on premiums and other  considerations  and policy and
contract benefits and changes in reserves were as follows (in millions):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------
                                                                                     
Premiums and other considerations:
   Direct........................................       $3,805.8           $4,080.1           $4,329.9
   Assumed.......................................          118.8              130.6               56.0
   Ceded.........................................         (290.5)            (328.9)            (263.6)
                                                   ------------------ ------------------ ------------------
Net premiums and other considerations............       $3,634.1           $3,881.8           $4,122.3
                                                   ================== ================== ==================
Benefits, claims and settlement expenses:
   Direct........................................       $4,966.9           $5,459.8           $5,700.3
   Assumed.......................................          129.3               10.6                7.4
   Ceded.........................................         (234.9)            (253.5)            (225.6)
                                                   ------------------ ------------------ ------------------
Net benefits, claims and settlement expenses.....       $4,861.3           $5,216.9           $5,482.1
                                                   ================== ================== ==================

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 us for  contracts  with  equity,  real  estate  and
fixed-income investments. Generally, the separate account contract owner, rather
than us, 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  ours.  We  receive  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.

At December 31, 2003 and 2002, the separate  accounts include a separate account
valued  at  $833.9  million  and $1.0  billion,  respectively,  which  primarily
includes  shares  of our stock  that  were  allocated  and  issued  to  eligible
participants of qualified  employee benefit plans  administered by us as part of
the policy credits issued under the  demutualization.  These shares are included
in both basic and diluted earnings per share calculations.  The separate account
shares are  recorded at fair value and are reported as separate  account  assets
and separate  account  liabilities in the  consolidated  statements of financial
position.  Activity of the  separate  account  shares is  reflected  in both the
separate account assets and separate account liabilities and does not impact our
results of operations.

INCOME TAXES

We  file  a  U.S.  consolidated  income  tax  return  that  includes  all of our
qualifying  subsidiaries.  Our  policy of  allocating  income tax  expenses  and
benefits to companies in the group is generally based upon pro rata contribution
of  taxable  income or  operating  losses.  We are 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.

                                      126

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

FOREIGN EXCHANGE

Assets and liabilities of our foreign subsidiaries and affiliates denominated in
non-U.S.  dollars are translated  into U.S.  dollar  equivalents at the year-end
spot foreign exchange rates. Resulting translation adjustments are reported as a
component  of  stockholders'  equity,  along  with any  related  hedge  effects.
Revenues and expenses for these entities are translated at the  weighted-average
exchange  rates for the  year.  Revenue,  expense  and  other  foreign  currency
transaction and translation  adjustments for foreign subsidiaries and affiliates
with the U.S.  dollar as the  functional  currency  that  affect  cash flows are
reported in current operations, along with related hedge effects.

GOODWILL AND OTHER INTANGIBLES

Goodwill  and other  intangibles  include the cost of acquired  subsidiaries  in
excess of the fair value of the net tangible  assets recorded in connection with
acquisitions.  Due to the adoption of SFAS 142,  goodwill  and  indefinite-lived
intangible  assets were no longer  amortized  after January 1, 2002.  Intangible
assets with a finite  useful life  continue to be amortized  on a  straight-line
basis generally over a period of 15 to 30 years.  Goodwill and  indefinite-lived
intangible  assets not subject to amortization  will be tested for impairment on
an annual  basis  during the fourth  quarter each year,  or more  frequently  if
events or changes in  circumstances  indicate  that the asset might be impaired.
Goodwill impairment testing involves a two-step process described further in the
recent accounting  pronouncements  section within Note 1. Impairment testing for
indefinite-lived intangible assets consists of a comparison of the fair value of
the intangible asset with its carrying value.

Other  intangible  assets  with  finite  useful  lives  continue  to be reviewed
periodically  for indicators of impairment in value. If facts and  circumstances
suggest possible impairment,  the sum of the estimated  undiscounted future cash
flows  expected  to result  from the use of the asset is compared to the current
carrying value of the asset. If the undiscounted future cash flows are less than
the carrying  value,  an  impairment  loss is  recognized  for the excess of the
carrying amount of assets over their fair value.  Prior to January 1, 2002, this
impairment method was used for all intangible assets and goodwill.

EARNINGS PER SHARE

Basic  earnings per share is calculated by dividing  income  available to common
stockholders by the weighted-average number of common shares outstanding for the
period and excludes the dilutive effect of stock options.  Diluted  earnings per
share reflects the potential  dilution that could occur if dilutive  securities,
such as options and non-vested  stock grants,  were exercised or resulted in the
issuance of common stock.

STOCK-BASED COMPENSATION

At December 31, 2003, we have four  stock-based  compensation  plans,  which are
described  more  fully in Note 20.  We  applied  the fair  value  method  to all
stock-based awards granted subsequent to January 1, 2002. For stock-based awards
granted prior to this date, we used the intrinsic value method.

                                      127

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Awards under our plans vest over  periods  ranging from one year to three years.
Therefore,  the  cost  related  to  stock-based  compensation  included  in  the
determination  of net income  for 2003 is less than that  which  would have been
recognized  if the fair value based  method had been applied to all awards since
the inception of our stock-based  compensation  plans. Had compensation  expense
for our stock option awards and employees' purchase rights been determined based
upon fair  values at the grant  dates for awards  under the plans in  accordance
with SFAS 123,  our net income and earnings per share would have been reduced to
the  pro  forma  amounts   indicated  below.  For  the  purposes  of  pro  forma
disclosures,  the  estimated  fair value of the options is  amortized to expense
over the options' vesting period.

                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------------
                                                                   2003          2002           2001 (1)
                                                              ------------- ---------------- ---------------
                                                                   (IN MILLIONS, EXCEPT PER SHARE DATA)

Net income, as reported.......................................   $746.3         $142.3        $358.8
Add:  Stock-based compensation expense
  included in reported net income, net of related tax effects.     20.1           11.8           6.6
Deduct:  Total stock-based compensation expense
  determined under fair value based method for all awards,
  net of related tax effects..................................     23.4           15.1           7.9
                                                              ------------- ---------------- ---------------
Pro forma net income..........................................   $743.0         $139.0        $357.5
                                                              ============= ================ ===============
Earnings per share:
  Basic:
    As reported...............................................     $2.29        $  0.41       $  0.99
    Pro forma.................................................     $2.28        $  0.40       $  0.99

  Diluted:
    As reported...............................................     $2.28        $  0.41       $  0.99
    Pro forma.................................................     $2.27        $  0.40       $  0.99

- ---------------------
(1)  Calculation of  weighted-average  shares included in the December 31, 2001,
     pro forma disclosures is described in Note 21.

RECLASSIFICATIONS

Reclassifications  have  been made to the 2001 and 2002  consolidated  financial
statements to conform to the 2003 presentation.

                                      128

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. GOODWILL AND OTHER INTANGIBLE ASSETS

Amortized intangible assets were as follows (in millions):

                                 AS OF DECEMBER 31, 2003                  AS OF DECEMBER 31, 2002
                         ------------------------------------------------------------------------------------
                            GROSS                         NET        GROSS                         NET
                           CARRYING    ACCUMULATED      CARRYING    CARRYING    ACCUMULATED      CARRYING
                            AMOUNT     AMORTIZATION      AMOUNT      AMOUNT     AMORTIZATION      AMOUNT
                         ----------- ---------------- ------------ ---------- ---------------- --------------
                                                                                
Value of insurance in
   force acquired.......    $117.7         $23.6       $  94.1       $83.5          $6.6          $76.9
Other ..................      13.4           0.6          12.8         1.6           0.4            1.2
                         ----------- ---------------- ------------ ---------- ---------------- --------------
Total amortized             $131.1         $24.2       $ 106.9       $85.1          $7.0          $78.1
   intangibles ......... =========== ================ ============ ========== ================ ==============

Unamortized intangible assets were as follows (in millions):

                                                                           AS OF DECEMBER 31,
                                                              -----------------------------------------------
                                                                       2003                   2002
                                                              ----------------------  -----------------------
                                                                  NET CARRYING            NET CARRYING
                                                                    AMOUNT                   AMOUNT
                                                              ----------------------  -----------------------

Other indefinite-lived intangible assets ............                   $14.5                   $10.7
                                                              ======================  =======================

The  amortization  expense for  intangible  assets with finite  useful lives was
$16.5  million,  $2.6  million  and  $2.5  million  for  2003,  2002  and  2001,
respectively.  At December 31, 2003, the estimated  amortization expense for the
next five years is as follows (in millions):

                                                                   ESTIMATED
                                                                  AMORTIZATION
                                                                    EXPENSE
                                                            --------------------

2004.................................................                $11.1
2005.................................................                  9.3
2006.................................................                  9.1
2007.................................................                  9.1
2008.................................................                  9.2

                                      129

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

The  changes  in the  carrying  amount of  goodwill  reported  in our  operating
segments for 2002 and 2003 were as follows (in millions):

                                                  INTERNATIONAL
                                  U.S. ASSET         ASSET
                                  MANAGEMENT       MANAGEMENT         LIFE AND
                                     AND              AND              HEALTH         MOTGAGE
                                 ACCUMULATION     ACCUMULATION        INSURANCE       BANKING       CONSOLIDATED
                                --------------- ------------------- -------------- -------------- ----------------

Balance at January 1, 2002....      $12.5             $33.7           $49.4           $8.4            $ 104.0
Goodwill from acquisitions....       10.7               -               -              -                 10.7
Goodwill disposed of during
  the period..................        -                 -              (0.7)           -                 (0.7)
Cumulative effect of
  accounting change (1).......        -                 -              (4.6)           -                 (4.6)
Foreign currency translation..        -                (2.9)            -              -                 (2.9)
                                --------------- ------------------- -------------- -------------- ----------------
Balance at December 31, 2002..       23.2              30.8            44.1            8.4              106.5
Goodwill from acquisitions....       30.5              15.7            25.1            -                 71.3
Foreign currency translation..        -                 6.4             -              -                  6.4
                                --------------- ------------------- -------------- -------------- ----------------
Balance at December 31, 2003..      $53.7             $52.9           $69.2           $8.4            $ 184.2
                                =============== =================== ============== ============== ================

- -----------------------
(1)  Excludes  goodwill  impairments of $300.3  million  related to BT Financial
     Group  (see  Note 3) and $20.9  million  related  to an  equity  investment
     subsidiary of Principal International.

3.  DISCONTINUED OPERATIONS

On October 31, 2002, we sold  substantially all of BT Financial Group to Westpac
Banking  Corporation  ("Westpac").  As of December  31, 2003,  we have  received
proceeds of A$958.9 million Australian dollars ("A$") (U.S. $537.4 million) from
Westpac,  with  future  contingent  proceeds  in 2004 of up to  A$150.0  million
(approximately  U.S. $115.0 million).  The contingent  proceeds will be based on
Westpac's  future  success in growing retail funds under  management.  We do not
anticipate receiving the contingent proceeds.

The decision to sell BT Financial Group was made with a view toward focusing our
resources,  executing  on core  strategic  priorities  and  meeting  shareholder
expectations.  Changing  market  dynamics since our  acquisition of BT Financial
Group, including industry  consolidation,  led us to conclude that the interests
of BT Financial  Group  clients and staff would be best served  under  Westpac's
ownership.

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

As of December 31, 2002, we accrued for an estimated  after-tax loss on disposal
of $208.7  million.  For the year ended  December 31,  2003,  we  recognized  an
after-tax  gain of $21.8  million,  primarily due to additional tax benefits and
additional proceeds received upon completion of the sale to Westpac. These gains
were  recorded  in  the  income  (loss)  from  discontinued  operations  in  the
consolidated statements of operations.

                                      130

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  DISCONTINUED OPERATIONS (CONTINUED)

BT Financial  Group is accounted for as a discontinued  operation and therefore,
the results of  operations  (excluding  corporate  overhead) and cash flows have
been  removed  from  our  results  of  continuing  operations  for  all  periods
presented.  Corporate  overhead allocated to BT Financial Group does not qualify
for  discontinued  operations  treatment  under SFAS 144, and therefore is still
included in our results of continuing operations.

The results of operations  (excluding corporate overhead) for BT Financial Group
are  reported  as  other  after-tax   adjustments  in  our  International  Asset
Management and Accumulation  segment in the Segment  Information note (Note 19).
Additionally,  the information included in the notes to the financial statements
exclude information applicable to BT Financial Group, unless otherwise noted.

Selected financial information for the discontinued operations is as follows:

                                                                         FOR THE YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------------------
                                                                2003               2002                2001
                                                            -------------    ---------------    -----------------
                                                                               (IN MILLIONS)

Total revenues..........................................          $ -            $  139.7             $ 220.9
                                                            =============    ===============    =================
Loss from continuing operations, net of related income
  taxes (corporate overhead)............................          $ -            $   (2.6)            $  (3.6)

Income (loss) from discontinued operations:
  Income (loss) before income taxes.....................            -                17.7               (15.6)
  Income taxes (benefits)...............................            -                 5.7                (4.4)
                                                            -------------    ---------------    -----------------
  Income (loss) from discontinued operations (1)........            -                12.0               (11.2)
  Income (loss) on disposal, net of related income
    taxes (2)...........................................           21.8            (208.7)                -
                                                            -------------    ---------------    -----------------
Income (loss) from discontinued operations, net of
  related income taxes..................................           21.8            (196.7)              (11.2)
Cumulative effect of accounting change, net of related
  income taxes..........................................            -              (255.4)                -
                                                            -------------    ---------------    -----------------
Net income (loss).......................................          $21.8          $ (454.7)            $ (14.8)
                                                            =============    ===============    =================

- ------------------------
(1)  The 2002 summary  results of  operations  information  is for the 10 months
     ended  October  31,  2002,  the  date of sale of BT  Financial  Group  and,
     accordingly, there is no statement of operations data to present for 2003.

(2)  Net of related  income tax benefits of $14.6  million and $89.6  million in
     2003 and 2002, respectively.

4.   OTHER DIVESTITURES

On February 1, 2002, we sold our remaining  investment of 15.1 million shares in
Coventry  Health  Care,  Inc.  common stock and a warrant,  exercisable  for 3.1
million shares of Coventry Health Care,  Inc. common stock.  Total proceeds from
the  completion of this  transaction  were $325.4  million,  which resulted in a
realized capital gain of $114.5 million, net of income tax.

                                      131

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  VARIABLE INTEREST ENTITIES

We have  relationships  with various types of special purpose entities and other
entities where we have a variable interest. After reviewing these relationships,
we determined  that we have  investments in some of these entities that meet the
definition of a VIE under FIN 46.

CONSOLIDATED VARIABLE INTEREST ENTITIES

As of July 1, 2003, we  consolidated  a  residential  mortgage loan funding VIE,
three  grantor  trusts  and  several  other  immaterial  VIEs in  which  we have
determined we are the primary  beneficiary.  The  incremental  impact on certain
financial  data as of December 31,  2003,  after  consideration  of our previous
investment for these consolidated VIEs, is as follows (in millions):

Total assets......................................              $  2,164.3
                                                       =======================

Total short-term debt.............................              $    615.0
Total long-term debt..............................                 1,458.0
Total other liabilities...........................                    95.4
                                                       -----------------------
Total liabilities.................................                 2,168.4
Total equity......................................                    (4.1)
                                                       -----------------------
  Total liabilities and equity....................              $  2,164.3
                                                       =======================

The consolidation of these entities did not have a material impact on our income
from  continuing  operations,  net of related  income taxes,  for the year ended
December 31, 2003. See Note 12 for details regarding the debt related to certain
VIEs.

RESIDENTIAL  MORTGAGE LOAN FUNDING VIE. Principal  Residential  Mortgage Capital
Resources,  LLC  ("PRMCR")  provides  a source of  funding  for our  residential
mortgage  loan  production.  The maximum  amount of  mortgage  loans that can be
warehoused in PRMCR is $4.0 billion.  PRMCR held $2.0 billion in mortgage  loans
held-for-sale  as of December 31, 2003. The portfolio of loans  held-for-sale by
PRMCR must meet portfolio  criteria,  eligibility  representations and portfolio
aging limitations.

As of December 31, 2003, PRMCR's short- and long-term debt of $615.0 million and
$1.4  billion,  respectively,  are  included on our  consolidated  statement  of
financial  position and are  collateralized by the assets of PRMCR. These assets
are primarily  classified as mortgage loans  held-for-sale  on our  consolidated
statement  of  financial  position.  The  creditors of PRMCR have no recourse to
other assets of our company.

GRANTOR TRUSTS. We contributed undated subordinated floating rate notes to three
grantor trusts.  The trusts  separated the cash flows of the underlying notes by
issuing an interest-only  certificate and a residual certificate related to each
note contributed. Each interest-only certificate entitles the holder to interest
on the stated note for a specified term while the residual  certificate entitles
the holder to  interest  payments  subsequent  to the term of the  interest-only
certificate  and  to all  principal  payments.  We  retained  the  interest-only
certificate  and the residual  certificates  were  subsequently  sold to a third
party.

                                      132

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  VARIABLE INTEREST ENTITIES (CONTINUED)

Upon adoption of FIN 46, we have  determined that these grantor trusts are VIEs.
In the event of a default or prepayment on the  underlying  notes,  which is the
main risk of loss, our interest-only certificates are exposed to the majority of
the risk of loss. The restricted interest periods end between 2016 and 2020 and,
at that time, the residual certificate holders' certificates are redeemed by the
trust in return for the notes. It will be necessary for us to consolidate  these
entities until the expiration of the  interest-only  period.  As of December 31,
2003, our consolidated  statement of financial  position included $351.8 million
of undated  subordinated  floating rate notes of the grantor  trusts,  which are
classified as available-for-sale  fixed maturity securities..  The obligation to
deliver the underlying  securities to the residual certificate holders of $103.9
million as of  December  31,  2003,  is  classified  as an other  liability  and
contains an embedded  derivative of the  forecasted  transaction  to deliver the
underlying  securities.  The creditors of the grantor trusts have no recourse to
the assets of our company.

OTHER. In addition to the entities above, we have a number of relationships with
a disparate  group of entities,  which meet the FIN 46 criteria for VIEs. Due to
the nature of our direct  investment in the equity and/or debt of these VIEs, we
are the primary  beneficiary of such entities,  which requires us to consolidate
them. These entities include a financial  services company, a private investment
trust and a real estate limited partnership. The consolidation of these VIEs did
not have a material  effect on either our  consolidated  statement  of financial
position or results of operation as of and for the year ended December 31, 2003.
As of December 31, 2003,  our  consolidated  financial  position  includes fixed
maturity  securities,  available-for-sale  ($12.7 million),  equity  securities,
available-for-sale  ($15.5  million),  real estate ($53.9  million) and cash and
other assets ($0.3  million),  which are pledged as collateral for such entities
short- and long-term debt of $27.2 million and $67.7 million,  respectively.  Of
these  amounts,  $65.0  million is  reflected in our  consolidated  statement of
financial  position as long-term  debt. The remaining  $27.2 million  short-term
debt and $2.7 million  long-term  debt was issued by  affiliated  entities  and,
therefore,  eliminated  upon  consolidation  of these VIEs.  For the majority of
these entities, the creditors have no recourse to the assets of our company.

SIGNIFICANT UNCONSOLIDATED VARIABLE INTEREST ENTITIES

We hold a significant variable interest in a number of VIEs where we are not the
primary  beneficiary.  These  entities  include  private  investment  trusts and
custodial  relationships  that  have  issued  trust  certificates  or  custodial
receipts that are recorded as  available-for-sale  fixed maturity  securities in
the consolidated financial statements.

Between  October 3, 1996 and September 21, 2001, we entered into seven  separate
but similar transactions where various third parties transferred funds to either
a custodial  account or a trust.  The custodians or trusts  purchased  shares of
specific  money  market  funds and then  separated  the cash  flows of the money
market shares into share receipts and dividend  receipts.  The dividend receipts
entitle  the  holder to  dividends  paid for a  specified  term  while the share
receipts  purchased  at a  discount  entitle  the  holder to  dividend  payments
subsequent to the term of the dividend receipts and the rights to the underlying
shares.  We have purchased the share  receipts.  After the  restricted  dividend
period ends between 2017 and 2021,  we, as the share  receipt  holder,  have the
right to terminate the custodial account or trust agreement and will receive the
underlying  money market fund shares.  The primary  beneficiary  is the dividend
receipt holder, which has the majority of the risk of loss. Our maximum exposure
to loss as a result of our  involvement  with  these  entities  is our  recorded
investment of $180.8 million as of December 31, 2003.

                                      133

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  VARIABLE INTEREST ENTITIES (CONTINUED)

On June 20, 1997, we entered into a transaction in which we purchased a residual
trust certificate.  The trust separated the cash flows of an underlying security
into an  interest-only  certificate  that  entitles the third party  certificate
holder to the stated interest on the underlying  security  through May 15, 2017,
and into a  residual  certificate  entitling  the  holder to  interest  payments
subsequent  to the  term of the  interest-only  certificates  and any  principal
payments.  Subsequent to the  restricted  interest  period,  we, as the residual
certificate  holder,  have the right to terminate  the trust  agreement and will
receive the underlying  security.  The primary  beneficiary is the interest-only
certificate  holder,  which has the  majority  of the risk of loss.  Our maximum
exposure to loss as a result of our involvement with this entity is our recorded
investment of $56.2 million as of December 31, 2003.

We entered into various  separate but similar  transactions  between  August 15,
2000 and February 15, 2001, in which we contributed cash to trusts in return for
a trust note. The trusts executed swaps in which the trust delivered cash to the
counterparty in return for convertible,  puttable fixed maturity securities.  On
the various dates in 2004 and 2005 that the trust notes are due, the  underlying
securities  are  returned  to the swap  counterparty  and the  trust  notes  are
redeemed  with the  proceeds.  The trust  also  swaps the  equity  option  value
embedded in the convertible  security and the coupon on the security to the swap
counterparty  in return for a variable  interest  rate which the trust remits to
the trust note holder. The swap counterparty has the right to instruct the trust
to call the trust note and return the  underlying  security  in order to utilize
the convertible features of the security. We are not the primary beneficiary but
we hold a significant variable interest in each of the trusts in which our notes
have not yet been called by the swap  counterparties.  Our  maximum  exposure to
loss  as a  result  of our  involvement  with  these  entities  is our  recorded
investment of $75.9 million as of December 31, 2003.

                                      134

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS

FIXED MATURITIES AND EQUITY SECURITIES

The cost,  gross  unrealized gains and losses and fair value of fixed maturities
and equity securities  available-for-sale  as of December 31, 2003 and 2002, are
summarized as follows (in millions):

                                                              GROSS           GROSS
                                                           UNREALIZED       UNREALIZED
                                             COST             GAINS           LOSSES         FAIR VALUE
                                        ---------------- ---------------- ---------------- ----------------
                                                                                
DECEMBER 31, 2003
Fixed maturities, available-for-sale:
  U.S. government and agencies........    $    617.0        $    12.9         $   1.0       $     628.9
  Non-U.S. governments................         627.0            117.8             0.1             744.7
  States and political subdivisions...         498.7             40.5             2.2             537.0
  Corporate - public..................      17,296.4          1,371.8            33.0          18,635.2
  Corporate - private.................       9,260.5            618.9            96.5           9,782.9
  Mortgage-backed and other
    asset-backed securities...........       6,795.8            347.4            22.2           7,121.0
                                        ---------------- ---------------- ---------------- ----------------
Total fixed maturities,
  available-for-sale..................    $ 35,095.4        $ 2,509.3         $ 155.0       $  37,449.7
                                        ================ ================ ================ ================
Total equity securities,
  available-for-sale..................    $    692.0        $    26.5         $   6.0       $     712.5
                                        ================ ================ ================ ================

DECEMBER 31, 2002
Fixed maturities, available-for-sale:
  U.S. government and agencies........    $    502.6        $    19.5         $   -         $     522.1
  Non-U.S. governments................         595.5             64.4             -               659.9
  States and political subdivisions...         399.2             33.1             5.9             426.4
  Corporate - public..................      16,672.0          1,101.0           281.7          17,491.3
  Corporate - private.................       8,522.7            523.0           186.5           8,859.2
  Mortgage-backed and other
    asset-backed securities...........       5,819.6            421.7            14.5           6,226.8
                                        ---------------- ---------------- ---------------- ----------------
Total fixed maturities,
  available-for-sale..................    $ 32,511.6        $ 2,162.7         $ 488.6       $  34,185.7
                                        ================ ================ ================ ================
Total equity securities,
  available-for-sale..................    $    381.0        $     9.9         $  12.2       $     378.7
                                        ================ ================ ================ ================

                                      135

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

The cost and fair value of fixed maturities  available-for-sale  at December 31,
2003, by expected maturity, were as follows (in millions):

                                                                            COST            FAIR VALUE
                                                                     ------------------- ------------------

Due in one year or less............................................     $  2,236.7          $  2,282.8
Due after one year through five years..............................        9,055.0             9,616.4
Due after five years through ten years.............................        8,507.6             9,266.6
Due after ten years................................................        8,500.3             9,162.9
                                                                     ------------------- ------------------
                                                                          28,299.6            30,328.7
Mortgage-backed and other asset-backed securities..................        6,795.8             7,121.0
                                                                     ------------------- ------------------
Total..............................................................     $ 35,095.4          $ 37,449.7
                                                                     =================== ==================

The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or prepay obligations.

Corporate  private  placement  bonds  represent  a primary  area of credit  risk
exposure.  The corporate  private  placement  bond  portfolio is  diversified by
issuer and  industry.  We  monitor  the  restrictive  bond  covenants  which are
intended to regulate  the  activities  of issuers and control  their  leveraging
capabilities.

NET INVESTMENT INCOME

Major  categories  of net  investment  income  are  summarized  as  follows  (in
millions):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------
                                                         2003               2002               2001
                                                  ------------------ ------------------ ------------------

Fixed maturities, available-for-sale............        $2,275.6           $2,219.7           $2,207.0
Fixed maturities, trading.......................            10.1                5.2                -
Equity securities, available-for-sale...........            47.0               27.6               27.7
Mortgage loans..................................           914.9              816.5              884.2
Real estate.....................................            91.5               85.7              178.2
Policy loans....................................            54.5               57.6               57.5
Cash and cash equivalents.......................            15.1               16.8               28.1
Derivatives.....................................            65.3               63.8                8.9
Other...........................................           101.5              111.3               94.7
                                                  ------------------ ------------------ ------------------
                                                         3,575.5            3,404.2            3,486.3

Less investment expenses........................          (155.9)             (99.5)            (102.7)
                                                  ------------------ ------------------ ------------------
Net investment income...........................        $3,419.6           $3,304.7           $3,383.6
                                                  ================== ================== ==================

                                      136

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

NET REALIZED/UNREALIZED CAPITAL GAINS AND LOSSES

The major  components of net  realized/unrealized  capital losses on investments
are summarized as follows (in millions):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                    --------------------------------------------------------
                                                         2003               2002               2001
                                                    ------------------ ------------------ ------------------

Fixed maturities, available-for-sale:
   Gross gains...................................        $  75.7            $ 172.3          $   75.8
   Gross losses..................................         (302.9)            (538.5)           (408.8)
Fixed maturities, trading:
   Gross gains...................................            3.5                4.0               0.9
   Gross losses..................................           (0.3)              (0.1)             (0.1)
Equity securities, available-for-sale:
   Gross gains...................................            9.8                4.1               9.4
   Gross losses..................................           (5.5)             (32.8)            (76.9)
Mortgage loans...................................           (2.2)             (10.3)             10.7
Real estate......................................           (6.7)               9.3             (19.0)
Derivatives......................................          107.2              (73.3)              -
Other............................................           55.7              110.5            (106.0)
                                                    ------------------ ------------------ ------------------
Net realized/unrealized capital losses...........        $ (65.7)           $(354.8)         $ (514.0)
                                                    ================== ================== ==================

Proceeds from sales of  investments  (excluding  call and maturity  proceeds) in
fixed maturities were $3.0 billion,  $8.2 billion and $5.7 billion in 2003, 2002
and 2001, respectively.  Of the 2003, 2002 and 2001 proceeds, $0.1 billion, $4.3
billion  and $1.6  billion,  respectively,  relate  to sales of  mortgage-backed
securities. Our mortgage-backed portfolio is actively managed to reduce the risk
of  prepayment  by purchasing  securities  that are trading close to par.  Gross
gains of $0.6 million,  $88.2 million and $22.5 million and gross losses of $0.9
million,  $11.6 million and $5.0 million in 2003,  2002 and 2001,  respectively,
were realized on sales of mortgage-backed securities.

We recognize  impairment  losses for fixed maturities and equity securities when
declines in value are other than  temporary.  Realized  losses  related to other
than  temporary  impairments  were  $157.2  million,  $357.0  million and $227.4
million in 2003, 2002 and 2001, respectively.

                                      137

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES

For fixed maturities and equity  securities  available-for-sale  with unrealized
losses as of December  31,  2003,  the gross  unrealized  losses and fair value,
aggregated by investment category and length of time that individual  securities
have been in a continuous unrealized loss position are summarized as follows (in
millions):

                                      LESS THAN             GREATER THAN OR EQUAL
                                    TWELVE MONTHS             TO TWELVE MONTHS
                               --------------------------  -------------------------
                                              GROSS                      GROSS         TOTAL        TOTAL GROSS
                                CARRYING    UNREALIZED     CARRYING    UNREALIZED     CARRYING      UNREALIZED
                                  VALUE       LOSSES         VALUE       LOSSES        VALUE          LOSSES
                               ----------- --------------  ---------- -------------- ------------ --------------

Fixed maturities, available-
  for-sale:
  U.S. government and
    agencies.................   $   293.7    $    1.0      $    -        $    -      $   293.7        $   1.0
  Non-U.S. governments.......         1.5         0.1           -             -            1.5            0.1
  States and political
    subdivisions.............        50.3         1.2          20.5           1.0         70.8            2.2
  Corporate - public.........       883.7        23.8          77.7           9.2        961.4           33.0
  Corporate - private........     1,269.3        69.3         228.1          27.2      1,497.4           96.5
  Mortgage-backed and
    other asset-backed
    securities...............     1,381.2        15.0          83.2           7.2      1,464.4           22.2
                               ----------- --------------  ---------- -------------- ------------ --------------
Total fixed maturities,
  available-for-sale.........   $ 3,879.7    $  110.4      $  409.5      $   44.6    $ 4,289.2        $ 155.0
                               =========== ==============  ========== ============== ============ ==============
Total equity securities,
  available-for-sale.........   $    98.6    $    3.2      $  241.7      $    2.8    $   340.3        $   6.0
                               =========== ==============  ========== ============== ============ ==============

As of December 31, 2003, we held $4,289.2  million in  available-for-sale  fixed
maturity  securities with unrealized losses of $155.0 million. Of these amounts,
Principal  Life's General  Account  portfolio  represented  $3,786.2  million in
available-for-sale  fixed maturity  securities with unrealized  losses of $147.3
million.  Principal Life's General Account portfolio  consists of fixed maturity
securities  where 89% are  investment  grade  (rated AAA  through  BBB-) with an
average price of 95 (carrying value/amortized cost). Of the $155.0 million total
gross unrealized losses,  $24.8 million is related to fixed maturity  securities
that are part of a fair value hedging  relationship that have been recognized in
net income as of December 31, 2003.  These  securities  are included in the less
than twelve months Corporate-Private category.

For those  securities  that have been in a loss  position  for less than  twelve
months,  Principal Life's General Account  portfolio holds 349 securities with a
carrying  value of $3,386.4  million  and  unrealized  losses of $102.8  million
reflecting an average price of 97. Of this portfolio, 95.7% was investment grade
(rated AAA through BBB-) at December 31, 2003, with associated unrealized losses
of $67.5 million.  The losses on these securities can primarily be attributed to
changes  in market  interest  rates and  changes  in  credit  spreads  since the
securities were acquired.

                                      138

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

For those  securities that have been in a continuous loss position  greater than
or equal to twelve months,  Principal Life's General Account holds 60 securities
with a carrying value of $399.8 million and unrealized  losses of $44.5 million.
The  average  rating of this  portfolio  is BBB- with an average  price of 90 at
December 31, 2003. The  Corporate-Public and  Corporate-Private  sectors account
for $36.4 million of the $44.5 million in unrealized  losses.  The average price
of the corporate sectors is 89 and the average credit rating is BB/BB-. Included
in the  Corporate-Private  sector  and  Mortgage-backed  and other  asset-backed
securities sector are three previously impaired securities with a carrying value
of $9.0 million and $2.0 million, respectively, and a current unrealized loss of
$1.0 million and $0.8 million, respectively.

