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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF THE SECURITIES EXCHANGE ACT OF 1934




|                                            |                              
|------------------------------------------- | -----------------------------
|For the fiscal year ended December 31, 2004 | Commission file number 0-8483

CERES GROUP, INC.




|                                                                             |  |                                     
|---------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                     |  | 34-1017531                          
|                                                                             |  |                                     
|(State or other jurisdiction of
    incorporation or organization)           |  | (I.R.S. Employer Identification No.)
|                                                                            
|17800 Royalton Road, Cleveland, Ohio(Address of principal executive offices) |  | 44136(Zip Code)                     

(440) 572-2400







Securities Registered Pursuant to Section 12(b) of the
Act: None


Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, par value $0.001 per share









YES [X]  NO [ ]






YES [X]  NO [ ]









DOCUMENTS INCORPORATED BY REFERENCE:











---










CERES GROUP, INC.


INDEX TO


ANNUAL REPORT ON FORM 10-K


For the Year Ended December 31, 2004


|                                                                      |  |                                                                                                                        |    |      |    | 
|--------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                      |  |                                                                                                                        |    | Page |   
|                                                                      |  |                                                                                                                        |    |      |   
|PART I                                                                |  |                                                                                                                        |    |      |    | 
|Item 1                                                                |  | Business                                                                                                               |    |      | 1  | 
|Item 2                                                                |  | Properties                                                                                                             |    |      | 17 | 
|Item 3                                                                |  | Legal Proceedings                                                                                                      |    |      | 17 | 
|Item 4                                                                |  | Submission of Matters to a Vote of Security
    Holders                                                                |    |      | 18 | 
|                                                                     
|PART II                                                               |  |                                                                                                                        |    |      |    | 
|Item 5                                                                |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Repurchases of Equity
    Securities |    |      | 19 | 
|Item 6                                                                |  | Selected Financial Data                                                                                                |    |      | 20 | 
|Item 7                                                                |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                              |    |      | 22 | 
|Item 7A                                                               |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                         |    |      | 42 | 
|Item 8                                                                |  | Financial Statements and Supplementary
    Data                                                                        |    |      | 43 | 
|                                                                      |  | Schedule II  Condensed
    Financial Information of Registrant  Ceres Group,
    Inc. (Parent Only)                  |    |      | 87 | 
|                                                                      |  | Schedule III  Supplemental
    Insurance Information                                                                  |    |      | 90 | 
|                                                                      |  | Schedule IV  Reinsurance                                                                                              |    |      | 91 | 
|Item 9                                                                |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                               |    |      | 92 | 
|Item 9A                                                               |  | Controls and Procedures                                                                                                |    |      | 92 | 
|Item 9B                                                               |  | Other Information                                                                                                      |    |      | 92 | 
|                                                                     
|PART III                                                              |  |                                                                                                                        |    |      |    | 
|Item 10                                                               |  | Directors and Executive Officers of the
    Registrant                                                                 |    |      | 92 | 
|Item 11                                                               |  | Executive Compensation                                                                                                 |    |      | 93 | 
|Item 12                                                               |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                     |    |      | 94 | 
|Item 13                                                               |  | Certain Relationships and Related
    Transactions                                                                     |    |      | 95 | 
|Item 14                                                               |  | Principal Accountant Fees and Services                                                                                 |    |      | 95 | 
|                                                                     
|PART IV                                                               |  |                                                                                                                        |    |      |    | 
|Item 15                                                               |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                    |    |      | 95 | 
|Signatures                                                            |  |                                                                                                                        | 99 |     
|Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
|Exhibit 23.2 Consent of Independent Registered Public Accounting Firm
|Exhibit 31.1 Section 302 CEO Certification                           
|Exhibit 31.2 Section 302 CFO Certification                           
|Exhibit 32 Section 906 Certifications                                





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PART I





ITEM 1.   BUSINESS


Overview
























| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | grow our historically profitable and predictable Senior segment;                        
|
| |  | focus on the profitability of our Medical segment;                                      
|
| |  | promote electronic distribution for increased efficiency and
    agent productivity; and
|
| |  | reduce administrative costs.                                                            

1



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Our Core Businesses


Senior health, life and annuity products.


Catastrophic and comprehensive major medical
insurance.




2



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Business Strategy




Increasing senior market focus.


Focusing on profitability in the major medical
market.




| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | target marketing with select distributors in select states with
    the greatest potential for profitability;      
|
| |  | selective products that shift some of the control over routine,
    discretionary healthcare costs to the consumer;
|
| |  | rate adjustments;                                                                                                  
|
| |  | cancellation of unprofitable blocks of business in certain
    states;                                             
|
| |  | proactive medical cost management; and                                                                             
|
| |  | lowered administrative and sales expenses.                                                                         







Promoting electronic distribution.






Reducing administrative costs.


3



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Products and Services




Major medical.










Short-term major medical.


Small group products.


4



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Life and annuity.


Senior health insurance products.


Senior life insurance and annuities.


Medical cost management.






| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | shifting to the consumer a greater portion of risk with higher
    deductible plans and lower premiums;                                                                                                                                                                                                                      
|
| |  | focusing our business with national and regional PPOs with
    superior pricing and management of costs;                                                                                                                                                                                                                     
|
| |  | use of a Centers of Excellence network providing our
    insureds access to transplant and other necessary high-risk
    procedures at approximately 103 renowned medical
    institutions that have the staff, experience and volume of
    patients to produce higher recovery rates while offering
    discounted costs;
|
| |  | a multiple benefit level pharmacy coverage to promote use of
    lower cost drugs when possible;                                                                                                                                                                                                                             
|
| |  | screening techniques to identify and move high-cost and
    high-risk insureds as early as possible into case management
    programs to enhance treatment programs and lower the long-term
    total medical expenses;                                                                                                      
|
| |  | a program to detect fraud and abuse by medical providers,
    policyholders or agents;                                                                                                                                                                                                                                       
|
| |  | medical protocol use to avoid claims for unnecessary procedures;                                                                                                                                                                                                                                                             
|
| |  | claims cost negotiation for long-term care expenses;                                                                                                                                                                                                                                                                         
|
| |  | product design geared to encourage use of PPOs; and                                                                                                                                                                                                                                                                          
|
| |  | enhanced communication to insureds on the features and benefits
    of these programs, emphasizing how they can reduce their total
    healthcare costs.                                                                                                                                                                     





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Marketing and Sales




Distribution Channels.






| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Senior Brokerage.These agents target Americans
    age 55 and over with a comprehensive product line.                                                                                                                                                                                                                                                                                                                                                                            
|
| | 2. | Senior Semi-Career.This channel is comprised of an
    independent marketing organization that exclusively markets a
    new line of senior products for Central Reserve. In addition,
    this channel includes some marketing organizations that
    primarily market our senior products.                                                                                                                                                                                     
|
| | 3. | Medical Semi-Career.This channel is comprised of
    well-established marketing organizations that primarily market
    health insurance and supplemental health insurance. Some of this
    business is sold through electronic platforms.                                                                                                                                                                                                                                      
|
| | 4. | Medical Brokerage.Our brokerage agents concentrate on
    individuals, families, associations, and small business owners.
    The product portfolio includes catastrophic medical coverage,
    individual medical plans, small group medical plans,
    HSA-qualified plans, basic medical coverage, short-term major
    medical, life insurance and annuities. These agents may
    represent multiple insurance carriers.                                                    
|
| | 5. | Electronic Distribution.QQLink is our fully
    transactional online platform for Continental Generals
    major medical and senior life and health products. QQLink,
    founded in late 2000, combines a traditional agent distribution
    system with direct online sales of insurance. Consumers are able
    to review and receive premium quotes and apply for insurance
    online. QQLink is 99% owned by Ceres with the remaining 1% owned
    by three of our agents.

Marketing Support.






| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | competitive products and commission structures;                                       
|
| |  | advanced commissions on select products for agents who qualify;                       
|
| |  | ongoing product development;                                                          
|
| |  | special incentive awards to new agents;                                               
|
| |  | training seminars to introduce new products and sales material
    for our agents; and
|
| |  | consistent agent communication and quality sales materials.                           

Customer Base




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|                                 |              |                   |         |         |                   |  |        |           |  |  |         |         |  |  |        |        | 
|-------------------------------- | ------------ | ----------------- | ------- | ------- | ----------------- |  | ------ | --------- |  |  | ------- | ------- |  |  | ------ | ------ | 
|                                 |              | December 31, 2004 |         |         | December 31, 2003 | 
|                                 |              |                   |         |         |                   | 
|                                 |              | Indemnity         |         |         | PPO               |  |        | Indemnity |  |  | PPO     |        
|                                 |              |                   |         |         |                   |  |        |           |  |  |         |        
|Major Medical                    |              |                   | 7,919   |         |                   |  | 58,805 |           |  |  | 12,850  |         |  |  | 71,317 |       
|Senior and Supplemental Products |              |                   | 126,404 |         |                   |  |       |           |  |  | 115,935 |         |  |  |       |       
|                                 |              |                   |         |         |                   |  |        |           |  |  |         |        
|                                 | Total Health |                   |         | 134,323 |                   |  |        | 58,805    |  |  |         | 128,785 |  |  |        | 71,317 | 
|Life and Annuity Products        |              |                   | 51,358  |         |                   |  |       |           |  |  | 52,686  |         |  |  |       |       
|                                 |              |                   |         |         |                   |  |        |           |  |  |         |        
|                                 |              |                   | 185,681 |         |                   |  | 58,805 |           |  |  | 181,471 |         |  |  | 71,317 |       
|                                 |              |                   |         |         |                   |  |        |           |  |  |         |        



7



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|                       |       |         |                        |         |          |  |         |       |   |              |       |   |          |         |  |  |      |       |  
|---------------------- | ----- | ------- | ---------------------- | ------- | -------- |  | ------- | ----- | - | ------------ | ----- | - | -------- | ------- |  |  | ---- | ----- | -
|December 31, 2004      |       |         | December 31, 2003      |        
|(dollars in thousands) |       |         | (dollars in thousands) |        
|                       |       |         |                        |        
|                       |       | Percent |                        |         |          |  | Percent |      
|State                  |       | Amount  |                        |         | of Total |  |         | State |   | Amount       |       |   | of Total |        
|                       |       |         |                        |         |          |  |         |       |   |              |       |   |          |        
|Ohio                   |       | $       | 76,699                 |         |          |  | 14.1    | %     |   | Ohio         |       | $ | 81,129   |         |  |  | 13.5 | %    
|Florida                |       |         | 42,750                 |         |          |  | 7.9     |       |   | Florida      |       |   | 51,240   |         |  |  | 8.5  |      
|Pennsylvania           |       |         | 40,433                 |         |          |  | 7.4     |       |   | Pennsylvania |       |   | 43,708   |         |  |  | 7.2  |      
|Texas                  |       |         | 32,397                 |         |          |  | 6.0     |       |   | Texas        |       |   | 35,071   |         |  |  | 5.8  |      
|Indiana                |       |         | 31,071                 |         |          |  | 5.7     |       |   | Indiana      |       |   | 33,148   |         |  |  | 5.5  |      
|Georgia                |       |         | 21,598                 |         |          |  | 4.0     |       |   | Georgia      |       |   | 26,606   |         |  |  | 4.4  |      
|Kansas                 |       |         | 21,338                 |         |          |  | 3.9     |       |   | Kansas       |       |   | 23,379   |         |  |  | 3.9  |      
|Nebraska               |       |         | 20,747                 |         |          |  | 3.8     |       |   | Nebraska     |       |   | 21,810   |         |  |  | 3.6  |      
|Illinois               |       |         | 20,724                 |         |          |  | 3.8     |       |   | Illinois     |       |   | 21,508   |         |  |  | 3.6  |      
|Virginia               |       |         | 19,700                 |         |          |  | 3.6     |       |   | Missouri     |       |   | 20,247   |         |  |  | 3.4  |      
|Other                  |       |         | 216,538                |         |          |  | 39.8    |       |   | Other        |       |   | 245,026  |         |  |  | 40.6 |      
|                       |       |         |                        |         |          |  |         |       |   |              |       |   |          |        
|                       | Total |         | $                      | 543,995 |          |  |         | 100.0 | % |              | Total |   | $        | 602,872 |  |  |      | 100.0 | %
|                       |       |         |                        |         |          |  |         |       |   |              |       |   |          |        

Pricing and Underwriting








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Claims






| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | claims processing and other administrative services for the
    Chambers and Provident American Lifes HealthEdge business;
|
| |  | claims processing for the run-off business of Provident American
    Life and United Benefit Life;                         
|
| |  | prescription drug claims; and                                                                                              
|
| |  | claims processing for our dental business.                                                                                 







Systems








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Investments










|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |      |        |   |       |         |         | 
|------------------------------------ | --------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------- |  | --- | --------- | ------ |  | ---------- | ---- | ------ | - | ----- | ------- | ------- | 
|                                     |                                         |                                           |       | Gross Unrealized |         |  |    
|                                     |                                         | Amortized                                 |       |                  |         |  |     | Estimated |       
|                                     |                                         | Cost                                      |       |                  | Gains   |  |     | Losses    |        |  | Fair Value |     
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | (dollars in thousands)                    |      
|Fixed maturities available-for-sale  |                                         |                                           |       |                  |         |  |     |           |        |  |            |      |        |   |       |        
|                                     | U.S. Treasury securities                |                                           | $     | 17,849           |         |  | $   | 138       |        |  | $          | (196 | )      |   | $     | 17,791  |        
|                                     | Non-government agencies and authorities |                                           |       | 47,615           |         |  |     | 615       |        |  |            | (125 | )      |   |       | 48,105  |        
|                                     | State and political subdivisions        |                                           |       | 4,999            |         |  |     | 25        |        |  |            | (93  | )      |   |       | 4,931   |        
|                                     | Corporate bonds                         |                                           |       | 187,721          |         |  |     | 9,134     |        |  |            | (682 | )      |   |       | 196,173 |        
|                                     | Mortgage- and asset-backed securities   |                                           |       | 185,339          |         |  |     | 4,232     |        |  |            | (496 | )      |   |       | 189,075 |        
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | Total fixed maturities available-for-sale |       |                  | 443,523 |  |     |           | 14,144 |  |            |      | (1,592 | ) |       |         | 456,075 | 
|Equity securities available-for-sale |                                         |                                           | 7,214 |                  |         |  | 444 |           |        |  |           |      |        |   | 7,658 |        
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | Total available-for-sale                  |       | $                | 450,737 |  |     | $         | 14,588 |  |            | $    | (1,592 | ) |       | $       | 463,733 | 
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     



Reserves




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| |   |                                                       
| | - | ------------------------------------------------------
| |  | healthcare cost trends;                               
|
| |  | the incidence of incurred claims;                     
|
| |  | the extent to which all claims have been reported; and
|
| |  | internal claims processing changes.                   











Reinsurance


General.




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Existing Arrangements.
















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Competition






Ratings






Government Regulation




Insurance Regulation.


13



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company Action Level is triggered if a
    companys total adjusted capital is less than 200%, but
    greater than or equal to 150% of its RBC. At the Company
    Action Level, a company must submit a comprehensive plan
    to the regulatory authority that discusses proposed corrective
    actions to improve its capital position. A company whose total
    adjusted capital is between 250% and 200% of its RBC is subject
    to a trend test. The trend test calculates the greater of any
    decrease in the margin (i.e., the amount in dollars by which a
    companys adjusted capital exceeds its RBC) between the
    current year and the prior year and between the current year and
    the average of the past three years, and assumes that the
    decrease could occur again in the coming year. If a similar
    decrease in margin in the coming year would result in a RBC
    ratio of less than 190%, then Company Action Level
    regulatory action would be triggered.
|
| |  | The Regulatory Action Level is triggered if a
    companys total adjusted capital is less than 150%, but
    greater than or equal to 100% of its RBC. At the
    Regulatory Action Level, the regulatory authority
    will perform a special examination of the company and issue an
    order specifying corrective actions that must be followed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Authorized Control Level is triggered if a
    companys total adjusted capital is less than 100%, but
    greater than or equal to 70% of its RBC, at which level the
    regulatory authority may take any action it deems necessary,
    including placing the company under regulatory control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Mandatory Control Level is triggered if a
    companys total adjusted capital is less than 70% of its
    RBC, at which level the regulatory authority is mandated to
    place the company under its control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                





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Healthcare Regulation and Reform.










15



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E-Commerce Regulation.


Employees




Available Information




16



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http://www.ceresgp.com


http://www.ceresgp.com

















|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Owned Properties (office
space)


|                |  |               |  |                   
|--------------- |  | ------------- |  | ------------------
|Location        |  | Segment       |  | Square Footage    
|                |  |               |  |                   
|Omaha, Nebraska |  | Major medical |  | 61,400 square feet
|Mission, Kansas |  | Senior(1)     |  | 45,000 square feet






|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Immediately prior to the closing of the Pyramid Life sale,
    Continental General acquired Pyramid Lifes building in
    Kansas. See Note D. Discontinued Operations for further
    information.

Leased Properties (office
space)


|                   |  |                                          |  |                    
|------------------ |  | ---------------------------------------- |  | -------------------
|Location           |  | Segment                                  |  | Square Footage     
|                   |  |                                          |  |                    
|Strongsville, Ohio |  | Corporate headquarters and Major medical |  | 121,625 square feet
|Dallas, Texas      |  | Sales office                             |  | 4,365 square feet  






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS





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



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PART II







|        |                                                                                                                       
|------- | ----------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY
    SECURITIES

a) Market Information.


|     |                |      |   |      |     |  |   |      | 
|---- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|     |                | High |   |      | Low | 
|     |                |      |   |      |     | 
|2004 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 7.32 |     |  | $ | 5.64 | 
|     | Second Quarter |      |   | 7.37 |     |  |   | 5.80 | 
|     | Third Quarter  |      |   | 6.10 |     |  |   | 5.24 | 
|     | Fourth Quarter |      |   | 5.89 |     |  |   | 4.50 | 
|    
|2003 |                |      |   |      |     |  |   |     
|     | First Quarter  |      | $ | 2.04 |     |  | $ | 1.36 | 
|     | Second Quarter |      |   | 2.99 |     |  |   | 1.87 | 
|     | Third Quarter  |      |   | 4.15 |     |  |   | 2.78 | 
|     | Fourth Quarter |      |   | 6.00 |     |  |   | 3.88 | 

(b) Holders.


(c) Dividends.




(d) Sales of Unregistered Securities.


19



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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA



|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |         |       |         |   |         |       |         | 
|---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | - | ------- | - | ------- | ------ | ------- | - | ------- | ------- | ------- | ---- | ------- | ----- | ------- | - | ------- | ----- | ------- | 
|                                                                                   |                                                                                                                  | For the Years Ended December 31,                 |        
|                                                                                   |                                                                                                                  |                                                  |        
|                                                                                   |                                                                                                                  | 2004                                             |         |   | 2003    |   |         | 2002   |         |   | 2001    |         |         | 2000 |        
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|                                                                                   |                                                                                                                  | (dollars in thousands, except per share amounts) |        
|Premiums (net of reinsurance)                                                      |                                                                                                                  | $                                                | 430,222 |   |         | $ | 478,326 |        |         | $ | 540,136 |         |         | $    | 555,522 |       |         | $ | 482,382 |      
|Net investment income                                                              |                                                                                                                  |                                                  | 26,216  |   |         |   | 25,090  |        |         |   | 24,258  |         |         |      | 25,287  |       |         |   | 24,171  |      
|Net realized gains (losses)                                                        |                                                                                                                  |                                                  | 423     |   |         |   | 1,891   |        |         |   | 2,262   |         |         |      | 2,265   |       |         |   | (128    | )    
|Fee and other income                                                               |                                                                                                                  |                                                  | 19,463  |   |         |   | 28,875  |        |         |   | 33,548  |         |         |      | 41,113  |       |         |   | 38,683  |      
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|                                                                                   |                                                                                                                  | Total revenues                                   |         | $ | 476,324 |   |         | $      | 534,182 |   |         | $       | 600,204 |      |         | $     | 624,187 |   |         | $     | 545,108 | 
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|Income (loss) from continuing operations                                           |                                                                                                                  | $                                                | 19,117  |   |         | $ | 19,365  |        |         | $ | 2,117   |         |         | $    | (5,529  | )     |         | $ | 13,097  |      
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|Discontinued operations(1)                                                         |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |         |       |         |   |         |      
|                                                                                   | Income from operations of Pyramid Life (less tax expense of
    $3,223, $3,877, $4,513 and $1,804, respectively) |                                                  |         |  |         |   |         | 5,732  |         |   |         | 7,109   |         |      |         | 7,861 |         |   |         | 3,353 |        
|                                                                                   | Loss on sale of Pyramid Life (less tax benefit of $79 and $683,
    respectively)                                |                                                  |         |  |         |   |         | (2,149 | )       |   |         | (11,627 | )       |      |         |      |         |   |         |      |        
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|Income (loss) from discontinued operations                                         |                                                                                                                  |                                                  |        |   |         |   | 3,583   |        |         |   | (4,518  | )       |         |      | 7,861   |       |         |   | 3,353   |      
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|Net income (loss)                                                                  |                                                                                                                  |                                                  | 19,117  |   |         |   | 22,948  |        |         |   | (2,401  | )       |         |      | 2,332   |       |         |   | 16,450  |      
|Gain on repurchase of the convertible voting preferred stock,
    net of dividends |                                                                                                                  |                                                  |        |   |         |   |        |        |         |   |        |         |         |      | 2,827   |       |         |   | (327    | )    
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        
|Net income (loss) attributable to common stockholders                              |                                                                                                                  | $                                                | 19,117  |   |         | $ | 22,948  |        |         | $ | (2,401  | )       |         | $    | 5,159   |       |         | $ | 16,123  |      
|                                                                                   |                                                                                                                  |                                                  |         |   |         |   |         |        |         |   |         |         |         |      |        

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|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |   |       |   |  |   |      | 
|------------------------------------- | -------------------------- | ------------------------------------------------ | - | ---- | ---- |  | - | ---- |  |  | ---- | ----- | - | ---- | - | ----- | - |  | - | ---- | 
|                                      |                            | For the Years Ended December 31,                 |  
|                                      |                            |                                                  |  
|                                      |                            | 2004                                             |   |      | 2003 |  |   | 2002 |  |  | 2001 |       |   | 2000 |  
|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |  
|                                      |                            | (dollars in thousands, except per share amounts) |  
|Basic earnings (loss) per share:      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |   |       |   |  |   |     
|                                      | Continuing operations      |                                                  | $ | 0.55 |      |  | $ | 0.56 |  |  | $    | 0.06  |   |      | $ | (0.15 | ) |  | $ | 0.84 | 
|                                      | Discontinued operations(1) |                                                  |   |     |      |  |   | 0.11 |  |  |      | (0.13 | ) |      |   | 0.44  |   |  |   | 0.22 | 
|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |  
|                                      | Net income (loss)          |                                                  | $ | 0.55 |      |  | $ | 0.67 |  |  | $    | (0.07 | ) |      | $ | 0.29  |   |  | $ | 1.06 | 
|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |  
|Diluted earnings (loss) per share(2): |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |   |       |   |  |   |     
|                                      | Continuing operations      |                                                  | $ | 0.55 |      |  | $ | 0.56 |  |  | $    | 0.06  |   |      | $ | (0.15 | ) |  | $ | 0.80 | 
|                                      | Discontinued operations(1) |                                                  |   |     |      |  |   | 0.11 |  |  |      | (0.13 | ) |      |   | 0.44  |   |  |   | 0.20 | 
|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |  
|                                      | Net income (loss)          |                                                  | $ | 0.55 |      |  | $ | 0.67 |  |  | $    | (0.07 | ) |      | $ | 0.29  |   |  | $ | 1.00 | 
|                                      |                            |                                                  |   |      |      |  |   |      |  |  |      |       |   |      |  

|                                              |                                                  |                                                  |         |      |      |   |         |      |  |   |         |      |  |      |         |      |  |   |         |      | 
|--------------------------------------------- | ------------------------------------------------ | ------------------------------------------------ | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                              |                                                  | December 31,                                     |        
|                                              |                                                  |                                                  |        
|                                              |                                                  | 2004                                             |         |      | 2003 |   |         | 2002 |  |   | 2001    |      |  | 2000 |        
|                                              |                                                  |                                                  |         |      |      |   |         |      |  |   |         |      |  |      |        
|                                              |                                                  | (dollars in thousands, except per share amounts) |        
|Investments                                   |                                                  | $                                                | 494,951 |      |      | $ | 484,280 |      |  | $ | 397,103 |      |  | $    | 385,915 |      |  | $ | 338,019 |     
|Reinsurance receivable                        |                                                  |                                                  | 130,345 |      |      |   | 143,397 |      |  |   | 170,075 |      |  |      | 217,360 |      |  |   | 233,471 |     
|Assets of Pyramid Life(1)                     |                                                  |                                                  |        |      |      |   |        |      |  |   | 157,774 |      |  |      | 151,168 |      |  |   | 136,587 |     
|Total assets                                  |                                                  |                                                  | 765,993 |      |      |   | 773,914 |      |  |   | 887,481 |      |  |      | 947,666 |      |  |   | 880,918 |     
|Total policy liabilities and benefits accrued |                                                  |                                                  | 489,829 |      |      |   | 504,493 |      |  |   | 512,003 |      |  |      | 566,608 |      |  |   | 545,339 |     
|Debt                                          |                                                  |                                                  | 10,750  |      |      |   | 13,000  |      |  |   | 25,003  |      |  |      | 31,000  |      |  |   | 57,018  |     
|Liabilities of Pyramid Life(1)                |                                                  |                                                  |        |      |      |   |        |      |  |   | 102,457 |      |  |      | 93,757  |      |  |   | 86,568  |     
|Retained earnings                             |                                                  |                                                  | 63,495  |      |      |   | 44,378  |      |  |   | 21,430  |      |  |      | 23,831  |      |  |   | 18,672  |     
|Stockholders equity(3)                       |                                                  |                                                  | 204,818 |      |      |   | 185,139 |      |  |   | 167,524 |      |  |      | 156,575 |      |  |   | 103,283 |     
|Equity per share:                             |                                                  |                                                  |         |      |      |   |         |      |  |   |         |      |  |      |         |      |  |   |         |     
|                                              | After accumulated other comprehensive income(4)  |                                                  |         | 5.93 |      |   |         | 5.38 |  |   |         | 4.89 |  |      |         | 4.62 |  |   |         | 5.52 | 
|                                              | Before accumulated other comprehensive income(4) |                                                  |         | 5.72 |      |   |         | 5.17 |  |   |         | 4.51 |  |      |         | 4.61 |  |   |         | 5.88 | 






|    |                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective March 31, 2003, Continental General sold its
    subsidiary, Pyramid Life Insurance Company, to Pennsylvania Life
    Insurance Company, a subsidiary of Universal American Financial
    Corp., for approximately $57.5 million in cash. See
    Note D. Discontinued Operations to our audited consolidated
    financial statements for further information.
|   
|(2) | The exercise of options and warrants is not assumed when a loss
    from operations is reported and the result would be antidilutive.                                                                                                                                                                                                                                    
|   
|(3) | In 2001, we received net proceeds of $46.5 million from a
    public offering of 16.1 million shares of our common stock,
    at $3.20 per share. In 2000, we received net proceeds of
    $27.5 million from the private placement of
    3.3 million shares of our common stock at $6.00 per
    share and 75,000 shares of preferred stock at
    $100.00 per share.  
|   
|(4) | Accumulated other comprehensive income relates
    primarily to the net unrealized gain (loss) on
    available-for-sale securities.                                                                                                                                                                                                                                   

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS



Overview








Critical Accounting Policies




Liabilities for Other Policy Claims and Benefits Payable.






22



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Deferred Acquisition Costs.








Other Accounting Policies and Insurance Business Factors




Goodwill and Other Intangible Assets.


23



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Goodwill and Other Intangible Assets


Long-lived Assets.


Revenue recognition.