We closely  monitor our below  investment  grade  holdings and those  investment
grade names where we have concerns.  While we are in an unrealized loss position
on these  securities,  all  securities  except those  identified  as  previously
impaired continue to make payments. We consider relevant facts and circumstances
in  evaluating  whether the  impairment  of a security is other than  temporary.
Relevant facts and circumstances  considered include: (1) the length of time the
fair value has been below cost; (2) the financial position and access to capital
of the issuer,  including the current and future impact of any specific  events;
and (3) our  ability  and intent to hold the  security  to  maturity or until it
recovers in value.  To the extent we  determine  that a security is deemed to be
other than temporarily impaired,  the difference between amortized cost and fair
value is charged to earnings.

NET UNREALIZED GAINS AND LOSSES ON AVAILABLE-FOR-SALE SECURITIES

The net  unrealized  gains and losses on  investments  in fixed  maturities  and
equity  securities  available-for-sale  are 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 was as follows (in millions):

                                                                                AS OF DECEMBER 31,
                                                                        ----------------------------------
                                                                              2003              2002
                                                                        ---------------- -----------------

Net unrealized gains on fixed maturities, available-for-sale (1).......     $ 2,413.5         $1,671.4
Net unrealized gains (losses) on equity securities, available-for-sale           18.1             (0.4)
Adjustments for assumed changes in amortization patterns:
  Deferred policy acquisition costs....................................        (274.4)          (226.2)
  Unearned revenue reserves............................................          15.3             13.6
Net unrealized losses on derivative instruments........................         (90.9)          (167.1)
Net unrealized loss on policyholder dividend obligation................         (99.0)           (33.6)
Net unrealized loss on equity method subsidiaries and minority
  interest adjustments.................................................         (12.1)            (4.2)
Provision for deferred income taxes....................................        (677.7)          (431.5)
                                                                        ---------------- -----------------
Net unrealized gains on available-for-sale securities..................     $ 1,292.8         $  822.0
                                                                        ================ =================

- -----------------------
(1)  Excludes   net   unrealized    gains   (losses)   on   fixed    maturities,
     available-for-sale included in fair value hedging relationships.

                                      139

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

COMMERCIAL MORTGAGE LOANS

Commercial  mortgage loans represent a primary area of credit risk exposure.  At
December 31, 2003 and 2002, the commercial  mortgage portfolio is diversified by
geographic region and specific  collateral  property type as follows (dollars in
millions):

                                                               AS OF DECEMBER 31,
                                       --------------------------------------------------------------------
                                                     2003                              2002
                                       ------------------------------- ------------------------------------
                                         CARRYING          PERCENT         CARRYING          PERCENT
                                         AMOUNT           OF TOTAL         AMOUNT            OF TOTAL
                                       -------------- ---------------- ------------------ -----------------
                                                                                  
GEOGRAPHIC DISTRIBUTION
New England..........................    $   398.9            4.1%         $   387.6            4.1%
Middle Atlantic......................      1,686.8           17.5            1,617.0           17.3
East North Central...................        945.7            9.8              913.7            9.8
West North Central...................        336.4            3.5              311.5            3.3
South Atlantic.......................      2,285.2           23.7            2,180.8           23.3
East South Central...................        312.1            3.2              345.5            3.7
West South Central...................        662.1            6.9              641.8            6.9
Mountain.............................        702.0            7.3              711.8            7.6
Pacific..............................      2,350.8           24.5            2,339.7           24.9
Valuation allowance..................        (49.6)          (0.5)             (83.6)          (0.9)
                                       -------------- ---------------- ------------------ -----------------
Total................................    $ 9,630.4          100.0%          $9,365.8          100.0%
                                       ============== ================ ================== =================

PROPERTY TYPE DISTRIBUTION
Office...............................    $ 3,545.2           36.8%          $3,166.2           33.8%
Retail...............................      2,706.4           28.1            2,836.0           30.3
Industrial...........................      2,708.8           28.1            2,802.6           29.9
Apartments...........................        545.9            5.7              475.4            5.1
Hotel................................         52.8            0.5               57.4            0.6
Mixed use/other......................        120.9            1.3              111.8            1.2
Valuation allowance..................        (49.6)          (0.5)             (83.6)          (0.9)
                                       -------------- ---------------  ------------------ ------------------
Total................................    $ 9,630.4          100.0%          $9,365.8          100.0%
                                       ============== ===============  ================== ==================

COMMERCIAL AND RESIDENTIAL MORTGAGE LOAN LOSS ALLOWANCE

Mortgage  loans on real estate are considered  impaired  when,  based on current
information  and events,  it is  probable  that we will be unable to collect all
amounts  due  according  to  contractual  terms of the loan  agreement.  When we
determine that a loan is impaired,  a provision for loss is established equal to
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  included  in  net  realized/unrealized  capital  losses  on our
consolidated statements of operations. Mortgage loans deemed to be uncollectible
are charged  against the allowance for losses,  and  subsequent  recoveries  are
credited to the allowance for losses.

                                      140

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

The  allowance  for  losses  is  maintained  at a  level  believed  adequate  by
management to absorb  estimated  probable credit losses.  Management's  periodic
evaluation  and  assessment  of the adequacy of the allowance for losses and the
need for  mortgage  impairments  is based on  known  and  inherent  risks in the
portfolio,  adverse  situations that may affect the borrower's ability to repay,
the  estimated  value  of the  underlying  collateral,  composition  of the loan
portfolio,   current  economic  conditions  and  other  relevant  factors.   The
evaluation  of our loan specific  reserve  component is also  subjective,  as it
requires  estimating  the amounts and timing of future cash flows expected to be
received  on  impaired  loans.  Impaired  mortgage  loans along with the related
allowance for losses were as follows (in millions):

                                                                                 AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                               2003            2002
                                                                     ------------------  ------------------

Impaired loans.....................................................         $149.6             $ 123.0
Allowance for losses...............................................          (12.6)              (26.9)
                                                                     ------------------  ------------------
Net impaired loans.................................................         $137.0             $  96.1
                                                                     ==================  ==================

The average  recorded  investment  in impaired  mortgage  loans and the interest
income recognized on impaired mortgage loans were as follows (in millions):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------
                                                                                      
Average recorded investment in
  impaired loans.................................       $116.6              $88.4              $74.4
Interest income recognized on impaired loans.....         13.8                8.6               12.5

All interest income on impaired  commercial mortgage loans was recognized on the
cash  basis  of  income  recognition,   whereas,  interest  income  on  impaired
residential mortgage loans was recognized on the accrual basis.

A summary  of the  changes  in the  commercial  and  residential  mortgage  loan
allowance for losses is as follows (in millions):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------

Balance at beginning of year....................        $ 87.0              $92.3            $ 110.4
Provision for losses............................           1.3               35.1               11.2
Releases due to write-downs,
  sales and foreclosures........................         (35.3)             (40.4)             (29.3)
                                                   ------------------ ------------------ ------------------
Balance at end of year..........................        $ 53.0              $87.0            $  92.3
                                                   ================== ================== ==================

                                      141

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

RESIDENTIAL MORTGAGE BANKING ACTIVITIES

We were servicing  approximately  960,000 and 920,000 residential mortgage loans
with aggregate  principal  balances of  approximately  $118.7 billion and $107.7
billion at December 31, 2003 and 2002,  respectively.  In connection  with these
mortgage  servicing  activities,  we held  funds in trust  for  others  totaling
approximately  $681.3  million and $646.7 million at December 31, 2003 and 2002,
respectively.  As of  December  31,  2003 and 2002,  $253.2  million  and $273.9
million,  respectively,  of the funds  held in trust  were  held in our  banking
subsidiary.  In connection with our loan administration  activities,  we advance
payments of property taxes and insurance premiums and also advance principal and
interest  payments to investors  in advance of  collecting  funds from  specific
mortgagors.  In addition,  we make certain  payments of attorney  fees and other
costs related to loans in foreclosure. These amounts receivable are recorded, at
cost,  as other assets in our  consolidated  statements  of financial  position.
Amounts  advanced are considered in  management's  evaluation of the adequacy of
the mortgage loan allowance for losses.

In June 2000, our Mortgage Banking segment created a special purpose  bankruptcy
remote entity,  PRMCR, to provide an off-balance sheet source of funding for our
residential mortgage loan production.  As described in Note 5, effective July 1,
2003,  we  consolidated  PRMCR due to the  adoption of FIN 46. We sell  eligible
residential mortgage loans to PRMCR, where they are warehoused until sold to the
final  investor.  We sold $32.8 billion and $47.1  billion in mortgage  loans to
PRMCR for the six months ended June 30, 2003, and during 2002, respectively. The
maximum amount of mortgage  loans,  which can be warehoused in PRMCR,  increased
from $1.0 billion at  inception  to $4.0 billion as of December 31, 2002.  PRMCR
held $4.0 billion in mortgage loans  held-for-sale  as of December 31, 2002. The
portfolio  of  loans  held-for-sale  by  PRMCR  must  meet  portfolio  criteria,
eligibility  representations  and portfolio  aging  limitations.  Based on these
eligibility representations, we are required to repurchase ineligible loans from
PRMCR.  For the six months ended June 30, 2003,  and during 2002, we repurchased
$74.7 million and $51.9 million, respectively, of ineligible loans from PRMCR.

Prior to our adoption of FIN 46, PRMCR was  capitalized  by equity  certificates
owned  by  third  party  investors  not  affiliated  with us or our  affiliates,
directors  or  officers.  The equity  holders bear the risk of loss on defaulted
mortgages.  At December 31, 2002, PRMCR had outstanding  equity  certificates of
$193.0 million.  PRMCR also issues short-term secured liquidity notes as well as
medium  term  notes to  provide  funds to  purchase  mortgage  loans from us. At
December  31,  2002,  PRMCR  had  outstanding  secured  liquidity  notes of $2.2
billion,  three-year  fixed term notes of $800.0 million and five-year  variable
term notes of $800.0 million.  All borrowings were  collateralized by the assets
of PRMCR.

We paid a commitment fee to PRMCR based on the overall  warehouse  limit.  PRMCR
used a portion of the fee to fund a cash collateral account maintained at PRMCR.
These funds are  available as  additional  collateral  to cover  credit  related
losses on defaulted mortgage loans. Prior to our adoption of FIN 46, the balance
in the account was $24.0  million at December  31,  2002,  and was  reflected in
other assets on our consolidated statements of financial position. We maintain a
right to the servicing of the mortgage loans held by PRMCR and retain  servicing
upon the sale of the majority of the mortgage loans to the final  investors.  As
the  servicer,  we  receive  a  monthly  servicing  fee and may earn  additional
incentive   servicing   fees  upon   successful   completion  of  our  servicing
responsibilities.  We received $13.7 million, $23.3 million and $12.6 million in
servicing and incentive  servicing fees from PRMCR for the six months ended June

                                      142

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

30, 2003, and in 2002 and 2001,  respectively.  Any unpaid and earned  incentive
fees as well as any  remaining  amounts in the cash  collateral  account will be
returned to us upon the termination of PRMCR. Additionally,  as the servicer, we
are  required to advance to PRMCR those  payments  due from  borrowers,  but not
received,  as of  specified  cutoff  dates.  In  addition,  we  perform  certain
secondary marketing,  accounting and various administrative  functions on behalf
of PRMCR.

In order to hedge  interest rate risk and  non-credit-related  market value risk
associated  with its inventory of mortgage  loans  held-for-sale,  PRMCR entered
into swaps with  non-affiliated  counterparties  that are  required  to maintain
certain minimum  ratings as approved by the rating  agencies.  Through  separate
swap agreements with the swap counterparties that mirror the original swaps with
PRMCR,  the  interest  rate  risk  and  non-credit-related   market  value  risk
components are swapped back to us.

In October 2000, our Mortgage  Banking segment  created a wholly owned,  special
purpose entity, Principal Residential Mortgage Funding, LLC ("PRMF"), to provide
an  off-balance-sheet  source of funding for up to $250.0  million of qualifying
delinquent  mortgage  loans.  The limit was  increased to $1.1 billion in August
2003. We sell qualifying delinquent FHA and VA mortgage loans to PRMF which then
transfers the loans to Principal  Residential  Mortgage EBO Trust ("Trust"),  an
unaffiliated  Delaware  business trust and a qualifying  special purpose entity.
The Trust funds its acquisitions of the mortgage loans by selling  participation
certificates,  representing  an undivided  interest in the Trust,  to commercial
paper  conduit  purchasers,  who  are  not  affiliated  with  us or  any  of our
affiliates, directors or officers. At December 31, 2003 and 2002, the Trust held
$653.4  million and $405.1  million in  mortgage  loans,  respectively,  and had
outstanding  participation  certificates  of $618.4 million and $382.8  million,
respectively.

Mortgage loans  typically  remain in the Trust until they are processed  through
the foreclosure claim process,  are paid off or reinstated.  Mortgage loans that
reinstate  are no longer  eligible to remain in the Trust and are required to be
removed  at  fair  market  value  at  the  monthly   settlement  date  following
reinstatement.

We are  retained  as the  servicer  of  the  mortgage  loans  and  also  perform
accounting  and  various  administrative  functions  on behalf  of PRMF,  in our
capacity as the managing member of PRMF. As the servicer, we receive a servicing
fee  pursuant to the  pooling and  servicing  agreement.  We may also  receive a
successful  servicing  fee only after all other  conditions  in the monthly cash
flow  distribution  are met. We  received  $34.7  million  and $23.4  million in
servicing  and   successful   servicing   fees  from  PRMF  in  2003  and  2002,
respectively.  At December 31, 2003 and 2002, our estimated residual interest in
such cash  flows was $50.9  million  and $32.7  million,  respectively,  and was
recorded in other assets on our consolidated  statements of financial  position.
The value of the residual  interest was estimated based on the net present value
of expected  cash flows from PRMF.  We are required to advance funds for payment
of interest on the  participation  certificates  and other  carrying  costs,  if
sufficient  cash is not available in the trust  collection  account to meet this
obligation.

Both the Trust and us, are  parties to a cost of funds hedge  agreement.  We pay
the weighted-average  cost of funds on the participation  certificates plus fees
and expenses and receive the  weighted-average  coupon of mortgage  loans in the
Trust less a spread.

Based on PRMF's  classification as a qualifying  special purpose entity pursuant
to the  guidance of SFAS No. 140,  ACCOUNTING  FOR  TRANSFERS  AND  SERVICING OF

                                      143

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INVESTMENTS (CONTINUED)

FINANCIAL  ASSETS AND  EXTINGUISHMENTS  OF  LIABILITIES - A REPLACEMENT  OF FASB
STATEMENT NO. 125 ("SFAS 140"),  PRMF is not required to be  consolidated  under
the provisions of FIN 46.

REAL ESTATE

Depreciation  expense on invested real estate was $34.4  million,  $31.8 million
and $20.2 million in 2003, 2002 and 2001, respectively. Accumulated depreciation
was  $199.6  million  and  $157.3  million  as of  December  31,  2003 and 2002,
respectively.

OTHER INVESTMENTS

Other  investments  include minority  interests in  unconsolidated  entities and
properties  owned  jointly with venture  partners and operated by the  partners.
Total assets of the  unconsolidated  entities  amounted to $4,285.1  million and
$3,637.9 million at December 31, 2003 and 2002, respectively.  Total revenues of
the  unconsolidated  entities were $752.9  million,  $618.8 million and $2,855.2
million in 2003,  2002 and 2001,  respectively.  During 2003,  2002 and 2001, we
included $40.3 million,  $19.2 million and $48.8 million,  respectively,  in net
investment  income  representing  our share of  current  year net  income of the
unconsolidated  entities.  Total  revenues  and  net  investment  income  of the
unconsolidated  entities during 2001 included our ownership interest in Coventry
Health Care, Inc. On February 1, 2002, we sold our minority interest in Coventry
Health  Care,  Inc.  (See  Note 4).  At  December  31,  2003 and  2002,  our net
investment  in  unconsolidated  entities  was $99.4  million and $22.3  million,
respectively,  which primarily  included our minority  interests in domestic and
international joint ventures and partnerships.

In the ordinary course of our business and as part of our investment operations,
we have also  entered  into  long  term  contracts  to make and  purchase  loans
aggregating  $1,012.0  million and $525.1 million at December 31, 2003 and 2002,
respectively.

Derivatives are reflected on our consolidated  statements of financial  position
and reported as a component of other investments. Certain seed money investments
are carried at fair value with  changes in fair value  included in net income as
net realized/unrealized capital losses.

7. SECURITIZATION TRANSACTIONS

COMMERCIAL MORTGAGE LOANS

We,  along  with  other   contributors,   sell  commercial   mortgage  loans  in
securitization  transactions  to trusts.  As these  trusts are  classified  as a
qualifying special purpose entity pursuant to the guidance of SFAS 140, they are
not  required  to be  consolidated  under  the  provisions  of FIN 46. We retain
primary servicing responsibilities and may retain other immaterial interests. We
receive annual servicing fees approximating  0.01%, which approximates cost. The
investors and the  securitization  entities have no recourse to our other assets
for failure of debtors to pay when due. The value of our  retained  interests is
subject primarily to credit risk.

In 2003 and 2002,  we  recognized  gains of $16.4  million  and  $17.2  million,
respectively, on the securitization of commercial mortgage loans.

                                      144

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SECURITIZATION TRANSACTIONS (CONTINUED)

Key economic assumptions used in measuring the retained interests at the date of
securitization  resulting  from  transactions  completed  included a  cumulative
default  rate  between 5% and 12% during  2003 and 6% and 11% during  2002.  The
assumed  range of the loss  severity,  as a percentage of defaulted  loans,  was
between 14% and 33% during 2003 and 12% and 32% during 2002.  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,  2003,  the fair values of  retained  interests  related to the
securitizations of commercial  mortgage loans were $255.4 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,  2003,  as a result of these
assumptions were not significant.

RESIDENTIAL MORTGAGE LOANS AND RESIDENTIAL MORTGAGE SERVICING RIGHTS

We  sell  residential  mortgage  loans  and  retain  servicing  responsibilities
pursuant to the terms of the applicable  servicing  agreements.  These sales are
generally  transacted  on a  non-recourse  basis.  In 2003,  2002 and  2001,  we
recognized  gains  of  $472.0  million,   $373.9  million  and  $237.2  million,
respectively, on the sales of residential mortgage loans. Essentially all of our
mortgage servicing rights are held by our Mortgage Banking segment

We  receive  annual  servicing  fees  approximating  0.41%  of  the  outstanding
principal balances on the underlying loans. The value of the servicing rights is
subject to prepayment and interest rate risks on the transferred  mortgage loans
and is  amortized  in  proportion  to,  and over the period  of,  estimated  net
servicing income.

Changes in capitalized mortgage servicing rights in our Mortgage Banking segment
were as follows (in millions):

                                                                              AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                            2003               2002
                                                                     ------------------  ------------------

Balance at beginning of year.......................................       $2,011.5            $1,910.0
Additions..........................................................        1,304.8             1,103.0
Sales..............................................................          (66.9)               (5.5)
Valuation adjustments due to hedge accounting......................          224.4              (631.0)
Release due to direct write-downs..................................         (666.4)                -
Amortization.......................................................         (434.8)             (364.9)
                                                                     ------------------  ------------------
                                                                           2,372.6             2,011.6
Valuation allowance................................................         (420.7)             (493.7)
                                                                     ------------------  ------------------
Balance at end of year.............................................       $1,951.9            $1,517.9
                                                                     ==================  ==================

                                      145

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SECURITIZATION TRANSACTIONS (CONTINUED)

To the extent that the carrying value of the servicing rights exceeds  estimated
fair value for any stratum, a valuation  allowance is established,  which may be
adjusted  in the  future as the  estimated  fair value of the  servicing  rights
increase or decrease.  Activity in the  valuation  allowance  for mortgage  loan
servicing rights is summarized as follows (in millions):

                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                           ------------------------------------------------
                                                                2003             2002            2001
                                                           ---------------  --------------- ---------------

Balance at beginning of year..............................      $493.7           $198.1        $    2.3
Sales.....................................................       (43.5)             -               -
Impairments...............................................       636.9            318.3           196.0
Recoveries................................................         -              (22.7)           (0.2)
Release due to direct write-downs.........................      (666.4)             -               -
                                                           ---------------  --------------- ---------------
Balance at end of year....................................      $420.7           $493.7        $  198.1
                                                           ===============  =============== ===============

Impairments reflect the decline in the fair value of unhedged mortgage servicing
rights  during  the years  presented.  Due to the  continuing  lack of an active
servicing market, we obtained  additional evidence to support our estimated fair
value at December 31, 2003. Based on this information,  we performed an analysis
of our mortgage  servicing  rights  portfolio,  which  resulted in an additional
impairment  charge of $141.3 million in our Mortgage Banking segment in December
2003.

During  2003,  we  established  a policy  of  further  evaluating  our  mortgage
servicing  rights valuation  allowance by identifying  portions of the allowance
that represent a permanent impairment (i.e., direct write-downs).  Each quarter,
we will  recognize  a direct  write-down  when the gross  carrying  value is not
expected to be recovered in the  foreseeable  future.  We estimate the amount of
direct  write-downs  based  on an  analysis  of the  mortgage  servicing  rights
valuation allowance related to loans that have prepaid.

The key  economic  assumptions  used in  estimating  the fair value of  mortgage
servicing  rights at the date of loan sale for sales completed in 2003, 2002 and
2001 were as follows:

                                                        2003               2002               2001
                                                 ----------------------------------------------------------

Weighted-average life (years)..................        6.78               6.42               7.84
Weighted-average prepayment speed..............       10.20%             11.91%              9.48%
Yield to maturity discount rate................        6.48%              6.75%              7.45%

Prepayment   speed  is  the  constant   prepayment  rate  that  results  in  the
weighted-average life disclosed above.

                                      146

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SECURITIZATION TRANSACTIONS (CONTINUED)

At December  31, 2003,  key  economic  assumptions  and the  sensitivity  of the
current  estimated fair value of the mortgage  servicing rights to immediate 10%
and 20%  adverse  changes  in those  assumptions  were as  follows  (dollars  in
millions):

Estimated fair value of mortgage servicing rights...................  $1,959.4
Expected weighted-average life (in years)...........................       5.7
Prepayment speed *..................................................      13.40%
  Decrease in estimated fair value of 10% adverse change............     $88.4
  Decrease in estimated fair value of 20% adverse change............    $168.9
Yield to maturity discount rate *...................................       7.45%
  Decrease in estimated fair value of 10% adverse change............    $111.6
  Decrease in estimated fair value of 20% adverse change............    $223.2

*  Represents the  weighted-average  prepayment  speed and discount rate for the
   life of the  mortgage  servicing  rights  asset  using  our  Option  Adjusted
   Spread/Monte Carlo simulation of 160 interest rate paths.

These  sensitivities  are hypothetical  and should be used with caution.  As the
figures  indicate,  changes in estimated  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  estimated  fair  value may not be
linear.  Also,  in the above  table,  the effect of a variation  in a particular
assumption  on the estimated  fair value of the  servicing  rights is calculated
independently without changing any other assumption.  In reality, changes in one
factor may result in changes in another,  which might magnify or counteract  the
sensitivities.  For example,  changes in prepayment speed estimates could result
in changes in the discount rate.

SECURITIZATION TRANSACTIONS CASH FLOWS

The table  below  summarizes  cash  flows for  securitization  transactions  (in
millions):

                                                          FOR THE YEAR ENDED DECEMBER 31,
                                         --------------------------------------------------------------------
                                                  2003                   2002                   2001
                                         ----------------------   -------------------- ----------------------

Proceeds from new securitizations.....        $59,351.4              $48,749.4              $39,200.6
Servicing fees received...............            488.7                  443.1                  307.8
Other cash flows received on
  retained interests..................             89.0                   74.9                   51.6

                                      147

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

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 our  asset/liability mix consistent with our risk
management activities.

Our  risk of loss is  typically  limited  to the fair  value  of our  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. We are
also  exposed  to  credit  losses  in  the  event  of   nonperformance   of  the
counterparties.  Our  current  credit  exposure  is  limited  to  the  value  of
derivatives  that have become  favorable to us. This credit risk is minimized by
purchasing such agreements from financial  institutions with high credit ratings
and by  establishing  and monitoring  exposure  limits.  We also utilize various
credit  enhancements,  including  collateral  and credit  triggers to reduce the
credit exposure to our derivative instruments.

Our derivative  transactions are generally  documented under International Swaps
and Derivatives  Association,  Inc. Master Agreements.  Management believes that
such agreements provide for legally enforceable set-off and close-out netting of
exposures to specific counterparties.  Under such agreements, in connection with
an  early  termination  of a  transaction,  we  are  permitted  to set  off  our
receivable  from a  counterparty  against our payables to the same  counterparty
arising out of all included transactions.

Prior to the application of the aforementioned  credit  enhancements,  the gross
exposure  to credit  risk  with  respect  to these  derivative  instruments  was
$1,197.3  million at December 31, 2003, and $424.4 million at December 31, 2002.
Subsequent to the application of such credit  enhancements,  the net exposure to
credit  risk was $862.8  million at December  31,  2003,  and $285.8  million at
December 31, 2002.

                                      148

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING (CONTINUED)

The notional amounts and credit exposure of our derivative financial instruments
by type were as follows (in millions):

                                                                                 AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                               2003                2002
                                                                     ------------------- ------------------
                                                                                     
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH
  REGARD TO U.S. OPERATIONS
Foreign currency swaps.............................................    $   2,823.4         $   3,217.0
Interest rate floors...............................................        1,650.0             1,650.0
Interest rate swaps................................................        8,158.9             9,719.2
Principal only swaps...............................................            -                 123.6
Mortgage-backed forwards and options...............................        4,892.3            17,494.9
Swaptions..........................................................        5,642.5             9,772.5
Bond forwards......................................................          467.2               363.7
Interest rate lock commitments.....................................        2,242.4             8,198.1
Call options.......................................................           30.0                30.0
U.S. Treasury futures..............................................           27.8               271.1
Currency forwards..................................................          282.0                 -
Treasury rate guarantees...........................................            -                  63.0
Credit default swap long...........................................          863.3               705.2
U.S. LIBOR.........................................................        4,380.0             2,225.0
Bond options.......................................................           17.5                 -
Other..............................................................            1.5                 -
                                                                     ------------------- ------------------
                                                                          31,478.8            53,833.3
NOTIONAL AMOUNTS OF DERIVATIVE INSTRUMENTS WITH
  REGARD TO INTERNATIONAL OPERATIONS
Currency forwards..................................................            -                   0.2
                                                                     ------------------- ------------------
Total notional amounts at end of year..............................    $  31,478.8         $  53,833.5
                                                                     =================== ==================
NET CREDIT EXPOSURE OF DERIVATIVE INSTRUMENTS WITH
  REGARD TO U.S. OPERATIONS
Foreign currency swaps.............................................    $     637.1         $     195.0
Interest rate floors...............................................            1.9                 1.7
Interest rate swaps................................................           89.6                48.4
Swaptions..........................................................           29.2                31.4
Call options.......................................................            6.6                 0.4
Currency forwards..................................................            0.3                 -
Bond forwards......................................................           52.2                 -
Credit default swap long...........................................           45.9                 8.9
                                                                     ------------------- ------------------
Total credit exposure at end of year...............................    $     862.8         $     285.8
                                                                     =================== ==================

                                      149

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING (CONTINUED)

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 derivative
instruments related to residential mortgage loan servicing rights is included in
the basis of the  derivatives.  These  derivatives are marked to market with the
changes in market  value  reported in  operating  expenses  on the  consolidated
statements of operations.

The fair value of our  derivative  instruments  classified as assets at December
31, 2003 and 2002, was $969.7  million and $1,129.9  million,  respectively.  Of
this  amount,  the fair value of  derivatives  related to  investment  hedges at
December 31, 2003 and 2002, was $736.4 million and $348.8 million, respectively,
and was reported with other invested  assets on the  consolidated  statements of
financial  position.  The  fair  value of  derivatives  related  to  residential
mortgage loan servicing  rights and  residential  mortgage loans at December 31,
2003 and 2002,  was $233.3  million and $781.1  million,  respectively,  and was
reported with other assets on the consolidated statements of financial position.
The fair value of derivative  instruments  classified as liabilities at December
31, 2003 and 2002, was $142.7 million and $454.4 million,  respectively, and was
reported  with other  liabilities  on the  consolidated  statements of financial
position.

FAIR VALUE HEDGES

We use  fixed-to-floating  rate  interest  rate swaps to more closely  align the
interest rate  characteristics  of certain assets and  liabilities.  In general,
these swaps are used in asset and liability management to modify duration.

We also enter into currency  exchange swap agreements to convert certain foreign
denominated  assets and liabilities into U.S. dollar  floating-rate  denominated
instruments  to eliminate  the exposure to future  currency  volatility on those
items.

We  recognized  a pretax net gain of $128.4  million,  $50.5  million  and $95.5
million in 2003, 2002 and 2001, respectively, relating to our fair value hedges.
These net gains consisted of the following components:

                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                  2003          2002         2001
                                                              ------------ --------------- ------------
                                                                             (IN MILLIONS)

Net gain (loss) related to the ineffective portion of our
  fair value hedges of residential mortgage loan servicing
  rights.....................................................     $ 18.1        $ (6.6)     $ 151.7
Net gain (loss)  related to the change in the value of the
  servicing  hedges that were excluded from the assessment
  of hedge effectiveness.....................................      119.8          77.1        (43.6)
Net loss related to the ineffective portion of
  our investment hedge.......................................       (9.5)        (20.0)       (12.6)
                                                              ------------ --------------- ------------
Net gain relating to fair value hedges.......................     $128.4        $ 50.5      $  95.5
                                                              ============ =============== ============

The net gain (loss) on servicing hedges was reported with operating expenses and
the net loss on our investment hedges was reported with net  realized/unrealized
capital losses on our consolidated statements of operations.

                                      150

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DERIVATIVES HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING (CONTINUED)

CASH FLOW HEDGES

We also utilize floating-to-fixed rate interest rate swaps to match cash flows.

We entered into currency  exchange swap agreements to convert both principal and
interest  payments of certain foreign  denominated  assets and liabilities  into
U.S.  dollar  denominated  fixed-rate  instruments  to eliminate the exposure to
future currency volatility on those items.

In 2003,  2002 and 2001,  we  recognized a $49.6  million,  $(74.5)  million and
$(5.8) million after-tax increase (decrease) in value, respectively,  related to
cash flow hedges in accumulated  other  comprehensive  income.  During this time
period,  none of our cash flow  hedges  have been  discontinued  because  it was
probable that the original forecasted  transaction would not occur by the end of
the originally  specified time period.  We reclassified  $54.6 million and $17.8
million net losses from  accumulated  comprehensive  income into earnings during
2003 and 2002, respectively (none was transferred during 2001), and we expect to
reclassify $5.2 million net losses in the next 12 months.

In most  cases,  zero  hedge  ineffectiveness  for cash flow  hedges is  assumed
because the  derivative  instrument was  constructed  such that all terms of the
derivative  match the  hedged  risk in the  hedged  item.  As a result,  we have
recognized   an   immaterial   amount  in  earnings   due  to  cash  flow  hedge
ineffectiveness.

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS

We attempt to match the timing of when interest rates are committed on insurance
products, residential mortgage loans and other new investments.  However, timing
differences may occur and can expose us to fluctuating interest rates. To offset
this  risk,  we  use  mortgage-backed  forwards,   over-the-counter  options  on
mortgage-backed securities, U.S. Treasury futures contracts, options on Treasury
futures, Treasury rate guarantees and interest rate floors to economically hedge
anticipated transactions and to manage interest rate risk. Futures contracts are
marked to market and settled  daily,  which  minimizes  the  counterparty  risk.
Forward contracts are marked to market no less than quarterly. Our interest rate
lock  commitments  on  residential  mortgage  loans  are also  accounted  for as
derivatives.

Occasionally,  we 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,   we  may  sell  an
investment-type  contract with attributes tied to market indices,  in which case
we write an equity call option to convert the overall contract into a fixed-rate
liability, essentially eliminating the equity component altogether. We have also
entered into credit  default  swaps to exchange the credit  default swap risk of
one bond  for that of  another.  We have  also  entered  into  currency  forward
agreements  to reduce the  exposure  to future  currency  volatility  in various
short-term foreign cash equivalents.