Value of business acquired.




The number of years a policy has been in effect.


Lapsation and persistency.


24



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External factors also contribute to policy renewal or
lapsation.




Reinsurance.


Liabilities for Litigation.






Insurance.


25



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Results of Operations






| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Medical  includes catastrophic and comprehensive
    major medical plans;                                                        
|
| |  | Senior and Other  includes Medicare supplement,
    long-term care, dental, life insurance and annuities; and                    
|
| |  | Corporate and Other  includes primarily interest
    income, interest expense, and corporate expenses of the holding
    company.



Discontinued Operations. Accounting for the Impairment or
Disposal of Long-Lived Assets


Overview and Outlook for 2005.






26



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| |                      
| | ---------------------
| | 2004 Compared to 2003

|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |        |         |         |        |        |       |       |  
|----------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------- | --------------------- | - | ------- | --------------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------ | ------ | ----- | ----- | -
|                                                                                    |                                                    |                           |                       |   |         | Increase        |        
|                                                                                    |                                                    |                           |                       |   |         | (Decrease) from |        
|                                                                                    |                                                    |                           |                       |   |         | Previous Year   |        
|                                                                                    |                                                    |                           |                       |   |         |                 |        
|                                                                                    |                                                    | 2004                      |                       |   | 2003    |                 |         | Dollars |         |         | %       |       
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|                                                                                    |                                                    | (dollars in thousands,    |                      
|                                                                                    |                                                    | except per share amounts) |                      
|Premiums, net                                                                       |                                                    |                           |                       |   |         |                 |         |         |         |         |         |        |         |         |        |       
|                                                                                    |                                                    | Medical                   |                       | $ | 247,002 |                 |         | $       | 305,441 |         |         | $      | (58,439 | )       |        |        | (19.1 | )%   
|                                                                                    |                                                    | Senior and other          |                       |   | 183,220 |                 |         |         | 172,885 |         |         |        | 10,335  |         |        |        | 6.0   |      
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|                                                                                    |                                                    |                           | Total                 |   |         | 430,222         |         |         |         | 478,326 |         |        |         | (48,104 | )      |        |       | (10.1 | )
|Net investment income                                                               |                                                    |                           | 26,216                |   |         |                 | 25,090  |         |         |         | 1,126   |        |         |         | 4.5    |       
|Net realized gains                                                                  |                                                    |                           | 423                   |   |         |                 | 1,891   |         |         |         | (1,468  | )      |         |         | (77.6  | )     
|Fee and other income                                                                |                                                    |                           | 19,463                |   |         |                 | 28,875  |         |         |         | (9,412  | )      |         |         | (32.6  | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|                                                                                    |                                                    |                           | Consolidated revenues |   |         | 476,324         |         |         |         | 534,182 |         |        |         | (57,858 | )      |        |       | (10.8 | )
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Benefits, claims, losses and settlement expenses                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |        |         |         |        |       
|                                                                                    |                                                    | Medical                   |                       |   | 176,143 |                 |         |         | 226,249 |         |         |        | (50,106 | )       |        |        | (22.1 | )    
|                                                                                    |                                                    | Senior and other          |                       |   | 138,490 |                 |         |         | 127,491 |         |         |        | 10,999  |         |        |        | 8.6   |      
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|                                                                                    |                                                    |                           | Total                 |   |         | 314,633         |         |         |         | 353,740 |         |        |         | (39,107 | )      |        |       | (11.1 | )
|Selling, general and administrative expenses                                        |                                                    |                           | 134,563               |   |         |                 | 146,857 |         |         |         | (12,294 | )      |         |         | (8.4   | )     
|Net amortization and change in acquisition costs and value of
    business acquired |                                                    |                           | 4,571                 |   |         |                 | 5,953   |         |         |         | (1,382  | )      |         |         | (23.2  | )     
|Interest expense and financing costs                                                |                                                    |                           | 684                   |   |         |                 | 1,620   |         |         |         | (936    | )      |         |         | (57.8  | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|                                                                                    |                                                    |                           | 454,451               |   |         |                 | 508,170 |         |         |         | (53,719 | )      |         |         | (10.6  | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Income from continuing operations before federal income taxes                       |                                                    |                           | 21,873                |   |         |                 | 26,012  |         |         |         | (4,139  | )      |         |         | (15.9  | )     
|Federal income tax expense                                                          |                                                    |                           | 2,756                 |   |         |                 | 6,647   |         |         |         | (3,891  | )      |         |         | (58.5  | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Income from continuing operations                                                   |                                                    |                           | 19,117                |   |         |                 | 19,365  |         |         |         | (248    | )      |         |         | (1.3   | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Discontinued operations:                                                            |                                                    |                           |                       |   |         |                 |         |         |         |         |         |        |         |         |        |       
|                                                                                    | Income from operations of Pyramid Life, net of tax |                           |                       |  |         |                 |         | 5,732   |         |         |         | (5,732 | )       |         |        | (100.0 | )    
|                                                                                    | Loss on sale of Pyramid Life, net of tax           |                           |                       |  |         |                 |         | (2,149  | )       |         |         | 2,149  |         |         |        | 100.0  |      
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Income from discontinued operations                                                 |                                                    |                           |                      |   |         |                 | 3,583   |         |         |         | (3,583  | )      |         |         | (100.0 | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Net income                                                                          |                                                    | $                         | 19,117                |   |         | $               | 22,948  |         |         | $       | (3,831  | )      |         |         | (16.7  | )     
|                                                                                    |                                                    |                           |                       |   |         |                 |         |         |         |         |         |       
|Basic earnings per share                                                            |                                                    | $                         | 0.55                  |   |         | $               | 0.67    |         |         | $       | (0.12   | )      |         |         | (17.9  | )     
|Diluted earnings per share                                                          |                                                    | $                         | 0.55                  |   |         | $               | 0.67    |         |         | $       | (0.12   | )      |         |         | (17.9  | )     
|Medical loss ratio                                                                  |                                                    |                           | 71.3                  | % |         |                 | 74.1    | %       |         |         |        |        |         |         |       |       
|Senior loss ratio                                                                   |                                                    |                           | 75.6                  | % |         |                 | 73.7    | %       |         |         |        |        |         |         |       |       
|Overall loss ratio                                                                  |                                                    |                           | 73.1                  | % |         |                 | 74.0    | %       |         |         |        |        |         |         |       |       
|Selling, general and administrative expense ratio                                   |                                                    |                           | 31.3                  | % |         |                 | 30.7    | %       |         |         |        |        |         |         |       |       

27



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Net Premiums (net of reinsurance ceded)






| |        
| | -------
| | Medical







| |                 
| | ----------------
| | Senior and Other



Other Revenues








Benefits, Claims, Losses and Settlement Expenses




28



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| |        
| | -------
| | Medical





| |                 
| | ----------------
| | Senior and Other



Other Expenses and Net Income












29



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30



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| |                      
| | ---------------------
| | 2003 Compared to 2002

|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |        |         |         |        |       |       |       |  
|---------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------- | --------------------- | ------ | ------- | --------------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------ | ----- | ----- | ----- | -
|                                                                                               |                                                    |                           |                       |        |         | Increase        |        
|                                                                                               |                                                    |                           |                       |        |         | (Decrease) from |        
|                                                                                               |                                                    |                           |                       |        |         | Previous Year   |        
|                                                                                               |                                                    |                           |                       |        |         |                 |        
|                                                                                               |                                                    | 2003                      |                       |        | 2002    |                 |         | Dollars |         |         | %       |       
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|                                                                                               |                                                    | (dollars in thousands,    |                      
|                                                                                               |                                                    | except per share amounts) |                      
|Premiums, net                                                                                  |                                                    |                           |                       |        |         |                 |         |         |         |         |         |        |         |         |        |      
|                                                                                               |                                                    | Medical                   |                       | $      | 305,441 |                 |         | $       | 370,029 |         |         | $      | (64,588 | )       |        |       | (17.5 | )%   
|                                                                                               |                                                    | Senior and other          |                       |        | 172,885 |                 |         |         | 170,107 |         |         |        | 2,778   |         |        |       | 1.6   |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|                                                                                               |                                                    |                           | Total                 |        |         | 478,326         |         |         |         | 540,136 |         |        |         | (61,810 | )      |       |       | (11.4 | )
|Net investment income                                                                          |                                                    |                           | 25,090                |        |         |                 | 24,258  |         |         |         | 832     |        |         |         | 3.4    |      
|Net realized gains                                                                             |                                                    |                           | 1,891                 |        |         |                 | 2,262   |         |         |         | (371    | )      |         |         | (16.4  | )    
|Fee and other income                                                                           |                                                    |                           | 28,875                |        |         |                 | 33,548  |         |         |         | (4,673  | )      |         |         | (13.9  | )    
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|                                                                                               |                                                    |                           | Consolidated revenues |        |         | 534,182         |         |         |         | 600,204 |         |        |         | (66,022 | )      |       |       | (11.0 | )
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Benefits, claims, losses and settlement expenses                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |        |         |         |        |      
|                                                                                               |                                                    | Medical                   |                       |        | 226,249 |                 |         |         | 291,789 |         |         |        | (65,540 | )       |        |       | (22.5 | )    
|                                                                                               |                                                    | Senior and other          |                       |        | 127,491 |                 |         |         | 129,235 |         |         |        | (1,744  | )       |        |       | (1.3  | )    
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|                                                                                               |                                                    |                           | Total                 |        |         | 353,740         |         |         |         | 421,024 |         |        |         | (67,284 | )      |       |       | (16.0 | )
|Selling, general and administrative expenses                                                   |                                                    |                           | 146,857               |        |         |                 | 175,183 |         |         |         | (28,326 | )      |         |         | (16.2  | )    
|Net amortization (deferral) and change in acquisition costs
    and value of business acquired |                                                    |                           | 5,953                 |        |         |                 | (3,845  | )       |         |         | 9,798   |        |         |         | N/M    |      
|Interest expense and financing costs                                                           |                                                    |                           | 1,620                 |        |         |                 | 2,001   |         |         |         | (381    | )      |         |         | (19.0  | )    
|Special charge                                                                                 |                                                    |                           |                      |        |         |                 | 2,381   |         |         |         | (2,381  | )      |         |         | (100.0 | )    
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|                                                                                               |                                                    |                           | 508,170               |        |         |                 | 596,744 |         |         |         | (88,574 | )      |         |         | (14.8  | )    
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Income from continuing operations before federal income taxes                                  |                                                    |                           | 26,012                |        |         |                 | 3,460   |         |         |         | 22,552  |        |         |         | N/M    |      
|Federal income tax expense                                                                     |                                                    |                           | 6,647                 |        |         |                 | 1,343   |         |         |         | 5,304   |        |         |         | N/M    |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Income from continuing operations                                                              |                                                    |                           | 19,365                |        |         |                 | 2,117   |         |         |         | 17,248  |        |         |         | N/M    |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Discontinued operations:                                                                       |                                                    |                           |                       |        |         |                 |         |         |         |         |         |        |         |         |        |      
|                                                                                               | Income from operations of Pyramid Life, net of tax |                           |                       | 5,732  |         |                 |         | 7,109   |         |         |         | (1,377 | )       |         |        | (19.4 | )    
|                                                                                               | Loss on sale of Pyramid Life, net of tax           |                           |                       | (2,149 | )       |                 |         | (11,627 | )       |         |         | 9,478  |         |         |        | 81.5  |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Income (loss) from discontinued operations                                                     |                                                    |                           | 3,583                 |        |         |                 | (4,518  | )       |         |         | 8,101   |        |         |         | 179.3  |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Net income (loss)                                                                              |                                                    | $                         | 22,948                |        |         | $               | (2,401  | )       |         | $       | 25,349  |        |         |         | N/M    |      
|                                                                                               |                                                    |                           |                       |        |         |                 |         |         |         |         |         |       
|Basic earnings (loss) per share                                                                |                                                    | $                         | 0.67                  |        |         | $               | (0.07   | )       |         | $       | 0.74    |        |         |         | N/M    |      
|Diluted earnings (loss) per share                                                              |                                                    | $                         | 0.67                  |        |         | $               | (0.07   | )       |         | $       | 0.74    |        |         |         | N/M    |      
|Medical loss ratio                                                                             |                                                    |                           | 74.1                  | %      |         |                 | 78.9    | %       |         |         |        |        |         |         |       |      
|Senior loss ratio                                                                              |                                                    |                           | 73.7                  | %      |         |                 | 76.0    | %       |         |         |        |        |         |         |       |      
|Overall loss ratio                                                                             |                                                    |                           | 74.0                  | %      |         |                 | 77.9    | %       |         |         |        |        |         |         |       |      
|Selling, general and administrative expense ratio                                              |                                                    |                           | 30.7                  | %      |         |                 | 32.4    | %       |         |         |        |        |         |         |       |      






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Net Premiums (net of reinsurance ceded)






| |        
| | -------
| | Medical





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a 34.0% decrease in major medical certificates in force from
    127,463 at December 31, 2002 to 84,167 at December 31,
    2003 due to exiting certain unprofitable states and higher
    lapsation rates. Rate increases implemented in excess of claim
    trend on certain unprofitable blocks caused higher lapsation
    rates in 2003.                                                                                                                                                                                                                                                                                             
|
| |  | a 58.3% decline in new business production from
    $89.2 million in annualized premium in 2002 to
    $37.2 million in 2003. We discontinued Continental General
    major medical brokerage sales in 2003 due to adverse claim
    experience, which accounted for $18.0 million of the
    decreased production levels. In addition, Continental General
    did not write major medical business in Florida for half of
    2003, due to capital constraints. Florida accounted for
    approximately 19% of our major medical production in 2002.
    Continental General is currently writing major medical business
    in Florida.
|
| |  | renewal premium increases averaging between 25-30% prior to any
    benefit downgrades or deductible changes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | a decline in the percentage of business ceded from 15.3% in 2002
    to 13.5% in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    





| |                 
| | ----------------
| | Senior and Other





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a slight increase in Medicare supplement premium of
    $124.7 million in 2003 compared to $124.5 million in
    2002, which includes a 8.5% decrease in policies in force offset
    by annual rate increases and reduced levels of reinsurance.
    Medicare supplement production was expected to increase
    significantly in 2004 due to the introduction of new
    standardized plans and expanded distribution into our Central
    Reserve subsidiary. Medicare supplement premium was projected to
    increase approximately 10% in 2004.
|
| |  | a $4.0 million increase in life and annuity premium due to
    the growth of senior life new business production.                                                                                                                                                                                                                                                                                                                                                                                                                                    

Other Revenues






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Benefits, Claims, Losses and Settlement Expenses




Medical






| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | the implementation of rate increases in excess of claim trend on
    certain unprofitable blocks;           
|
| |  | the cancellation of Central Reserves major medical
    business in Texas effective September 30, 2002; and 
|
| |  | a higher level of severity in the December 31, 2001 claim
    inventory adversely impacted 2002 loss ratios.

Senior and Other




Other Expenses and Net Income












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Liquidity and Capital Resources






| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the current year includes an $23.5 million increase in
    fixed maturity and equity securities classified as trading due
    to our purchase of convertible bonds and convertible preferred
    stock in the fourth quarter of 2004;                  
|
| |  | a significant reduction in our major medical claims reserves as
    of December 31, 2004;                                                                                                                                                              
|
| |  | the prior year included a $12.1 million increase in future
    policy benefits, claims and funds payable due to Continental
    Generals assumption of certain interest sensitive
    whole-life policies from Pyramid Life on March 31, 2003;        
|
| |  | the prior year reflected a larger reduction in our reinsurance
    receivable due to the final settlement of our London Life
    reinsurance receivable in 2004 and a larger decline in our
    reinsurance receivable and reserves ceded balances; and
|
| |  | an increase in current federal income taxes paid.                                                                                                                                                                                                      









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Credit Agreement.










Off-Balance Sheet Arrangements.


Contractual Obligations.


|                                              |                               |                        |         |           |        |   |        |           |         |   |           |        |  |       |        |        |  |   |         |         | 
|--------------------------------------------- | ----------------------------- | ---------------------- | ------- | --------- | ------ | - | ------ | --------- | ------- | - | --------- | ------ |  | ----- | ------ | ------ |  | - | ------- | ------- | 
|                                              |                               | Payments Due by Year   |        
|                                              |                               |                        |        
|                                              |                               |                        |         | Less than |        |   |        |           | After 5 |  
|Contractual Obligations                       |                               | Total                  |         |           | 1 year |   |        | 1-3 years |         |   | 4-5 years |        |  | years |       
|                                              |                               |                        |         |           |        |   |        |           |         |   |           |        |  |       |       
|                                              |                               | (dollars in thousands) |        
|Long-term debt                                |                               | $                      | 10,750  |           |        | $ | 2,500  |           |         | $ | 5,750     |        |  | $     | 2,500  |        |  | $ |        |        
|Operating leases                              |                               |                        | 24,637  |           |        |   | 2,698  |           |         |   | 4,499     |        |  |       | 3,968  |        |  |   | 13,472  |        
|Unfunded investment commitments(1)            |                               |                        | 578     |           |        |   | 578    |           |         |   |          |        |  |       |       |        |  |   |        |        
|Deposit and investment contracts(2)           |                               |                        | 236,127 |           |        |   | 19,132 |           |         |   | 40,989    |        |  |       | 35,257 |        |  |   | 140,749 |        
|Long-term care claims and benefits payable(3) |                               |                        | 35,107  |           |        |   | 11,859 |           |         |   | 14,252    |        |  |       | 5,341  |        |  |   | 3,655   |        
|                                              |                               |                        |         |           |        |   |        |           |         |   |           |        |  |       |       
|                                              | Total contractual obligations |                        | $       | 307,199   |        |   | $      | 36,767    |         |   | $         | 65,490 |  |       | $      | 47,066 |  |   | $       | 157,876 | 
|                                              |                               |                        |         |           |        |   |        |           |         |   |           |        |  |       |       






|    |                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents estimated timing for fulfilling unfunded commitments
    for investments in a limited partnership. Outstanding
    commitments with this limited partnership are included in
    payments due in less than one year since the timing of funding
    these commitments cannot be reasonably estimated.

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|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents estimated payments required under interest sensitive
    life and annuity contracts. The actual payments could vary based
    on changes in assumed crediting rates, persistency, and
    mortality levels.                                           
|   
|(3) | Excludes claims and benefits payable on our major medical,
    Medicare supplement, and other health products since over 90% of
    the claims are paid within the subsequent six month period and
    virtually all of the claims are paid within twelve months.







Net Operating Loss Carryforward






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Financial Information about Industry Segments from Continuing
Operations




|                    |                                                   |                             |         |        |         |   |         |        |         |  |         |        |         | 
|------------------- | ------------------------------------------------- | --------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- |  | ------- | ------ | ------- | 
|                    |                                                   | Year Ended December 31,     |        
|                    |                                                   |                             |        
|                    |                                                   | 2004                        |         |        | 2003    |   |         | 2002   |        
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   | (dollars in thousands)      |        
|Medical             |                                                   |                             |         |        |         |   |         |        |         |  |         |       
|                    | Revenues                                          |                             |         |        |         |   |         |        |         |  |         |        |        
|                    |                                                   | Net premiums                |         | $      | 247,002 |   |         | $      | 305,441 |  |         | $      | 370,029 | 
|                    |                                                   | Net investment income       |         |        | 4,392   |   |         |        | 5,598   |  |         |        | 7,317   | 
|                    |                                                   | Net realized (losses) gains |         |        | (36     | ) |         |        | 550     |  |         |        | 1,194   | 
|                    |                                                   | Other income                |         |        | 16,851  |   |         |        | 21,680  |  |         |        | 30,481  | 
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   |                             | 268,209 |        |         |   | 333,269 |        |         |  | 409,021 |       
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    | Expenses                                          |                             |         |        |         |   |         |        |         |  |         |        |        
|                    |                                                   | Benefits and claims         |         |        | 176,143 |   |         |        | 226,249 |  |         |        | 291,789 | 
|                    |                                                   | Other operating expenses    |         |        | 86,888  |   |         |        | 98,186  |  |         |        | 123,134 | 
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   |                             | 263,031 |        |         |   | 324,435 |        |         |  | 414,923 |       
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    | Segment profit (loss) before federal income taxes |                             | $       | 5,178  |         |   | $       | 8,834  |         |  | $       | (5,902 | )      
|                    |                                                   |                             |         |        |         |   |         |        |        
|Senior and Other    |                                                   |                             |         |        |         |   |         |        |         |  |         |       
|                    | Revenues                                          |                             |         |        |         |   |         |        |         |  |         |        |        
|                    |                                                   | Net premiums                |         | $      | 183,220 |   |         | $      | 172,885 |  |         | $      | 170,107 | 
|                    |                                                   | Net investment income       |         |        | 21,820  |   |         |        | 19,487  |  |         |        | 16,932  | 
|                    |                                                   | Net realized gains          |         |        | 11      |   |         |        | 905     |  |         |        | 634     | 
|                    |                                                   | Other income                |         |        | 2,612   |   |         |        | 7,188   |  |         |        | 3,067   | 
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   |                             | 207,663 |        |         |   | 200,465 |        |         |  | 190,740 |       
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    | Expenses                                          |                             |         |        |         |   |         |        |         |  |         |        |        
|                    |                                                   | Benefits and claims         |         |        | 138,490 |   |         |        | 127,491 |  |         |        | 129,235 | 
|                    |                                                   | Other operating expenses    |         |        | 50,689  |   |         |        | 53,058  |  |         |        | 46,637  | 
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   |                             | 189,179 |        |         |   | 180,549 |        |         |  | 175,872 |       
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    | Segment profit before federal income taxes        |                             | $       | 18,484 |         |   | $       | 19,916 |         |  | $       | 14,868 |        
|                    |                                                   |                             |         |        |         |   |         |        |        
|Corporate and Other |                                                   |                             |         |        |         |   |         |        |         |  |         |       
|                    | Revenues                                          |                             |         |        |         |   |         |        |         |  |         |        |        
|                    |                                                   | Net investment income       |         | $      | 4       |   |         | $      | 5       |  |         | $      | 9       | 
|                    |                                                   | Net realized gains          |         |        | 448     |   |         |        | 436     |  |         |        | 434     | 
|                    |                                                   | Other income                |         |        |        |   |         |        | 7       |  |         |        |        | 
|                    |                                                   |                             |         |        |         |   |         |        |        
|                    |                                                   |                             | 452     |        |         |   | 448     |        |         |  | 443     |       
|                    |                                                   |                             |         |        |         |   |         |        |        

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|                                                                  |                                          |                                      |        |        |       |   |        |        |       |   |       |        |       | 
|----------------------------------------------------------------- | ---------------------------------------- | ------------------------------------ | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ----- | ------ | ----- | 
|                                                                  |                                          | Year Ended December 31,              |       
|                                                                  |                                          |                                      |       
|                                                                  |                                          | 2004                                 |        |        | 2003  |   |        | 2002   |      
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  |                                          | (dollars in thousands)               |       
|                                                                  | Expenses                                 |                                      |        |        |       |   |        |        |       |   |       |        |      
|                                                                  |                                          | Interest expense and financing costs |        |        | 684   |   |        |        | 1,620 |   |       |        | 2,001 | 
|                                                                  |                                          | Other operating expenses             |        |        | 1,557 |   |        |        | 1,566 |   |       |        | 1,567 | 
|                                                                  |                                          | Special charge                       |        |        |      |   |        |        |      |   |       |        | 2,381 | 
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  |                                          |                                      | 2,241  |        |       |   | 3,186  |        |       |   | 5,949 |       
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  | Segment loss before federal income taxes |                                      | $      | (1,789 | )     |   | $      | (2,738 | )     |   | $     | (5,506 | )    
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|Income from continuing operations before federal income
    taxes |                                          | $                                    | 21,873 |        |       | $ | 26,012 |        |       | $ | 3,460 |       
|                                                                  |                                          |                                      |        |        |       |   |        |        |      

Market Risk and Management Policies




Inadequate Pricing Risk


Legal/ Regulatory Risk




Investment Impairment Risk


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| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | debt downgrades or other events that adversely affects an
    investees access to, or cost of, financing;                       
|
| |  | negative economic factors and conditions specific to the
    issuers industry;                                                  
|
| |  | adverse changes in the regulatory environment specific to the
    issuers industry;                                             
|
| |  | all spread changes exceeding 50 basis points; or                                                                                 
|
| |  | corporate bond prices that move more than 10% over the past
    week, 20% over the past month, or 30% over the past three months.



Credit Risk


Interest Rate Risk




Seasonality


Impact of Inflation






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Forward-Looking Statements








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unforeseen losses with respect to loss and settlement expense
    reserves for unreported and reported claims or adverse changes
    in persistency or profitability of insurance contracts that
    would accelerate the amortization of our deferred acquisition
    costs;                                                                                                                                                                                                   
|
| |  | our ability to implement increases in premium rates and to
    develop, market, distribute and administer competitive products
    and services in a timely, cost-effective manner;                                                                                                                                                                                                                                                                                             
|
| |  | our ability to successfully implement our business plans,
    including our growth strategy;                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | changes or developments in healthcare reform and other
    regulatory issues, including Medicare reform and the Health
    Insurance Portability and Accountability Act of 1996 and
    increased privacy and security regulation, and changes in laws
    and regulations in key states in which we operate, could
    increase our costs, cause us to discontinue marketing products
    in certain states or cause us to change our business or
    operations significantly;
|
| |  | changing regulations of corporate governance and public
    disclosure that has increased both our costs and the risk of
    non-compliance, including Section 404 of the Sarbanes-Oxley
    Act of 2002;                                                                                                                                                                                                                                                                       
|
| |  | business conditions and competition in the healthcare industry;                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | rising healthcare costs, especially the rising costs of
    prescription drug costs that are rising faster than other
    medical costs, and rising utilization rates;                                                                                                                                                                                                                                                                                                          
|
| |  | the risk of material adverse outcomes in litigation and related
    matters;                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | our ability to meet risk-based or statutory capital requirements
    and the outcome of our efforts to meet these capital
    requirements;                                                                                                                                                                                                                                                                                                                                     
|
| |  | our ability to continue to meet the terms of our debt
    obligations under our credit agreement which contains a number
    of significant financial and other covenants;                                                                                                                                                                                                                                                                                                      
|
| |  | the adequacy of funds, including fee income, received from our
    non-regulated subsidiaries, and the restrictions on our
    insurance subsidiaries ability to pay dividends to Ceres,
    to meet our debt obligations;                                                                                                                                                                                                                                                     
|
| |  | the performance of others on whom we rely for insurance and
    reinsurance, particularly Hannover Life Reassurance Company of
    America upon whom we have relied for substantially all of our
    reinsurance;                                                                                                                                                                                                                                                               
|
| |  | failure (included material weaknesses) of our information and
    administration systems;                                                                                                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our financial and claims paying ratings, including any potential
    downgrades;                                                                   
|
| |  | our ability to maintain our current PPO network arrangements;                                                                                      
|
| |  | dependence on senior management and key personnel;                                                                                                 
|
| |  | the risk of selling investments to meet liquidity requirements;                                                                                    
|
| |  | our ability to obtain additional debt or equity financing on
    terms favorable to us to facilitate our long-term growth;                         
|
| |  | the risk that issuers of securities owned by Ceres will default
    or that other parties will not pay or perform;                                 
|
| |  | the performance of others on whom we rely for administrative and
    operations services;                                                          
|
| |  | changes in accounting and reporting practices;                                                                                                     
|
| |  | the failure to successfully manage our operations and integrate
    future acquisitions, if any, including the failure to achieve
    cost savings;
|
| |  | payments to state assessment funds;                                                                                                                
|
| |  | changes in tax laws; and                                                                                                                           
|
| |  | our ability to fully collect all agent advances.                                                                                                   



Recently Issued Accounting Pronouncements


Share-Based Payment Statement of Cash Flows


The Meaning
of Other-Than-Temporary Impairments and Its Application to
Certain Investments


41



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Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts







|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK



42



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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CERES GROUP, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND


FINANCIAL STATEMENT SCHEDULES


|                                                                                                             |  |      |    | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                             |  | Page |   
|                                                                                                             |  |      |   
|Reports of Independent Registered Public
    Accounting Firm  KPMG LLP                                      |  |      | 44 | 
|Report of Independent Registered Public
    Accounting Firm  Ernst & Young LLP                              |  |      | 47 | 
|                                                                                                            
|Consolidated Financial Statements                                                                            |  |      |    | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                             |  |      | 48 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002               |  |      | 49 | 
|Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2004, 2003 and 2002 |  |      | 50 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002               |  |      | 51 | 
|Notes to Consolidated Financial Statements
    for the years ended December 31, 2004, 2003 and 2002          |  |      | 52 | 
|                                                                                                            
|Financial Statement Schedules                                                                                |  |      |    | 
|Schedule II  Condensed
    Financial Information of Registrant  Ceres Group,
    Inc. (Parent Only)        |  |      | 87 | 
|Schedule III  Supplemental
    Insurance Information                                                        |  |      | 90 | 
|Schedule IV  Reinsurance                                                                                    |  |      | 91 | 

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Report of Independent Registered Public Accounting Firm




















44



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Report of Independent Registered Public Accounting Firm

















45



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.