Although the  above-mentioned  derivatives are effective hedges from an economic
standpoint,  they do not meet the requirements  for hedge  accounting  treatment
under  SFAS  133.  As  such,  periodic  changes  in the  market  value  of these
instruments flow directly into net income. In 2003, 2002 and 2001, gains of $1.0
million,  $19.1  million and $68.3  million,  respectively,  were  recognized in
income from market value changes of derivatives not receiving  hedge  accounting
treatment.

In 2002, we entered into an interest rate swap as part of a structuring  process
of an investment grade  collateralized debt obligation ("CDO") issuance.  Due to
market  conditions,  the CDO was never  issued.  The pretax loss realized on the
termination of the interest rate swap was $17.3 million.

                                      151

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CLOSED BLOCK

In connection with the 1998 MIHC formation, Principal Life formed a Closed Block
to provide  reasonable  assurance to policyholders  included therein that, after
the  formation of the MIHC,  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 of Principal Life were allocated to the
Closed  Block in an  amount  that  produces  cash  flows  which,  together  with
anticipated  revenue from policies and  contracts  included in the Closed Block,
were expected to be sufficient to support the Closed Block policies,  including,
but not limited to, provisions for payment of claims, certain 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.  Due to adjustable life policies being
included in the Closed Block, the Closed Block is charged with amounts necessary
to  properly  fund for  certain  adjustments,  such as face  amount and  premium
increases,  that are made to these  policies  after the Closed  Block  inception
date.  These  amounts  are  referred  to as Funding  Adjustment  Charges and are
treated as capital transfers from the Closed Block.

Assets  allocated to the Closed Block inure solely 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 other similar assets and liabilities. Principal
Life will continue to pay guaranteed benefits under all policies,  including the
policies  within 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 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 their  general  funds.  No  additional
policies  were added to the Closed Block,  nor was the Closed Block  affected in
any other way, as a result of the demutualization.

A policyholder dividend obligation is required to be established for earnings in
the Closed Block that are not available to  shareholders.  A model of the Closed
Block was established to produce the pattern of expected  earnings in the Closed
Block (adjusted to eliminate the impact of related amounts in accumulated  other
comprehensive  income).  If actual  cumulative  earnings of the Closed Block are
greater  than the expected  cumulative  earnings of the Closed  Block,  only the
expected  cumulative  earnings  will be  recognized  in income  with the  excess
recorded as a  policyholder  dividend  obligation.  This  policyholder  dividend
obligation  represents  undistributed  accumulated earnings that will be paid to
Closed Block policyholders as additional policyholder dividends unless offset by
future  performance of the Closed Block that is less  favorable than  originally
expected. If actual cumulative performance is less favorable than expected, only
actual  earnings will be  recognized  in income.  At December 31, 2003 and 2002,
cumulative  actual  earnings have been less than cumulative  expected  earnings.
However, cumulative net unrealized gains were greater than expected resulting in
the recognition of a policyholder dividend obligation of $99.0 million and $33.6
million as of December 31, 2003 and 2002, respectively.

                                      152

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CLOSED BLOCK (CONTINUED)

Closed  Block  liabilities  and assets  designated  to the Closed  Block were as
follows:

                                                                        AS OF DECEMBER 31,
                                                        ---------------------------------------------------
                                                                   2003                      2002
                                                        ------------------------- -------------------------
                                                                            (IN MILLIONS)
                                                                                      
CLOSED BLOCK LIABILITIES
Future policy benefits and claims....................             $5,401.7                  $5,320.0
Other policyholder funds.............................                 30.7                      33.0
Policyholder dividends payable.......................                371.3                     374.3
Policyholder dividend obligation.....................                 99.0                      33.6
Other liabilities....................................                 42.9                      20.1
                                                        ------------------------- -------------------------
  Total Closed Block liabilities.....................              5,945.6                   5,781.0

ASSETS DESIGNATED TO THE CLOSED BLOCK
Fixed maturities, available-for-sale.................              2,864.1                   2,707.0
Equity securities, available-for-sale................                 80.7                      23.4
Mortgage loans.......................................                849.9                     862.9
Real estate..........................................                  1.9                       0.5
Policy loans.........................................                757.8                     776.1
Other investments....................................                 26.8                      19.8
                                                        ------------------------- -------------------------
  Total investments..................................              4,581.2                   4,389.7

Cash and cash equivalents (deficit)..................                 (6.0)                     (5.4)
Accrued investment income............................                 74.1                      77.5
Deferred tax asset...................................                 70.1                      68.5
Premiums due and other receivables...................                 28.1                      29.5
Other assets.........................................                 22.3                       -
                                                        ------------------------- -------------------------
  Total assets designated to the Closed Block........              4,769.8                   4,559.8
                                                        ------------------------- -------------------------
Excess of Closed Block liabilities over assets
  designated to the Closed Block.....................              1,175.8                   1,221.2

Amounts included in other comprehensive income.......                 74.6                      77.8
                                                        ------------------------- -------------------------
Maximum future earnings to be recognized from
  Closed Block assets and liabilities................             $1,250.4                  $1,299.0
                                                        ========================= =========================

                                      153

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CLOSED BLOCK (CONTINUED)

Closed Block revenues and expenses were as follows:

                                                            FOR THE YEAR ENDED DECEMBER 31,
                                             --------------------------------------------------------------
                                                   2003                2002                  2001
                                             ------------------  ------------------  ----------------------
                                                                     (IN MILLIONS)
                                                                               
REVENUES
Premiums and other considerations.........         $684.3             $ 710.0           $   742.1
Net investment income.....................          306.6               309.9               311.8
Net realized/unrealized capital losses....           (6.6)              (40.8)              (19.7)
                                             ------------------  ------------------  ----------------------
  Total revenues..........................          984.3               979.1             1,034.2

EXPENSES
Benefits, claims and settlement
  expenses................................          557.4               583.3               614.4
Dividends to policyholders................          298.6               305.2               305.8
Operating expenses........................            8.3                12.3                12.7
                                             ------------------  ------------------  ----------------------
  Total expenses..........................          864.3               900.8               932.9
                                             ------------------  ------------------  ----------------------
Closed Block revenue, net of Closed Block
  expenses, before income taxes...........          120.0                78.3               101.3
Income taxes..............................           39.5                25.2                33.5
                                             ------------------  ------------------  ----------------------
Closed Block revenue, net of Closed Block            80.5                53.1                67.8
  expenses and income taxes...............
Funding adjustment charges................          (31.9)               (3.5)               (7.6)
                                             ------------------  ------------------  ----------------------
Closed Block revenue, net of Closed Block
  expenses, income tax and funding
  adjustment charges......................         $ 48.6             $  49.6           $    60.2
                                             ==================  ==================  ======================

The change in maximum future earnings of the Closed Block was as follows:

                                                                        AS OF DECEMBER 31,
                                                         --------------------------------------------------
                                                                  2003                      2002
                                                         -----------------------  -------------------------
                                                                           (IN MILLIONS)

Beginning of year....................................        $  1,299.0                  $ 1,348.6
End of year..........................................           1,250.4                    1,299.0
                                                         -----------------------  -------------------------
Change in maximum future earnings....................        $    (48.6)                 $   (49.6)
                                                         =======================  =========================

Principal  Life  charges the Closed  Block with federal  income  taxes,  payroll
taxes,  state and local premium  taxes and other state or local taxes,  licenses
and fees as provided in the plan of reorganization.

                                      154

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. DEFERRED POLICY ACQUISITION COSTS

Policy  acquisition  costs deferred and amortized in 2003, 2002 and 2001 were as
follows (in millions):

                                                                    AS OF DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------

Balance at beginning of year.....................       $1,414.4           $1,372.5           $1,333.3
Cost deferred during the year....................          349.8              323.4              261.7
Amortized to expense during the year.............         (142.8)            (144.5)            (159.9)
Effect of unrealized gains.......................          (49.7)            (137.0)             (62.6)
                                                   ------------------ ------------------ ------------------
Balance at end of year...........................       $1,571.7           $1,414.4           $1,372.5
                                                   ================== ================== ==================

11. INSURANCE LIABILITIES

CONTRACTHOLDER FUNDS

Major  components  of  contractholder  funds in the  consolidated  statements of
financial position are summarized as follows (in millions):

                                                                              AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                            2003               2002
                                                                     ------------------- ------------------
                                                                                        
Liabilities for investment-type contracts:
  Guaranteed investment contracts..................................       $12,868.3           $13,894.4
  Funding agreements...............................................         9,336.2             6,246.3
  Other investment-type contracts..................................         1,563.4             1,775.3
                                                                     ------------------- ------------------
Total liabilities for investment-type contracts....................        23,767.9            21,916.0

Liabilities for individual annuities...............................         3,486.2             2,900.4
Universal life and other reserves..................................         1,648.4             1,498.6
                                                                     ------------------- ------------------
Total contractholder funds.........................................       $28,902.5           $26,315.0
                                                                     =================== ==================

Our 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 a minimum notice period.

Funding  agreements include those issued  domestically  directly to nonqualified
institutional  investors,  as well as to two separate programs where the funding
agreements are issued directly or indirectly to  unconsolidated  special purpose
entities.  Claims for  principal  and  interest  under  funding  agreements  are
afforded equal  priority to claims of life  insurance and annuity  policyholders
under insolvency provisions of Iowa Insurance Laws.

We are  authorized  to issue up to $4.0  billion of funding  agreements  under a
program  to  support  the  prospective  issuance  of  medium  term  notes  by an
unaffiliated entity in non-U.S.  markets.  Due to our adoption of FIN 46 in July
2003, we are no longer required to consolidate this program.  As of December 31,
2003  and  2002,  $3,618.7  million  and  $3,583.5  million,  respectively,  are
outstanding under this program.

                                      155

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INSURANCE LIABILITIES (CONTINUED)

In addition, we are authorized to issue up to $7.0 billion of funding agreements
under another program to support the  prospective  issuance of medium term notes
by an unaffiliated entity in both domestic and international  markets.  The $7.0
billion represents a $3.0 billion increase over the authorization  amount we had
at the end of 2002.  The  unaffiliated  entity is an  unconsolidated  qualifying
special purpose entity.  As of December 31, 2003 and 2002,  $5,613.4 million and
$2,555.0 million, respectively, are outstanding under this program.

FUTURE POLICY BENEFITS AND CLAIMS

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):

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------

Balance at beginning of year....................      $   699.3          $   714.8          $   705.0

Incurred:
  Current year..................................        1,572.3            1,588.3            1,597.1
  Prior years...................................          (24.7)               0.6              (17.5)
                                                   ------------------ ------------------ ------------------
Total incurred..................................        1,547.6            1,588.9            1,579.6

Payments:
  Current year..................................        1,304.6            1,333.2            1,283.2
  Prior years...................................          236.5              271.2              286.6
                                                   ------------------ ------------------ ------------------
Total payments..................................        1,541.1            1,604.4            1,569.8

Balance at end of year:
  Current year..................................          267.7              255.1              313.9
  Prior years...................................          438.1              444.2              400.9
                                                   ------------------ ------------------ ------------------
Total balance at end of year....................      $   705.8          $   699.3          $   714.8
                                                   ================== ================== ==================

The activity  summary in the  liability  for unpaid  accident and health  claims
shows an  increase  (decrease)  of $(24.7)  million,  $0.6  million  and $(17.5)
million  for the year ended  December  31,  2003,  2002 and 2001,  respectively,
relating to prior years.  Such liability  adjustments,  which  affected  current
operations  during  2003,  2002 and 2001,  respectively,  resulted  in part from
developed  claims for prior years being different than were anticipated when the
liabilities for unpaid accident and health claims were originally estimated.  In
addition,  in 2003 we  established a premium  deficiency  reserve on our medical
conversion  business  that was included in our  incurred but not reported  claim
reserve in prior years.  These trends have been considered in  establishing  the
current year liability for unpaid accident and health claims.  We also had claim
adjustment  expenses of $26.4  million,  $22.0  million and $23.3  million,  and
related reinsurance  recoverables of $2.5 million, $2.0 million and $1.4 million
in 2003, 2002 and 2001, respectively,  which are not included in the rollforward
above.

                                      156

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. DEBT

SHORT-TERM DEBT

The  components  of  short-term  debt as of December 31, 2003 and 2002,  were as
follows (in millions):

                                                                              AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                            2003               2002
                                                                     ------------------- ------------------

PRMCR secured liquidity notes.......................................     $   215.0           $     -
PRMCR fixed term notes..............................................         400.0                 -
Mortgage servicing rights financing.................................         300.0                 -
Commercial paper....................................................         399.8               157.5
Other recourse short-term debt......................................          27.0                38.6
Nonrecourse short-term debt.........................................         276.0               368.7
                                                                     ------------------- ------------------
Total short-term debt...............................................     $ 1,617.8           $   564.8
                                                                     =================== ==================

As of  December  31,  2003,  we had credit  facilities  with  various  financial
institutions in an aggregate  amount of $4.2 billion,  which consisted of a $2.2
billion PRMCR credit  facility and $2.0 billion in other credit  facilities.  We
consolidated  PRMCR in July 2003 as a result of adopting  FIN 46. See Note 5 for
more information regarding PRMCR. PRMCR can use the $2.2 billion credit facility
to issue  short-term  debt. As of December 31, 2003, PRMCR had $215.0 million of
short-term  secured  liquidity  notes  outstanding  under  this  facility.   All
borrowings are  collateralized  by the assets of PRMCR.  Of our other  remaining
credit  facilities,  as of December  31, 2003 and 2002,  we had $1.0 billion and
$564.8 million of outstanding  borrowings,  with $1.0 billion and $459.5 million
of assets pledged as support,  respectively.  Assets pledged consisted primarily
of mortgage servicing rights,  commercial  mortgages and securities.  Our credit
facilities  also  include a $600.0  million  back-stop  facility to provide 100%
support for our  commercial  paper  program,  of which there were no outstanding
balances as of December 31, 2003 and 2002.

PRMCR's $400.0  million  outstanding  short-term  debt in fixed term notes as of
December 31, 2003, was originally  issued under a separate  credit  facility for
long-term  borrowings.  Due to a maturity date of less than twelve months at the
time of  consolidation  in July 2003,  the fixed term notes were  classified  as
short-term debt. See the Long-Term Debt section for further discussion.

The weighted-average  interest rates on short-term borrowings as of December 31,
2003  and  2002,  were  2.9%  and  1.8%,  respectively.   Excluding  PRMCR,  the
weighted-average  interest  rates on  short-term  borrowings  as of December 31,
2003, was 1.6%.

LONG-TERM DEBT

The  components  of  long-term  debt as of December  31, 2003 and 2002,  were as
follows (in millions):

                                                                              AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                            2003               2002
                                                                     ------------------- ------------------

7.95% notes payable, due 2004.......................................     $   200.0           $   200.0
8.2% notes payable, due 2009........................................         464.0               463.9
7.875% surplus notes payable, due 2024..............................         199.0               199.0
8% surplus notes payable, due 2044..................................          99.2                99.1
PRMCR medium term notes.............................................       1,200.0                 -
PRMCR equity certificates...........................................         193.0                 -
Nonrecourse mortgages and notes payable.............................         340.7               248.0
Other mortgages and notes payable...................................          71.4               122.5
                                                                     ------------------- ------------------
Total long-term debt................................................     $ 2,767.3           $ 1,332.5
                                                                     =================== ==================

                                      157

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. DEBT (CONTINUED)

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.

At December 31, 2003,  PRMCR had a $1.8 billion of credit facility for long-term
debt, of which $1.4 billion of long-term debt was outstanding  ($1,200.0 million
in medium  term  notes and  $193.0  million  in equity  certificates).  In 2001,
$1,600.0 million in medium term notes were issued under this facility,  of which
$1,200.0 million was classified as long-term debt on our consolidated  statement
of financial  position as of December 31, 2003. The remaining  $400.0 million in
medium  term  notes  were   classified  as  short-term   debt  at  the  time  of
consolidation  in July 2003 due to the maturity  date ending in less than twelve
months.  Maturities for the long-term portion are three years for $400.0 million
and five years for $800.0 million. The three-year medium term notes have a fixed
rate. The five-year medium term notes pay interest based on LIBOR plus a spread.
The  weighted  average  interest  rate on the medium  term notes  classified  as
long-term debt was 2.46% at December 31, 2003.  Equity  certificates were issued
in 2000 and 2001, of which $193.0 million remains as outstanding  long-term debt
as of December 31, 2003. The equity  certificates have a five-year  maturity and
pay interest based on LIBOR plus a spread. The weighted average interest rate on
the equity certificates was 2.86% at December 31, 2003. All PRMCR borrowings are
collateralized by the assets of PRMCR.

On August 25, 1999, Principal Financial Group (Australia) Holdings Pty. Limited,
a  wholly  owned  indirect  subsidiary,   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. On December 28, 2001, all of the long-term debt  obligations of Principal
Financial Group (Australia)  Holdings Pty. Limited were assumed by their parent,
Principal Financial Services, Inc.

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.
None of our affiliates  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, 2003, 2002 and 2001, interest
of $23.8 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.

                                      158

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. DEBT (CONTINUED)

The  mortgages  and  other  notes  payable  are   financings   for  real  estate
developments.  We, including certain subsidiaries,  had $192.5 million in credit
facilities with various financial  institutions,  in addition to obtaining loans
with  various  lenders  to finance  these  developments.  Outstanding  principal
balances as of December 31, 2003,  range from $0.4 million to $99.9  million per
development with interest rates generally ranging from 6.0% to 8.6%. Outstanding
principal  balances as of December 31,  2002,  range from $0.2 million to $100.9
million per development with interest rates generally ranging from 6.0% to 8.6%.
Outstanding debt is secured by the underlying real estate properties, which were
reported as real estate on our  consolidated  statements  of financial  position
with a carrying  value of $319.2  million and $260.4  million as of December 31,
2003 and 2002, respectively.

At December 31, 2003,  future annual  maturities  of the long-term  debt were as
follows (in millions):

2004................................................................. $   779.4
2005.................................................................      74.4
2006.................................................................     971.3
2007.................................................................      98.2
2008.................................................................      76.2
Thereafter...........................................................     767.8
                                                                     -----------
Total future maturities of the long-term debt........................  $2,767.3
                                                                     ===========

Cash paid for  interest  for 2003,  2002 and 2001,  was $150.4  million,  $117.0
million and $126.5 million, respectively. These amounts include interest paid on
taxes during these years.  Cash paid for interest in 2003 includes $37.6 million
of interest paid by PRMCR.

13. INCOME TAXES

Our income tax expense from continuing operations was as follows (in millions):

                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------------
                                                           2003               2002               2001
                                                     ------------------ ------------------ ------------------
                                                                                       
Current income taxes (benefit):
  U.S. federal.....................................     $    88.0            $ (40.2)           $  30.7
  State and foreign................................          41.1               41.7               29.0
  Net realized/unrealized capital losses...........        (119.9)             (74.3)            (214.1)
                                                     ------------------ ------------------ ------------------
Total current income taxes (benefit)...............           9.2              (72.8)            (154.4)
Deferred income taxes..............................         216.6              118.7              237.8
                                                     ------------------ ------------------ ------------------
Total income taxes.................................     $   225.8            $  45.9            $  83.4
                                                     ================== ================== ==================

                                      159

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. INCOME TAXES (CONTINUED)

Our 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  pretax  income  and our  effective  tax rate on  pretax  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 from continuing operations is as follows:

                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------------------
                                                         2003               2002               2001
                                                   ------------------ ------------------ ------------------

Statutory corporate tax rate....................          35%                35%                35%
Dividends received deduction....................          (6)               (11)               (13)
Interest exclusion from taxable income..........          (1)                (2)                (3)
Federal tax settlement for prior years..........          (3)               (17)                 -
Other...........................................          (1)                 2                 (1)
                                                   ------------------ ------------------ ------------------
Effective tax rate..............................          24%                 7%                18%
                                                   ================== ================== ==================

Significant  components  of our net  deferred  income  taxes were as follows (in
millions):

                                                                              AS OF DECEMBER 31,
                                                                     --------------------------------------
                                                                            2003               2002
                                                                     ------------------- ------------------
                                                                                     
Deferred income tax assets (liabilities):
  Insurance liabilities............................................    $    426.7          $    263.1
  Deferred policy acquisition costs................................        (512.6)             (446.0)
  Net unrealized gains on available-for-sale securities............        (673.3)             (430.1)
  Mortgage loan servicing rights...................................        (482.5)             (429.6)
  Other............................................................        (382.6)             (118.2)
                                                                     ------------------- ------------------
Total net deferred income tax liabilities..........................    $ (1,624.3)         $ (1,160.8)
                                                                     =================== ==================

At December 31, 2003 and 2002,  respectively,  our net deferred tax liability is
comprised of  international  net deferred tax assets of $19.7  million and $16.9
million  which have been  included  in other  assets and  $1,644.0  million  and
$1,177.7  million of U.S. net deferred tax liabilities  which have been included
in deferred income taxes in the consolidated statements of financial position.

The Internal  Revenue Service (the  "Service") has completed  examination of the
U.S.  consolidated  federal  income tax  returns for 1998 and prior  years.  The
Service has also begun to examine  returns for 1999,  2000 and 2001.  We believe
that there are  adequate  defenses  against  or  sufficient  provisions  for any
challenges.

U.S  Federal and state  income  taxes have not been  provided  on  approximately
$117.0   million  of   accumulated   but   undistributed   earnings  of  foreign
subsidiaries,  as such earnings are considered to be indefinitely  reinvested in
the business.  Determining the amount of the unrecognized deferred tax liability
that would  arise if these  earnings  were  remitted is not  practicable  due to
foreign tax  credits and  exclusions  that may become  available  at the time of
remittance.  A tax liability will be recognized  when we expect  distribution of
earnings in the form of dividends, sale of the investment or otherwise.

Net cash received for income taxes in 2003 and 2002 was $72.0 million and $189.3
million, respectively, primarily due to refunds for the 2002 loss on the sale of
BT Financial  Group,  2001 capital  losses and the  favorable  settlement  of an
Internal  Revenue  Service  audit issue.  Cash paid for income taxes in 2001 was
$76.4 million.

                                      160

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS

We  have  defined  benefit  pension  plans  covering  substantially  all  of our
employees and certain agents. Some of these plans provide  supplemental  pension
benefits to employees  with salaries  and/or  pension  benefits in excess of the
qualified  plan limits  imposed by federal tax law. The employees and agents are
generally  first eligible for the pension plans when they reach age 21. For plan
participants  employed prior to January 1, 2002, the pension  benefits are based
on the greater of a final  average pay benefit or a cash  balance  benefit.  The
final  average pay benefit is 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 final average pay 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
cash  balance  portion of the plan  started on  January 1, 2002.  An  employee's
account will be credited with an amount based on the employee's  salary, age and
service. These credits will accrue with interest. For plan participants hired on
and after January 1, 2002, only the cash balance plan applies.  Our policy is to
fund the cost of providing  pension benefits in the years that the employees and
agents are providing service to us. Our funding policy for the qualified defined
benefit plan is to contribute  an amount  annually at least equal to the minimum
annual  contribution  required under the Employee Retirement Income Security Act
("ERISA"),  and,  generally,  not greater  than the  maximum  amount that can be
deducted  for  federal   income  tax  purposes.   Our  funding  policy  for  the
non-qualified  benefit plan is to fund the plan in the years that the  employees
are providing  service to us using a methodology  similar to the  calculation of
the net periodic benefit cost under U.S. GAAP, but using long-term  assumptions.
However,  if the U.S. GAAP funded status is positive,  no deposit is made. While
we fund this plan,  the assets are not  included  as part of the asset  balances
presented  in this  footnote as they do not qualify as assets under SFAS No. 87,
EMPLOYERS'  ACCOUNTING FOR PENSIONS,  ("SFAS 87"), however, they are included in
our consolidated statements of financial position.

We also provide  certain health care, life insurance and long-term care benefits
for retired  employees.  Subsidized  retiree  health  benefits  are provided for
employees  hired prior to January 1, 2002.  Employees  hired after  December 31,
2001,  will have access to retiree health  benefits but will need to pay for the
full  cost  of the  coverage.  The  health  care  plans  are  contributory  with
participants'  contributions  adjusted annually;  the contributions are based on
the number of years of service  and age at  retirement  for those hired prior to
January  1,  2002.  As  part  of  the  substantive   plan,  the  retiree  health
contributions  are assumed to be adjusted in the future as claim levels  change.
The life  insurance  plans  are  contributory  for a small  group of  previously
grandfathered participants that have elected supplemental coverage and dependent
coverage.

Covered  employees  are first  eligible for the medical and life  postretirement
benefits when they reach age 57 and have completed ten years of service with us.
Retiree  long-term care benefits are provided for employees whose retirement was
effective prior to July 1, 2000.  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.  Our policy is to fund the cost of
providing retiree benefits in the years that the employees are providing service
to us using a methodology similar to the calculation of the net periodic benefit
cost under U.S. GAAP, but using long-term assumptions. However, if the U.S. GAAP
funded status is positive, no deposit is made.

We use a measurement date of October 1 for the pension and other  postretirement
benefit plans.

                                      161

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

 OBLIGATIONS AND FUNDED STATUS

The plans'  combined  funded  status,  reconciled  to amounts  recognized in the
consolidated  statements of financial  position and  consolidated  statements of
operations, was as follows (in millions):

                                                                                  OTHER POSTRETIREMENT
                                                     PENSION BENEFITS                   BENEFITS
                                               ----------------------------- ------------------------------
                                                    AS OF DECEMBER 31,            AS OF DECEMBER 31,
                                               ----------------------------- ------------------------------
                                                   2003           2002           2003            2002
                                               -------------  -------------- -------------- ---------------
                                                                                   
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.....     $(1,046.4)     $  (856.0)      $ (280.2)      $ (231.1)
Service cost................................         (49.0)         (36.5)         (12.3)          (9.4)
Interest cost...............................         (66.9)         (63.0)         (17.9)         (17.8)
Actuarial gain (loss).......................         (65.5)        (124.4)          55.0          (36.6)
Participant contributions...................           -              -             (2.5)          (1.5)
Benefits paid...............................          38.1           33.5            9.7            8.9
Other.......................................          (1.7)           -             (5.1)           7.3
                                               -------------  -------------- -------------- ---------------
Benefit obligation at end of year...........     $(1,191.4)     $(1,046.4)      $ (253.3)      $ (280.2)
                                               =============  ============== ============== ===============
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
  of year...................................     $   893.3      $   952.5       $  354.0       $  362.3
Actual return (loss) on plan assets.........         140.5          (32.2)          31.5           (2.2)
Employer contribution.......................          37.8            6.5            0.5            1.3
Participant contributions...................           -              -              2.5            1.5
Benefits paid...............................         (38.1)         (33.5)          (9.7)          (8.9)
                                               -------------  -------------- -------------- ---------------
Fair value of plan assets at end of year....     $ 1,033.5      $   893.3       $  378.8       $  354.0
                                               =============  ============== ============== ===============

Funded (underfunded) status.................     $  (157.9)     $  (153.1)      $  125.5       $   73.8
Unrecognized net actuarial loss.............         165.6          183.7            7.3           70.7
Unrecognized prior service cost (benefit)...           6.0            5.9          (24.4)         (32.6)
Unamortized transition asset................          (0.1)          (0.5)           -              -
                                               -------------  -------------- -------------- ---------------
Net amount recognized.......................     $    13.6      $    36.0       $  108.4       $  111.9
                                               =============  ============== ============== ===============
AMOUNTS RECOGNIZED IN STATEMENT OF
  FINANCIAL POSITION CONSIST OF
Prepaid benefit cost........................     $   166.7      $   175.1       $  109.0       $  112.5
Accrued benefit liability including
  minimum liability.........................        (157.0)        (139.1)          (0.6)          (0.6)
Accumulated other comprehensive income......           3.9            -              -              -
                                               -------------  -------------- -------------- ---------------
Net amount recognized.......................     $    13.6      $    36.0       $  108.4       $  111.9
                                               =============  ============== ============== ===============

Employer  contributions to the pension plans include contributions made directly
to the qualified pension plan assets and contributions  from corporate assets to
pay  nonqualified  pension  benefits.  Nonqualified  pension plan assets are not
included as part of the asset balances  presented in this  footnote,  as they do
not  qualify  as assets  under SFAS 87.  Benefits  paid from the  pension  plans
include both qualified and nonqualified plan benefits.

                                      162

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

Employees of Professional  Pensions, Inc ("PPI") are eligible for coverage under
the pension plans,  which was reflected in 2003.  For 2002, the higher  benefits
and compensation limits of the Economic Growth and Tax Relief Reconciliation Act
of 2001 were recognized in the accounting of the defined benefit plans.

The  pension  plans'  gains  and  losses  are  amortized  using a  straight-line
amortization method over the average remaining service period of employees.  For
the qualified  pension plan, there is no corridor  recognized in determining the
amount to amortize;  for the  nonqualified  pension plans,  the corridor allowed
under SFAS 87 is used.

Effective  for 2004,  we moved to a 100% self insured  medical plan for both the
active and retiree participants.  A co-pay structure that varies by benefit type
and a coinsurance  provision  were added to the plans.  Due to the changes,  the
premium structures and associated participant  contribution rates changed. These
changes were  reflected in 2003 and  increased  the  accumulated  postretirement
benefit  obligation by $5.1  million.  Effective for 2003, we amended the method
for  determining  postretirement  retiree health plan  contributions  for future
years.  As a result of this change,  the accumulated  postretirement  obligation
decreased by $7.2 million in 2002.

Also  effective  January  1, 2004,  a $1.0  million  cap on active  and  retiree
employer-provided life insurance was implemented. This cap only affected a small
group of previously  grandfathered  employees. For those currently over the $1.0
million  amount,  their  cap will be set  equal to  their  coverage  level as of
January 1, 2004. This change was reflected in 2003 and resulted in a decrease in
the accumulated postretirement benefit obligation by $0.1 million.

An actuarial  liability gain of $55.0 million occurred during 2003 for the other
postretirement  benefit plans. This was due to the demographic experience of the
active employees (higher turnover rates than expected),  a change in demographic
assumptions including an increase in the turnover rates which more appropriately
reflects past experience and our  expectations  for the future and only a slight
increase in our claim cost per capita  assumptions  from last year.  Claim costs
are developed by looking at the plan's actual  experience.  Slightly  offsetting
these gains was a loss created by a lower discount rate assumption.

The  accumulated  benefit  obligation for all defined  benefit pension plans was
$976.8 million and $837.4 million at December 31, 2003, and 2002, respectively.

INFORMATION FOR PENSION PLANS WITH AN ACCUMULATED  BENEFIT  OBLIGATION IN EXCESS
OF PLAN ASSETS:

The obligations below relate only to the nonqualified  pension plan liabilities.
The  nonqualified  plans have assets that are housed in trusts that fail to meet
the  requirements  to be included in plan assets under SFAS 87,  however,  these
assets are included in our consolidated statements of financial position.

                                                     AS OF DECEMBER 31,
                                         ---------------------------------------
                                              2003                   2002
                                         --------------------  -----------------
                                                       (IN MILLIONS)

Projected benefit obligation......        $  224.0                  $  180.6
Accumulated benefit obligation....           157.0                     125.1

                                      163

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

INFORMATION  FOR  OTHER   POSTRETIREMENT   BENEFIT  PLANS  WITH  AN  ACCUMULATED
POSTRETIREMENT BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS:

                                                     AS OF DECEMBER 31,
                                         ---------------------------------------
                                              2003                   2002
                                         --------------------  -----------------
                                                      (IN MILLIONS)
Accumulated postretirement benefit
  obligation.........................      $  88.3                 $ 90.2
Fair value of plan assets............         84.6                   80.0

COMPONENTS OF NET PERIODIC BENEFIT COST (IN MILLIONS):

                                       PENSION BENEFITS                     OTHER POSTRETIREMENT BENEFITS
                             ----------------------------------------- ------------------------------------
                                FOR THE YEAR ENDED DECEMBER 31,           FOR THE YEAR ENDED DECEMBER 31,
                             ----------------------------------------- ------------------------------------
                                2003          2002          2001          2003       2002         2001
                             ----------- ------------- --------------- ----------- ---------- -------------

Service cost...............    $  49.0      $ 36.5        $  31.2       $ 12.3     $  9.4      $  8.3
Interest cost..............       66.9        63.0           59.3         17.9       17.8        15.6
Expected return on plan
  assets...................      (74.8)      (84.6)         (99.2)       (25.8)     (32.8)      (32.3)
Amortization of prior
  service cost
  (benefit)................        1.7         1.7            1.7         (3.2)      (2.7)       (2.6)
Amortization of transition
  (asset) obligation.......       (0.5)       (2.2)         (11.5)         -          -           0.3
Recognized net actuarial
  (gain) loss..............       17.9        (7.9)         (14.1)         2.7        0.2        (1.3)
                             ----------- ------------- --------------- ----------- ---------- -------------
Net periodic benefit cost
  (income).................    $  60.2      $  6.5        $ (32.6)      $  3.9     $ (8.1)     $(12.0)
                             =========== ============= =============== =========== ========== =============

ADDITIONAL INFORMATION:

                                                                       OTHER POSTRETIREMENT
                                         PENSION BENEFITS                     BENEFITS
                                     -------------------------    ----------------------------------
                                                          FOR THE YEAR ENDED DECEMBER 31,
                                     ---------------------------------------------------------------
                                       2003           2002             2003               2002
                                     ----------    -----------    ---------------    ---------------
                                                               (IN MILLIONS)
                                                                             
Increase in minimum liability
  included in other
  comprehensive income...........     $ 3.9          $  -             N/A                N/A

                                      164

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

ASSUMPTIONS:

WEIGHTED-AVERAGE  ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS AS DISCLOSED
UNDER THE OBLIGATIONS AND FUNDED STATUS SECTION

                                                                             OTHER POSTRETIREMENT
                                                 PENSION BENEFITS                  BENEFITS
                                            ---------------------------    ------------------------
                                                       FOR THE YEAR ENDED DECEMBER 31,
                                            -------------------------------------------------------
                                               2003          2002             2003         2002
                                            ------------ --------------    ------------ -----------

Discount rate............................      6.25%         6.50%            6.25%       6.50%
Rate of compensation increase............      5.00%         5.00%            5.00%       5.00%

WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST

                                      PENSION BENEFITS              OTHER POSTRETIREMENT BENEFITS
                               -------------------------------    ---------------------------------
                                                       FOR THE YEAR ENDED DECEMBER 31,
                               --------------------------------------------------------------------
                                 2003       2002       2001         2003        2002       2001
                               ---------- ---------- ---------    ---------- ----------- ----------

Discount rate...............     6.50%      7.50%     8.00%         6.50%      7.50%       8.00%
Expected long-term return
   on plan assets...........     8.50%      9.00%     9.00%         7.36%      9.11%       9.02%
Rate of compensation
   increase.................     5.00%      5.00%     5.80%         5.00%      5.00%       5.80%

For  other  postretirement  benefits,  the  7.36%  rate for 2003 is based on the
weighted  average  expected  long-term  asset  returns for the health,  life and
long-term  care plans.  The expected  long-term  rates for the health,  life and
long-term care plans are 7.25%, 8.25% and 8.25%, respectively.

The expected  return on plan assets is set at the long-term  rate expected to be
earned based on the long-term  investment  strategy of the plans and the various
classes of the invested  funds.  For each asset class, a long-term  asset return
assumption is developed  taking into account the long-term  level of risk of the
asset and the tax status of the plan  trusts.  Historical  returns  of  multiple
asset classes were  analyzed to develop risk premiums for each asset class.  The
risk  premiums  take into account the  long-term  level of risk of the asset.  A
long-term risk-free real rate of return was also developed. The overall expected
rate for each asset class was  developed  by  combining  a  long-term  inflation
component, the risk-free real rate of return, and the associated risk premium. A
weighted  average  expected  long-term  rate was  developed  based on  long-term
returns for each asset class and the target asset allocation of the plan.

ASSUMED HEALTH CARE COST TREND RATES

                                                             FOR THE YEAR ENDED DECEMBER 31,
                                                          -------------------------------------------
                                                                 2003                    2002
                                                          -------------------     -------------------
                                                                                  
Health care cost trend rate assumed for next year.....          12.5%                   15.0%
Rate to which the cost trend rate is assumed to
  decline (the ultimate trend rate)...................           5.0%                    5.0%
Year that the rate reaches the ultimate trend rate....           2010                    2009

                                      165

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

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..........        $   9.5            $   (7.4)
Effect on accumulated postretirement benefit obligation..........           38.1               (31.1)

PENSION PLAN ASSETS

The pension plan's  weighted-average  asset allocations by asset category are as
follows:

                                                                         PLAN ASSETS AS OF OCTOBER 1,
                                                                    ---------------------------------------
                                                                           2003                2002
                                                                    ------------------- -------------------
                                                                                         
ASSET CATEGORY
Domestic equity securities........................................          58%                 41%
International equity securities...................................          10                  14
Domestic debt securities..........................................          27                  40
Real estate.......................................................           5                   5
                                                                    ------------------- -------------------
   Total                                                                   100%                100%
                                                                    =================== ===================

Our investment strategy is to achieve the following:

o    Obtain a  reasonable  long-term  return  consistent  with the level of risk
     assumed  and at a cost of  operation  within  prudent  levels.  Performance
     benchmarks are monitored.
o    Ensure  that  sufficient  cash  is on hand to  meet  the  emerging  benefit
     liabilities for the plan.
o    Provide  for  diversification  of  assets in an effort to avoid the risk of
     large  losses  and  maximize  the  investment  return to the  pension  plan
     consistent with market and economic risk.

In  administering  the qualified  pension plan's asset allocation  strategy,  we
consider the projected  liability stream of benefit  payments,  the relationship
between  current and projected  assets of the plan and the  projected  actuarial
liabilities streams, the historical  performance of capital markets adjusted for
the perception of future short- and long-term capital market performance and the
perception of future economic conditions.

The overall target asset allocation for the qualified plan assets is:

ASSET CATEGORY                                              TARGET ALLOCATION
- -------------------------                             --------------------------
Domestic equity securities.......................           40%-60%
International equity securities..................            5%-15%
Domestic debt securities.........................           20%-30%
International debt securities....................             0%-7%
Real estate......................................            3%-10%
Other............................................             0%-7%

                                      166

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

For 2003 and 2002, respectively, the plan assets include $66.8 million and $79.4
million in Principal  Financial Group stock held under a separate  account under
an annuity contract. These assets were received in the qualified defined benefit
plan as a result  of the  demutualization.  For  2001,  the  value of the  stock
received in the demutualization was $56.7 million,  which was amortized over the
remaining  service  period  of plan  participants.  We have a plan in  place  to
liquidate these holdings, which we are planning to complete in 2005.

OTHER POSTRETIREMENT BENEFIT PLANS' ASSETS

The other postretirement  benefit plans'  weighted-average  asset allocations by
asset category are as follows:

                                                                        PLAN ASSETS AS OF OCTOBER 1,
                                                                   ---------------------------------------
                                                                          2003                2002
                                                                   ------------------- -------------------
                                                                                        
ASSET CATEGORY
Equity securities.................................................         47%                 40%
Debt securities...................................................         53                  60
                                                                   ------------------- -------------------
  Total...........................................................        100%                100%
                                                                   =================== ===================

The  weighted  average  target  asset  allocation  for the other  postretirement
benefit plans is:

ASSET CATEGORY                                         TARGET ALLOCATION
                                                   -------------------------
Equity securities...........................               40-60%
Debt securities.............................               40-60%

The  investment  strategies  and policies for the other  postretirement  benefit
plans are similar to those  employed by the  qualified  pension  plan,  but with
respect to our retiree health, life and long-term care plans.

In 2001, as a result of the demutualization,  the other  postretirement  benefit
plans  received  $11.3  million in  compensation,  which was used to pay benefit
claims and  participant  contributions,  with the remainder to be amortized over
the remaining service period of plan participants.

CONTRIBUTIONS

We expect to contribute roughly $1.0 million to our other postretirement benefit
plans in 2004. Our funding policy for the qualified  pension plan is to fund the
plan  annually in an amount at least equal to the  minimum  annual  contribution
required  under ERISA and,  generally,  not greater than the maximum amount that
can be deducted for federal  income tax purposes.  We don't  anticipate  that we
will be  required  to fund a minimum  annual  contribution  under  ERISA for the
qualified  pension  plan.  At this time,  it is too early to estimate the amount
that may be  contributed,  but it is possible that we may fund the plans in 2004
in the range of $10-$50  million.  This includes  funding for both our qualified
and nonqualified plans.

                                      167

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

The  information  that follows shows  supplemental  information  for our defined
benefit  pension  plans.  Certain  key  summary  data is  shown  separately  for
qualified and non-qualified plans (in millions).

                                                      FOR THE YEAR ENDED DECEMBER 31,
                              ---------------------------------------------------------------------------------
                                               2003                                     2002
                              --------------------------------------- -----------------------------------------
                               QUALIFIED   NONQUALIFIED                QUALIFIED   NONQUALIFIED
                                  PLAN        PLANS        TOTAL         PLAN         PLANS            TOTAL
                              --------------------------------------- -----------------------------------------

Benefit obligation, end of
  the year..................    $  (967.4)   $ (224.0)    $(1,191.4)     $(865.8)    $(180.6)       $(1,046.4)
Fair value of plan assets,
  end of the year...........      1,033.5         -         1,033.5        893.3         -              893.3
                              --------------------------------------- -----------------------------------------
Funded (underfunded) status.         66.1      (224.0)       (157.9)        27.5      (180.6)          (153.1)
Unrecognized net actuarial
   loss.....................         85.5        80.1         165.6        132.1        51.6            183.7
Unrecognized prior service
   cost (benefit)...........         15.3        (9.3)          6.0         17.4       (11.5)             5.9
Unrecognized transition
   (asset) liability........         (0.2)        0.1          (0.1)        (1.9)        1.4             (0.5)
                              --------------------------------------- -----------------------------------------
Net amount recognized.......    $   166.7    $ (153.1)    $    13.6      $ 175.1     $(139.1)       $    36.0
                              ======================================= =========================================
AMOUNTS RECOGNIZED IN
  STATEMENT OF FINANCIAL
  POSITION
Prepaid benefit cost........    $   166.7    $    -       $   166.7      $ 175.1     $   -          $   175.1
Accrued benefit liability
  including minimum
  liability.................          -        (157.0)       (157.0)         -        (139.1)          (139.1)
Accumulated other
  comprehensive income......          -           3.9           3.9          -           -                -
                              --------------------------------------- -----------------------------------------
Net amount recognized.......    $   166.7    $ (153.1)    $    13.6      $ 175.1     $(139.1)       $    36.0
                              ======================================= =========================================
COMPONENTS OF NET
  PERIODIC BENEFIT COST
Service cost................    $    41.5    $    7.5     $    49.0      $  31.4     $   5.1        $    36.5
Interest cost...............         55.4        11.5          66.9         52.1        10.9             63.0
Expected return on plan
  assets....................        (74.8)        -           (74.8)       (84.6)        -              (84.6)
Amortization of prior
  service cost (benefit)....          3.7        (2.0)          1.7          2.9        (1.2)             1.7
Amortization of transition
  (asset) obligation........         (1.6)        1.1          (0.5)        (3.2)        1.0             (2.2)
Recognized net actuarial
  (gain) loss...............         14.3         3.6          17.9         (8.8)        0.9             (7.9)
                              --------------------------------------- -----------------------------------------
Net periodic benefit cost
  (income)..................    $    38.5    $   21.7     $    60.2      $ (10.2)    $  16.7        $     6.5
                              ======================================= =========================================

                                      168

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. EMPLOYEE AND AGENT BENEFITS (CONTINUED)

In addition,  we have defined contribution plans that are generally available to
all employees and agents who are age 21 or older.  Eligible  participants  could
not contribute more than $12,000 of their  compensation to the plans in 2003. We
match the participant's  contribution at a 50% contribution rate up to a maximum
contribution of 3% of the participant's  compensation.  The defined contribution
plans allow employees to choose among various investment options,  including our
common stock. Effective September 1, 2002, the employer stock fund was converted
to an employee stock ownership plan. We contributed $18.5 million, $20.2 million
and $18.9 million in 2003, 2002 and 2001, respectively, to our qualified defined
contribution plans.

We also have a nonqualified defined contribution plan available to employees and
agents  who are age 21 and over and whose  annual  compensation  is in excess of
limits imposed by federal tax law. We match the participant's  contribution at a
50% contribution  rate up to a maximum  contribution of 3% of the  participant's
compensation.  We  contributed  $3.7  million,  $3.5 million and $1.5 million in
2003, 2002 and 2001,  respectively,  to our  nonqualified  defined  contribution
plans.

As a result of the  demutualization,  the defined  contribution  plans  received
$19.7 million in compensation, which was allocated to participant accounts.

On  December  8,  2003  the  Medicare   Prescription   Drug,   Improvement   and
Modernization  Act of 2003 ("the Act") was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health benefits.  The benefit obligations and net
periodic  postretirement  benefit costs do not reflect the effects of the Act on
the retiree  medical  plans in  accordance  with FASB Staff  Position FAS 106-1,
"ACCOUNTING  AND DISCLOSURE  REQUIREMENTS  RELATED TO THE MEDICARE  PRESCRIPTION
DRUG,  IMPROVEMENT  AND  MODERNIZATION  ACT  OF  2003".  Specific  authoritative
guidance on the accounting for the federal subsidy is pending and that guidance,
when issued,  could require us to change  previously  reported  information.  We
believe our plan would be  actuarially  equivalent  to the new  Medicare  Part D
prescription  drug plan and thus  would be  eligible  for the  federal  subsidy.
However, it is anticipated that the plan would need to be amended to clarify how
the plan would  operate  with  respect to the new  legislation.  The Act will be
reflected  once  the  plan is  amended  or FASB  issues  finalized  guidance  on
accounting for the impact of the Act.

15. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS

LITIGATION

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

                                      169

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

Principal  Life  was a  defendant  in two  class-action  lawsuits  that  alleged
improper sales practices.  A number of persons and entities who were eligible to
be class members excluded themselves from the class (or "opted out"), as the law
permits them to do. Some of those who opted out from the class filed  individual
lawsuits making claims similar to those addressed by the class-action  lawsuits.
The two  class-action  lawsuits and the majority of the opt-out claims have been
settled and  dismissed  with  prejudice.  The remaining  opt-out  claims are not
expected to have a material impact on our business,  financial  condition or net
income.

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

GUARANTEES AND INDEMNIFICATIONS

In the normal course of business,  we have provided  guarantees to third parties
primarily related to a former subsidiary,  joint ventures and industrial revenue
bonds.  These  agreements  generally  expire from 2004 through 2019. The maximum
exposure  under these  agreements  as of December  31, 2003,  was  approximately
$190.0  million;  however,  we believe the  likelihood  is remote that  material
payments will be required and therefore  have not accrued for a liability on our
consolidated statements of financial position.  Should we be required to perform
under these  guarantees,  we generally  could recover a portion of the loss from
third parties  through  recourse  provisions  included in  agreements  with such
parties,  the sale of assets held as  collateral  that can be  liquidated in the
event that  performance  is  required  under the  guarantees  or other  recourse
generally  available to us, minimizing the impact to net income.  The fair value
of such guarantees issued after January 1, 2003, was insignificant.

In connection  with the 2002 sale of BT Financial  Group, we agreed to indemnify
the  purchaser,  Westpac,  for among other  things,  the costs  associated  with
potential  late  filings  made by BT  Financial  Group in New  Zealand  prior to
Westpac's  ownership,  up to a maximum of  A$250.0  million  Australian  dollars
(approximately  U.S.  $190.0  million as of  December  31,  2003).  New  Zealand
securities regulations allow Australian issuers to issue their securities in New
Zealand  provided that certain  documents are  appropriately  filed with the New
Zealand Registrar of Companies.  Specifically,  the regulations require that any
amendments to  constitutions  and compliance  plans be filed in New Zealand.  In
April 2003, the New Zealand Securities Commission ("the Commission") opined that
such late filings would result in certain New Zealand  investors  having a right
to return of their  investment  plus  interest at 10% per annum from the date of
investment.  Consequently,  the  Commission has advised that it has initiated an
inquiry  into the  matter,  both  with  regard to BT  Financial  Group and other
similar  issuers.  We view these potential late filings as a technical matter as
we believe  investors  received the information  that is required to be provided
directly to them. In addition,  we believe this technical  issue may affect many
in the industry and result in a favorable  legislative or judicial  solution.  A
relevant  legislative  solution  and  judicial  action  are both  pending in New
Zealand.  Although we cannot  predict  the outcome of this matter or  reasonably
estimate  losses,  we do not believe that it would result in a material  adverse
effect on our business or financial position.  It is possible,  however, that it
could have a material  adverse  effect on net income in a particular  quarter or
annual period.

                                      170

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

In the normal course of business, we are subject to indemnification  obligations
related to the sale of residential mortgage loans. Under these indemnifications,
we are  required  to  repurchase  certain  mortgage  loans that fail to meet the
standard  representations  and warranties  included in the sales contracts.  The
amount of our  exposure is based on the  potential  loss that may be incurred if
the repurchased  mortgage loans are processed  through the foreclosure  process.
Based on historical  experience,  total mortgage loans  repurchased  pursuant to
these  indemnification  obligations are estimated to be  approximately  0.04% of
annual  mortgage  loan  production  levels.  Total losses on the mortgage  loans
repurchased are estimated to approximate 25% of the unpaid principal  balance of
the related  mortgage  loans.  As of December  31,  2003,  $5.9 million has been
accrued for  representing the fair value of such  indemnifications  issued after
January 1, 2003, in accordance with FASB's  Interpretation  No. 45,  GUARANTOR'S
ACCOUNTING  AND  DISCLOSURE  REQUIREMENTS  FOR  GUARANTEES,  INCLUDING  INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS.

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

SECURITIES POSTED AS COLLATERAL

We  posted  $756.4  million  in  mortgage-backed   securities  under  collateral
agreements at December 31, 2003, to satisfy collateral  requirements  associated
with our Mortgage Banking segment and derivatives credit support agreements.

16. STOCKHOLDERS' EQUITY

COMMON STOCK

As a result of the demutualization and initial public offering described in Note
1, we have one class of capital  stock,  common  stock ($.01 par value,  2,500.0
million shares authorized).

On December 8, 2003,  we paid an annual  dividend  of $145.3  million,  equal to
$0.45 per share,  to  shareholders of record as of November 7, 2003. On December
9, 2002, we paid an annual dividend of $83.8 million,  equal to $0.25 per share,
to shareholders of record as of November 8, 2002.

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

In May 2003,  our board of directors  authorized  a repurchase  program of up to
$300.0 million of our outstanding  common stock. The repurchases will be made in

                                      171

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. STOCKHOLDERS' EQUITY (CONTINUED)

the open market or through privately negotiated transactions, from time to time,
depending on market conditions.  As of December 31, 2003, $147.0 million remains
outstanding under this repurchase program.

As a result of the  demutualization,  363.7 thousand shares with a value of $6.7
million  were issued to rabbi  trusts held by us for  certain  employee  benefit
plans.  These  shares were  reported as treasury  stock and  additional  paid-in
capital in the consolidated  statements of stockholders'  equity at December 31,
2001. In February 2002, these shares were sold, which generated proceeds of $8.0
million, with a cost of $6.7 million.

OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive  income (loss) includes all changes in stockholders' equity during
a  period  except  those  resulting  from   investments  by   stockholders   and
distributions to stockholders.

The components of accumulated other comprehensive  income (loss) were as follows
(in millions):

                                      NET             NET
                                   UNREALIZED      UNREALIZED
                                  GAINS (LOSSES)    GAINS          FOREIGN                     ACCUMULATED
                                  ON AVAILABLE-   (LOSSES) ON      CURRENCY      MINIMUM         OTHER
                                   FOR-SALE        DERIVATIVE     TRANSLATION    PENSION      COMPREHENSIVE
                                   SECURITIES     INSTRUMENTS     ADJUSTMENT    LIABILITY     INCOME (LOSS)
                                 ---------------- ------------- ------------- ------------ ---------------------

BALANCES AT JANUARY 1, 2001.....    $  134.2         $ (4.3)      $ (189.9)       $    -       $  (60.0)
Net change in unrealized gains
  (losses) on fixed maturities,
  available-for-sale............       511.0            -              -               -          511.0
Net change in unrealized gains
  (losses) on equity securities,
  available-for-sale............         3.4            -              -               -            3.4
Adjustments for assumed
  changes in amortization
  pattern:
  Deferred policy
    acquisition costs...........       (61.3)           -              -               -          (61.3)
  Unearned revenue reserves.....         4.3            -              -               -            4.3
Net change in unrealized
  gains (losses) on
  derivative instruments........         -             (8.9)           -               -           (8.9)
Provision for deferred income
  tax benefit (expense).........      (161.2)           3.1            -               -         (158.1)
Net change in unrealized gains
  (losses) on equity method
  subsidiaries and minority
  interest adjustments..........         3.1            -              -               -            3.1
Change in net foreign
  currency translation
  adjustment....................         -              -            (71.8)            -          (71.8)
Cumulative effect of
  accounting change, net of
  related income taxes..........        20.9          (24.0)         (11.1)            -          (14.2)
                                ----------------- ------------- ------------- ------------ ---------------------
BALANCES AT DECEMBER 31,
  2001..........................    $  454.4         $(34.1)      $ (272.8)       $    -       $  147.5

                                      172

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. STOCKHOLDERS' EQUITY (CONTINUED)

                                      NET             NET
                                   UNREALIZED      UNREALIZED
                                   GAINS (LOSSES)    GAINS         FOREIGN                     ACCUMULATED
                                   ON AVAILABLE-   (LOSSES) ON     CURRENCY     MINIMUM          OTHER
                                   FOR-SALE        DERIVATIVE    TRANSLATION    PENSION      COMPREHENSIVE
                                   SECURITIES     INSTRUMENTS     ADJUSTMENT    LIABILITY     INCOME (LOSS)
                                 ---------------- ------------- ------------- ------------ ---------------------

BALANCES AT JANUARY 1, 2002.....      $454.4       $  (34.1)       $(272.8)     $    -          $ 147.5
Net change in unrealized gains
  (losses) on fixed maturities,
  available-for-sale............       844.4            -              -             -            844.4
Net change in unrealized gains
  (losses) on equity securities,
  available-for-sale............        45.1            -              -             -             45.1
Adjustments for assumed
  changes in amortization
  pattern:
  Deferred policy
    acquisition costs...........      (121.6)           -              -             -           (121.6)
  Unearned revenue reserves.....         6.4            -              -             -              6.4
Net change in unrealized
  gains (losses) on
  derivative instruments........         -           (114.6)           -             -           (114.6)
Net change in unrealized gains
  (losses) on policyholder
  dividend obligation...........       (33.6)           -              -             -            (33.6)
Provision for deferred income
  tax benefit (expense).........      (257.2)          40.1            -             -           (217.1)
Net change in unrealized gains
  (losses) on equity method
  subsidiaries and minority
  interest adjustments..........        (7.3)           -              -             -             (7.3)
Change in net foreign
  currency translation
  adjustment....................         -              -             86.6           -             86.6
                                 ----------------- ------------ ------------- ------------ ---------------------
BALANCES AT DECEMBER 31,
  2002..........................      $930.6       $ (108.6)       $(186.2)     $    -          $ 635.8

                                      173

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. STOCKHOLDERS' EQUITY (CONTINUED)

                                      NET             NET
                                   UNREALIZED      UNREALIZED
                                   GAINS (LOSSES)    GAINS         FOREIGN                     ACCUMULATED
                                   ON AVAILABLE-   (LOSSES) ON     CURRENCY     MINIMUM          OTHER
                                   FOR-SALE        DERIVATIVE    TRANSLATION    PENSION      COMPREHENSIVE
                                   SECURITIES     INSTRUMENTS     ADJUSTMENT    LIABILITY     INCOME (LOSS)
                                 ---------------- ------------- ------------- ------------ ---------------------

BALANCES AT JANUARY 1, 2003.....     $   930.6      $ (108.6)      $ (186.2)     $  -           $    635.8
Net change in unrealized gains
  (losses) on fixed maturities,
  available-for-sale............         728.0           -              -           -                728.0
Net change in unrealized gains
  (losses) on equity securities,
  available-for-sale............          18.4           -              -           -                 18.4
Adjustments for assumed
  changes in amortization
  pattern:
  Deferred policy
    acquisition costs...........         (48.2)          -              -           -                (48.2)
  Unearned revenue reserves.....           1.6           -              -           -                  1.6
Net change in unrealized
  gains (losses) on
  derivative instruments........           -            76.3            -           -                 76.3
Net change in unrealized gains
  (losses) on policyholder
  dividend obligation...........         (65.3)          -              -           -                (65.3)
Provision for deferred income
  tax benefit (expense).........        (216.0)        (26.7)           -           1.4             (241.3)
Net change in unrealized gains
  (losses) on equity method
  subsidiaries and minority
  interest adjustments..........          (7.8)          -              -           -                 (7.8)
Change in net foreign
  currency translation
  adjustment....................           -             -             68.6         -                 68.6
Change in minimum pension
  liability.....................           -             -              -          (3.9)              (3.9)
Cumulative effect of
  accounting change, net of
  related income taxes..........           9.1           -              -           -                  9.1
                                ----------------- ------------- ------------- ------------ ---------------------
BALANCES AT DECEMBER 31,
  2003..........................     $ 1,350.4      $  (59.0)      $ (117.6)     $ (2.5)        $  1,171.3
                                ================= ============= ============= ============ =====================

                                      174

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. STOCKHOLDERS' EQUITY (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):

                                                                          AS OF DECEMBER 31,
                                                             ----------------------------------------------
                                                                  2003           2002            2001
                                                             --------------- -------------- ---------------
                                                                                      
Unrealized gains on available-for-sale securities
  arising during the year..............................          $605.9          $642.1        $ 537.7
Adjustment for realized losses on available-for-sale
  securities included in net income....................          (136.5)         (240.4)        (247.3)
                                                             --------------- -------------- ---------------
Unrealized gains on available-for-sale securities, as
  adjusted.............................................          $469.4          $401.7        $ 290.4
                                                             =============== ============== ===============

The  above  table  is  presented  net of  income  tax,  related  changes  in the
amortization  patterns of deferred policy acquisition costs and unearned revenue
reserves.

DIVIDEND LIMITATIONS

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  Commissioner 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  2003  statutory  results,  Principal  Life  could  pay
approximately $701.2 million in stockholder  dividends in 2004 without exceeding
the statutory limitation.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  discussion  describes the methods and  assumptions  we utilize in
estimating  our  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 our  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 our financial
instruments.

We define 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.

                                      175

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Fair values of public debt and equity securities have been determined by us 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.

The fair values of our reserves and  liabilities for  investment-type  insurance
contracts 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.
Investment-type insurance contracts include 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. Insurance contracts include insurance, annuity
and other policy  contracts that do involve  significant  mortality or morbidity
risk. The fair values for our insurance  contracts,  other than  investment-type
contracts,  are not  required to be  disclosed.  We do  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 our incremental borrowing rate for similar borrowing arrangements.

The carrying amounts and estimated fair values of our financial instruments were
as follows (in millions):

                                                               AS OF DECEMBER 31,
                                       --------------------------------------------------------------------
                                                     2003                               2002
                                       ---------------- ----------------- ---------------- ----------------
                                           CARRYING                          CARRYING
                                            AMOUNT        FAIR VALUE          AMOUNT         FAIR VALUE
                                       ---------------- ----------------- ---------------- ----------------
                                                                                  
ASSETS (LIABILITIES)
Fixed maturities, available-for-
  sale ..............................     $37,449.7        $37,449.7         $34,185.7        $34,185.7
Fixed maturities, trading ...........         102.9            102.9             101.7            101.7
Equity securities, available-for-
  sale ..............................         712.5            712.5             378.7            378.7
Mortgage loans.......................      13,508.1         14,700.5          11,081.9         12,466.1
Policy loans.........................         804.1            804.1             818.5            818.5
Other investments....................       1,323.5          1,323.5           1,148.3          1,148.3
Cash and cash equivalents............       1,692.9          1,692.9           1,038.6          1,038.6
Investment-type insurance
  contracts..........................     (27,254.1)       (28,299.8)        (24,816.4)       (25,660.9)
Short-term debt......................      (1,617.8)        (1,617.8)           (564.8)          (564.8)
Long-term debt.......................      (2,767.3)        (2,889.2)         (1,332.5)        (1,459.3)

                                      176

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. STATUTORY INSURANCE FINANCIAL INFORMATION

Principal Life, the largest  indirect  subsidiary of Principal  Financial Group,
Inc., 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  (the  "State  of  Iowa").  The  State  of Iowa
recognizes only statutory  accounting  practices  prescribed or permitted by the
State of Iowa for determining and reporting the financial  condition and results
of operations of an insurance  company to determine its solvency  under the Iowa
Insurance  Law. The National  Association of Insurance  Commissioners'  ("NAIC")
Accounting  Practices and  Procedures  manual ("NAIC SAP") has been adopted as a
component  of  prescribed  or  permitted  practices  by the  State of Iowa.  The
Commissioner has the right to permit other specific  practices that deviate from
prescribed practices.

In 2003 and 2002,  Principal  Life received  written  approval from the State of
Iowa to recognize as admitted  assets those assets  pledged by Principal Life on
behalf of a wholly owned  subsidiary  instead of  nonadmitting  such assets.  At
December 31, 2003 and 2002,  respectively,  the  statutory  surplus of Principal
Life was $707.0  million and $698.7  million  greater than it would have been if
NAIC SAP had been followed for this transaction.  This permitted practice has no
effect on Principal  Life's net income for the years then ended.  Principal Life
is exploring  other  arrangements  for the financing  needs of this  subsidiary,
which would eliminate the pledging mentioned above.

Life and 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 and health insurance company
is to be  determined  based on the various  risk  factors  related to it. If the
State of Iowa were to  rescind  its  permission  for the  transaction  described
above,  Principal Life's  regulatory total adjusted capital would not fall below
the authorized  control level RBC amount.  At December 31, 2003,  Principal Life
meets the RBC requirements.

Statutory net income and statutory capital and surplus of Principal Life were as
follows (in millions):

                                                           AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                                    -------------------------------------------------------
                                                          2003               2002              2001
                                                    ------------------ ----------------- ------------------

Statutory net income...............................     $   577.1          $   402.1         $   415.0
Statutory surplus..................................       3,861.9            3,339.2           3,483.8

19. SEGMENT INFORMATION

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

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

                                      177

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENT INFORMATION (CONTINUED)

The  International  Asset Management and Accumulation  segment offers retirement
products and  services,  annuities,  long-term  mutual funds and life  insurance
through subsidiaries in Argentina,  Chile, Mexico, Hong Kong and India and joint
ventures in Brazil, Japan and Malaysia. Prior to October 31, 2002, the operating
segment included BT Financial  Group, an Australia based asset manager.  We sold
substantially  all of BT Financial Group effective  October 31, 2002,  described
further in Note 3. As a result, the results of operations  (excluding  corporate
overhead) for BT Financial Group are reported as other after-tax adjustments for
all periods presented.

The Life and  Health  insurance  segment  provides  individual  and  group  life
insurance,  group health insurance and individual and group disability insurance
throughout the U.S.

The Mortgage Banking segment originates and services  residential  mortgage loan
products for customers in the U.S.

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

The  Corporate  and Other  segment  included  an equity  ownership  interest  in
Coventry  Health Care,  Inc. The ownership  interest was sold in February  2002,
described  further  in Note 4. The  Corporate  and  Other  segment's  equity  in
earnings of Coventry  Health Care,  Inc.,  which was included in net  investment
income, was $2.1 million and $20.2 million during 2002 and 2001, respectively.

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

The  accounting  policies of the segments  are  consistent  with the  accounting
policies  for the  consolidated  financial  statements,  with the  exception  of
capital  allocation  and  income  tax  allocation.  We  allocate  capital to our
segments  based upon an internal  capital  model that allows  management to more
effectively  manage our capital.  The Corporate  and Other segment  functions to
absorb the risk inherent in interpreting  and applying tax law. The segments are
allocated  tax  adjustments  consistent  with the  positions  we took on our tax
returns. The Corporate and Other segment results reflect any differences between
the tax returns and the estimated resolution of any disputes.