46



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Report of Independent Registered Public Accounting Firm












Goodwill and Other Intangible Assets Accounting for the Impairment or Disposal of Long-Lived
Assets












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CERES GROUP, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


December 31, 2004 and 2003


(dollars in thousands)








|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |         |         |         |         |         | 
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ----------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                |                                                                                                                                             | 2004                             |                                                 |         | 2003    |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|ASSETS                                                                                          |                                                                                                                                             |                                  |                                                 |         |         |         |         |        
|Investments                                                                                     |                                                                                                                                             |                                  |                                                 |         |         |         |         |        
|                                                                                                | Fixed maturities available-for-sale, at fair value                                                                                          |                                  | $                                               | 456,075 |         |         | $       | 479,089 |        
|                                                                                                | Fixed maturities trading, at fair value                                                                                                     |                                  |                                                 | 18,531  |         |         |         |        |        
|                                                                                                | Equity securities available-for-sale, at fair value                                                                                         |                                  |                                                 | 7,658   |         |         |         |        |        
|                                                                                                | Equity securities trading, at fair value                                                                                                    |                                  |                                                 | 4,938   |         |         |         |        |        
|                                                                                                | Limited partnership                                                                                                                         |                                  |                                                 | 4,166   |         |         |         |        |        
|                                                                                                | Surplus notes                                                                                                                               |                                  |                                                 |        |         |         |         | 1,006   |        
|                                                                                                | Policy and mortgage loans                                                                                                                   |                                  |                                                 | 3,583   |         |         |         | 4,185   |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total investments  Note B                      |         |         | 494,951 |         |         |         | 484,280 | 
|Cash and cash equivalents (of which $6,967 and $6,978 is
    restricted, respectively)  Note B |                                                                                                                                             |                                  | 22,635                                          |         |         |         | 26,394  |        
|Accrued investment income                                                                       |                                                                                                                                             |                                  | 5,389                                           |         |         |         | 5,658   |        
|Premiums receivable                                                                             |                                                                                                                                             |                                  | 4,096                                           |         |         |         | 4,443   |        
|Reinsurance receivable  Note K                                                                 |                                                                                                                                             |                                  | 130,345                                         |         |         |         | 143,397 |        
|Property and equipment, net  Note C                                                            |                                                                                                                                             |                                  | 5,277                                           |         |         |         | 5,527   |        
|Deferred acquisition costs  Note F                                                             |                                                                                                                                             |                                  | 67,074                                          |         |         |         | 69,609  |        
|Value of business acquired  Note G                                                             |                                                                                                                                             |                                  | 10,952                                          |         |         |         | 13,034  |        
|Goodwill  Note H                                                                               |                                                                                                                                             |                                  | 10,657                                          |         |         |         | 10,657  |        
|Licenses  Note H                                                                               |                                                                                                                                             |                                  | 3,440                                           |         |         |         | 3,440   |        
|Other assets                                                                                    |                                                                                                                                             |                                  | 11,177                                          |         |         |         | 7,475   |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total assets                                    |         | $       | 765,993 |         |         | $       | 773,914 | 
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                            |                                                                                                                                             |                                  |                                                 |         |         |         |         |        
|Policy liabilities and benefits accrued                                                         |                                                                                                                                             |                                  |                                                 |         |         |         |         |        
|                                                                                                | Future policy benefits, losses and claims                                                                                                   |                                  |                                                 |         |         |         |         |         |        
|                                                                                                |                                                                                                                                             | Life                             |                                                 | $       | 12,899  |         |         | $       | 9,730   |        
|                                                                                                |                                                                                                                                             | Deposit and investment contracts |                                                 |         | 236,127 |         |         |         | 236,568 |        
|                                                                                                |                                                                                                                                             | Accident and health              |                                                 |         | 103,161 |         |         |         | 94,965  |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total future policy benefits, losses and claims |         |         | 352,187 |         |         |         | 341,263 | 
|                                                                                                | Unearned premiums                                                                                                                           |                                  |                                                 | 34,939  |         |         |         | 33,993  |        
|                                                                                                | Other policy claims and benefits payable  Note J                                                                                           |                                  |                                                 | 102,703 |         |         |         | 129,237 |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total policy liabilities and benefits accrued   |         |         | 489,829 |         |         |         | 504,493 | 
|Deferred reinsurance gain  Note K                                                              |                                                                                                                                             |                                  | 6,562                                           |         |         |         | 9,456   |        
|Other policyholders funds                                                                      |                                                                                                                                             |                                  | 19,016                                          |         |         |         | 20,821  |        
|Debt  Note M                                                                                   |                                                                                                                                             |                                  | 10,750                                          |         |         |         | 13,000  |        
|Deferred federal income taxes payable  Note I                                                  |                                                                                                                                             |                                  | 7,071                                           |         |         |         | 9,572   |        
|Other liabilities                                                                               |                                                                                                                                             |                                  | 27,947                                          |         |         |         | 31,433  |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total liabilities                               |         |         | 561,175 |         |         |         | 588,775 | 
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|Stockholders equity                                                                            |                                                                                                                                             |                                  |                                                 |         |         |         |         |        
|                                                                                                | Non-voting preferred stock, $0.001 par value,
    1,900,000 shares authorized, none issued 
    Note P                                     |                                  |                                                 |        |         |         |         |        |        
|                                                                                                | Convertible voting preferred stock, $0.001 par value, at
    stated value, 100,000 shares authorized, none
    issued  Note P              |                                  |                                                 |        |         |         |         |        |        
|                                                                                                | Common stock, $0.001 par value, 50,000,000 shares
    authorized, 34,522,979 and 34,391,398 shares issued and
    outstanding, respectively |                                  |                                                 | 35      |         |         |         | 34      |        
|                                                                                                | Additional paid-in capital                                                                                                                  |                                  |                                                 | 134,090 |         |         |         | 133,549 |        
|                                                                                                | Retained earnings                                                                                                                           |                                  |                                                 | 63,495  |         |         |         | 44,378  |        
|                                                                                                | Accumulated other comprehensive income                                                                                                      |                                  |                                                 | 7,198   |         |         |         | 7,178   |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             | Total stockholders equity       |                                                 |         | 204,818 |         |         |         | 185,139 |        
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        
|                                                                                                |                                                                                                                                             |                                  | Total liabilities and stockholders equity      |         | $       | 765,993 |         |         | $       | 773,914 | 
|                                                                                                |                                                                                                                                             |                                  |                                                 |         |         |        



48



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended December 31, 2004, 2003 and 2002


(dollars in thousands, except per share amounts)








|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                               |                                                                                                  | 2004                                                   |         |         | 2003    |   |         | 2002    |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|REVENUES                                                                                                       |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|Premiums, net  Note K                                                                                         |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|                                                                                                               | Medical                                                                                          |                                                        | $       | 247,002 |         |   | $       | 305,441 |         |   | $       | 370,029 |        
|                                                                                                               | Senior and other                                                                                 |                                                        |         | 183,220 |         |   |         | 172,885 |         |   |         | 170,107 |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               |                                                                                                  | Total premiums, net                                    |         |         | 430,222 |   |         |         | 478,326 |   |         |         | 540,136 | 
|Net investment income  Note B                                                                                 |                                                                                                  |                                                        | 26,216  |         |         |   | 25,090  |         |         |   | 24,258  |        
|Net realized gains                                                                                             |                                                                                                  |                                                        | 423     |         |         |   | 1,891   |         |         |   | 2,262   |        
|Fee and other income                                                                                           |                                                                                                  |                                                        | 19,463  |         |         |   | 28,875  |         |         |   | 33,548  |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               |                                                                                                  |                                                        | 476,324 |         |         |   | 534,182 |         |         |   | 600,204 |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|BENEFITS, LOSSES AND EXPENSES                                                                                  |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|Benefits, claims, losses and settlement expenses 
    Note K                                                  |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|                                                                                                               | Medical                                                                                          |                                                        |         | 176,143 |         |   |         | 226,249 |         |   |         | 291,789 |        
|                                                                                                               | Senior and other                                                                                 |                                                        |         | 138,490 |         |   |         | 127,491 |         |   |         | 129,235 |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               |                                                                                                  | Total benefits, claims, losses and settlement expenses |         |         | 314,633 |   |         |         | 353,740 |   |         |         | 421,024 | 
|Selling, general and administrative expenses 
    Note K                                                      |                                                                                                  |                                                        | 134,563 |         |         |   | 146,857 |         |         |   | 175,183 |        
|Net amortization (deferral) and change in acquisition costs
    and value of business acquired  Notes F and G |                                                                                                  |                                                        | 4,571   |         |         |   | 5,953   |         |         |   | (3,845  | )      
|Interest expense and financing costs                                                                           |                                                                                                  |                                                        | 684     |         |         |   | 1,620   |         |         |   | 2,001   |        
|Special charge  Note N                                                                                        |                                                                                                  |                                                        |        |         |         |   |        |         |         |   | 2,381   |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               |                                                                                                  |                                                        | 454,451 |         |         |   | 508,170 |         |         |   | 596,744 |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Income from continuing operations before federal income taxes                                                  |                                                                                                  |                                                        | 21,873  |         |         |   | 26,012  |         |         |   | 3,460   |        
|Federal income tax expense  Note I                                                                            |                                                                                                  |                                                        | 2,756   |         |         |   | 6,647   |         |         |   | 1,343   |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Income from continuing operations                                                                              |                                                                                                  |                                                        | 19,117  |         |         |   | 19,365  |         |         |   | 2,117   |        
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Discontinued operations  Note D                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|                                                                                                               | Income from operations of Pyramid Life (less tax expense of
    $3,223 and $3,877, respectively) |                                                        |         |        |         |   |         | 5,732   |         |   |         | 7,109   |        
|                                                                                                               | Loss on sale of Pyramid Life (less tax benefit of $79 and $683,
    respectively)                |                                                        |         |        |         |   |         | (2,149  | )       |   |         | (11,627 | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Income (loss) from discontinued operations                                                                     |                                                                                                  |                                                        |        |         |         |   | 3,583   |         |         |   | (4,518  | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Net income (loss)                                                                                              |                                                                                                  | $                                                      | 19,117  |         |         | $ | 22,948  |         |         | $ | (2,401  | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Basic earnings (loss) per share  Note S:                                                                      |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|                                                                                                               | Continuing operations                                                                            |                                                        | $       | 0.55    |         |   | $       | 0.56    |         |   | $       | 0.06    |        
|                                                                                                               | Discontinued operations                                                                          |                                                        |         |        |         |   |         | 0.11    |         |   |         | (0.13   | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               | Net income (loss)                                                                                |                                                        | $       | 0.55    |         |   | $       | 0.67    |         |   | $       | (0.07   | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|Diluted earnings (loss) per share  Note S:                                                                    |                                                                                                  |                                                        |         |         |         |   |         |         |         |   |         |        
|                                                                                                               | Continuing operations                                                                            |                                                        | $       | 0.55    |         |   | $       | 0.56    |         |   | $       | 0.06    |        
|                                                                                                               | Discontinued operations                                                                          |                                                        |         |        |         |   |         | 0.11    |         |   |         | (0.13   | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        
|                                                                                                               | Net income (loss)                                                                                |                                                        | $       | 0.55    |         |   | $       | 0.67    |         |   | $       | (0.07   | )      
|                                                                                                               |                                                                                                  |                                                        |         |         |         |   |         |         |        