                                      178

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENT INFORMATION (CONTINUED)

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

                                                                       AS OF DECEMBER 31,
                                                          ----------------------------------------------
                                                                   2003                    2002
                                                          ----------------------   ---------------------
                                                                           (IN MILLIONS)
                                                                                   
ASSETS:
U.S. Asset Management and Accumulation ...............         $   83,904.8              $ 70,371.9
International Asset Management and Accumulation.......              3,011.4                 2,202.5
Life and Health Insurance.............................             12,171.8                11,356.3
Mortgage Banking......................................              5,558.8                 3,740.1
Corporate and Other ..................................              3,107.6                 2,190.5
                                                          ----------------------   ---------------------
  Total consolidated assets...........................         $  107,754.4              $ 89,861.3
                                                          ======================   =====================

                                                             FOR THE YEAR ENDED DECEMBER 31,
                                              --------------------------------------------------------------
                                                     2003                  2002                 2001
                                              -------------------   -------------------   ------------------
                                                                      (IN MILLIONS)
                                                                                      
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation....          $ 3,651.0             $ 3,780.5            $ 3,799.8
International Asset Management and
  Accumulation............................              412.1                 357.9                508.4
Life and Health Insurance.................            4,014.3               3,946.8              3,946.4
Mortgage Banking..........................            1,396.8               1,153.0                757.4
Corporate and Other.......................                8.8                 (15.1)               101.7
                                              -------------------   -------------------   ------------------
  Total segment operating revenues........            9,483.0               9,223.1              9,113.7
Net realized/unrealized capital losses,
  including recognition of front-end fee
  revenues and certain market value
  adjustments to fee revenues.............              (78.8)               (400.6)              (527.4)
                                              -------------------   -------------------   ------------------
Investment income generated from IPO
  proceeds................................                -                     -                    6.3
                                              -------------------   -------------------   ------------------
  Total revenue per consolidated
     statements of operations.............          $ 9,404.2             $ 8,822.5            $ 8,592.6
                                              ===================   ===================   ==================

                                      179

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENT INFORMATION (CONTINUED)

                                                             FOR THE YEAR ENDED DECEMBER 31,
                                              --------------------------------------------------------------
                                                      2003                  2002                 2001
                                              -------------------   -------------------   ------------------
                                                                      (IN MILLIONS)
                                                                                     
OPERATING EARNINGS (LOSS) BY SEGMENT,
  NET OF RELATED INCOME TAXES:
U.S. Asset Management and Accumulation ...           $  433.8              $  370.9           $ 353.8
International Asset Management and
  Accumulation............................               34.9                  19.5               2.3
Life and Health Insurance.................              241.2                 233.1             201.2
Mortgage Banking..........................               53.2                 142.9             126.7
Corporate and Other ......................              (12.5)                (17.0)             38.1
                                              -------------------   -------------------   ------------------
  Total segment operating earnings, net
    of related income taxes...............              750.6                 749.4             722.1
Net realized/unrealized capital losses,
  as adjusted.............................              (51.6)               (243.9)           (321.0)
Other after-tax adjustments (1)...........               47.3                (363.2)            (42.3)
                                              -------------------   -------------------   ------------------
  Net income per consolidated statements
    of operations.........................           $  746.3              $  142.3           $ 358.8
                                              ===================   ===================   ==================

- ----------------------
(1) In 2003,  other  after-tax  adjustments  of $47.3  million  included (1) the
    positive  effect of: (a) a decrease in income tax reserves  established  for
    contested  IRS tax audit  matters  ($28.9  million)  and (b) a change in the
    estimated loss on disposal of BT Financial Group ($21.8 million) and (2) the
    negative effect of a cumulative  effect of accounting  change related to the
    implementation of FIN 46 ($3.4 million).

    In 2002,  other after-tax  adjustments of ($363.2)  million included (1) the
    negative effects of: (a) a cumulative effect of accounting change related to
    the  implementation  of SFAS  142  ($280.9  million);  (b) a loss  from  the
    discontinued  operations  of BT Financial  Group  ($196.7  million);  (c) an
    increase  to a loss  contingency  reserve  established  for  sales  practice
    litigation ($21.6 million);  and (d) expenses related to the demutualization
    ($2.0 million) and (2) the positive effect of the settlement of an IRS audit
    issue ($138.0 million).

    In 2001,  other after-tax  adjustments of ($42.3)  million  included (1) the
    negative  effects of: (a)  expenses  related to the  demutualization  ($18.6
    million); (b) a loss from the discontinued  operations of BT Financial Group
    ($11.2 million); (c) a cumulative effect of accounting change related to the
    implementation  of SFAS 133 ($10.7  million);  and (d) an increase to a loss
    contingency reserve established for sales practice litigation ($5.9 million)
    and (2) the positive effect of investment income generated from the proceeds
    of the IPO ($4.1 million).

                                      180

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENT INFORMATION (CONTINUED)

The  following  is a summary of income tax expense  (benefit)  allocated  to our
segments for purposes of determining  operating  earnings.  Segment income taxes
are  reconciled  to income  taxes  reported on our  consolidated  statements  of
operations.

                                                             FOR THE YEAR ENDED DECEMBER 31,
                                              --------------------------------------------------------------
                                                     2003                  2002                 2001
                                              -------------------   -------------------   ------------------
                                                                       (IN MILLIONS)
                                                                                     
INCOME TAX EXPENSE (BENEFIT) BY SEGMENT:
U.S. Asset Management and
  Accumulation............................          $ 136.1             $  96.3               $  82.5
International Asset Management and
  Accumulation............................              5.1                 7.1                  (2.6)
Life and Health Insurance.................            122.6               122.1                 104.5
Mortgage Banking..........................             31.1               101.9                  78.4
Corporate and Other.......................            (16.3)              (31.5)                 19.4
                                              -------------------   -------------------   ------------------
  Total segment income taxes from
    operating earnings....................            278.6               295.9                 282.2
Taxes related to net realized/unrealized
  capital losses, as adjusted.............            (26.7)             (134.0)               (187.8)
Taxes related to other after-tax
  adjustments.............................            (26.1)             (116.0)                (11.0)
                                              -------------------   -------------------   ------------------
  Total income tax expense per
    consolidated statements of
    operations............................          $ 225.8             $  45.9               $  83.4
                                              ===================   ===================   ==================

                                      181

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENT INFORMATION (CONTINUED)

The following table summarizes  operating revenues for our products and services
(in millions):

                                                           FOR THE YEAR ENDED DECEMBER 31,
                                             -------------------------------------------------------------
                                                    2003                 2002                2001
                                             -------------------- ------------------- --------------------

U.S. Asset Management and
  Accumulation:
Full-service accumulation................         $ 1,099.5             $1,076.5            $1,116.6
Full-service payout......................             862.5              1,191.8             1,214.8
Investment only..........................             905.9                886.4               918.1
                                             -------------------- ------------------- --------------------
  Total pension..........................           2,867.9              3,154.7             3,249.5

Individual annuities.....................             354.9                303.8               263.3
Mutual funds.............................             121.1                113.8               108.3
Other and eliminations...................              36.3                 32.2                19.0
                                             -------------------- ------------------- --------------------
  Total U.S. Asset Accumulation..........           3,380.2              3,604.5             3,640.1
Principal Global Investors...............             313.4                216.4               194.9
Eliminations.............................             (42.6)               (40.4)              (35.2)
                                             -------------------- ------------------- --------------------
  Total U.S. Asset Management and
    Accumulation.........................           3,651.0              3,780.5             3,799.8

International Asset Management and
  Accumulation...........................             412.1                357.9               508.4

Life and Health Insurance:
Life insurance...........................           1,607.7              1,629.6             1,658.7
Health insurance.........................           2,104.4              2,058.3             2,061.3
Disability insurance.....................             302.2                258.9               226.4
                                             -------------------- ------------------- --------------------
  Total Life and Health Insurance........           4,014.3              3,946.8             3,946.4

Mortgage Banking:
Mortgage loan production.................             694.3                562.9               354.4
Mortgage loan servicing..................             702.5                590.1               403.0
                                             -------------------- ------------------- --------------------
  Total Mortgage Banking.................           1,396.8              1,153.0               757.4

Corporate and Other......................               8.8                (15.1)              101.7
                                             -------------------- ------------------- --------------------
Total operating revenues.................         $ 9,483.0             $9,223.1            $9,113.7
                                             ==================== =================== ====================
Total operating revenues.................         $ 9,483.0             $9,223.1            $9,113.7

Net realized/unrealized capital losses,
  including recognition of front-end fee
  revenues and certain market value
  adjustments to fee revenues............             (78.8)              (400.6)             (527.4)
Other after-tax adjustments..............               -                    -                   6.3
                                             -------------------- ------------------- --------------------
Total GAAP revenues......................         $ 9,404.2             $8,822.5            $8,592.6
                                             ==================== =================== ====================

                                      182

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20. STOCK-BASED COMPENSATION PLANS

As of December 31, 2003, we sponsor the Stock  Incentive  Plan,  Directors Stock
Plan, Stock Purchase Plan and Long Term Performance Plan.

Under the terms of the Stock  Incentive Plan,  grants may be nonqualified  stock
options,  incentive stock options  qualifying  under Section 422 of the Internal
Revenue Code,  restricted  stock,  restricted stock units or stock  appreciation
rights.  Total options granted under this plan were 2.2 million, 1.5 million and
3.7 million in 2003, 2002 and 2001, respectively.  Options outstanding under the
Stock  Incentive  Plan were  granted at a price equal to the market value of our
common  stock on the date of grant,  and expire ten years  after the grant date.
Options granted in 2001 have cliff vesting over a three-year period.  Subsequent
to 2001, all options granted have graded vesting over a three-year period.

In 2003,  281,492  restricted  stock  units  were  issued to  certain  employees
pursuant  to the  Stock  Incentive  Plan at a  weighted-average  award  price of
$32.33. Units awarded have graded or cliff vesting over a three-year period.

In 2003, 26,727 stock appreciation  rights were issued to agents meeting certain
production requirements.  The stock appreciation rights will vest ratably over a
three-year-period. At December 31, 2003, we had 25,120 stock appreciation rights
outstanding, and we recorded $0.1 million in compensation expense related to the
plan.

The Directors Stock Plan provides for the grant of  nonqualified  stock options,
restricted  stock or restricted  stock units to our nonemployee  directors.  The
total  number  of shares to be issued  under  this plan may not  exceed  500,000
shares.  Options  granted under the Directors  Stock Plan have an exercise price
equal to the fair market  value of the common stock on the date of the grant and
a term equal to the earlier of three years from the date the participant  ceases
to provide service or the tenth  anniversary of the date the option was granted.
Since no options were to become  exercisable for directors earlier than eighteen
months following  October 26, 2001, the date of  demutualization,  option grants
made in 2002 under this plan  cliff-vested  one year from grant date.  Beginning
with the 2003 grant,  options  become  exercisable in four  approximately  equal
installments on the three,  six and nine month  anniversaries of the grant date,
and on the date that the Director's full term of office expires. Options granted
under this plan amounted to 25,155  options in 2003 and 52,000  options in 2002.
There were no grants under this plan in 2001.

Beginning in 2002,  16,641  restricted  stock units were issued  pursuant to the
Directors  Stock  Plan  at a  weighted-average  award  price  of  $28.02  to all
directors in office.  In 2003,  10,400  restricted  stock units were issued at a
weighted-average  award price of $30.27. The number received by each director is
prorated with respect to the amount of time  remaining in the  director's  term.
Restrictions  on the sale or transfer of  restricted  stock units shall lapse in
installments  from the  date of  grant to the date of the end of the  director's
term. When service to the company  ceases,  all vesting stops and unvested units
are forfeited.  The unamortized deferred  compensation was $0.3 million and $0.1
million at December 31, 2003 and 2002, respectively.

We also maintain the 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-year  period.  This plan was amended in May 2001,  to utilize  stock as an
option for payment  starting with payments in 2003. For the years ended December
31, 2003, 2002 and 2001, we recorded  compensation expense of $7.1 million, $4.4
million and $13.7 million, respectively, related to the plan.

                                      183

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20. STOCK-BASED COMPENSATION PLANS (CONTINUED)

The  maximum  number  of shares  of  common  stock we may issue  under the Stock
Incentive  Plan,   together  with  an  excess  plan  (a   nonqualified   defined
contribution   retirement  plan),  the  Directors  Stock  Plan,  the  Long  Term
Performance  Plan and any new plan awarding our common stock,  in the five years
following the completion of the initial public offering,  is 6% of the number of
shares  outstanding  immediately  following  the  completion  of the IPO.  As of
December  31,  2003 and  2002,  a total of  15,382,192  and  17,493,989  shares,
respectively, were available to be made issuable by us for these plans.

Under our Stock Purchase Plan,  participating  employees have the opportunity to
purchase  shares of our common stock on a quarterly  basis.  For 2001,  2002 and
2003, the maximum amount an employee could  contribute  during any plan year was
the lesser of $10,000,  or such greater or lesser  amount as  determined  by the
plan administrator, and 10% of the employee's salary. Effective January 1, 2004,
employees may purchase up to $25,000 worth of company stock each year. Employees
may  purchase  shares of our common stock at a price equal to 85% of the share's
fair market value as of the beginning or end of the quarter, whichever is lower.
Under the Stock Purchase Plan, employees purchased 639,524,  713,885 and 320,406
shares during 2003, 2002 and 2001, respectively. In 2003 and 2002, an additional
14,634  and 5,415  shares,  respectively,  were  purchased  from  dividends  and
reinvested into participants' accounts.

The maximum  number of shares of common  stock that we may issue under the Stock
Purchase Plan is 2% of the number of shares  outstanding  immediately  following
the  completion  of the  IPO.  As of  December  31,  2003 and  2002,  a total of
5,542,303 and 6,181,826 shares, respectively,  are available to be made issuable
by us for this plan.

In 2001,  compensation  expense was recognized for stock option awards issued to
career agents using the fair value method as  prescribed in FASB  Interpretation
No. 44, ACCOUNTING FOR CERTAIN  TRANSACTIONS  INVOLVING STOCK  COMPENSATION - AN
INTERPRETATION  OF APB  OPINION  NO.  25.  The  compensation  cost that has been
charged against income for the Stock  Incentive  Plan,  Directors Stock Plan and
Stock Purchase Plan was $22.7 million, $10.5 million and $0.01 million for 2003,
2002 and 2001, respectively.

The weighted-average  estimated fair value of stock options granted during 2003,
2002 and 2001, using the Black-Scholes option valuation model was $10.66, $10.19
and $6.07 per share,  respectively.  The fair value of each option was estimated
on the date of grant  using  the  Black-Scholes  option  pricing  model  and the
following assumptions:

                                     2003              2002           2001
                                 ------------      -----------      ------------

Dividend yield..............         .91   %            .91 %           1.12   %
                                 ============      ===========      ============
Expected volatility.........       38.6    %          32.5  %          37.5    %
                                 ============      ===========      ============
Risk-free interest rate.....        3.1    %           4.7  %           3.7    %
                                 ============      ===========      ============
Expected life (in years)....        6                  6                3
                                 ============      ===========      ============

The fair value of the employees' purchase rights,  which represent a price equal
to 15% of the share's fair market value under the Stock  Purchase Plan, was $1.6
million in 2001.

                                      184

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20. STOCK-BASED COMPENSATION PLANS (CONTINUED)

The  following is a summary of the status of all of our stock option plans as of
December 31, 2003, and related changes during the year then ended:

                                                                                             WEIGHTED-
                                                                        NUMBER OF         AVERAGE EXERCISE
                                                                         SHARES               PRICE
                                                                   ------------------- -------------------

Options outstanding at January 1, 2001............................                -          $   -
   Granted........................................................        3,671,000             22.33
   Exercised......................................................                -              -
   Canceled.......................................................           32,800             22.33
                                                                   -------------------
Options outstanding at December 31, 2001.                                 3,638,200             22.33
   Granted........................................................        1,492,905             27.59
   Exercised......................................................              600             22.33
   Canceled.......................................................          993,380             23.08
                                                                   -------------------
Options outstanding at December 31, 2002.                                 4,137,125             24.05
   Granted........................................................        2,235,820             27.64
   Exercised......................................................           13,869             26.18
   Canceled.......................................................          476,718             23.77
                                                                   -------------------
Options outstanding at December 31, 2003..........................        5,882,358            $25.43

Options exercisable at December 31, 2001..........................            1,000            $22.33
                                                                   ===================
Options exercisable at December 31, 2002..........................           22,000            $22.33
                                                                   ===================
Options exercisable at December 31, 2003..........................          515,254            $27.13
                                                                   ===================

At December  31,  2003,  we had 5.9 million  stock  options  outstanding  with a
weighted-average  remaining contractual life of 8.4 years and a weighted-average
exercise price of $25.43.

21. EARNINGS PER SHARE

After our IPO, SFAS No. 128,  EARNINGS PER SHARE,  was adopted,  which  requires
disclosure of basic and diluted earnings per share.

For  purposes of our  unaudited  basic and diluted pro forma  earnings per share
calculations  for the period  January 1, 2001  through  October  25,  2001,  the
weighted-average  number of shares  outstanding  was assumed to be 360.8 million
shares.  These shares  represent  260.8 million  shares issued to  policyholders
entitled to receive compensation in the demutualization and 100.0 million shares
sold to  investors  in the  IPO,  prior  to the  underwriters'  exercise  of the
overallotment  option.  The  shares  issued to the  policyholders  include  56.2
million shares issued as policy credits.

                                      185

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. EARNINGS PER SHARE (CONTINUED)

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

                                                                                        PRO FORMA
                                                 FOR THE YEAR      FOR THE YEAR      (UNAUDITED) FOR
                                                    ENDED             ENDED           THE YEAR ENDED
                                                 DECEMBER 31,      DECEMBER 31,        DECEMBER 31,
                                                    2003              2002                2001
                                               ----------------- ------------------ ------------------
                                                        (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                
Income from continuing operations, net of
  related income taxes......................     $ 727.9            $619.9               $380.7
                                               ================= ================== ==================
Weighted-average shares outstanding:
  Basic.....................................       326.0             350.2                362.4
  Dilutive effects:
    Stock options (1).......................         0.5               0.4                  -
    Long term performance plan (2)..........         0.3               0.1                  -
    Restricted stock units (3)..............         -                 -                    -
                                               ----------------- ------------------ ------------------
  Diluted...................................       326.8             350.7                362.4
                                               ================= ================== ==================
Income from continuing operations
  per share:
  Basic.....................................     $   2.23           $  1.77              $  1.05
                                               ================= ================== ==================
  Diluted...................................         2.23              1.77                 1.05
                                               ================= ================== ==================

- -------------------------
(1)  The dilutive  effect of the stock options was less than 0.1 million  shares
     in 2001.
(2)  The Long Term  Performance  Plan had no  dilutive  impact in 2001 since the
     only option for payment was cash.
(3)  The dilutive effect of the restricted stock units was less than 0.1 million
     shares in 2001, 2002 and 2003.

The  calculation of diluted  earnings per share for the years ended December 31,
2003 and 2002,  excludes the incremental  effect related to certain  outstanding
stock-based compensation grants due to their anti-dilutive effect.

The  calculation  of diluted  earnings per share for the year ended December 31,
2001,  excludes the  incremental  effect related to a treasury stock  repurchase
forward  contract.  This contract's  inception price is in excess of the average
volume  weighted-average  price for purchases of our stock during the period the
contract has been outstanding, resulting in an antidilutive effect.

                                      186

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for 2003
and 2002:

                                                               FOR THE THREE MONTHS ENDED
                                         -----------------------------------------------------------------------
                                             MARCH 31          JUNE 30         SEPTEMBER 30       DECEMBER 31
                                         ---------------- ----------------- ------------------ -----------------
                                                          (IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                       
2003
   Total revenues.......................     $2,296.8         $2,412.4           $2,216.5          $2,478.5
   Total expenses.......................      2,074.6          2,127.3            1,981.9           2,266.7
   Income from continuing operations,
     net of related income taxes........        156.4            202.6              175.5             193.4
   Income (loss) from discontinued
     operations, net of related
     income taxes.......................         (0.7)            (0.4)              12.4              10.5
   Net income...........................        155.7            202.2              184.5             203.9
   Basic earnings per share for income
     from continuing operations, net of
     related income taxes...............     $    0.47        $    0.62          $    0.54         $    0.60
   Basic earnings per share for net
     income.............................          0.47             0.62               0.54              0.60
   Diluted earnings per share for
     income from continuing operations,
     net of related income taxes .......          0.47             0.62               0.57              0.63
   Diluted earnings per share for net
     income.............................          0.47             0.62               0.57              0.63

2002
   Total revenues.......................     $2,227.8         $2,335.5           $1,995.9          $2,263.3
   Total expenses.......................      1,877.8          2,187.2            1,950.9           2,140.8
   Income from continuing operations,
     net of related income taxes........        243.7            116.4               42.6             217.2
   Income (loss) from discontinued
     operations, net of related income
     taxes..............................          2.3              3.8             (201.0)             (1.8)
   Net income (loss)....................        (34.9)           120.2             (158.4)            215.4
   Basic earnings per share for income
     from continuing operations, net of
     related income taxes...............     $    0.68        $    0.33          $    0.12         $    0.65
   Basic earnings per share
     for net income (loss)..............         (0.10)            0.34              (0.46)             0.64
   Diluted earnings per share for
     income from continuing operations,
     net of related income taxes........          0.68             0.33               0.12              0.64
   Diluted earnings per share for net
     income (loss)......................         (0.10)            0.34              (0.45)             0.64

                                      187

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our U.S.  life  insurance  subsidiary,  Principal  Life,  is in the  process  of
establishing  special purpose entities to issue secured medium-term notes. Under
the program,  the payment obligations of principal and interest on the notes are
secured by funding  agreements  issued by  Principal  Life.  This  program is in
addition to the two medium-term  note programs  described in Note 11.  Principal
Life's   payment   obligations   on  the  funding   agreements   are  fully  and
unconditionally  guaranteed  by  Principal  Financial  Group,  Inc.  All  of the
outstanding  stock of Principal Life is indirectly owned by Principal  Financial
Group,  Inc. and Principal  Financial  Group,  Inc. is the only guarantor of the
payment obligations of the funding agreements.

Effective  October 26, 2001,  Principal Mutual Holding Company  converted from a
mutual  insurance  holding  company to a stock  company  subsidiary of Principal
Financial Group, Inc. For more information on the demutualization, see Note 1.

The following tables set forth condensed  consolidating financial information of
Principal Life and Principal  Financial Group,  Inc. as of December 31, 2003 and
2002, and for the years ended December 31, 2003, 2002 and 2001.

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

                                  PRINCIPAL     PRINCIPAL LIFE    PRINCIPAL FINANCIAL                     PRINCIPAL
                                  FINANCIAL       INSURANCE       SERVICES, INC. AND                      FINANCIAL
                                 GROUP, INC.       COMPANY        OTHER SUBSIDIARIES                     GROUP, INC.
                                 PARENT ONLY         ONLY            COMBINED (1)        ELIMINATIONS    CONSOLIDATED
                                -------------- ------------------ --------------------- --------------- -----------------
                                                                    (IN MILLIONS)
                                                                                           
ASSETS
Investments, excluding
  investment in
  unconsolidated entities.......    $    -           $48,156.9          $  8,610.9       $ (1,357.2)      $   55,410.6
Investment in unconsolidated
  entities......................     7,234.0             793.8             5,693.3        (13,553.9)             167.2
Cash and cash equivalents.......       173.8             640.5             1,360.5           (481.9)           1,692.9
Other intangibles...............         -                 4.5               116.9              -                121.4
Mortgage loan servicing rights..         -                 -               1,953.1              -              1,953.1
Separate account assets.........         -            42,753.4               632.2             22.2           43,407.8
All other assets................         1.7           3,825.7             1,374.4           (200.4)           5,001.4
                                -------------- ------------------ --------------------- --------------- -----------------
  Total assets..................    $7,409.5         $96,174.8           $19,741.3       $(15,571.2)      $  107,754.4
                                ============== ================== ===================== =============== =================

LIABILITIES
Contractholder funds............    $    -           $29,040.4          $     11.9       $   (149.8)      $   28,902.5
Future policy benefits and
  claims........................         -            14,025.3             1,449.4              -             15,474.7
Other policyholder funds........         -               706.2                 4.0              -                710.2
Short-term debt.................         -                 -               2,053.8           (436.0)           1,617.8
Long-term debt..................         -               423.3             2,630.7           (286.7)           2,767.3
Income taxes currently
  payable.......................         -               160.0                 4.3            (74.3)              90.0
Deferred income taxes...........         8.2             974.0               666.9             (5.1)           1,644.0
Separate account liabilities....         -            42,753.4               632.2             22.2           43,407.8
Other liabilities...............         1.7           1,226.1             5,054.2           (541.5)           5,740.5
                                -------------- ------------------ --------------------- --------------- -----------------
  Total liabilities.............    $    9.9         $89,308.7          $ 12,507.4       $ (1,471.2)      $  100,354.8

                                      188

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

      CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
                                DECEMBER 31, 2003

                                 PRINCIPAL     PRINCIPAL LIFE    PRINCIPAL FINANCIAL                       PRINCIPAL
                                 FINANCIAL       INSURANCE        SERVICES, INC. AND                       FINANCIAL
                                GROUP, INC.       COMPANY         OTHER SUBSIDIARIES                      GROUP, INC.
                                PARENT ONLY         ONLY             COMBINED (1)        ELIMINATIONS    CONSOLIDATED
                               -------------- ----------------- ----------------------- --------------- ----------------
                                                                   (IN MILLIONS)
                                                                                          
STOCKHOLDERS' EQUITY
Common stock..................   $     3.8      $        2.5       $           -          $     (2.5)    $      3.8
Additional paid-in capital....     7,153.2           5,052.1               6,796.9         (11,849.0)       7,153.2
Retained earnings (deficit)...       630.4             594.6                (734.4)            139.8          630.4
Accumulated other
  comprehensive income........     1,171.3           1,216.9               1,171.4          (2,388.3)       1,171.3
Treasury stock, at cost ......    (1,559.1)              -                     -                 -         (1,559.1)
                               -------------- ----------------- ----------------------- --------------- ----------------
  Total stockholders' equity..     7,399.6           6,866.1               7,233.9         (14,100.0)       7,399.6
                               -------------- ----------------- ----------------------- --------------- ----------------
  Total liabilities and
    stockholders' equity......   $ 7,409.5      $   96,174.8       $      19,741.3        $(15,571.2)    $107,754.4
                               ============== ================= ======================= =============== ================

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

                                      189

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23.  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2002

                                  PRINCIPAL     PRINCIPAL LIFE    PRINCIPAL FINANCIAL                     PRINCIPAL
                                  FINANCIAL       INSURANCE       SERVICES, INC. AND                      FINANCIAL
                                 GROUP, INC.       COMPANY        OTHER SUBSIDIARIES                     GROUP, INC.
                                 PARENT ONLY         ONLY            COMBINED (1)       ELIMINATIONS     CONSOLIDATED
                               ---------------- ----------------- --------------------- --------------- -----------------
                                                                      (IN MILLIONS)
                                                                                               
ASSETS
Investments, excluding
   investment in
   unconsolidated entities..... $        -       $     43,880.9        $  5,882.7       $     (873.6)         $48,890.0
Investment in unconsolidated
   entities....................      6,333.7              818.8           4,891.4          (11,938.3)             105.6
Cash and cash equivalents......        332.1              585.7             809.7             (688.9)           1,038.6
Other intangibles..............          -                  2.8              86.0                -                 88.8
Mortgage loan servicing rights.          -                  -             1,518.6                -              1,518.6
Separate account assets........          -             33,105.9             407.1              (11.6)          33,501.4
All other assets...............          1.4            3,239.5           2,047.3             (569.9)           4,718.3
                               ---------------- ----------------- --------------------- --------------- -----------------
   Total assets................ $    6,667.2     $     81,633.6        $ 15,642.8       $  (14,082.3)         $89,861.3
                               ================ ================= ===================== =============== =================
LIABILITIES
Contractholder funds........... $        -       $     26,374.2        $     17.8       $      (77.0)         $26,315.0
Future policy benefits and
   claims......................          -             13,634.9           1,101.5                -             14,736.4
Other policyholder funds.......          -                635.5               7.4                -                642.9
Short-term debt................          -                  -               953.7             (388.9)             564.8
Long-term debt.................          -                405.8           1,211.4             (284.7)           1,332.5
Income taxes currently payable.          -                 83.7              73.5             (157.2)               -
Deferred income taxes..........          8.4              609.0             596.6              (36.3)           1,177.7
Separate account liabilities...          -             33,105.9             407.1              (11.6)          33,501.4
Other liabilities..............          1.6            1,046.7           4,940.1           (1,055.0)           4,933.4
                               ---------------- ----------------- --------------------- --------------- -----------------
   Total liabilities...........         10.0           75,895.7           9,309.1           (2,010.7)          83,204.1

STOCKHOLDERS' EQUITY
Common stock................... $        3.8     $          2.5        $      -         $       (2.5)         $     3.8
Additional paid-in capital.....      7,106.3            5,015.0           6,758.1          (11,773.1)           7,106.3
Retained earnings (deficit)....         29.4              (64.7)         (1,060.2)           1,124.9               29.4
Accumulated other
   comprehensive income........        635.8              785.1             635.8           (1,420.9)             635.8

Treasury stock, at cost .......     (1,118.1)               -                 -                  -             (1,118.1)
                               ---------------- ----------------- --------------------- --------------- -----------------
   Total stockholders' equity..      6,657.2            5,737.9           6,333.7          (12,071.6)           6,657.2
                               ---------------- ----------------- --------------------- --------------- -----------------
   Total liabilities and
   stockholders' equity........ $    6,667.2     $     81,633.6        $ 15,642.8       $  (14,082.3)         $89,861.3
                               ================ ================= ===================== =============== =================

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

                                      190

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                  PRINCIPAL      PRINCIPAL LIFE    PRINCIPAL FINANCIAL                      PRINCIPAL
                                  FINANCIAL       INSURANCE        SERVICES, INC. AND                       FINANCIAL
                                 GROUP, INC.       COMPANY         OTHER SUBSIDIARIES                      GROUP, INC.
                                 PARENT ONLY         ONLY            COMBINED (1)        ELIMINATIONS     CONSOLIDATED
                                ---------------- ---------------- --------------------- --------------- -----------------
                                                                    (IN MILLIONS)
                                                                                          
REVENUES
Premiums and other
  considerations................     $   -        $ 3,423.7           $     210.4       $     -          $ 3,634.1
Fees and other revenues.........         -            827.3               1,782.5          (193.6)         2,416.2
Net investment income...........         3.5        2,948.9                 455.8            11.4          3,419.6
Net realized/unrealized capital
  gains (losses)................         -            (83.5)                 61.5           (43.7)           (65.7)
                                ---------------- ---------------- --------------------- --------------- -----------------
  Total revenues................         3.5        7,116.4               2,510.2          (225.9)         9,404.2

EXPENSES
Benefits, claims, and
  settlement expenses...........         -          4,590.2                 279.0            (7.9)         4,861.3
Dividends to policyholders......         -            307.9                   -               -              307.9
Operating expenses..............        10.8        1,499.2               1,946.8          (175.5)         3,281.3
                                ---------------- ---------------- --------------------- --------------- -----------------
  Total expenses................        10.8        6,397.3               2,225.8          (183.4)         8,450.5
                                ---------------- ---------------- --------------------- --------------- -----------------
Income (loss) from continuing
  operations before income
  taxes.........................        (7.3)         719.1                 284.4           (42.5)           953.7

Income taxes (benefits).........        (2.7)         134.4                 107.4           (13.3)           225.8
Equity in the net income of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of
  accounting change.............       732.5           74.5                 564.5        (1,371.5)             -
                                ---------------- ---------------- --------------------- --------------- -----------------
Income from continuing
  operations, net of related
  income taxes..................       727.9          659.2                 741.5        (1,400.7)           727.9

Income from discontinued
  operations, net of related
  income taxes..................        21.8            -                    21.8           (21.8)            21.8
                                ---------------- ---------------- --------------------- --------------- -----------------
Income before cumulative
  effect of accounting change...       749.7          659.2                 763.3        (1,422.5)           749.7

Cumulative effect of accounting
  change, net of related
  income taxes..................        (3.4)           -                   (12.4)           12.4             (3.4)
                                ---------------- ---------------- --------------------- --------------- -----------------
Net income......................     $ 746.3      $   659.2           $     750.9       $(1,410.1)       $   746.3
                                ================ ================ ===================== =============== =================

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

                                      191

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                       PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL       INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     -------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                               
REVENUES
Premiums and other considerations... $      -           $ 3,705.1        $     176.7         $    -           $ 3,881.8
Fees and other revenues.............        -               707.9            1,478.1           (195.2)          1,990.8
Net investment income...............        4.0           2,923.1              353.7             23.9           3,304.7
Net realized/unrealized capital
  gains (losses)....................        -              (528.1)             139.5             33.8            (354.8)
                                     -------------- ---------------- --------------------- ---------------- ----------------
  Total revenues....................        4.0           6,808.0            2,148.0           (137.5)          8,822.5

EXPENSES
Benefits, claims, and settlement
   expenses.........................        -             4,955.9              267.7             (6.7)          5,216.9
Dividends to policyholders..........        -               316.6                -                -               316.6
Operating expenses..................        7.1           1,375.0            1,404.7           (163.6)          2,623.2
                                     -------------- ---------------- --------------------- ---------------- ----------------
  Total expenses....................        7.1           6,647.5            1,672.4           (170.3)          8,156.7
                                     -------------- ---------------- --------------------- ---------------- ----------------
Income (loss) from continuing
   operations before income taxes...       (3.1)            160.5              475.6             32.8             665.8

Income taxes (benefits).............       (1.3)           (144.1)             179.5             11.8              45.9
Equity in the net income of
   subsidiaries, excluding
   discontinued operations and
   cumulative effect of accounting
   change...........................      621.7             247.5              325.6         (1,194.8)              -
                                     -------------- ---------------- --------------------- ---------------- ----------------
Income from continuing operations,
   net of related income taxes......      619.9             552.1              621.7         (1,173.8)            619.9

Loss from discontinued operations,
    net of related income taxes.....     (196.7)              -               (196.7)           196.7            (196.7)
                                     -------------- ---------------- --------------------- ---------------- ----------------
Income before cumulative
    effect of accounting change.....      423.2             552.1              425.0           (977.1)            423.2

Cumulative effect of accounting
    change, net of related
    income taxes....................     (280.9)              -               (280.9)           280.9            (280.9)
                                     -------------- ---------------- --------------------- ---------------- ----------------
Net income.......................... $    142.3         $   552.1        $     144.1         $ (696.2)        $   142.3
                                     ============== ================ ===================== ================ ================

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

                                      192

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                       PRINCIPAL        PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL          INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.          COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY (2)       ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                    ----------------- ----------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                                 
REVENUES
Premiums and other considerations..     $     -         $  3,763.8         $      358.5        $     -          $ 4,122.3
Fees and other revenues............           -              648.8              1,123.5           (171.6)         1,600.7
Net investment income..............           0.7          3,091.0                263.3             28.6          3,383.6
Net realized/unrealized capital
  losses...........................           -             (375.9)              (138.1)             -             (514.0)
                                    ----------------- ----------------- --------------------- ---------------- ----------------
  Total revenues...................           0.7          7,127.7              1,607.2           (143.0)         8,592.6

EXPENSES
Benefits, claims, and settlement
  expenses.........................           -            5,067.0                416.7             (1.6)         5,482.1
Dividends to policyholders.........           -              313.7                  -                -              313.7
Operating expenses.................           0.3          1,419.7              1,054.1           (141.4)         2,332.7
                                    ----------------- ----------------- --------------------- ---------------- ----------------
  Total expenses...................           0.3          6,800.4              1,470.8           (143.0)         8,128.5
                                    ----------------- ----------------- --------------------- ---------------- ----------------
Income from continuing operations
  before income taxes..............           0.4            327.3                136.4              -              464.1

Income taxes.......................           0.2             43.3                 39.9              -               83.4
Equity in the net income (loss) of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of accounting
  change...........................          (7.4)            93.9                273.3           (359.8)             -
                                    ----------------- ----------------- --------------------- ---------------- ----------------
Income (loss) from continuing
  operations, net of related
  income taxes.....................          (7.2)           377.9                369.8           (359.8)           380.7

Loss from discontinued operations,
  net of related income taxes......         (11.2)             -                  (11.2)            11.2            (11.2)
                                    ----------------- ----------------- --------------------- ---------------- ----------------
Income (loss) before cumulative                              377.9
  effect of accounting change......         (18.4)                                358.6           (348.6)           369.5
Cumulative effect of accounting
  change, net of related income
  taxes............................         (10.7)           (10.7)                 -               10.7            (10.7)
                                    ----------------- ----------------- --------------------- ---------------- ----------------
Net income (loss) .................     $   (29.1)      $    367.2         $      358.6        $  (337.9)       $   358.8
                                    ================= ================= ===================== ================ ================

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

(2)  The Principal  Financial Group,  Inc. ("PFG") parent company only Statement
     of  Operations  reflects the results of  operations of PFG from October 26,
     2001,  the  effective  date  of  the  demutualization  and  initial  public
     offering.  Prior to October 26, 2001,  the date  Principal  Mutual  Holding
     Company  converted  from a  mutual  insurance  holding  company  to a stock
     company, PFG, a Delaware business corporation, had no assets or operations.

                                      193

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                       PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL       INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     -------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                             
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities............    $  (3.3)      $ 2,302.7           $  1,318.2         $     96.2       $  3,713.8

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.......................        -          (9,550.3)            (1,804.4)             414.3        (10,940.4)
  Sales...........................        -           2,273.8              1,028.5             (339.6)         2,962.7
  Maturities......................        -           4,380.2                849.5                -            5,229.7
Net cash flows from trading
  securities......................        -               -                    2.0               (2.0)             -
Mortgage loans acquired or
  originated......................        -          (1,544.2)            (61,334.2)             49.4        (62,829.0)
Mortgage loans sold or repaid.....        -           1,088.1             63,094.8              (47.3)        64,135.6
Purchase of mortgage servicing
  rights..........................        -               -               (1,098.4)               -           (1,098.4)
Proceeds from sale of mortgage
  servicing rights................        -               -                   29.9                -               29.9
Real estate acquired..............        -            (245.3)               (38.0)               -             (283.3)
Real estate sold..................        -              82.6                 50.7                -              133.3
Net change in property and
  equipment.......................        -             (21.8)                (7.1)               -              (28.9)
Net proceeds from sales of
  subsidiaries....................        -              18.4                 40.9              (18.4)            40.9
Purchases of interest in
  subsidiaries, net of cash
  acquired........................        -             (26.1)              (110.1)               -             (136.2)
Dividends received from
  unconsolidated entities.........      425.0           189.2               (172.0)            (442.2)             -
Net change in other investments...        -             159.5                (17.2)              93.5            235.8
                                     -------------- ---------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
    investing activities..........    $ 425.0       $(3,195.9)          $    514.9         $   (292.3)      $ (2,548.3)

                                      194

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                       PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL       INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     -------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                              
FINANCING ACTIVITIES
Issuance of common stock...........  $    18.3         $    -              $     -           $    -          $    18.3
Acquisition and sales of treasury
  stock, net.......................     (453.0)             -                    -                -             (453.0)
Dividends to shareholders..........     (145.3)             -                    -                -             (145.3)
Issuance of long-term debt.........        -               31.6                 34.7            (31.6)            34.7
Principal repayments of
  long-term debt...................        -              (14.1)              (100.7)            29.5            (85.3)
Net repayments of short-term
  borrowings.......................        -                -               (1,164.0)           (19.8)        (1,183.8)
Dividends paid to parent...........        -                -                 (425.0)           425.0              -
Investment contract deposits.......        -            9,586.0                  -                -            9,586.0
Investment contract withdrawals....        -           (8,666.2)                 -                -           (8,666.2)
Net increase in bank deposits......        -                -                  372.7              -              372.7
Proceeds from financing element
  derivatives......................        -              118.0                  -                -              118.0
Proceeds for financing element
  derivatives......................        -             (107.3)                 -                -             (107.3)
                                     -------------- ---------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  financing activities.............     (580.0)           948.0             (1,282.3)           403.1           (511.2)
                                     -------------- ---------------- --------------------- ---------------- ----------------
Net increase (decrease) in cash
  and cash equivalents.............     (158.3)            54.8                550.8            207.0            654.3

Cash and cash equivalents at
  beginning of year................      332.1            585.7                809.7           (688.9)         1,038.6
                                     -------------- ---------------- --------------------- ---------------- ----------------
Cash and cash equivalents at end
  of year..........................  $   173.8         $  640.5            $ 1,360.5         $ (481.9)       $ 1,692.9
                                     ============== ================ ===================== ================ ================

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

                                      195

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                       PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL       INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     -------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                              
OPERATING ACTIVITIES
Net cash provided by operating
  activities......................    $     7.2      $  2,928.6          $   2,519.4       $    (75.6)       $  5,379.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.......................          -         (14,517.3)            (2,447.2)           281.0         (16,683.5)
  Sales...........................          -           8,094.4                365.6              -             8,460.0
  Maturities......................          -           3,629.2                844.1              -             4,473.3
Net cash flows from trading
  securities......................          -               -                  (84.4)             2.0             (82.4)
Mortgage loans acquired or
  originated......................          -            (960.0)           (48,976.4)          (280.9)        (50,217.3)
Mortgage loans sold or repaid.....          -           1,368.5             48,745.5            (86.3)         50,027.7
Purchase of mortgage servicing
  rights..........................          -               -                 (931.7)             -              (931.7)
Proceeds from sale of mortgage
  servicing rights................          -               -                    8.6              -                 8.6
Real estate acquired..............          -            (204.7)               (69.1)             -              (273.8)
Real estate sold..................          -             168.9                 86.8              -               255.7
Net change in property and
  equipment.......................          -             (52.9)                (6.6)             -               (59.5)
Net proceeds from sales of
  subsidiaries....................          -               -                  500.8              -               500.8
Purchases of interest in
  subsidiaries, net of cash
  acquired........................          -               -                  (54.5)             -               (54.5)
Dividends received from
  (contributions to)
  unconsolidated entities.........      1,100.0           206.0               (194.4)        (1,111.6)              -
Net change in other investments...          -              86.6                877.3           (465.4)            498.5
                                  ----------------- ---------------- --------------------- -------------    ----------------
Net cash provided by (used in)
  investing activities............    $ 1,100.0      $ (2,181.3)         $  (1,335.6)      $ (1,661.2)       $ (4,078.1)

                                      196

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                       PRINCIPAL     PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL       INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY        ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     -------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)
                                                                                              
FINANCING ACTIVITIES
Issuance of common stock...........   $    22.0         $    -         $       -            $   -            $     22.0
Acquisition and sales of treasury
  stock, net.......................      (750.4)             -                 8.0              -                (742.4)
Dividends to shareholders..........       (83.8)             -                 -                -                 (83.8)
Issuance of long-term debt.........         -                0.1              64.0              -                  64.1
Principal repayments of
  long-term debt...................         -              (91.3)            (81.8)            63.1              (110.0)
Net proceeds of short-term
  borrowings.......................         -                -               265.1           (211.9)               53.2
Dividends paid to parent...........         -             (590.2)         (1,100.0)         1,690.2                 -
Investment contract deposits.......         -            7,014.1               -                -               7,014.1
Investment contract withdrawals....         -           (7,225.7)              -                -              (7,225.7)
Net increase in bank deposits......         -                -               184.4              -                 184.4
                                      ------------- ---------------- --------------------- ---------------- ----------------
Net cash used in financing
  activities.......................      (812.2)          (893.0)           (660.3)         1,541.4              (824.1)
                                      ------------- ---------------- --------------------- ---------------- ----------------
Net increase (decrease) in cash
  and cash equivalents.............       295.0           (145.7)            523.5           (195.4)              477.4

Cash and cash equivalents at
  beginning of year................        37.1            731.4             286.2           (493.5)              561.2
                                      ------------- ---------------- --------------------- ---------------- ----------------
Cash and cash equivalents at end
  of year..........................   $   332.1         $  585.7       $     809.7          $(688.9)         $  1,038.6
                                     ============== ================ ===================== ================ ================

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

                                      197

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                       PRINCIPAL      PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL        INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                       GROUP, INC.       COMPANY       OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY (2)     ONLY            COMBINED (1)        ELIMINATIONS      CONSOLIDATED
                                     ---------------- ---------------- --------------------- ---------------- ----------------
                                                                         (IN MILLIONS)

OPERATING ACTIVITIES
Net cash provided by
  operating activities..........     $      0.2      $   2,252.7         $     1,562.6        $     97.1     $   3,912.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................            -          (11,939.5)             (2,932.3)              -         (14,871.8)
  Sales.........................            -            6,441.6                 205.3              60.8         6,707.7
  Maturities....................            -            2,440.6               2,288.9               -           4,729.5
Net cash flows from
  trading securities............            -                -                   (17.0)              -             (17.0)
Mortgage loans acquired or
  originated....................            -             (357.1)            (40,549.0)            449.2       (40,456.9)
Mortgage loans sold or repaid..             -            1,636.2              39,638.2            (365.8)       40,908.6
Purchase of mortgage
  servicing rights..............            -                -                  (968.4)              -            (968.4)
Proceeds from sale of mortgage
  servicing rights..............            -                -                    31.5               -              31.5
Real estate acquired............            -             (279.8)                (10.2)              -            (290.0)
Real estate sold................            -              795.3                   8.5               -             803.8
Net change in property and
  equipment.....................            -              (78.5)                (12.1)              -             (90.6)
Net disbursements from sales
  of subsidiaries...............            -               (1.4)                 (6.5)              -              (7.9)
Purchases of interest in
  subsidiaries, net of cash
  acquired......................            -                -                   (11.1)              -             (11.1)
Dividends received from
  (contributions to)
  unconsolidated entities.......       (1,614.7)           598.3                (695.1)          1,711.5             -
Net change in other
  investments...................            -             (281.6)               (499.4)            575.6          (205.4)
                                     -------------- ---------------- --------------------- --------------  -----------------
Net cash used in investing
  activities....................     $ (1,614.7)     $  (1,025.9)         $   (3,528.7)       $  2,431.3     $  (3,738.0)

                                      198

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                       PRINCIPAL       PRINCIPAL LIFE   PRINCIPAL FINANCIAL                       PRINCIPAL
                                       FINANCIAL         INSURANCE      SERVICES, INC. AND                        FINANCIAL
                                      GROUP, INC.        COMPANY        OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY (2)     ONLY            COMBINED (1)         ELIMINATIONS      CONSOLIDATED
                                     ----------------- ---------------- --------------------- ---------------- ----------------
                                                                               (IN MILLIONS)
                                                                                                  
FINANCING ACTIVITIES
Issuance of common stock.........       $2,019.3       $      -          $        -           $     -            $ 2,019.3
Payments to eligible
  policyholders under plan of
  conversion.....................            -           (1,177.5)                -                 -             (1,177.5)
Acquisition of treasury stock....         (367.7)             -                   -                 -               (367.7)
Issuance of long-term debt.......            -                0.1               149.1               -                149.2
Principal repayments of
  long-term debt.................            -             (175.4)              (53.7)             24.7             (204.4)
Net proceeds (repayments) of
  short-term borrowings..........            -             (604.9)              111.0             546.0               52.1
Dividends paid to parent.........            -            1,044.7             1,614.7          (2,659.4)               -
Investment contract deposits.....            -            5,054.9                 -                 -              5,054.9
Investment contract                          -                                    -                 -
  withdrawals....................                        (6,075.1)                                                (6,075.1)
Net increase in bank deposits....            -                -                 144.8               -                144.8
                                     ----------------- ---------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  financing activities...........        1,651.6         (1,933.2)            1,965.9          (2,088.7)            (404.4)
                                     ----------------- ---------------- --------------------- ---------------- ----------------
Net increase (decrease) in
  cash and cash equivalents......           37.1           (706.4)               (0.2)            439.7             (229.8)

Cash and cash equivalents at
  beginning of year..............             -           1,437.8               286.4            (933.2)             791.0
                                     ----------------- ---------------- --------------------- ---------------- ----------------
Cash and cash equivalents at
  end of year....................       $   37.1       $    731.4        $      286.2         $  (493.5)         $   561.2
                                     ================= ================ ===================== ================ ================

SCHEDULE OF NONCASH
  TRANSACTIONS
Policy credits to eligible
  policyholders under plan of
  conversion.....................                      $    472.6                                                $   472.6
                                                       ================                                        ================
Stock issued in exchange for
  membership interest............                      $  5,050.3                                                $ 5,050.3
                                                       ================                                        ================

- -----------------------
(1)  Principal Financial  Services,  Inc.  consolidated,  except Principal Life,
     which is reported on the equity method.
(2)  The PFG parent company only Statement of Cash Flows reflects the results of
     operations  of PFG  from  October  26,  2001,  the  effective  date  of the
     demutualization and initial public offering. Prior to October 26, 2001, the
     date Principal  Mutual Holding  Company  converted from a mutual  insurance
     holding company to a stock company,  PFG, a Delaware business  corporation,
     had no assets or operations.

                                      199

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

In December  2003, we filed a shelf  registration  statement with the Securities
and Exchange  Commission.  The shelf registration totals $3.0 billion,  with the
ability to issue debt securities, preferred stock, common stock, warrants, stock
purchase  contracts  and  stock  purchase  units  of  PFG  and  trust  preferred
securities of three subsidiary trusts. If we issue securities,  we intend to use
the  proceeds  from  the  sale of the  securities  offered  by this  prospectus,
including the corresponding junior subordinated  debentures issued to the trusts
in  connection  with  their  investment  of all the  proceeds  from  the sale of
preferred securities, for general corporate purposes, including working capital,
capital expenditures, investments in subsidiaries,  acquisitions and refinancing
of debt, including commercial paper and other short-term indebtedness. Principal
Financial Services, Inc. unconditionally guarantees our obligations with respect
to one or more series of debt  securities  described  in the shelf  registration
statement.

The following tables set forth condensed  consolidating financial information of
Principal  Financial  Services,  Inc. and Principal  Financial Group, Inc. as of
December 31, 2003 and 2002, and for the years ended December 31, 2003,  2002 and
2001.

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2003

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL          INSURANCE                              PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.   OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------  --------------------- ---------------- ----------------
                                                                        (IN MILLIONS)
                                                                                                
ASSETS
Investments, excluding
  investment in
  unconsolidated entities.......      $    -           $   150.5         $  55,260.1         $      -          $  55,410.6
Investment in unconsolidated
  entities......................       7,234.0           7,771.7               167.2          (15,005.7)             167.2
Cash and cash equivalents.......         173.8             872.7               870.1             (223.7)           1,692.9
Other intangibles...............           -                 -                 121.4                -                121.4
Mortgage loan servicing rights..           -                 -               1,953.1                -              1,953.1
Separate account assets.........           -                 -              43,407.8                -             43,407.8
All other assets................           1.7             186.1             4,940.1              (17.5)           5,001.4
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total assets..................      $7,409.5         $ 8,981.0         $ 106,610.8         $(15,246.9)       $ 107,754.4
                                     =============== ================= ===================== ================ ================
LIABILITIES
Contractholder funds............      $    -           $     -           $  28,902.5         $      -          $  28,902.5
Future policy benefits and
  claims........................           -                 -              15,474.7                -             15,474.7
Other policyholder funds........           -                 -                 710.2                -                710.2
Short-term debt.................           -               399.9             1,228.6              (10.7)           1,617.8
Long-term debt..................           -               664.0             2,103.3                -              2,767.3
Income taxes currently
  payable.......................           -                14.1                76.6               (0.7)              90.0
Deferred income taxes...........           8.2              20.7             1,615.1                -              1,644.0
Separate account liabilities....           -                 -              43,407.8                -             43,407.8
Other liabilities...............           1.7             648.3             5,320.3             (229.8)           5,740.5
                                      -------------- ----------------- --------------------- ---------------- ----------------
  Total liabilities.............      $    9.9         $ 1,747.0         $  98,839.1         $   (241.2)       $ 100,354.8

                                      200

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

      CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION (CONTINUED)
                                DECEMBER 31, 2003
                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                   
STOCKHOLDERS' EQUITY
Common stock....................       $      3.8     $         -        $          64.4     $       (64.4)       $      3.8
Additional paid-in capital......          7,153.2           6,796.9              5,851.8         (12,648.7)          7,153.2
Retained earnings (deficit).....            630.4            (734.3)               685.6              48.7             630.4
Accumulated other
  comprehensive income..........          1,171.3           1,171.4              1,169.9          (2,341.3)          1,171.3
Treasury stock, at cost.........         (1,559.1)              -                    -                 -            (1,559.1)
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total stockholders' equity....          7,399.6           7,234.0              7,771.7         (15,005.7)          7,399.6
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total liabilities and
    stockholders' equity........       $  7,409.5     $     8,981.0      $     106,610.8     $   (15,246.9)       $107,754.4
                                     =============== ================= ===================== ================ ================

                                      201

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

            CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
                                DECEMBER 31, 2002

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                  
ASSETS
Investments, excluding
  investment in
  unconsolidated entities.......      $      -            $    461.7       $  48,428.3         $      -          $  48,890.0
Investment in unconsolidated
  entities......................         6,333.7             6,402.2             110.9          (12,741.2)             105.6
Cash and cash equivalents.......           332.1               977.7             301.4             (572.6)           1,038.6
Other intangibles...............             -                   -                88.8                -                 88.8
Mortgage loan servicing rights..             -                   -             1,518.6                -              1,518.6
Separate account assets.........             -                   -            33,513.1              (11.7)          33,501.4
All other assets................             1.4               280.3           4,702.6             (266.0)           4,718.3
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total assets..................      $  6,667.2          $  8,121.9       $  88,663.7         $(13,591.5)       $  89,861.3
                                     =============== ================= ===================== ================ ================
LIABILITIES
Contractholder funds............      $      -            $      -         $  26,315.0         $      -          $  26,315.0
Future policy benefits and
  claims........................             -                   -            14,736.4                -             14,736.4
Other policyholder funds........             -                   -               642.9                -                642.9
Short-term debt.................             -                 157.5             407.3                -                564.8
Long-term debt..................             -                 663.8             668.7                -              1,332.5
Income taxes currently
  payable.......................             -                  59.4             195.1             (254.5)               -
Deferred income taxes...........             8.4                26.0           1,149.7               (6.4)           1,177.7
Separate account liabilities....             -                   -            33,513.1              (11.7)          33,501.4
Other liabilities...............             1.6               881.5           4,633.3             (583.0)           4,933.4
                                     --------------- ----------------- --------------------- ---------------- ----------------
   Total liabilities............            10.0             1,788.2          82,261.5             (855.6)          83,204.1

STOCKHOLDERS' EQUITY
Common stock....................             3.8                 -                56.1              (56.1)               3.8
Additional paid-in capital......         7,106.3             6,758.1           5,733.2          (12,491.3)           7,106.3
Retained earnings (deficit).....            29.4            (1,060.2)            (17.6)           1,077.8               29.4
Accumulated other comprehensive
  income........................           635.8               635.8             630.5           (1,266.3)             635.8
Treasury stock, at cost.........        (1,118.1)                -                 -                  -             (1,118.1)
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total stockholders' equity....         6,657.2             6,333.7           6,402.2          (12,735.9)           6,657.2
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total liabilities and
    stockholders' equity........      $  6,667.2          $  8,121.9       $  88,663.7         $(13,591.5)       $  89,861.3
                                     =============== ================= ===================== ================ ================

                                      202

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                      GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS     CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                   
REVENUES
Premiums and other considerations...   $    -         $      -          $      3,634.1         $      -           $ 3,634.1
Fees and other revenues.............        -                -                 2,417.2               (1.0)          2,416.2
Net investment income...............        3.5            115.9               3,299.4                0.8           3,419.6
Net realized/unrealized capital
  gains (losses)....................        -               22.6                 (88.3)               -               (65.7)
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total revenues....................        3.5            138.5               9,262.4               (0.2)          9,404.2

EXPENSES
Benefits, claims, and settlement
  expenses..........................        -                -                 4,861.3                -             4,861.3
Dividends to policyholders..........        -                -                   307.9                -               307.9
Operating expenses..................       10.8             65.2               3,205.5               (0.2)          3,281.3
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total expenses....................       10.8             65.2               8,374.7               (0.2)          8,450.5
                                     --------------- ----------------- --------------------- ---------------- ----------------
Income (loss) from continuing
  operations before income taxes....       (7.3)            73.3                 887.7                -               953.7

Income taxes (benefits).............       (2.7)            11.5                 217.0                -               225.8
Equity in the net income of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of
  accounting change.................      732.5            689.1                   -             (1,421.6)              -
                                     --------------- ----------------- --------------------- ---------------- ----------------
Income from continuing
  operations, net of related
  income taxes......................      727.9            750.9                 670.7           (1,421.6)            727.9
Income from discontinued
  operations, net of related
  income taxes......................       21.8              -                    21.8              (21.8)             21.8
                                     --------------- ----------------- --------------------- ---------------- ----------------
Income before cumulative
  effect of accounting change.......      749.7            750.9                 692.5           (1,443.4)            749.7

Cumulative effect of accounting
  change, net of related
  income taxes......................       (3.4)             -                    (3.4)               3.4              (3.4)
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net income..........................   $  746.3       $    750.9        $        689.1         $ (1,440.0)        $   746.3
                                     =============== ================= ===================== ================ ================

                                      203

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                  
REVENUES
Premiums and other considerations..     $    -         $     -            $  3,881.8           $       -         $ 3,881.8
Fees and other revenues............          -               -               1,991.7                  (0.9)        1,990.8
Net investment income..............          4.0            95.4             3,204.4                   0.9         3,304.7
Net realized/unrealized capital
  gains (losses)...................          -              10.0              (364.8)                  -            (354.8)
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total revenues...................          4.0           105.4             8,713.1                   -           8,822.5

EXPENSES
Benefits, claims, and settlement
  expenses.........................          -               -               5,216.9                   -           5,216.9
Dividends to policyholders.........          -               -                 316.6                   -             316.6
Operating expenses.................          7.1            62.4             2,553.7                   -           2,623.2
                                     --------------- ----------------- --------------------- ---------------- ----------------
  Total expenses...................          7.1            62.4             8,087.2                   -           8,156.7
                                     --------------- ----------------- --------------------- ---------------- ----------------
Income (loss) from continuing
  operations before income taxes...         (3.1)           43.0               625.9                   -             665.8

Income taxes (benefits)............         (1.3)           11.8                35.4                   -              45.9
Equity in the net income of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of
  accounting change................        621.7             3.3                 -                  (625.0)            -
                                     --------------- ----------------- --------------------- ---------------- ----------------
Income from continuing
  operations, net of related
  income taxes.....................        619.9            34.5               590.5                (625.0)          619.9
Income (loss) from discontinued
operations, net of related
income taxes.......................       (196.7)          109.6              (306.3)                196.7          (196.7)
                                      --------------- ----------------- --------------------- ---------------- ----------------
Income before cumulative
  effect of accounting change......        423.2           144.1               284.2                (428.3)          423.2

Cumulative effect of accounting
  change, net of related
  income taxes.....................       (280.9)            -                (280.9)                280.9          (280.9)
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net income.........................     $  142.3       $   144.1           $     3.3           $    (147.4)      $   142.3
                                     =============== ================= ===================== ================ ================

                                      204

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                                                            PRINCIPAL LIFE
                                       PRINCIPAL          PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL          FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.        SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY (1)       ONLY              COMBINED           ELIMINATIONS      CONSOLIDATED
                                     ----------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                   
REVENUES
Premiums and other considerations..     $     -          $     -             $  4,122.3          $      -         $  4,122.3
Fees and other revenues............           -                -                1,600.7                 -            1,600.7
Net investment income..............           0.7             15.3              3,367.6                 -            3,383.6
Net realized/unrealized capital
  gains (losses)...................           -                0.4               (514.4)                -             (514.0)
                                     ----------------- ----------------- --------------------- ---------------- ----------------
  Total revenues...................           0.7             15.7              8,576.2                 -            8,592.6

EXPENSES
Benefits, claims, and settlement
  expenses.........................           -                -                5,482.1                 -            5,482.1
Dividends to policyholders.........           -                -                  313.7                 -              313.7
Operating expenses.................           0.3              7.8              2,324.6                 -            2,332.7
                                     ----------------- ----------------- --------------------- ---------------- ----------------
  Total expenses...................           0.3              7.8              8,120.4                 -            8,128.5
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Income from continuing operations
  before income taxes..............           0.4              7.9                455.8                 -              464.1

Income taxes (benefits)............           0.2             (0.4)                83.6                 -               83.4
Equity in the net loss of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of accounting
  change...........................          (7.4)           (37.6)                 -                  45.0              -
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Income (loss) from continuing
  operations, net of related
  income taxes....................           (7.2)           (29.3)               372.2                45.0            380.7

Loss from discontinued operations,
  net of related income taxes......         (11.2)             -                  (11.2)               11.2            (11.2)
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Income (loss) before cumulative
  effect of accounting change......         (18.4)           (29.3)               361.0                56.2            369.5
Cumulative effect of accounting
  change, net of related income
  taxes............................         (10.7)             -                  (10.7)               10.7            (10.7)
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Net income (loss) .................     $   (29.1)       $   (29.3)          $    350.3          $     66.9       $    358.8
                                     ================= ================= ===================== ================ ================

- -----------------------
(1)  The PFG parent company only Statement of Operations reflects the results of
     operations  of PFG  from  October  26,  2001,  the  effective  date  of the
     demutualization and initial public offering. Prior to October 26, 2001, the
     date Principal  Mutual Holding  Company  converted from a mutual  insurance
     holding company to a stock company,  PFG, a Delaware business  corporation,
     had no assets or operations.