49



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


For the Years Ended December 31, 2004, 2003 and 2002


(dollars in thousands, except share amounts)








|                                                                                                                |                                                 |                        |            |        |            |   |            |         |            |   |            |         |            | 
|--------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------- | ---------- | ------ | ---------- | - | ---------- | ------- | ---------- | - | ---------- | ------- | ---------- | 
|                                                                                                                |                                                 | 2004                   |            |        | 2003       |   |            | 2002    |           
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Common Stock                                                                                                    |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|Balance at beginning of year                                                                                    |                                                 | $                      | 34         |        |            | $ | 34         |         |            | $ | 34         |        
|Issuance of common stock:                                                                                       |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|                                                                                                                | Employee/agent benefit and stock purchase plans |                        |            | 1      |            |   |            |        |            |   |            |        |           
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|                                                                                                                |                                                 | Balance at end of year |            | $      | 35         |   |            | $       | 34         |   |            | $       | 34         | 
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Additional Paid-in Capital                                                                                      |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|Balance at beginning of year                                                                                    |                                                 | $                      | 133,549    |        |            | $ | 133,052    |         |            | $ | 132,061    |        
|Issuance of stock:                                                                                              |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|                                                                                                                | Employee/agent benefit and stock purchase plans |                        |            | 541    |            |   |            | 497     |            |   |            | 991     |           
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|                                                                                                                |                                                 | Balance at end of year |            | $      | 134,090    |   |            | $       | 133,549    |   |            | $       | 133,052    | 
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Retained Earnings                                                                                               |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|Balance at beginning of year                                                                                    |                                                 | $                      | 44,378     |        |            | $ | 21,430     |         |            | $ | 23,831     |        
|Net income (loss)                                                                                               |                                                 |                        | 19,117     |        |            |   | 22,948     |         |            |   | (2,401     | )      
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|                                                                                                                |                                                 | Balance at end of year |            | $      | 63,495     |   |            | $       | 44,378     |   |            | $       | 21,430     | 
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Accumulated Other Comprehensive Income                                                                          |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|Balance at beginning of year                                                                                    |                                                 | $                      | 7,178      |        |            | $ | 13,008     |         |            | $ | 649        |        
|Unrealized gain (loss) on securities, net of tax expense
    (benefit) of $9, $(1,124) and $5,985, respectively |                                                 |                        | 20         |        |            |   | (2,086     | )       |            |   | 12,359     |        
|Realized gains due to the sale of Pyramid Life, net of tax
    expense of $2,016                                |                                                 |                        |           |        |            |   | (3,744     | )       |            |   |           |        
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|                                                                                                                |                                                 | Balance at end of year |            | $      | 7,198      |   |            | $       | 7,178      |   |            | $       | 13,008     | 
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Total Stockholders Equity                                                                                      |                                                 | $                      | 204,818    |        |            | $ | 185,139    |         |            | $ | 167,524    |        
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|Number of Shares of Common Stock                                                                                |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|Balance at beginning of year                                                                                    |                                                 |                        | 34,391,398 |        |            |   | 34,232,610 |         |            |   | 33,857,895 |        
|Issuance of stock:                                                                                              |                                                 |                        |            |        |            |   |            |         |            |   |            |        
|                                                                                                                | Employee/agent benefit and stock purchase plans |                        |            | 69,650 |            |   |            | 158,788 |            |   |            | 374,715 |           
|                                                                                                                | Warrants exercised                              |                        |            | 61,931 |            |   |            |        |            |   |            |        |           
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           
|                                                                                                                |                                                 | Balance at end of year |            |        | 34,522,979 |   |            |         | 34,391,398 |   |            |         | 34,232,610 | 
|                                                                                                                |                                                 |                        |            |        |            |   |            |         |           



50



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2004, 2003 and 2002


(dollars in thousands)








|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |        |        |         |          |        |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------ | ------- | ------- | ------- | ------- | -------- | ------ | ------ | ------- | -------- | ------ | ------- | -
|                                                    |                                                                                                            | 2004                                           |                                                  |         | 2003    |         |         | 2002     |       
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Operating activities                                |                                                                                                            |                                                |                                                  |         |         |         |         |          |        |        |         |         
|                                                    | Net income (loss)                                                                                          |                                                | $                                                | 19,117  |         |         | $       | 22,948   |        |        | $       | (2,401   | )     
|                                                    | Adjustments to reconcile net income (loss) to net cash provided
    by
    (used in) operating activities: |                                                |                                                  |         |         |         |         |          |        |        |         |          |       
|                                                    |                                                                                                            | Net (income) loss from discontinued operations |                                                  |         |        |         |         |          | (3,583 | )      |         |          | 4,518  |        
|                                                    |                                                                                                            | Depreciation and amortization                  |                                                  |         | 3,584   |         |         |          | 3,582  |        |         |          | 3,391  |        
|                                                    |                                                                                                            | Net realized gains                             |                                                  |         | (423    | )       |         |          | (1,891 | )      |         |          | (2,262 | )      
|                                                    |                                                                                                            | Net change in fixed maturities trading         |                                                  |         | (18,531 | )       |         |          |       |        |         |          |       |        
|                                                    |                                                                                                            | Net change in equity securities trading        |                                                  |         | (4,938  | )       |         |          |       |        |         |          |       |        
|                                                    |                                                                                                            | Deferred federal income taxes                  |                                                  |         | (2,512  | )       |         |          | (995   | )      |         |          | 6,613  |        
|                                                    |                                                                                                            | Impairment of intangible asset, licenses       |                                                  |         |        |         |         |          | 146    |        |         |          |       |        
|                                                    |                                                                                                            | Changes in assets and liabilities:             |                                                  |         |         |         |         |          |        |        |         |          |        |        
|                                                    |                                                                                                            |                                                | Accrued investment income                        |         |         | 269     |         |          |        | (422   | )       |          |        | 573     |  
|                                                    |                                                                                                            |                                                | Reinsurance and premiums receivable              |         |         | 13,399  |         |          |        | 27,045 |         |          |        | 47,461  |  
|                                                    |                                                                                                            |                                                | Deferred acquisition costs                       |         |         | 2,358   |         |          |        | 4,009  |         |          |        | (5,671  | )
|                                                    |                                                                                                            |                                                | Value of business acquired                       |         |         | 2,213   |         |          |        | 1,944  |         |          |        | 1,826   |  
|                                                    |                                                                                                            |                                                | Federal income taxes payable/recoverable         |         |         | (4,638  | )       |          |        | 3,114  |         |          |        | (1,587  | )
|                                                    |                                                                                                            |                                                | Other assets                                     |         |         | (18     | )       |          |        | 125    |         |          |        | (1,578  | )
|                                                    |                                                                                                            |                                                | Future policy benefits, claims and funds payable |         |         | (21,265 | )       |          |        | (5,568 | )       |          |        | (43,061 | )
|                                                    |                                                                                                            |                                                | Unearned premium                                 |         |         | 946     |         |          |        | (2,687 | )       |          |        | (388    | )
|                                                    |                                                                                                            |                                                | Deferred reinsurance gain                        |         |         | (2,894  | )       |          |        | (1,581 | )       |          |        | (2,843  | )
|                                                    |                                                                                                            |                                                | Other liabilities                                |         |         | (2,084  | )       |          |        | (3,185 | )       |          |        | (22,196 | )
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Net cash (used in) provided by operating activities |                                                                                                            |                                                | (15,417                                          | )       |         |         | 43,001  |          |        |        | (17,605 | )       
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Investing activities                                |                                                                                                            |                                                |                                                  |         |         |         |         |          |        |        |         |         
|                                                    | Net purchases of furniture and equipment                                                                   |                                                |                                                  | (937    | )       |         |         | (1,671   | )      |        |         | (317     | )     
|                                                    | Purchase of fixed maturities available-for-sale                                                            |                                                |                                                  | (87,091 | )       |         |         | (240,470 | )      |        |         | (179,873 | )     
|                                                    | Purchase of equity securities available-for-sale                                                           |                                                |                                                  | (7,214  | )       |         |         |         |        |        |         |         |       
|                                                    | Investment in limited partnership (net of distributions)                                                   |                                                |                                                  | (4,166  | )       |         |         |         |        |        |         |         |       
|                                                    | Decrease (increase) in mortgage and policy loans, net                                                      |                                                |                                                  | 602     |         |         |         | (290     | )      |        |         | (160     | )     
|                                                    | Proceeds from sales of fixed maturities available-for-sale                                                 |                                                |                                                  | 34,397  |         |         |         | 51,392   |        |        |         | 129,594  |       
|                                                    | Proceeds from calls and maturities of fixed maturities
    available-for-sale                              |                                                |                                                  | 73,925  |         |         |         | 100,603  |        |        |         | 53,184   |       
|                                                    | Net proceeds from sale of Pyramid Life Insurance Company                                                   |                                                |                                                  |        |         |         |         | 55,261   |        |        |         |         |       
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Net cash provided by (used in) investing activities |                                                                                                            |                                                | 9,516                                            |         |         |         | (35,175 | )        |        |        | 2,428   |         
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Financing activities                                |                                                                                                            |                                                |                                                  |         |         |         |         |          |        |        |         |         
|                                                    | Increase in annuity account balances                                                                       |                                                |                                                  | 24,390  |         |         |         | 17,018   |        |        |         | 7,740    |       
|                                                    | Decrease in annuity account balances                                                                       |                                                |                                                  | (20,540 | )       |         |         | (19,062  | )      |        |         | (23,945  | )     
|                                                    | Increase in debt borrowings                                                                                |                                                |                                                  |        |         |         |         | 13,000   |        |        |         |         |       
|                                                    | Principal payments on debt                                                                                 |                                                |                                                  | (2,250  | )       |         |         | (25,003  | )      |        |         | (5,997   | )     
|                                                    | Proceeds from issuance of common stock related to employee/agent
    benefit and stock purchase plans      |                                                |                                                  | 542     |         |         |         | 497      |        |        |         | 991      |       
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Net cash provided by (used in) financing activities |                                                                                                            |                                                | 2,142                                            |         |         |         | (13,550 | )        |        |        | (21,211 | )       
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Net decrease in cash                                |                                                                                                            |                                                | (3,759                                           | )       |         |         | (5,724  | )        |        |        | (36,388 | )       
|Cash and cash equivalents at beginning of year      |                                                                                                            |                                                | 26,394                                           |         |         |         | 32,118  |          |        |        | 68,506  |         
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Cash and cash equivalents at end of year            |                                                                                                            | $                                              | 22,635                                           |         |         | $       | 26,394  |          |        | $      | 32,118  |         
|                                                    |                                                                                                            |                                                |                                                  |         |         |         |         |          |       
|Supplemental disclosures of cash flow information   |                                                                                                            |                                                |                                                  |         |         |         |         |          |        |        |         |         
|                                                    | Cash paid during the year for interest                                                                     |                                                | $                                                | 592     |         |         | $       | 931      |        |        | $       | 1,985    |       
|                                                    | Cash paid during the year for federal income taxes                                                         |                                                |                                                  | 9,904   |         |         |         | 5,162    |        |        |         |         |       



51



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##### Table of Contents






CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004, 2003 and 2002








A.     Summary of Business and
Significant Accounting Policies


Summary of Business








Significant Accounting Policies


Principles of
Consolidation






Business Combinations


Business Combinations


Clarification of Paragraph 61(b) of FASB
Statement No. 141 and Paragraph 49(b) of FASB
No. 142,


52



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








Goodwill and Other Intangible Assets


Goodwill and Other
Intangible Assets




Goodwill and Other Intangible Assets.


Use of Estimates




Cash and Cash
Equivalents




Investments








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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002














Other-Than-Temporary
Declines in Fair Value






| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | our ability and intent to retain the investment for a period of
    time to allow for a recovery in value;
|
| |  | the duration and extent to which the fair value has been less
    than cost; and                          
|
| |  | the financial condition and prospects of the issuer.                                                      

Deferred Acquisition Costs
(DAC)






Value of Business Acquired
(VOBA)






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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










Shadow DAC/ VOBA




Property and
Equipment




Measurement of Impairment of
Long-Lived Assets


Accounting for the Impairment or
Disposal of Long-Lived Assets Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, 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, Consolidated Financial
Statements.




Future Policy Benefits,
Losses and Claims




55



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








Other Policy Claims and
Benefits Payable






Other Policyholders
Funds




Insurance Related
Assessments


Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments,


Comprehensive Income


Reporting Comprehensive Income.


Premium Revenue




Fee and Other Income




56



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##### Table of Contents



CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








Deferred Reinsurance
Gain




Federal Income Taxes


Accounting
for Income Taxes


Stock-Based
Compensation


Accounting for Stock Issued to Employees


Accounting for Stock-Based
Compensation , Accounting For Stock-Based
Compensation-Transition and Disclosure Interim Financial
Reporting.


57



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                                                                                                        |                     |                           |        |      |      |   |        |      |  |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ----- | -
|                                                                                                                        |                     | Year Ended December 31,   |       
|                                                                                                                        |                     |                           |       
|                                                                                                                        |                     | 2004                      |        |      | 2003 |   |        | 2002 | 
|                                                                                                                        |                     |                           |        |      |      |   |        |      | 
|                                                                                                                        |                     | (dollars in thousands,    |       
|                                                                                                                        |                     | except per share amounts) |       
|Net income (loss), as reported                                                                                          |                     | $                         | 19,117 |      |      | $ | 22,948 |      |  | $ | (2,401 | )    
|Total stock-based employee compensation expense determined under
    fair value based method for all awards, net of tax |                     |                           | (6     | )    |      |   | 868    | (1)  |  |   | (427   | )    
|                                                                                                                        |                     |                           |        |      |      |   |        |      | 
|Pro forma net income (loss)                                                                                             |                     | $                         | 19,111 |      |      | $ | 23,816 |      |  | $ | (2,828 | )    
|                                                                                                                        |                     |                           |        |      |      |   |        |      | 
|Earnings (loss) per share                                                                                               |                     |                           |        |      |      |   |        |      |  |   |        |      
|                                                                                                                        | Basic-as reported   |                           | $      | 0.55 |      |   | $      | 0.67 |  |   | $      | (0.07 | )
|                                                                                                                        | Basic-pro forma     |                           | $      | 0.55 |      |   | $      | 0.69 |  |   | $      | (0.08 | )
|                                                                                                                        | Diluted-as reported |                           | $      | 0.55 |      |   | $      | 0.67 |  |   | $      | (0.07 | )
|                                                                                                                        | Diluted-pro forma   |                           | $      | 0.55 |      |   | $      | 0.69 |  |   | $      | (0.08 | )






|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the year ended December 31, 2003, there was a positive
    pro forma impact on net income and basic and diluted earnings
    per share due to the forfeiture of options resulting from
    employee terminations.



| |                   
| | ------------------
| | Earnings per Share





| |                 
| | ----------------
| | Reclassification





| |                              
| | -----------------------------
| | New Accounting Pronouncements

Share-Based Payment Statement of Cash Flows,


58



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










The Meaning
of Other-Than-Temporary Impairments and Its Application to
Certain Investments


Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts


59



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|   |                     
|-- | --------------------
|B. | Cash and Investments



|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |      |        |   |       |         |         | 
|------------------------------------ | --------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------- |  | --- | --------- | ------ |  | ---------- | ---- | ------ | - | ----- | ------- | ------- | 
|                                     |                                         |                                           |       | Gross Unrealized |         |  |    
|                                     |                                         | Amortized                                 |       |                  |         |  |     | Estimated |       
|                                     |                                         | Cost                                      |       |                  | Gains   |  |     | Losses    |        |  | Fair Value |     
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | (dollars in thousands)                    |      
|Fixed maturities available-for-sale  |                                         |                                           |       |                  |         |  |     |           |        |  |            |      |        |   |       |        
|                                     | U.S. Treasury securities                |                                           | $     | 17,849           |         |  | $   | 138       |        |  | $          | (196 | )      |   | $     | 17,791  |        
|                                     | Non-government agencies and authorities |                                           |       | 47,615           |         |  |     | 615       |        |  |            | (125 | )      |   |       | 48,105  |        
|                                     | State and political subdivisions        |                                           |       | 4,999            |         |  |     | 25        |        |  |            | (93  | )      |   |       | 4,931   |        
|                                     | Corporate bonds                         |                                           |       | 187,721          |         |  |     | 9,134     |        |  |            | (682 | )      |   |       | 196,173 |        
|                                     | Mortgage- and asset-backed securities   |                                           |       | 185,339          |         |  |     | 4,232     |        |  |            | (496 | )      |   |       | 189,075 |        
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | Total fixed maturities available-for-sale |       |                  | 443,523 |  |     |           | 14,144 |  |            |      | (1,592 | ) |       |         | 456,075 | 
|Equity securities available-for-sale |                                         |                                           | 7,214 |                  |         |  | 444 |           |        |  |           |      |        |   | 7,658 |        
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     
|                                     |                                         | Total available-for-sale                  |       | $                | 450,737 |  |     | $         | 14,588 |  |            | $    | (1,592 | ) |       | $       | 463,733 | 
|                                     |                                         |                                           |       |                  |         |  |     |           |        |  |            |     



|                   |                                         |                          |   |                  |         |  |   |           |        |  |            |        |        |   |   |         |         | 
|------------------ | --------------------------------------- | ------------------------ | - | ---------------- | ------- |  | - | --------- | ------ |  | ---------- | ------ | ------ | - | - | ------- | ------- | 
|                   |                                         |                          |   | Gross Unrealized |         |  |  
|                   |                                         | Amortized                |   |                  |         |  |   | Estimated |       
|                   |                                         | Cost                     |   |                  | Gains   |  |   | Losses    |        |  | Fair Value |       
|                   |                                         |                          |   |                  |         |  |   |           |        |  |            |       
|                   |                                         | (dollars in thousands)   |  
|Available-for-sale |                                         |                          |   |                  |         |  |   |           |        |  |            |        |        |   |   |        
|                   | U.S. Treasury securities                |                          | $ | 21,470           |         |  | $ | 151       |        |  | $          | (246   | )      |   | $ | 21,375  |        
|                   | Non-government agencies and authorities |                          |   | 49,034           |         |  |   | 987       |        |  |            | (250   | )      |   |   | 49,771  |        
|                   | State and political subdivisions        |                          |   | 5,014            |         |  |   | 5         |        |  |            | (178   | )      |   |   | 4,841   |        
|                   | Corporate bonds                         |                          |   | 195,018          |         |  |   | 11,166    |        |  |            | (1,191 | )      |   |   | 204,993 |        
|                   | Mortgage- and asset-backed securities   |                          |   | 195,640          |         |  |   | 3,520     |        |  |            | (1,051 | )      |   |   | 198,109 |        
|                   |                                         |                          |   |                  |         |  |   |           |        |  |            |       
|                   |                                         | Total available-for-sale |   | $                | 466,176 |  |   | $         | 15,829 |  |            | $      | (2,916 | ) |   | $       | 479,089 | 
|                   |                                         |                          |   |                  |         |  |   |           |        |  |            |       



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                     |                                        |                                           |       |         |            |  |       |         |         | 
|------------------------------------ | -------------------------------------- | ----------------------------------------- | ----- | ------- | ---------- |  | ----- | ------- | ------- | 
|                                     |                                        | Amortized                                 |       |         | Estimated  | 
|                                     |                                        | Cost                                      |       |         | Fair Value | 
|                                     |                                        |                                           |       |         |            | 
|                                     |                                        | (dollars in thousands)                    |      
|Fixed maturities available-for-sale  |                                        |                                           |       |         |            |  |       |        
|                                     | Due in one year or less                |                                           | $     | 12,656  |            |  | $     | 12,845  |        
|                                     | Due after one year through five years  |                                           |       | 74,048  |            |  |       | 76,945  |        
|                                     | Due after five years through ten years |                                           |       | 96,157  |            |  |       | 99,613  |        
|                                     | Due after ten years                    |                                           |       | 75,323  |            |  |       | 77,597  |        
|                                     | Mortgage- and asset-backed securities  |                                           |       | 185,339 |            |  |       | 189,075 |        
|                                     |                                        |                                           |       |         |            | 
|                                     |                                        | Total fixed maturities available-for-sale |       |         | 443,523    |  |       |         | 456,075 | 
|Equity securities available-for-sale |                                        |                                           | 7,214 |         |            |  | 7,658 |        
|                                     |                                        |                                           |       |         |            | 
|                                     |                                        | Total available-for-sale                  |       | $       | 450,737    |  |       | $       | 463,733 | 
|                                     |                                        |                                           |       |         |            | 





|                      |  |                         |        |  |      |   |        |      |  |   |         | 
|--------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------- | 
|                      |  | Year Ended December 31, |       
|                      |  |                         |       
|                      |  | 2004                    |        |  | 2003 |   |        | 2002 | 
|                      |  |                         |        |  |      |   |        |      | 
|                      |  | (dollars in thousands)  |       
|Proceeds              |  | $                       | 34,397 |  |      | $ | 51,392 |      |  | $ | 129,594 | 
|Gross realized gains  |  |                         | 337    |  |      |   | 2,031  |      |  |   | 5,634   | 
|Gross realized losses |  |                         | 448    |  |      |   | 768    |      |  |   | 3,807   | 

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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                             |                       |                         |        |        |      |   |        |        |  |   |        |        | 
|-------------------------------------------- | --------------------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                             |                       | Year Ended December 31, |       
|                                             |                       |                         |       
|                                             |                       | 2004                    |        |        | 2003 |   |        | 2002   | 
|                                             |                       |                         |        |        |      |   |        |        | 
|                                             |                       | (dollars in thousands)  |       
|Fixed maturities                             |                       | $                       | 25,062 |        |      | $ | 24,695 |        |  | $ | 24,215 |       
|Unrealized gain on fixed maturities trading  |                       |                         | 602    |        |      |   |       |        |  |   |       |       
|Unrealized gain on equity securities trading |                       |                         | 199    |        |      |   |       |        |  |   |       |       
|Dividends on equity securities               |                       |                         | 255    |        |      |   |       |        |  |   |       |       
|Limited partnership                          |                       |                         | 93     |        |      |   |       |        |  |   |       |       
|Policy loans                                 |                       |                         | 277    |        |      |   | 286    |        |  |   | 269    |       
|Cash equivalents                             |                       |                         | 334    |        |      |   | 481    |        |  |   | 643    |       
|Other                                        |                       |                         | 20     |        |      |   | 259    |        |  |   | 365    |       
|                                             |                       |                         |        |        |      |   |        |        | 
|                                             | Investment income     |                         |        | 26,842 |      |   |        | 25,721 |  |   |        | 25,492 | 
|Investment expenses                          |                       |                         | (626   | )      |      |   | (631   | )      |  |   | (1,234 | )     
|                                             |                       |                         |        |        |      |   |        |        | 
|                                             | Net investment income |                         | $      | 26,216 |      |   | $      | 25,090 |  |   | $      | 24,258 | 
|                                             |                       |                         |        |        |      |   |        |        | 









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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                    |                                         |                                           |   |        |                     |  |   |            |      |   |            |       |        |            |   |      |            |   |   |        |         |  |   |      |        |  
|----------------------------------- | --------------------------------------- | ----------------------------------------- | - | ------ | ------------------- |  | - | ---------- | ---- | - | ---------- | ----- | ------ | ---------- | - | ---- | ---------- | - | - | ------ | ------- |  | - | ---- | ------ | -
|                                    |                                         | Less Than 12 Months                       |   |        | 12 Months or Longer |  |   | Total      |     
|                                    |                                         |                                           |   |        |                     |  |   |            |     
|                                    |                                         | Estimated                                 |   |        | Unrealized          |  |   | Estimated  |      |   | Unrealized |       |        | Estimated  |   |      | Unrealized |  
|                                    |                                         | Fair Value                                |   |        | Losses              |  |   | Fair Value |      |   | Losses     |       |        | Fair Value |   |      | Losses     |  
|                                    |                                         |                                           |   |        |                     |  |   |            |      |   |            |       |        |            |   |      |            |  
|                                    |                                         | (dollars in thousands)                    |  
|Fixed maturities available-for-sale |                                         |                                           |   |        |                     |  |   |            |      |   |            |       |        |            |   |      |            |   |   |        |         |  |   |     
|                                    | U.S. Treasury securities                |                                           | $ | 6,204  |                     |  | $ | (42        | )    |   | $          | 4,858 |        |            | $ | (154 | )          |   | $ | 11,062 |         |  | $ | (196 | )     
|                                    | Non-government agencies and authorities |                                           |   | 17,743 |                     |  |   | (125       | )    |   |            |      |        |            |   |     |            |   |   | 17,743 |         |  |   | (125 | )     
|                                    | State and political subdivisions        |                                           |   |       |                     |  |   |           |      |   |            | 3,880 |        |            |   | (93  | )          |   |   | 3,880  |         |  |   | (93  | )     
|                                    | Corporate bonds                         |                                           |   | 20,287 |                     |  |   | (170       | )    |   |            | 6,963 |        |            |   | (512 | )          |   |   | 27,250 |         |  |   | (682 | )     
|                                    | Mortgage- and asset-backed securities   |                                           |   | 51,832 |                     |  |   | (389       | )    |   |            | 2,729 |        |            |   | (107 | )          |   |   | 54,561 |         |  |   | (496 | )     
|                                    |                                         |                                           |   |        |                     |  |   |            |      |   |            |       |        |            |   |      |            |  
|                                    |                                         | Total fixed maturities available-for-sale |   | $      | 96,066              |  |   | $          | (726 | ) |            | $     | 18,430 |            |   | $    | (866       | ) |   | $      | 114,496 |  |   | $    | (1,592 | )
|                                    |                                         |                                           |   |        |                     |  |   |            |      |   |            |       |        |            |   |      |            |  

Accounting for Certain Investments in
Debt and Equity Securities.




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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








C.     Property and Equipment




|                                 |       |                        |        |       |      |   |        |       | 
|-------------------------------- | ----- | ---------------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                                 |       | December 31,           |       
|                                 |       |                        |       
|                                 |       | 2004                   |        |       | 2003 |  
|                                 |       |                        |        |       |      |  
|                                 |       | (dollars in thousands) |       
|Home office buildings            |       | $                      | 4,161  |       |      | $ | 4,115  |      
|Land                             |       |                        | 978    |       |      |   | 978    |      
|Furniture and fixtures           |       |                        | 2,262  |       |      |   | 2,253  |      
|Information technology equipment |       |                        | 1,059  |       |      |   | 809    |      
|Other property and equipment     |       |                        | 3,825  |       |      |   | 3,193  |      
|                                 |       |                        |        |       |      |  
|                                 |       |                        | 12,285 |       |      |   | 11,348 |      
|Accumulated depreciation         |       |                        | (7,008 | )     |      |   | (5,821 | )    
|                                 |       |                        |        |       |      |  
|                                 | Total |                        | $      | 5,277 |      |   | $      | 5,527 | 
|                                 |       |                        |        |       |      |  



D.     Discontinued Operations




64



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002












| |                         
| | ------------------------
| | Statements of Operations

|                                                                                               |  |                         |   |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                               |  | Year Ended December 31, |  
|                                                                                               |  |                         |  
|                                                                                               |  | 2004                    |   | 2003 |  |   | 2002   |  
|                                                                                               |  |                         |   |      |  |   |        |  
|                                                                                               |  | (dollars in thousands)  |  
|Revenues                                                                                       |  |                         |   |      |  |   |        |   |  |   |         |  
|Premiums, net                                                                                  |  | $                       |  |      |  | $ | 27,964 |   |  | $ | 97,953  |  
|Net investment income                                                                          |  |                         |  |      |  |   | 1,568  |   |  |   | 6,559   |  
|Net realized gains                                                                             |  |                         |  |      |  |   | 5,965  |   |  |   | 260     |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|                                                                                               |  |                         |  |      |  |   | 35,497 |   |  |   | 104,772 |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Benefits, Losses and Expenses                                                                  |  |                         |   |      |  |   |        |   |  |   |         |  
|Benefits, claims, losses and settlement expenses                                               |  |                         |  |      |  |   | 20,285 |   |  |   | 72,490  |  
|Selling, general and administrative expenses                                                   |  |                         |  |      |  |   | 8,702  |   |  |   | 29,422  |  
|Net (deferral) amortization and change in acquisition costs
    and value of business acquired |  |                         |  |      |  |   | (2,445 | ) |  |   | (8,413  | )
|Special charge                                                                                 |  |                         |  |      |  |   |       |   |  |   | 287     |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|                                                                                               |  |                         |  |      |  |   | 26,542 |   |  |   | 93,786  |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Income from operations before federal income taxes                                             |  |                         |  |      |  |   | 8,955  |   |  |   | 10,986  |  
|Federal income tax expense                                                                     |  |                         |  |      |  |   | 3,223  |   |  |   | 3,877   |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Income from operations                                                                         |  |                         |  |      |  |   | 5,732  |   |  |   | 7,109   |  
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Loss on sale of Pyramid Life                                                                   |  |                         |  |      |  |   | (2,228 | ) |  |   | (12,310 | )
|Federal income tax benefit                                                                     |  |                         |  |      |  |   | (79    | ) |  |   | (683    | )
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Loss on sale of Pyramid Life, net                                                              |  |                         |  |      |  |   | (2,149 | ) |  |   | (11,627 | )
|                                                                                               |  |                         |   |      |  |   |        |   | 
|Income (loss) from discontinued operations                                                     |  | $                       |  |      |  | $ | 3,583  |   |  | $ | (4,518  | )
|                                                                                               |  |                         |   |      |  |   |        |   | 