                                      205

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                 
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities............     $  (3.3)        $  (132.4)        $    3,551.5          $    298.0       $     3,713.8

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.......................         -               525.6            (11,126.4)             (339.6)          (10,940.4)
  Sales...........................         -              (139.8)             2,762.9               339.6             2,962.7
  Maturities......................         -                 -                5,229.7                 -               5,229.7
Net cash flows from trading
  securities......................         -                 -                    -                   -                   -
Mortgage loans acquired or
  originated......................         -                 -              (62,829.0)                -             (62,829.0)
Mortgage loans sold or repaid.....         -                 -               64,135.6                 -              64,135.6
Purchase of mortgage servicing
  rights..........................         -                 -               (1,098.4)                -              (1,098.4)
Proceeds from sale of mortgage
  servicing rights................         -                 -                   29.9                 -                  29.9
Real estate acquired..............         -                 -                 (283.3)                -                (283.3)
Real estate sold..................         -                 -                  133.3                 -                 133.3
Net change in property and
  equipment.......................         -                 -                  (28.9)                -                 (28.9)
Net proceeds from sales of
  subsidiaries....................         -                 -                   40.9                 -                  40.9
Purchases of interest in
  subsidiaries, net of cash
  acquired........................         -                (8.2)              (128.0)                -                (136.2)
Dividends received from
  (contributions to)
  unconsolidated entities.........       425.0             (57.1)               142.5              (510.4)                -
Net change in other investments...         -              (110.6)               244.3               102.1               235.8
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  investing activities............     $ 425.0         $   209.9         $   (2,774.9)         $   (408.3)      $    (2,548.3)

                                      206

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2003

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                
FINANCING ACTIVITIES
Issuance of common stock...........    $   18.3         $    -              $        -         $      -        $      18.3
Acquisition and sales of treasury
  stock, net.......................      (453.0)             -                       -                -             (453.0)
Dividends to shareholders..........      (145.3)             -                       -                -             (145.3)
Issuance of long-term debt.........         -                0.2                    34.7             (0.2)            34.7
Principal repayments of long-
  term debt........................         -                -                     (85.5)             0.2            (85.3)
Net proceeds (repayments) of
  short-term borrowings............         -              242.3                (1,415.5)           (10.6)        (1,183.8)
Dividends paid to parent...........         -             (425.0)                  (44.8)           469.8              -
Investment contract deposits.......         -                -                   9,586.0              -            9,586.0
Investment contract withdrawals....         -                -                  (8,666.2)             -           (8,666.2)
Net increase in bank deposits......         -                -                     372.7              -              372.7
Proceeds from financing element
  derivatives......................         -                -                     118.0              -              118.0
Proceeds for financing element
  derivatives......................         -                -                    (107.3)             -             (107.3)
                                     --------------- ----------------- --------------------- ---------------- -----------------
Net cash used in financing
  activities.......................      (580.0)          (182.5)                 (207.9)           459.2           (511.2)
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net increase (decrease) in cash
  and cash equivalents.............      (158.3)          (105.0)                  568.7            348.9            654.3

Cash and cash equivalents at
  beginning of year................       332.1            977.7                   301.4           (572.6)         1,038.6
                                     --------------- ----------------- --------------------- ---------------- ----------------
Cash and cash equivalents at end
  of year..........................  $    173.8         $  872.7            $      870.1       $   (223.7)     $   1,692.9
                                     =============== ================= ===================== ================ ================

                                      207

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                                                           PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                
OPERATING ACTIVITIES
Net cash provided by operating
  activities.......................   $     7.2       $    465.0         $     5,214.4         $    (307.0)    $   5,379.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases........................         -             (352.4)            (16,331.1)                -         (16,683.5)
  Sales............................         -                7.1               8,452.9                 -           8,460.0
  Maturities.......................         -                -                 4,473.3                 -           4,473.3
Net cash flows from trading
  securities.......................         -                -                   (82.4)                -             (82.4)
Mortgage loans acquired or
  originated.......................         -                -               (50,217.3)                -         (50,217.3)
Mortgage loans sold or repaid......         -                -                50,027.7                 -          50,027.7
Purchase of mortgage servicing
  rights...........................         -                -                  (931.7)                -            (931.7)
Proceeds from sale of mortgage
  servicing rights.................         -                -                     8.6                 -               8.6
Real estate acquired...............         -                -                  (273.8)                -            (273.8)
Real estate sold...................         -                -                   255.7                 -             255.7
Net change in property and
  equipment........................         -                -                   (59.5)                -             (59.5)
Net proceeds from sales of
  subsidiaries.....................         -                -                   500.8                 -             500.8
Purchases of interest in
  subsidiaries, net of cash
  acquired.........................         -                -                   (54.5)                -             (54.5)
Dividends received from
  (contributions to)
  unconsolidated entities..........     1,100.0           (480.4)                130.0              (749.6)            -
Net change in other investments....         -            1,402.0                (189.0)             (714.5)          498.5
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  investing activities.............   $ 1,100.0       $    576.3         $    (4,290.3)       $   (1,464.1)    $  (4,078.1)

                                      208

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                                                          PRINCIPAL LIFE
                                       PRINCIPAL        PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL        FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.      SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY         ONLY               COMBINED          ELIMINATIONS      CONSOLIDATED
                                     --------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                 
FINANCING ACTIVITIES
Issuance of common stock...........   $     22.0         $       -        $         -            $      -       $       22.0
Acquisition and sales of treasury
  stock, net.......................       (750.4)                -                  8.0                 -             (742.4)
Dividends to shareholders..........        (83.8)                -                  -                   -              (83.8)
Issuance of long-term debt.........          -                   0.2               64.1                (0.2)            64.1
Principal repayments of
  long-term debt...................          -                   -               (110.2)                0.2           (110.0)
Net proceeds (repayment) of
  short-term borrowings............          -                 (42.3)              95.5                 -               53.2
Dividends paid to parent...........          -              (1,100.0)            (590.2)            1,690.2              -
Investment contract deposits.......          -                   -              7,014.1                 -            7,014.1
Investment contract withdrawals....          -                   -             (7,225.7)                -           (7,225.7)
Net increase in bank deposits......          -                   -                184.4                 -              184.4
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net cash used in financing
  activities.......................       (812.2)           (1,142.1)            (560.0)            1,690.2           (824.1)
                                     --------------- ----------------- --------------------- ---------------- ----------------
Net increase (decrease) in cash
  and cash equivalents.............        295.0              (100.8)             364.1               (80.9)           477.4

Cash and cash equivalents at
  beginning of year................         37.1             1,078.5              (62.7)             (491.7)           561.2
                                     --------------- ----------------- --------------------- ---------------- ----------------
Cash and cash equivalents at end
  of year..........................   $    332.1         $     977.7      $       301.4          $   (572.6)    $    1,038.6
                                     =============== ================= ===================== ================ ================

                                      209

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                                                            PRINCIPAL LIFE
                                       PRINCIPAL          PRINCIPAL           INSURANCE                             PRINCIPAL
                                       FINANCIAL          FINANCIAL          COMPANY AND                            FINANCIAL
                                      GROUP, INC.        SERVICES, INC.    OTHER SUBSIDIARIES                       GROUP, INC.
                                      PARENT ONLY (1)       ONLY              COMBINED           ELIMINATIONS      CONSOLIDATED
                                     ----------------- ----------------- --------------------- ---------------- ----------------
                                                                          (IN MILLIONS)
                                                                                                    
OPERATING ACTIVITIES
Net cash provided by (used in)
  operating activities..........      $      0.2           $   (457.2)         $    3,713.4      $   656.2         $   3,912.6

INVESTING ACTIVITIES
Available-for-sale securities:
  Purchases.....................             -                    -               (14,871.8)           -             (14,871.8)
  Sales.........................             -                    -                 6,707.7            -               6,707.7
  Maturities....................             -                    -                 4,729.5            -               4,729.5
Net cash flows from trading
  securities....................             -                    -                   (17.0)           -                 (17.0)
Mortgage loans acquired or
  originated....................             -                    -               (40,456.9)           -             (40,456.9)
Mortgage loans sold or repaid...             -                    -                40,908.6            -              40,908.6
Purchase of mortgage servicing
  rights........................             -                    -                  (968.4)           -                (968.4)
Proceeds from sale of mortgage
  servicing rights..............             -                    -                    31.5            -                  31.5
Real estate acquired............             -                    -                  (290.0)           -                (290.0)
Real estate sold................             -                    -                   803.8            -                 803.8
Net change in property and
  equipment.....................             -                    -                   (90.6)           -                 (90.6)
Net disbursements from sales
  of subsidiaries...............             -                    -                    (7.9)           -                  (7.9)
Purchases of interest in
  subsidiaries, net of cash
  acquired......................             -                    -                   (11.1)           -                 (11.1)
Dividends received from
  (contributions to)
  unconsolidated entities.......        (1,614.7)             1,411.2                 709.9         (506.4)                -
Net change in other
  investments...................             -                    -                  (419.4)         214.0              (205.4)
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  investing activities..........      $ (1,614.7)          $  1,411.2          $   (3,242.1)     $  (292.4)        $  (3,738.0)

                                      210

                         PRINCIPAL FINANCIAL GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
                      FOR THE YEAR ENDED DECEMBER 31, 2001

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

FINANCING ACTIVITIES
Issuance of common stock.........      $  2,019.3         $   -             $        -           $      -          $  2,019.3
Payments to eligible
  policyholders under plan of
  conversion.....................             -               -                 (1,177.5)               -            (1,177.5)
Acquisition of treasury stock....          (367.7)            -                      -                  -              (367.7)
Issuance of long-term debt.......             -               -                    149.2                -               149.2
Principal repayments of
  long-term debt.................             -              (0.5)                (203.9)               -              (204.4)
Net proceeds (repayments) of
  short-term borrowings..........             -             200.0                 (147.9)               -                52.1
Dividends paid to parent.........             -             (75.0)                   -                 75.0               -
Investment contract deposits.....             -               -                  5,054.9                -             5,054.9
Investment contract
  withdrawals....................             -               -                 (6,075.1)               -            (6,075.1)
Net increase in bank deposits....             -               -                    144.8                -               144.8
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Net cash provided by (used in)
  financing activities...........         1,651.6           124.5               (2,255.5)              75.0            (404.4)
Net increase (decrease) in
  cash and cash equivalents......            37.1         1,078.5               (1,784.2)             438.8            (229.8)

Cash and cash equivalents at
  beginning of year..............             -               -                  1,721.5             (930.5)            791.0
                                     ----------------- ----------------- --------------------- ---------------- ----------------
Cash and cash equivalents at
  end of year....................      $     37.1        $1,078.5           $      (62.7)        $   (491.7)       $    561.2
                                     ================= ================= ===================== ================ ================
SCHEDULE OF NONCASH
  TRANSACTIONS
Policy credits to eligible
  policyholders under plan of
  conversion..................                                              $      472.6                           $    472.6
                                                                         ======================                 ================
Stock issued in exchange for
  membership interest..........                                             $    5,050.3                           $  5,050.3
                                                                         ======================                 ================

- -----------------------
(1)  The PFG parent company only Statement of Cash Flows reflects the results of
     operations  of PFG  from  October  26,  2001,  the  effective  date  of the
     demutualization and initial public offering. Prior to October 26, 2001, the
     date Principal  Mutual Holding  Company  converted from a mutual  insurance
     holding company to a stock company,  PFG, a Delaware business  corporation,
     had no assets or operations.

                                      211

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

In order to ensure  that the  information  that we must  disclose in our filings
with the SEC is recorded, processed,  summarized and reported on a timely basis,
we have adopted disclosure controls and procedures. Our Chief Executive Officer,
J. Barry Griswell,  and our Chief  Financial  Officer,  Michael H. Gersie,  have
reviewed and evaluated our disclosure controls and procedures as of December 31,
2003,  and have  concluded  that our  disclosure  controls  and  procedures  are
effective.

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  called for by Item 10  pertaining to directors is set forth in
Principal  Financial Group,  Inc.'s proxy statement  relating to the 2004 annual
shareholders  meeting  (the  "Proxy  Statement")  which  will be filed  with the
Securities and Exchange  Commission ("SEC") on or about April 5, 2004, under the
captions,   "Election  of  Directors",   "Governance  of  the  Company  -  Audit
Committee," and "Section 16(a) Beneficial Ownership Reporting  Compliance." Such
information is incorporated  herein by reference.  The information called for by
Item 10  pertaining  to  executive  officers can be found in Part I of this Form
10-K under the caption,  "Executive Officers of the Registrant." The Company has
adopted  a code of ethics  that  applies  to our  principal  executive  officer,
principal financial officer and principal accounting officer. The code of ethics
has been posted on our Internet website,  found at www.principal.com.  We intend
to satisfy disclosure requirements regarding amendments to, or waivers from, any
provision of our code of ethics on our website.

ITEM 11. EXECUTIVE COMPENSATION

The  information  called for by Item 11 pertaining to executive  compensation is
set forth in the Proxy  Statement under the caption,  "Executive  Compensation,"
and is incorporated herein by reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCK MATTERS

The  information  called for by Item 12  pertaining  to  security  ownership  of
certain  beneficial  owners and  management is set forth in the Proxy  Statement
under  the  caption,  "Security  Ownership  of  Certain  Beneficial  Owners  and
Management," and is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

In  general,  the  Company  has four  compensation  plans under which its equity
securities are authorized for issuance to employees or directors:  the Principal
Financial Group, Inc. Stock Incentive Plan, the Principal  Financial Group, Inc.
Employee  Stock Purchase Plan, the Principal  Financial  Group,  Inc.  Long-Term
Performance Plan, and the Principal  Financial Group, Inc. Directors Stock Plan.
The information  called for by Item 12 pertaining to equity  compensation is set
forth in the Proxy Statement under the caption "Approval of Compensation Plans -
Equity Compensation Plan Information," and is incorporated herein by reference.

                                      212

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  called for by Item 13 pertaining to certain  relationships  and
related  transactions  is set forth in the Proxy  Statement  under the captions,
"Compensation    Committee    Interlocks   and   Insider    Participation"   and
"CertainRelationships  and Related  Transactions," and is incorporated herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  called for by Item 14 pertaining to principal  accountant fees
and  services  is  set  forth  in  the  Proxy   Statement   under  the  caption,
"Ratification of Appointment of Independent Auditors" and is incorporated herein
by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  a. Documents filed as part of this report.

     1.   Financial Statements (see Item 8. Financial Statements and
            Supplementary Data)
          Report of Independent Auditors
          Audited Consolidated Financial Statements
          Consolidated Statements of Financial Position
          Consolidated Statements of Operations
          Consolidated Statements of Stockholders` Equity
          Consolidated Statements of Cash Flows
          Notes to Consolidated Financial Statements

     2.   Report of Independent Auditors on Schedules
          Schedule I - Summary of  Investments - Other Than  Investments in
            Related   Parties
          Schedule  II  -  Condensed   Financial  Information  of  Registrant
            (Parent  Only)
          Schedule  III  - Supplementary Insurance Information
          Schedule IV - Reinsurance

          All other  schedules  for which  provision  is made in the  applicable
          accounting  regulation of the Securities  and Exchange  Commission are
          not required under the related  instructions or are  inapplicable  and
          therefore have been omitted.

     3.   Exhibits

          Exhibits filed herewith

          10.12.1  Agreement and Release, dated December 8, 2003, between
                   Principal Life Insurance Company and Michael T. Daley
          12       Statement Regarding Computation of Ratios of Earnings to
                   Fixed Charges
          21       Principal Financial Group, Inc. Member Companies as of
                   December 31, 2003
          23       Consent of Ernst & Young, LLP
          24       Power of Attorney
          31.1     Certification of J. Barry Griswell
          31.2     Certification of Michael H. Gersie
          32.1     Certification Pursuant to Section 1350 of Chapter 63 of Title
                   18 of the United States Code - J. Barry Griswell
          32.2     Certification Pursuant to Section 1350 of Chapter 63 of Title
                   18 of the United States Code - Michael H. Gersie

          Exhibits incorporated by reference

                                      213

EXHIBIT
NUMBER                                DESCRIPTION
  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      Amended and Restated Stockholder Rights Agreement, dated as of
           October 22, 2001**
  10.1     Principal Financial Group, Inc. Stock Incentive Plan***
  10.2     Principal Financial Group Long-Term Performance Plan*
  10.3     Resolution of the Human Resources  Committee of the Board of
           Directors of Principal Financial Group, Inc. amending the Principal
           Financial Group Long-Term Performance Plan as of October 31, 2002*
  10.4     Principal Financial Group Incentive Pay Plan (PrinPay), amended and
           restated effective January 1, 2002****
  10.5     Principal Financial Group, Inc. Directors Stock Plan*
  10.6     Principal Select Savings Excess Plan***
  10.7     Supplemental Executive Retirement Plan for Employees*
  10.8     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*
  10.9     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*
  10.10    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 an Executive*
  10.11    Compensatory Arrangement,  dated as of March 14, 2002, between
           Principal Life Insurance Company and James P. McCaughan.*****
  10.12    Compensatory  Arrangement,  dated as of April 26, 2001,  between
           Principal  Life  Insurance  Company and Michael T. Daley.**
  10.13    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*

  b. Reports on Form 8-K

     Two Current Reports on Form 8-K (Item 9 and Item 12) both dated November 3,
     2003, were furnished November 3, 2003.
     The Current Report on Form 8-K (Item 9), dated December 15, 2003, was
     furnished December 14, 2003.
     The Current Report on Form 8-K (Item 9), dated December 22, 2003, was
     furnished December 22, 2003

  c. See Item 15(a)(3).
  d. See Item 15(a)(2).

                                      214

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                     PRINCIPAL FINANCIAL GROUP, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the date indicated.

Dated:  March 3, 2004

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    -------------------------------               ----------------------
    J. Barry Griswell                             Sandra L. Helton
    Chairman, President, Chief                    Director
    Executive Officer and Director

By  /S/ MICHAEL H. GERSIE                     By  /S/ MICHAEL H. GERSIE*
    -------------------------------               ----------------------
    Michael H. Gersie                             Charles S. Johnson
    Executive Vice President and Chief            Director
    Financial Officer
    (Principal Financial Officer and
    Chief Accounting Officer)

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    -------------------------------               ----------------------
    Betsy J. Bernard                              William T. Kerr
    Director                                      Director

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    -------------------------------               ----------------------
    Jocelyn Carter-Miller                         Richard L. Keyser
    Director                                      Director

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    -------------------------------               ----------------------
    Gary E. Costley                               Victor H. Loewenstein
    Director                                      Director

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    --------------------------------              ----------------------
    David J. Drury                                Arjun K. Mathrani
    Director                                      Director

By  /S/ MICHAEL H. GERSIE*                    By  /S/ MICHAEL H. GERSIE*
    --------------------------------              ----------------------
    C. Daniel Gelatt, Jr.                         Federico F. Pena
    Director                                      Director

By  /S/ MICHAEL H. GERSIE                     By  /S/ MICHAEL H. GERSIE*
    --------------------------------              ----------------------
* ATTORNEY-IN-FACT AND AGENT                      Elizabeth E. Tallett
                                                  Director

                                      215

REPORT OF INDEPENDENT AUDITORS ON SCHEDULES

The Board of Directors and Stockholders
Principal Financial Group, Inc.

We have audited the  consolidated  financial  statements of Principal  Financial
Group,  Inc. (the Company) as of December 31, 2003 and 2002, and for each of the
three years in the period ended  December  31, 2003,  and have issued our report
thereon  dated  January 30, 2004  (included  elsewhere  in this Form 10-K).  Our
audits also included the financial  statement  schedules  listed in the Index at
Item 15(a) of this Form 10-K.  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.  As
discussed in Note 1 to the consolidated financial statements, in response to new
accounting  standards,  the  Company  changed  its  methods  of  accounting  for
derivative  instruments  and  hedging  activities  effective  January  1,  2001,
discontinued operations,  goodwill and other intangible assets effective January
1, 2002, and variable interest entities effective July 1, 2003.

                                                         /s/ Ernst & Young LLP

Des Moines, Iowa
January 30, 2004

                                      216

 SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
                             AS OF DECEMBER 31, 2003

                                                                                                            AMOUNT AS
                                                                                                           SHOWN IN THE
                                                                                                           STATEMENT OF
                                                                                                            FINANCIAL
                TYPE OF INVESTMENT                                          COST            VALUE           POSITION
- ---------------------------------------------------------------------    ------------   --------------  ------------------
                                                                                        (IN MILLIONS)
                                                                                                   
Fixed maturities, available-for-sale:
  U.S. Treasury securities and obligations of U.S.
    government corporations and agencies............................      $    617.0    $       628.9       $    628.9
  States, municipalities and political subdivisions.................           498.7            537.0            537.0
  Foreign governments...............................................           627.0            744.7            744.7
  Public utilities..................................................         2,952.5          3,162.1          3,162.1
  Convertibles and bonds with warrants attached.....................            70.3             81.0             81.0
  Redeemable preferred..............................................           329.4            333.7            333.7
  All other corporate bonds.........................................        23,204.7         24,841.3         24,841.3
Mortgage-backed and other asset-backed securities...................         6,795.8          7,121.0          7,121.0
                                                                         ------------   --------------  ------------------
    Total fixed maturities, available-for-sale......................        35,095.4         37,449.7         37,449.7

Fixed maturities, trading...........................................            94.9            102.9            102.9

Equity securities, available-for-sale
Common stocks:
  Banks, trust and insurance companies..............................            28.5             30.7             30.7
  Industrial, miscellaneous and all other...........................            58.6             66.1             66.1
Non-redeemable preferred stock......................................           604.9            615.7            615.7
                                                                         -------------  --------------  ------------------
    Total equity securities, available-for-sale.....................           692.0            712.5            712.5
Mortgage loans (1)..................................................        13,561.2             XXXX         13,508.1

Real estate, net:
  Real estate acquired in satisfaction of debt(2)...................            52.2             XXXX             49.8
  Other real estate(2)..............................................         1,506.8             XXXX          1,487.7
Policy loans........................................................           804.1             XXXX            804.1
Other investments(3)................................................         1,241.8             XXXX          1,463.0
                                                                         ------------                   ------------------
    Total investments...............................................      $ 53,048.4             XXXX       $ 55,577.8
                                                                         ============                   ==================

- -------------------
(1)  The amount shown in the Statement of Financial  Position for mortgage loans
     differs from cost as 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.

(2)  The amounts  shown in the  Statement of Financial  Position for real estate
     differ from cost due to  properties  which were  determined to be impaired.
     The cost bases of these  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.

(3)  The  amount  shown  in  the  Statement  of  Financial  Position  for  other
     investments  differs from cost due to  accumulated  earnings  from minority
     interests in  unconsolidated  entities and  properties  owned  jointly with
     venture  partners  and operated by the  partners.  Other  investments  also
     includes derivatives and certain seed money investments, which are reported
     at fair value.

                                      217

    SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY)

                         STATEMENT OF FINANCIAL POSITION

                                                                                 DECEMBER 31,
                                                                   ------------------------------------------
                                                                          2003                   2002
                                                                   -------------------    -------------------
                                                                      ($ IN MILLIONS, EXCEPT PER SHARE DATA)
                                                                                      
ASSETS:
Cash.....................................................             $      173.8          $      332.1
Income taxes receivable..................................                      1.7                   1.4
Investment in subsidiary ................................                  7,234.0               6,333.7
                                                                   -------------------    -------------------
  Total assets...........................................             $    7,409.5          $    6,667.2
                                                                   ===================    ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Amounts payable to subsidiary ...........................             $        1.7          $        1.6
Deferred income taxes....................................                      8.2                   8.4
                                                                   -------------------    -------------------
  Total liabilities......................................                      9.9                  10.0

STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share - 2,500.0
  million shares  authorized, 377.4 million and 376.7
  million  shares  issued,  320.7 million and 334.4
  million shares outstanding in 2003 and 2002,
  respectively...........................................                      3.8                   3.8
Additional paid-in capital...............................                  7,153.2               7,106.3
Retained earnings .......................................                    630.4                  29.4
Accumulated other comprehensive income...................                  1,171.3                 635.8
Treasury stock, at cost (56.7 million and 42.3 million
  shares in 2003 and 2002, respectively).................                 (1,559.1)             (1,118.1)
                                                                   -------------------    -------------------
  Total stockholders' equity.............................                  7,399.6               6,657.2
                                                                   -------------------    -------------------
    Total liabilities and stockholders' equity...........             $    7,409.5           $   6,667.2
                                                                   ===================    ===================

SEE ACCOMPANYING NOTES.

                                      218

   SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY)
                                  (CONTINUED)

                             STATEMENT OF OPERATIONS

                                                   YEAR ENDED             YEAR ENDED              FOR THE PERIOD
                                                  DECEMBER 31,            DECEMBER 31,          OCTOBER 26 THROUGH
                                                     2003                    2002                DECEMBER 31, 2001
                                               -------------------     ------------------     -----------------------
                                                                          ($ IN MILLIONS)
                                                                                      
REVENUES:
Net investment income ....................         $        3.5          $       4.0           $        0.7
                                               -------------------     ------------------     -----------------------
  Total revenues..........................                  3.5                  4.0                    0.7

EXPENSES:
Other operating costs and expenses .......                 10.8                  7.1                    0.3
                                               -------------------     ------------------     -----------------------
  Total expenses..........................                 10.8                  7.1                    0.3
                                               -------------------     ------------------     -----------------------
Income (loss) before income
  taxes...................................                 (7.3)                (3.1)                   0.4

Income taxes (benefits) ..................                 (2.7)                (1.3)                   0.2
Equity in the net income (loss) of
  subsidiaries, excluding
  discontinued operations and
  cumulative effect of accounting
  change .................................                732.5                621.7                   (7.4)
                                               -------------------     ------------------     -----------------------
Income (loss) from continuing
  operations, net of related
  income taxes............................                727.9                619.9                   (7.2)
Income (loss) from discontinued
  operations, net of related income
  taxes ..................................                 21.8               (196.7)                 (11.2)
                                               -------------------     ------------------     -----------------------
Income (loss) before cumulative
  effect of accounting changes ...........                749.7                423.2                  (18.4)
Cumulative effect of accounting
  changes, net of related income
  taxes...................................                 (3.4)              (280.9)                 (10.7)
                                               -------------------     ------------------     -----------------------
Net income (loss).........................         $      746.3          $     142.3           $      (29.1)
                                               ===================     ==================     =======================

SEE ACCOMPANYING NOTES.

                                      219

   SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY)
                                  (CONTINUED)

                             STATEMENT OF CASH FLOWS

                                                      YEAR ENDED           YEAR ENDED             FOR THE PERIOD
                                                     DECEMBER 31,         DECEMBER 31,          OCTOBER 26 THROUGH
                                                         2003                 2002              DECEMBER 31, 2001
                                                   -----------------     ----------------     -----------------------
                                                                           (IN MILLIONS)

Net income (loss) ...........................        $      746.3             $  142.3             $     (29.1)
  Adjustments to reconcile net income
   (loss) to net cash provided by
   operating activities:
   Loss (income) from discontinued
     operations, net of related income
     taxes ..................................               (21.8)               196.7                    11.2
   Cumulative effect of accounting
     changes, net of related income taxes.                    3.4                280.9                    10.7
   Equity in the net income (loss) of
     subsidiary ..............................             (732.5)              (621.7)                    7.4
   Increase in amounts payable to
     subsidiary..............................                 0.1                  1.4                     0.2
   Increase (decrease) in income taxes........                0.5                  7.2                    (0.2)
   Stock-based compensation...................                0.7                  0.4                     -
                                                   -----------------     ----------------     -----------------------
     Net cash provided by (used
       in) operating activities..............                (3.3)                 7.2                     0.2

Cash flows from investing activities:
 Capital contributed to subsidiary ..........                 -                    -                  (1,689.7)
 Dividend received from subsidiary ..........               425.0              1,100.0                    75.0
                                                   -----------------     ----------------     -----------------------
     Net cash provided by (used in)
       investing activities..................               425.0              1,100.0                (1,614.7)

Cash flows from financing activities:
  Issuance of common stock...................                18.3                 22.0                 2,019.3
  Dividends to stockholders..................              (145.3)               (83.8)                    -
  Acquisition of treasury stock..............              (453.0)              (750.4)                 (367.7)
                                                   -----------------     ----------------     -----------------------
     Net cash provided by (used in)
       financing activities..................              (580.0)              (812.2)                1,651.6

     Net increase (decrease) in cash and
       cash equivalents......................              (158.3)               295.0                    37.1

     Cash and cash equivalents at
       beginning of period...................               332.1                 37.1                     -
                                                   -----------------     ----------------     -----------------------
Cash and cash equivalents at end of year.....        $      173.8             $  332.1             $      37.1
                                                   =================     ================     =======================

SEE ACCOMPANYING NOTES.

                                      220

    SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY)
                                   (CONTINUED)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

     The  accompanying   condensed  financial   statements  should  be  read  in
     conjunction with the consolidated financial statements and notes thereto of
     Principal Financial Group, Inc.

     In the  parent  company  only  financial  statements,  our  investments  in
     subsidiaries  are stated at cost plus equity in  undistributed  earnings of
     subsidiaries.

(2) CASH  DIVIDENDS FROM  SUBSIDIARY

     The  parent  company  received  cash  dividends  totaling  $425.0  million,
     $1,100.0  million and $75.0 million in 2003,  2002 and 2001,  respectively,
     from its subsidiary.

                                      221

               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
   AS OF DECEMBER 31, 2003, 2002 AND 2001 AND FOR EACH OF THE YEARS THEN ENDED

                                                                    DEFERRED             FUTURE          CONTRACTHOLDER
                                                                     POLICY              POLICY            AND OTHER
                                                                   ACQUISITION         BENEFITS AND      POLICYHOLDER
SEGMENT                                                               COSTS               CLAIMS            FUNDS
- -----------                                                       --------------      ---------------  -----------------
                                                                                     (IN MILLIONS)
                                                                                                 
2003:
U.S. Asset Management and Accumulation...................          $     615.4         $   7,146.4        $  27,502.9
International Asset Management and Accumulation..........                 52.1             1,449.3               15.9
Life and Health Insurance................................                904.2             6,876.1            2,243.7
Mortgage Banking.........................................                  -                   -                  -
Corporate and Other......................................                  -                   2.9             (149.8)
                                                                  --------------      ---------------  -----------------
  Total..................................................          $   1,571.7         $  15,474.7        $  29,612.7
                                                                  ==============      ===============  =================
2002:
U.S. Asset Management and Accumulation...................          $     501.7         $   6,956.3        $  24,985.6
International Asset Management and Accumulation..........                 40.0             1,101.5               25.2
Life and Health Insurance................................                872.7             6,675.6            2,024.2
Mortgage Banking.........................................                  -                   -                  -
Corporate and Other......................................                  -                   3.0              (77.1)
                                                                  --------------      ---------------  -----------------
  Total..................................................          $   1,414.4         $  14,736.4        $  26,957.9
                                                                  ==============      ===============  =================
2001:
U.S. Asset Management and Accumulation...................          $     411.6         $   6,463.2        $  23,421.7
International Asset Management and Accumulation..........                 50.2             1,022.7               32.4
Life and Health Insurance................................                910.7             6,544.4            1,880.2
Mortgage Banking.........................................                  -                   -                  -
Corporate and Other......................................                  -                   4.3              (60.8)
                                                                  --------------      ---------------  -----------------
  Total..................................................          $   1,372.5         $  14,034.6        $  25,273.5
                                                                  ==============      ===============  =================

                                      222

         SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, (CONTINUED)
   AS OF DECEMBER 31, 2003, 2002 AND 2001 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 (1)     EXPENSES            COSTS          EXPENSES(1)
- -------                                           --------------  -------------- --------------  -----------------  ----------------
                                                                         (IN MILLIONS)
                                                                                                       
2003:
U.S. Asset Management and Accumulation........    $      420.0     $    2,397.6    $   2,139.7     $      82.5        $   850.8
International Asset Management
  and Accumulation............................           195.1            139.7          269.1            (1.2)           105.3
Life and Health Insurance.....................         3,019.0            656.5        2,457.7            61.5            826.5
Mortgage Banking..............................             -              155.3            -               -            1,312.5
Corporate and Other...........................             -               70.5           (5.2)            -               43.4
                                                  --------------  -------------- --------------  -----------------  ----------------
  Total  .....................................    $    3,634.1     $    3,419.6    $   4,861.3     $     142.8        $ 3,138.5
                                                  ==============  ============== ==============  =================  ================

2002:
U.S. Asset Management and Accumulation........    $      746.5     $    2,352.8    $   2,530.3     $      57.1        $   697.7
International Asset Management
  and Accumulation............................           161.9            139.6          258.0             3.4             84.1
Life and Health Insurance.....................         2,973.4            660.2        2,433.4            84.0            750.4
Mortgage Banking..............................             -               99.8            -               -              908.2
Corporate and Other...........................             -               52.3           (4.8)            -               38.3
                                                  --------------  -------------- --------------  -----------------  ----------------
  Total  .....................................    $    3,881.8     $    3,304.7    $   5,216.9     $     144.5        $ 2,478.7
                                                  ==============  ============== ==============  =================  ================

2001:
U.S. Asset Management and Accumulation........    $      766.3     $    2,400.4    $   2,583.1     $      64.9        $   700.3
International Asset Management
  and Accumulation............................           344.9            117.4          407.5             3.1             98.1
Life and Health Insurance.....................         3,011.1            678.6        2,491.0            91.9            740.7
Mortgage Banking..............................             -               31.1            -               -              552.3
Corporate and Other...........................             -              156.1            0.5             -               81.4
                                                  --------------  -------------- --------------  -----------------  ----------------
  Total ......................................    $    4,122.3     $    3,383.6    $   5,482.1     $     159.9       $  2,172.8
                                                  ==============  ============== ==============  =================  ================

- -----------------------
(1)  Allocations of net  investment  income and certain  operating  expenses are
     based on a number of  assumptions  and  estimates,  and reported  operating
     results would change by segment if different methods were applied.

                                      223

                            SCHEDULE IV - REINSURANCE
   AS OF DECEMBER 31, 2003, 2002 AND 2001 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)

2003:
Life insurance in force.......................     $  167,842.1   $    33,628.8    $   2,317.0     $ 136,530.3        1.7%
                                                  ==============  ==============  ==============   ============
Premiums:
  Life insurance..............................     $    1,445.9   $        65.1    $     118.7     $   1,499.5        7.9%
  Accident and health insurance...............          2,359.8           225.2            -           2,134.6          -%
                                                  --------------  --------------  --------------   ------------
    Total.....................................     $    3,805.7   $       290.3    $     118.7     $   3,634.1        3.3%
                                                  ==============  ==============  ==============   ============
2002:
Life insurance in force.......................     $  166,330.2   $    30,421.5    $   1,885.7     $ 137,794.4        1.4%
                                                  ==============  ==============  ==============   ============
Premiums:
  Life insurance..............................     $    1,751.2   $        57.7    $     130.6     $   1,824.1        7.2%
  Accident and health insurance...............          2,328.9           271.2            -           2,057.7          -%
                                                  --------------  --------------  --------------   ------------
    Total.....................................     $    4,080.1   $       328.9    $     130.6     $   3,881.8        3.4%
                                                  ==============  ==============  ==============   ============
2001:
Life insurance in force.......................     $  160,920.4   $    27,049.9    $   1,439.0     $ 135,309.5        1.1%
                                                  ==============  ==============  ==============   ============
Premiums:
  Life insurance..............................     $    2,085.0   $        52.4    $      56.4     $   2,089.0        2.7%
  Accident and health insurance...............          2,244.5           211.2            -           2,033.3          -%
                                                  --------------  --------------  --------------   ------------
    Total.....................................     $    4,329.5   $       263.6    $      56.4     $   4,122.3        1.4%
                                                  ==============  ==============  ==============   ============

                                      224

                                  EXHIBIT INDEX

EXHIBIT
NUMBER                             DESCRIPTION                              PAGE
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       Amended and Restated Stockholder Rights Agreement, dated as of
          October 22, 2001**
10.1      Principal Financial Group, Inc. Stock Incentive Plan***
10.2      Principal Financial Group Long-Term Performance Plan*
10.3      Resolution  of Human  Resources  Committee of the Board of
          Directors of Principal  Financial  Group,  Inc. amending the
          Principal Financial Group Long-Term Performance Plan as of
          October 31, 2002**
10.4      Principal Financial Group Incentive Pay Plan (PrinPay), amended
          and restated effective January 1, 2002****
10.5      Principal Financial Group, Inc. Directors Stock Plan*
10.6      Principal Select Savings Excess Plan***
10.7      Supplemental Executive Retirement Plan for Employees*
10.8      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*
10.9      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*
10.10     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 an
          Executive*
10.11     Compensatory  Arrangement,  dated as of March 14, 2002, between
          Principal Life Insurance Company and James P. McCaughan.*****
10.12     Compensatory  Arrangement,  dated as of April 26,  2001,  between
          Principal  Life  Insurance  Company and Michael T. Daley.**
10.12.1   Agreement and Release, dated December 8, 2003, between Principal
          Life Insurance Company and Michael T. Daley******                 227
10.13     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*
12        Statement Regarding Computation of Ratio of Earnings to Fixed
          Charges******                                                     231
21        Principal Financial Group, Inc. Member Companies as of December
          31, 2001******                                                    232
23        Consent of Ernst & Young LLP******                                235
24        Power of Attorney******                                           236
31.1      Certification of J. Barry Griswell******                          237
31.2      Certification of Michael H. Gersie******                          238
32.1      Certification  Pursuant  to Section  1350 of Chapter 63 of Title
          18 of the United  States  Code - J. Barry Griswell******          239
32.2      Certification  Pursuant to Section  1350 of Chapter 63 of Title
          18 of the United  States Code - Michael H. Gersie******           240

                                      225

*    Incorporated  by  reference  to the exhibit with the same number filed with
     Principal Financial Group,  Inc.'s  Registration  Statement on Form S-1, as
     amended (Commission File No. 333-62558).

**   Incorporated  by  reference  to  exhibit  with the same  number  filed with
     Principal  Financial Group,  Inc.'s Annual Report on Form 10-K for the year
     ended December 31, 2001, (Commission File No. 1-16725).

***  Incorporated  by reference  to exhibit  with the same exhibit  number filed
     with Principal  Financial  Group,  Inc.'s Quarterly Report on Form 10-Q for
     the quarter ended June 30, 2002, (Commission File No. 1-16725).

**** Incorporated  by  reference  to exhibit  number  10.4 filed with  Principal
     Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
     March 31, 2003 (Commission File No. 1-16725).

*****Incorporated  by  reference to exhibit  number  10.11 filed with  Principal
     Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
     March 31, 2002, (Commission File No. 1-16725).

****** Exhibits filed herewith

                                      226

                                                                 Exhibit 10.12.1

                  PLEASE READ THIS DOCUMENT CAREFULLY. IT WILL
                    RELEASE AND WAIVE LEGAL CLAIMS AND RIGHTS
                    AN ATTORNEY BEFORE SIGNING THIS DOCUMENT.
                  YOU MAY HAVE. YOU ARE ADVISED TO CONSULT WITH

                              AGREEMENT AND RELEASE

1.   DEFINITIONS.  All words used by this Release  have their plain  meanings in
     ordinary  English.  Specific  terms used in this Release have the following
     meanings.

     A.   "I," "ME," and "MY,"  mean both me and  anyone who has or obtains  any
          legal rights or claims  through me,  including  but not limited to, my
          spouse, heirs, assigns, representatives, and executors.

     B.   "PRINCIPAL"  means  Principal  Life  Insurance  Company and any of its
          present or past predecessors,  successors,  subsidiaries,  affiliates,
          parents, divisions, committees, or joint venture partners.

     C.   "EMPLOYER" means Principal;  any present or past directors,  officers,
          employees,  attorneys, agents, or representatives of the Employer; any
          present or past employee benefit plan sponsored by the Employer and/or
          the  directors,   officers,   trustees,   administrators.   employees,
          attorneys,  agents,  or  representatives  of that  plan;  any  company
          providing  insurance to the  Employer in the present or past;  and any
          person who acted on behalf of or on instructions from the Employer.

     D.   "MY CLAIMS" means all of my existing  rights to any relief of any kind
          from Principal, including but not limited to:

          (1)  all claims arising out of or relating to my past  employment with
               The  Principal.  the  termination  of  that  employment,  or  the
               statements or actions of Principal;

          (2)  all claims under any federal, state, or local statute, ordinance,
               or  regulation,  including  but not  limited  to,  claims for any
               alleged  unlawful  discrimination  or any other alleged  unlawful
               employment  practices  under the Fair Labor  Standards  Act,  the
               Equal Pay Act, Title VII of the Civil Rights Act of 1964, the Age
               Discrimination  in  Employment  Act,  the Older  Workers  Benefit
               Protection  Act, the Americans with  Disabilities  Act, the Civil
               Rights Act of 1991.  the Civil  Rights Act of I 866, the National
               Labor  Relations Act: the Employment  Retirement  Income Security
               Act. the Family and Medical Leave Act. and the Worker  Adjustment
               and Retraining Notification Act;

          (3)  all claims under any  principle of common law.  including but not
               limited  to,  claims for alleged  unpaid  salary,  overtime,  and
               bonuses; harassment; retaliation or reprisal; assault or battery,
               defamation;  intentional  or  negligent  infliction  of emotional
               distress;   invasion  of  privacy;  false  imprisonment;   fraud;
               intentional  or negligent  misrepresentation;  interference  with
               contractual  or  business  relationships;   violation  of  public
               policy;  my conduct,  if any, as a  "whistleblower";  negligence;
               breach of  contract;  breach  of  fiduciary  duty;  breach of the
               covenant of good faith and fair dealing;  promissory or equitable
               estoppel; and any other wrongful employment practices;

          (4)  all claims for any type of relief  from the  Employer,  including
               but not  limited  to,  claims  for  back  pay,  front  pay,  lost
               benefits,  reinstatement,  liquidated damages,  multiple damages,
               punitive damages, and damages for any alleged breach of contract,

                                      227

               any tort  claim,  or any  alleged  personal  injury or  emotional
               injury or damage,  whether or not compensable  under any workers'
               compensation statutes:

          (5)  all claims for attorneys' fees, costs, and disbursements.

          (6)  "MY  CLAIMS" do not  include  my vested  rights,  if any,  in the
               Principal  Pension Plan, the  Supplemental  Executive  Retirement
               Plan  for  Employees,  the  Principal  Select  Savings  Plan  for
               Employees  and the  Principal  Select  Savings  Excess  Plan (the
               "Principal's Plans"), which survive unaffected by this Release.

2.   AGREEMENT  TO RELEASE MY CLAIMS.  In exchange  for the  payments  and other
     consideration   described  in  Paragraph  3  of  this  Release.  which  are
     substantially  more than  Principal  is  required  to  provide me under its
     policies and procedures,  and which are conditioned on and in consideration
     of my execution of this Release,  I agree to give up all My Claims  against
     the  Employer.  I will not bring any lawsuits or make any other  demands or
     claims against the Employer or allow or authorize any other person to do so
     on my behalf based on My Claims. The payments and other  consideration that
     I will receive are a full and fair  compromise for the release of My Claims
     and for the other obligations I am assuming as specified in this Release.

3.   PAYMENTS AND OTHER CONSIDERATION.

     A.   My last  day in the  office  will be  December  5 ,  2004.  I will use
          Personal  Time Off ("PTO") from  December 8, 2003  through  January 2,
          2004, when my employment will terminate.  I will accrue no further PTO
          after December 5, 2003.

     B.   I will receive  executive level  outplacement  services at Principal's
          expense,  through a firm selected by Principal for a period of six (6)
          months, starting in January of 2004.

     C.   I will be treated according to the plan provisions under the Principal
          Financial  Group  Long  Term  Performance  Plan  ("LTPP"),   Principal
          Financial  Group.  Inc.  Stock  Incentive  Plan ("SIP") and  Principal
          Financial  Group,  Inc.  Employee Stock  Purchase Plan  ("ESPP").  For
          purposes of the LTPP,  I will  therefore  be eligible for payments for
          the 2001 through  2003 cycle  (payable in 2004).  All  unvested  stock
          options   issued  under  the  SIP  will  be  forfeited.   Any  payroll
          contributions  collected  under  the ESPP  that  have not been used to
          purchase stock as of my termination date will be returned to me.

     D.   I will receive a PrinPay bonus for 2003 consistent with the provisions
          of the Principal Financial Group Incentive Pay Plan. The bonus will be
          paid in March of 2004,  and as provided  in the Plan,  the amount paid
          will be subject to approval of  Principal's  board of  directors.  The
          individual  modifier  proposed  for the  award  will be 100%,  and any
          corporate wide adjustments to the plan payout will apply to the award.

     E.   I will receive  additional pay equal to 52 weeks of base salary.  This
          payment will be made in January of 2004.

     F.   I will receive payment for any accrued and unused PTO as of January 2,
          2004.

     G.   Withholding  taxes and  appropriate  deductions will be taken from all
          payments due under this Release.

4.   CONFIDENTIAL  INFORMATION.   In  the  course  of  performing  services  for
     Principal,  I have had access to and have become  familiar with  non-public
     information, ideas, processes, methods, designs, devices, inventions, data,
     models  and other  information  relating  to  Principal  and its  products,
     services,  businesses,  operations,  employees  or  customers,  whether  in
     tangible or intangible  form,  that  Principal  desires to protect and keep
     secret and confidential, including trade secrets and information from third
     parties that the Principal is obligated to keep confidential ("CONFIDENTIAL
     INFORMATION").  Confidential Information shall not include: (i) information
     that  is or  becomes  generally  known  through  no  fault  of  mine;  (ii)
     information  received  from a third  party  outside of  Principal  that was

                                      228

     disclosed  without a breach  of any  confidentiality  obligation;  or (iii)
     information approved for release by written  authorization of Principal.  I
     recognize that all such Confidential  Information is the sole and exclusive
     property of  Principal,  and that  disclosure of  Confidential  Information
     would cause damage to Principal.  I agree that,  except in connection  with
     enforcing  my rights  under  this  Release  or if  compelled  by a court or
     governmental  agency,  in each case provided  that prior written  notice is
     given to Principal, I will not, without the consent of Principal, willfully
     disseminate or otherwise disclose, directly or indirectly, any Confidential
     Information obtained during my employment with Principal, and will take all
     necessary precautions to prevent disclosure, to any unauthorized individual
     or entity inside or outside  Principal,  and will not use the  Confidential
     information  or permit its use for my  benefit or the  benefit of any other
     person or entity.

5.   NON-SOLICITATION.  For a period  of 2 years  after  the  termination  of my
     employment, I shall not, directly or indirectly:

     A.   encourage  any employee or agent of the  Principal to terminate his or
          her relationship with the Principal;

     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  Principal,  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 Principal; or

     D.   interfere with the  relationship of the Principal with, or endeavor to
          entice  away from the  Principal,  any person who or which at any time
          during the 2 year period  prior to the date I sign this Release was or
          is a  material  customer  ("Customer")  or  material  supplier  of, or
          maintained a material business relationship with, Principal.

6.   CONFIDENTIALITY.  I  understand  that I may  disclose  the contents of this
     Release  to my spouse  or  domestic  partner,  my  attorney(s),  and my tax
     advisor(s).  I  agree  that  if I  do  so,  I  will  inform  them  of  this
     confidentiality  clause  and tell them  that  they are also  bound by it. I
     agree that I will not  disclose  the contents of this Release or any of its
     terms to any other individual,  corporation,  or entity, except as required
     by law. I acknowledge  that  disclosing the contents of this Release except
     to the persons listed above would cause  Principal  injury and damage,  the
     actual  amount of which would be difficult to  determine;  thus, I agree to
     pay  Principal $ 10,000.00  each time that I violate  this  confidentiality
     clause,  and also to pay all of Principal's  attorneys'  fees,  costs,  and
     disbursements  incurred in getting a court order to stop me from  violating
     this  confidentiality  clause or to seek damages from me resulting  from my
     violation.

7.   ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though the Employer will pay
     me to release My Claims, the Employer does not admit that it is responsible
     or  legally  obligated  to me for My  Claims.  In fact,  I  understand  the
     Employer denies that it is responsible or legally  obligated for My Claims,
     or that it has engaged in any  improper or unlawful  conduct or  wrongdoing
     against me.

8.   COOPERATION.  I agree that I will, at the request of the  Employer,  render
     all  assistance  and perform all lawful  acts that the  Employer  considers
     necessary or advisable in  connection  with any  litigation  involving  the
     Employer  or  any  director,   officer,   employee,   shareholder,   agent,
     representative, consultant, client or vendor of the Employer.

9.   ADVICE TO CONSULT WITH AN ATTORNEY.  I understand and acknowledge that I am
     being advised by the Employer to consult with an attorney  prior to signing
     this  Release.  My decision  to sign or not to sign this  Release is my own
     voluntary  decision made with full  knowledge that the Employer has advised
     me to consult with an attorney.

10.  MY REPRESENTATIONS.  I am old enough to sign this Release and to be legally
     bound by the agreements that I am making. I represent that I have not filed
     for personal bankruptcy or been involved in any pending personal bankruptcy

                                      229

     proceeding  between any  accrual of My Claims and the date of my  signature
     below. I am legally able and entitled to receive the full payment that will
     be made to me by the Employer in settlement of My Claims.  I have read this
     Release  carefully.  I understand  all its terms.  In agreeing to sign this
     Release I have not relied on any  statements  or  explanations  made by the
     Employer  or its  attorneys,  except  as  specifically  set  forth  in this
     Release. I am voluntarily  releasing My Claims against the Employer. I made
     the decision to sign this Release freely and without duress or coercion.  I
     acknowledge  I am a  resident  of the  State of Iowa and  agree  that  this
     Release shall be governed by and  construed  under the laws of the State of
     Iowa with the courts of that state having full and  exclusive  jurisdiction
     over My  Claims  and all  matters  covered  by and/or  arising  out of this
     Release and my employment relationship with Principal.

11.  MY RIGHTS TO REVIEW, ACCEPT, OR RESCIND. The Employer has informed me and I
     understand and  acknowledge  that I have a period of 21 days,  beginning on
     the day after the day this Release is delivered to me, to consider  whether
     I wish to enter into this  Release and be bound by its terms.  The Employer
     has informed me and I understand  and  acknowledge  that if I do not accept
     the terms of this Release within that 21-day review  period,  Principal may
     not  extend  the time in which  its  offer  to  enter  into the  agreements
     contained in this Release is open to me. I understand and acknowledge  that
     if I sign this Release before the end of the 21-day  period,  it will be my
     personal, voluntary decision to do so.

     If I decide to accept the terms of this Release, I must send the signed and
     dated  Release by overnight  courier  delivery or deliver it by hand to the
     address  given  below  within the 21 -day  period  that I have to  consider
     signing this Release.

     The Employer has informed me and I also  understand and  acknowledge  that,
     after I sign this Release,  I may change my mind within a 7-day period, not
     counting the day on which I signed it, and revoke my  acceptance  of it. In
     order for my revocation to be effective,  I understand and acknowledge that
     it must be in writing and mailed by overnight  courier  delivery or deliver
     it by hand to Principal at the following address via courier and postmarked
     or received by Principal within the 7-day period.

         Jim DeVries
         Vice President - Human Resources
         Principal Financial Group
         Des Moines, IA 50392-0001

     I understand and acknowledge that I will not receive any payment under this
     Release if I revoke it, and in any event,  I will not  receive  any payment
     until after the 7-day revocation period has expired.

12.  ENTIRE  AGREEMENT.  This Release is the entire agreement  between Principal
     and me relating to the termination of my employment and this settlement. If
     any  portion  of  this  Release  is  found  to  be  invalid,  unlawful,  or
     unenforceable, I desire that all other portions of this Release that can be
     separated from it or appropriately limited in scope will remain fully valid
     and enforceable.

/s/ Michael T. Daley                                Dated:  December 8, 2003
- ---------------------------
Michael T. Daley

PRINCIPAL LIFE INSURANCE COMPANY

By:  /s/ Jim DeVries                                Dated:  December 8, 2003
- ---------------------------
     Jim DeVries
     Vice President - Human
     Resources

                                      230

                                                                      EXHIBIT 12

                         Principal Financial Group, Inc.

                 Computation of Earnings to Fixed Charges Ratio

                                                     FOR THE YEAR ENDED DECEMBER 31,
                                             -------------------------------------------
                                                2003           2002           2001
                                             ------------  ------------- ---------------
                                                                    
1.  Income from continuing operations
      before income taxes...................  $   953.7       $   665.8      $   464.1
2.  Interest expense........................      104.3            99.2           96.7
3.  Interest factor of rental expense.......        5.0             8.9           10.3
4.  Undistributed income from equity
      investees.............................      (18.3)            4.3          (17.4)
                                             ------------  ------------- ---------------
5.  Earnings before interest credited on
      investment products...................    1,044.7           778.2          553.7
6.  Interest credited on investment
      products..............................      735.7           743.4          773.1
                                             ------------  ------------- ---------------
7.  Earnings................................  $ 1,780.4       $ 1,521.6      $ 1,326.8
                                             ============  ============= ===============
8.  Interest expense........................  $   104.3            99.2      $    96.7
9.  Interest factor of rental expense.......        5.0             8.9           10.3
10. Preferred stock dividend requirements of
      majority-owned subsidiaries (non-
      intercompany).........................        1.2             0.4            -
                                             ------------  ------------- ---------------
11. Fixed charges before interest credited
      on investment products................      110.5           108.5          107.0
12. Interest credited on investment
      products..............................      735.7           743.4          773.1
                                             ------------  ------------- ---------------
13. Fixed charges...........................  $   846.2       $   851.9      $   880.1
                                             ============  ============= ===============
14. Ratio of earnings to fixed charges
      before interest credited on
      investment products (Line item 5/Line
      item 11)..............................        9.5             7.2            5.2

15. Ratio of earnings to fixed charges
      (Line item 7/Line item 13)............        2.1             1.8            1.5

                                      231

                                                                      EXHIBIT 21

                PRINCIPAL FINANCIAL GROUP, INC. MEMBER COMPANIES
                            AS OF DECEMBER 31, 2003

ENTITY NAME                                      JURISDICTION OF INCORPORATION
- ---------------------------------------------  ---------------------------------
BCI Group, LLC                                            Delaware
Benefit Fiduciary Corporation                             Rhode Island
Boston Insurance Trust, Inc.                              Massachusetts
BrasilPrev Seguros e Previdencia S.A.                     Brazil
Delaware Charter Guarantee & Trust Company                Delaware
Dental-Net, Inc.                                          Arizona
Distribuidora Principal Mexico, S.A. de C.V.              Mexico
Employers Dental Services, Inc.                           Arizona
Equity FC, Ltd.                                           Iowa
Executive Benefit Services, Inc.                          North Carolina
Executive Broker Dealer Services, LLC                     North Carolina
Healthrisk Resource Group, Inc.                           Iowa
ING/Principal Pensions Co., Ltd.                          Japan
Insource Group, LLC                                       Delaware
Patrician Associates, Inc.                                California
Petula Associates, Ltd.                                   Iowa
Petula Prolix Development Company                         Iowa
PFG Do Brasil LTDA                                        Brazil
PPI Employee Benefits Corporation                         Connecticut
Preferred Product Network, Inc.                           Delaware
Principal Afore, S.A., DE C.V.                            Mexico
Principal Asset Management Company (Asia)
  Ltd.                                                    Hong Kong
Principal Asset Management Company Private
  Limited                                                 India
Principal Asset Markets, Inc.                             Iowa
Principal Australia (Holdings) Pty Ltd                    Australia
Principal Bank                                            Federal
Principal Capital Futures Trading Advisor,
  LLC                                                     Delaware
Principal Capital Global Investors Limited                Australia
Principal Commercial Acceptance, LLC                      Delaware
Principal Commercial Funding, LLC                         Delaware
Principal Compania De Seguros De Vida Chile
  S.A.                                                    Chile
Principal Consulting (India) Private Limited              India
Principal Creditos Hipotecarios, S.A.                     Chile
Principal Delaware Name Holding Company, Inc.             Delaware
Principal Development Associates, Inc.                    California
Principal Development Investors, LLC                      Delaware
Principal Enterprise Capital, LLC                         Delaware
Principal FC, Ltd.                                        Iowa
Principal Financial Advisors, Inc.                        Iowa
Principal Financial Group (Mauritius) Ltd.                Mauritius
Principal Financial Group Australia Pty Ltd.              Australia
Principal Financial Group Investments
  (Australia) Pty Ltd.                                    Australia
Principal Financial Group, Inc.                           Delaware
Principal Financial Services (Australia), Inc.            Iowa
Principal Financial Services (NZ), Inc.                   Iowa
Principal Financial Services, Inc.                        Iowa

                                      232

ENTITY NAME                                      JURISDICTION OF INCORPORATION
- ---------------------------------------------  ---------------------------------
Principal Genera, S.A. DE C.V. Operadora de
  Fondos de Inversion                                     Mexico
Principal Generation Plant, LLC                           Delaware
Principal Global Investors (Asia) Limited                 Hong Kong
Principal Global Investors (Australia)
  Limited                                                 Australia
Principal Global Investors (Australia)
  Service Company Pty                                     Australia
Ltd.
Principal Global Investors (Europe) Limited               United Kingdom
Principal Global Investors (Ireland) Ltd.                 Ireland
Principal Global Investors (Singapore)
  Limited                                                 Singapore
Principal Global Investors Holding Company,
  Inc.                                                    Delaware
Principal Global Investors Trust                          Delaware
Principal Global Investors, LLC                           Delaware
Principal Health Care, Inc.                               Iowa
Principal Health Insurance Company                        Iowa
Principal Holding Company                                 Iowa
Principal Hotel Ltd.                                      Australia
Principal Hotels Australia Pty Ltd.                       Australia
Principal Hotels Holdings Pty Ltd.                        Australia
Principal Insurance Company (Hong Kong)
  Limited                                                 Hong Kong
Principal International (Asia) Limited                    Hong Kong
Principal International Argentina, S.A.                   Argentina
Principal International De Chile S.A.                     Chile
Principal International Holding Company, LLC              Delaware
Principal International, Inc.                             Iowa
Principal Investments (Australia) Limited                 Delaware
Principal Investors Corporation                           New Jersey
Principal Life Compania de Seguros, S.A.                  Argentina
Principal Life Insurance Company                          Iowa
Principal Management Corporation                          Iowa
Principal Mexico Compania de Seguros, S.A.
  de C.V.                                                 Mexico
Principal Mexico Servicios, S.A. de C.V.                  Mexico
Principal Mortgage Reinsurance Company                    Vermont
Principal Net Lease Investors, LLC                        Delaware
Principal Pensiones, S.A. de C.V.                         Mexico
Principal Portfolio Services, Inc.                        Iowa
Principal Real Estate Investors (Australia)
  Limited                                                 Australia
Principal Real Estate Investors, LLC                      Delaware
Principal Residential Mortgage Capital
  Resources, LLC                                          Delaware
Principal Residential Mortgage Funding, LLC               Delaware
Principal Residential Mortgage Servicing, LLC             Delaware
Principal Residential Mortgage, Inc.                      Iowa
Principal Retiro Compania de Seguros de
  Retiro, S.A.                                            Argentina
Principal Siefore, S.A. de C.V.                           Mexico
Principal Spectrum Associates, Inc.                       California
Principal Tactical Asset Management Pty Ltd.              Australia
Principal Tanner Administradora General de
Fondos Mutuos S.A.                                        Chile
Principal Trust Company (Asia) Limited                    Hong Kong
Principal Trustee Company Private Limited                 India
Principal Wholesale Mortgage, Inc.                        Iowa

                                      233

ENTITY NAME                                      JURISDICTION OF INCORPORATION
- ---------------------------------------------  ---------------------------------
Princor Financial Services Corporation                    Iowa
Professional Pensions, Inc.                               Connecticut
Spectrum Asset Management, Inc.                           Connecticut
Zao Principal International                               Russia

                                      234

                                                                      Exhibit 23

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form
S-3, File Nos. 333-110499 and 333-110499-01) and related Prospectus of Principal
Financial Group,  Inc. and Principal Life Insurance Company for the registration
of $4,000,000,000 Secured Medium-Term Notes, in the universal shelf Registration
Statement (Form S-3, File No.  333-111352)  and related  Prospectus of Principal
Financial Group,  Inc.,  Principal Capital I, Principal Capital II and Principal
Capital III for the registration of $3,000,000,000 of various securities, in the
Registration  Statement (Form S-8, File No.  333-72006)  pertaining to Principal
Financial Group, Inc. Stock Incentive Plan,  Principal Financial Group Long-Term
Performance  Plan,  Principal  Financial Group,  Inc.  Directors Stock Plan, and
Principal  Financial  Group,  Inc.  Employee  Stock  Purchase  Plan,  and in the
Registration  Statement  (Form  S-8,  File  No.  333-72002)  pertaining  to  The
Principal Select Savings Excess Plan, Nonqualified Defined Contribution Plan for
Designated Participants, The Principal Select Savings Plan for Individual Field,
and The Principal Select Savings Plan for Employees of our reports dated January
30, 2004, with respect to the consolidated financial statements and schedules of
Principal  Financial Group,  Inc.  included in the Annual Report (Form 10-K) for
the year ended December 31, 2003.

                                                          /s/ Ernst & Young, LLP

Des Moines, Iowa
March 1, 2004

                                      235

                                                                      Exhibit 24

                                POWER OF ATTORNEY

Each person whose  signature  appears  below hereby  authorizes  and appoints J.
Barry Griswell, Michael H. Gersie, Karen E. Shaff and Joyce N. Hoffman, and each
of them, as such person's true and lawful  attorney-in-fact and agent, with full
power  of  substitution  and  resubstitution,  to sign on such  person's  behalf
individually  and in each  capacity  stated below the Annual Report on Form 10-K
under the Securities  Exchange Act of 1934, as amended,  of Principal  Financial
Group,  Inc.,  and to file  the  same,  with all  exhibits  thereto,  and  other
documents in connection therewith,  with the Securities and Exchange Commission,
granting unto said  attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every thing  requisite  and necessary to be
done in  connection  therewith,  as fully to all  intents  and  purposes as such
person  could do in  person,  hereby  ratifying  and  confirming  all that  such
attorney-in-fact or agent may lawfully do or cause to be done by virtue hereof.

Dated as of February 27, 2004

     /S/ J. BARRY GRISWELL                        /S/ CHARLES S. JOHNSON
     ------------------------------               ---------------------------
     J. Barry Griswell                            Charles S. Johnson
     Chairman, President and Chief                Director
     Executive Officer, Director

     /S/ MICHAEL H. GERSIE                         /S/ WILLIAM T. KERR
     ------------------------------               ---------------------------
     Michael H. Gersie                            William T. Kerr
     Executive Vice President and                 Director
     Chief Financial Officer
     Financial Officer

     /S/ BETSY J. BERNARD                          /S/ RICHARD L. KEYSER
     ------------------------------               ---------------------------
     Betsy J. Bernard                             Richard L. Keyser
     Director                                     Director

     /S/ JOCELYN CARTER-MILLER                     /S/ VICTOR H. LOEWENSTEIN
     ------------------------------               ---------------------------
     Jocelyn Carter-Miller                        Victor H. Loewenstein
     Director                                     Director

     /S/ GARY E. COSTLEY                          /S/ ARJUN K. MATHRANI
     ------------------------------               ---------------------------
     Gary E. Costley                              Arjun K. Mathrani
     Director                                     Director

     /S/ DAVID J. DRURY                           /S/ FEDERICO F. Pena
     ------------------------------               ---------------------------
     David J. Drury                               Federico F. Pena
     Director                                     Director

     /S/ C. DANIEL GELATT, JR.                    /S/ ELIZABETH E. TALLETT
     ------------------------------               ---------------------------
     C. Daniel Gelatt, Jr.                        Elizabeth E. Tallett
     Director                                     Director

     /S/ SANDRA L. HELTON
     ------------------------------
     Sandra L. Helton
     Director

                                      236

                                                                    Exhibit 31.1

                                 CERTIFICATIONS

I, J. Barry Griswell, certify that:

1.  I have  reviewed  this  annual  report on Form 10-K of  Principal  Financial
    Group, Inc.;

2.  Based on my knowledge,  this report does not contain any untrue statement of
    a  material  fact or omit to state a  material  fact  necessary  to make the
    statements made, in light of the  circumstances  under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information included in this report, fairly present in all material respects
    the  financial  condition,  results  of  operations  and  cash  flows of the
    registrant as of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer(s) and I are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed  such  disclosure  controls  and  procedures,   or  caused  such
       disclosure  controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities,  particularly  during the period in which this  report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  and  presented  in this  report  our  conclusions  about  the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's  internal control
       over  financial  reporting  that occurred  during the  registrant's  most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual  report)  that has  materially  affected,  or is  reasonably
       likely to  materially  affect,  the  registrant's  internal  control over
       financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed,  based on
    our most recent evaluation of internal control over financial reporting,  to
    the registrant's  auditors and the audit committee of registrant's  board of
    directors (or persons performing the equivalent functions):

    a) All  significant  deficiencies  and material  weaknesses in the design or
       operation  of  internal  control  over  financial   reporting  which  are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) Any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       control over financial reporting.

Date:  March 3, 2004

                                            /s/ J. Barry Griswell
                                            ------------------------------------
                                            J. Barry Griswell
                                            Chairman, President and Chief
                                            Executive Officer

                                      237

                                                                    Exhibit 31.2

                                 CERTIFICATIONS

I, Michael H. Gersie, certify that:

1.   I have  reviewed  this annual  report on Form 10-K of  Principal  Financial
     Group, Inc.;

2.  Based on my knowledge,  this report does not contain any untrue statement of
    a  material  fact or omit to state a  material  fact  necessary  to make the
    statements made, in light of the  circumstances  under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information included in this report, fairly present in all material respects
    the  financial  condition,  results  of  operations  and  cash  flows of the
    registrant as of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer(s) and I are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed  such  disclosure  controls  and  procedures,   or  caused  such
       disclosure  controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities,  particularly  during the period in which this  report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  and  presented  in this  report  our  conclusions  about  the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's  internal control
       over  financial  reporting  that occurred  during the  registrant's  most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual  report)  that has  materially  affected,  or is  reasonably
       likely to  materially  affect,  the  registrant's  internal  control over
       financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed,  based on
    our most recent evaluation of internal control over financial reporting,  to
    the registrant's  auditors and the audit committee of registrant's  board of
    directors (or persons performing the equivalent functions):

    a) All  significant  deficiencies  and material  weaknesses in the design or
       operation  of  internal  control  over  financial   reporting  which  are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) Any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       control over financial reporting.

Date:  March 3, 2004

                                            /s/ Michael H. Gersie
                                            ------------------------------------
                                            Michael H. Gersie
                                            Executive Vice President and Chief
                                            Financial Officer

                                      238

                                                                    Exhibit 32.1

              CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
                      OF TITLE 18 OF THE UNITED STATES CODE

I, J.  Barry  Griswell,  Chairman,  President  and Chief  Executive  Officer  of
Principal  Financial  Group,  Inc.,  certify that (i) the Form 10-K for the year
ended December 31, 2003 fully complies with the requirements of Section 13(a) of
the Securities  Exchange Act of 1934 and (ii) the  information  contained in the
Form 10-K for the year ended December 31, 2003 fairly presents,  in all material
respects,  the  financial  condition  and  results of  operations  of  Principal
Financial Group, Inc.

                                           /s/ J. Barry Griswell
                                           -------------------------------------
                                           J. Barry Griswell
                                           Chairman, President and Chief
                                           Executive Officer
                                           Date:  March 3, 2004

                                      239

                                                                    Exhibit 32.2

              CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
                      OF TITLE 18 OF THE UNITED STATES CODE

I, Michael H. Gersie,  Executive Vice President and Chief  Financial  Officer of
Principal  Financial  Group,  Inc.,  certify that (i) the Form 10-K for the year
ended December 31, 2003 fully complies with the requirements of Section 13(a) of
the Securities  Exchange Act of 1934 and (ii) the  information  contained in the
Form 10-K for the year ended December 31, 2003 fairly presents,  in all material
respects,  the  financial  condition  and  results of  operations  of  Principal
Financial Group, Inc.

                                           /s/ Michael H. Gersie
                                           -------------------------------------
                                           Michael H. Gersie
                                           Executive Vice President and Chief
                                           Financial Officer
                                           Date:  March 3, 2004

                                      240