E.     Leases




65



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                   |  |                        |        |  |           |   |       |       |  |   |        | 
|---------------------------------- |  | ---------------------- | ------ |  | --------- | - | ----- | ----- |  | - | ------ | 
|                                   |  | Cleveland              |        |  |           |   |      
|                                   |  | Headquarters           |        |  | All Other |   |       | Total | 
|                                   |  |                        |        |  |           |   |       |       | 
|                                   |  | (dollars in thousands) |       
|2005                               |  | $                      | 1,845  |  |           | $ | 853   |       |  | $ | 2,698  | 
|2006                               |  |                        | 1,893  |  |           |   | 438   |       |  |   | 2,331  | 
|2007                               |  |                        | 1,960  |  |           |   | 208   |       |  |   | 2,168  | 
|2008                               |  |                        | 1,958  |  |           |   | 54    |       |  |   | 2,012  | 
|2009                               |  |                        | 1,956  |  |           |   |      |       |  |   | 1,956  | 
|Thereafter                         |  |                        | 13,472 |  |           |   |      |       |  |   | 13,472 | 
|                                   |  |                        |        |  |           |   |       |       | 
|Total future minimum rent payments |  | $                      | 23,084 |  |           | $ | 1,553 |       |  | $ | 24,637 | 
|                                   |  |                        |        |  |           |   |       |       | 

F.     Deferred Acquisition Costs




|                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                  |  | Year Ended December 31, |        
|                                                                                                  |  |                         |        
|                                                                                                  |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                                                                                                  |  |                         |         |   |      |   |         |      | 
|                                                                                                  |  | (dollars in thousands)  |        
|Balance at beginning of year                                                                      |  | $                       | 69,609  |   |      | $ | 74,891  |      |  | $ | 68,934  |  
|Current years costs deferred                                                                     |  |                         | 14,971  |   |      |   | 14,373  |      |  |   | 27,791  |  
|                                                                                                  |  |                         |         |   |      |   |         |      | 
|                                                                                                  |  |                         | 84,580  |   |      |   | 89,264  |      |  |   | 96,725  |  
|Amortization for the year                                                                         |  |                         | (17,327 | ) |      |   | (18,383 | )    |  |   | (22,120 | )
|Adjustment for the change in net unrealized gains and losses on
    available-for-sale securities |  |                         | (179    | ) |      |   | (1,272  | )    |  |   | 286     |  
|                                                                                                  |  |                         |         |   |      |   |         |      | 
|Balance at end of year                                                                            |  | $                       | 67,074  |   |      | $ | 69,609  |      |  | $ | 74,891  |  
|                                                                                                  |  |                         |         |   |      |   |         |      | 

G.     Value of Business Acquired




|                                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                  |  | Year Ended December 31, |       
|                                                                                                  |  |                         |       
|                                                                                                  |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                                                                                  |  |                         |        |   |      |   |        |      | 
|                                                                                                  |  | (dollars in thousands)  |       
|Balance at beginning of year                                                                      |  | $                       | 13,034 |   |      | $ | 16,084 |      |  | $ | 17,910 |  
|Amortization                                                                                      |  |                         | (1,006 | ) |      |   | (862   | )    |  |   | (1,275 | )
|Adjustments to expense reserve                                                                    |  |                         | (1,207 | ) |      |   | (1,082 | )    |  |   | (551   | )
|Adjustment for the change in net unrealized gains and losses on
    available-for-sale securities |  |                         | 131    |   |      |   | (1,106 | )    |  |   |       |  
|                                                                                                  |  |                         |        |   |      |   |        |      | 
|Balance at end of year                                                                            |  | $                       | 10,952 |   |      | $ | 13,034 |      |  | $ | 16,084 |  
|                                                                                                  |  |                         |        |   |      |   |        |      | 

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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|     |  |              |       | 
|---- |  | ------------ | ----- | 
|     |  | Amortization |      
|     |  |              |      
|2005 |  | $            | 2,149 | 
|2006 |  |              | 1,858 | 
|2007 |  |              | 1,596 | 
|2008 |  |              | 1,368 | 
|2009 |  |              | 1,170 | 

H.     Goodwill and Other Intangible
Assets




Goodwill and Other Intangible Assets




|   |                     
|-- | --------------------
|I. | Federal Income Taxes





|         |       |                         |        |       |      |   |       |       |  |   |        |       | 
|-------- | ----- | ----------------------- | ------ | ----- | ---- | - | ----- | ----- |  | - | ------ | ----- | 
|         |       | Year Ended December 31, |       
|         |       |                         |       
|         |       | 2004                    |        |       | 2003 |   |       | 2002  | 
|         |       |                         |        |       |      |   |       |       | 
|         |       | (dollars in thousands)  |       
|Current  |       | $                       | 5,268  |       |      | $ | 7,642 |       |  | $ | (5,894 | )    
|Deferred |       |                         | (2,512 | )     |      |   | (995  | )     |  |   | 7,237  |      
|         |       |                         |        |       |      |   |       |       | 
|         | Total |                         | $      | 2,756 |      |   | $     | 6,647 |  |   | $      | 1,343 | 
|         |       |                         |        |       |      |   |       |       | 

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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                                                                                     |                                                                                              |                         |       |       |      |   |        |        |  |   |       |        | 
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | ----------------------- | ----- | ----- | ---- | - | ------ | ------ |  | - | ----- | ------ | 
|                                                                                     |                                                                                              | Year Ended December 31, |      
|                                                                                     |                                                                                              |                         |      
|                                                                                     |                                                                                              | 2004                    |       |       | 2003 |   |        | 2002   | 
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 
|                                                                                     |                                                                                              | (dollars in thousands)  |      
|Statement of Operations                                                              |                                                                                              |                         |       |       |      |   |        |        |  |   |       |       
|Continuing operations                                                                |                                                                                              | $                       | 2,756 |       |      | $ | 6,647  |        |  | $ | 1,343 |       
|Discontinued operations                                                              |                                                                                              |                         |      |       |      |   | 3,144  |        |  |   | 3,194 |       
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 
|Total income tax expense included in the consolidated statements
    of operations   |                                                                                              |                         | 2,756 |       |      |   | 9,791  |        |  |   | 4,537 |       
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 
|Statement of Stockholders Equity                                                    |                                                                                              |                         |       |       |      |   |        |        |  |   |       |       
|Expense (benefit) related to the change in unrealized gain or
    loss on securities |                                                                                              |                         | 9     |       |      |   | (1,124 | )      |  |   | 5,985 |       
|Expense on realized gains due to the sale of Pyramid Life                            |                                                                                              |                         |      |       |      |   | 2,016  |        |  |   |      |       
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 
|                                                                                     | Total income tax expense included in the consolidated statements
    of stockholders equity |                         |       | 9     |      |   |        | 892    |  |   |       | 5,985  | 
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 
|                                                                                     | Total income tax expense included in the consolidated financial
    statements               |                         | $     | 2,765 |      |   | $      | 10,683 |  |   | $     | 10,522 | 
|                                                                                     |                                                                                              |                         |       |       |      |   |        |        | 



|                                 |  |                         |        |   |      |   |        |      |  |   |       |  
|-------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                 |  | Year Ended December 31, |       
|                                 |  |                         |       
|                                 |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                 |  |                         |        |   |      |   |        |      | 
|                                 |  | (dollars in thousands)  |       
|Expected tax expense at 35%      |  | $                       | 7,656  |   |      | $ | 9,112  |      |  | $ | 1,194 |  
|Tax exempt interest              |  |                         |       |   |      |   | (30    | )    |  |   | (30   | )
|Reduction in valuation allowance |  |                         | (4,950 | ) |      |   | (2,691 | )    |  |   |      |  
|Meals and entertainment          |  |                         | 41     |   |      |   | 140    |      |  |   | 165   |  
|Non deductible expenses          |  |                         | 8      |   |      |   | 91     |      |  |   | 103   |  
|Other                            |  |                         | 1      |   |      |   | 25     |      |  |   | (89   | )
|                                 |  |                         |        |   |      |   |        |      | 
|                                 |  | $                       | 2,756  |   |      | $ | 6,647  |      |  | $ | 1,343 |  
|                                 |  |                         |        |   |      |   |        |      | 



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                             |                                         |                        |        |       |      |   |        |       | 
|---------------------------- | --------------------------------------- | ---------------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                             |                                         | December 31,           |       
|                             |                                         |                        |       
|                             |                                         | 2004                   |        |       | 2003 |  
|                             |                                         |                        |        |       |      |  
|                             |                                         | (dollars in thousands) |       
|Deferred tax liabilities     |                                         |                        |        |       |      |   |        |      
|                             | Value of business acquired              |                        | $      | 4,530 |      |   | $      | 5,219 | 
|                             | Deferred acquisition costs              |                        |        | 5,175 |      |   |        | 8,711 | 
|                             | Unrealized gain adjustment              |                        |        | 4,156 |      |   |        | 3,865 | 
|                             | Deferred and uncollected premium        |                        |        | 967   |      |   |        | 1,096 | 
|                             | Other                                   |                        |        | 3,871 |      |   |        | 2,731 | 
|                             |                                         |                        |        |       |      |  
|                             |                                         |                        | 18,699 |       |      |   | 21,622 |      
|                             |                                         |                        |        |       |      |  
|Deferred tax assets          |                                         |                        |        |       |      |   |        |      
|                             | Reinsurance transactions                |                        |        | 2,633 |      |   |        | 4,031 | 
|                             | Deferred gain on Cleveland headquarters |                        |        | 2,013 |      |   |        | 2,170 | 
|                             | Reserves                                |                        |        | 1,396 |      |   |        | 4,456 | 
|                             | Net operating loss carryfoward          |                        |        | 4,755 |      |   |        | 4,950 | 
|                             | Advance premium                         |                        |        | 15    |      |   |        | 31    | 
|                             | Other                                   |                        |        | 816   |      |   |        | 1,362 | 
|                             |                                         |                        |        |       |      |  
|                             |                                         |                        | 11,628 |       |      |   | 17,000 |      
|Valuation allowance          |                                         |                        |       |       |      |   | 4,950  |      
|                             |                                         |                        |        |       |      |  
|Net deferred tax liabilities |                                         | $                      | 7,071  |       |      | $ | 9,572  |      
|                             |                                         |                        |        |       |      |  





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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002












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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|   |                                                       
|-- | ------------------------------------------------------
|J. | Liability for Other Policy Claims and Benefits Payable



|                                                                            |              |                        |         |         |         |   |         |         |         |   |         |         |         | 
|--------------------------------------------------------------------------- | ------------ | ---------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                            |              | December 31,           |        
|                                                                            |              |                        |        
|                                                                            |              | 2004                   |         |         | 2003    |   |         | 2002    |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|                                                                            |              | (dollars in thousands) |        
|Gross balance at beginning of year                                          |              | $                      | 129,237 |         |         | $ | 147,938 |         |         | $ | 186,783 |        
|Less: Reserves ceded                                                        |              |                        | 25,878  |         |         |   | 28,622  |         |         |   | 58,078  |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|Adjusted net beginning balance                                              |              |                        | 103,359 |         |         |   | 119,316 |         |         |   | 128,705 |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|Paid claims and claims adjustments expenses, net of reinsurance,
    for    |              |                        |         |         |         |   |         |         |         |   |         |        
|                                                                            | Current year |                        |         | 252,668 |         |   |         | 252,789 |         |   |         | 268,036 |        
|                                                                            | Prior years  |                        |         | 71,023  |         |   |         | 91,655  |         |   |         | 136,693 |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|                                                                            |              | Total paid             |         |         | 323,691 |   |         |         | 344,444 |   |         |         | 404,729 | 
|                                                                            |              |                        |         |         |         |   |         |         |        
|Incurred claims and claims adjustment expenses, net of
    reinsurance, for |              |                        |         |         |         |   |         |         |         |   |         |        
|                                                                            | Current year |                        |         | 322,272 |         |   |         | 358,567 |         |   |         | 368,935 |        
|                                                                            | Prior years  |                        |         | (19,596 | )       |   |         | (12,995 | )       |   |         | 8,394   |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|                                                                            |              | Total incurred         |         |         | 302,676 |   |         |         | 345,572 |   |         |         | 377,329 | 
|                                                                            |              |                        |         |         |         |   |         |         |        
|Net reserve balance at end of year                                          |              |                        | 82,344  |         |         |   | 120,444 |         |         |   | 101,305 |        
|Plus: Reserves ceded at end of year                                         |              |                        | 22,076  |         |         |   | 25,878  |         |         |   | 28,622  |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|Balance before reinsurance recoveries on paid claims                        |              |                        | 104,420 |         |         |   | 146,322 |         |         |   | 129,927 |        
|Plus: (Decrease) increase in reinsurance recoveries on paid
    claims      |              |                        | (1,717  | )       |         |   | (17,085 | )       |         |   | 18,011  |        
|                                                                            |              |                        |         |         |         |   |         |         |        
|Gross balance at end of year                                                |              | $                      | 102,703 |         |         | $ | 129,237 |         |         | $ | 147,938 |        
|                                                                            |              |                        |         |         |         |   |         |         |        





|   |                         
|-- | ------------------------
|K. | Reinsurance Arrangements



| |                                       
| | --------------------------------------
| | Central Reserve Life Insurance Company



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002
















| |                                           
| | ------------------------------------------
| | Continental General Life Insurance Company





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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002












| |                                                       
| | ------------------------------------------------------
| | Provident American Life & Health Insurance
    Company









| |                                      
| | -------------------------------------
| | United Benefit Life Insurance Company







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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










| |      
| | -----
| | Other





|                                                      |                                   |                                                        |         |         |         |   |         |         |         |   |         |          |         | 
|----------------------------------------------------- | --------------------------------- | ------------------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | -------- | ------- | 
|                                                      |                                   | Year Ended December 31,                                |        
|                                                      |                                   |                                                        |        
|                                                      |                                   | 2004                                                   |         |         | 2003    |   |         | 2002    |        
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|                                                      |                                   | (dollars in thousands)                                 |        
|Premiums, net                                         |                                   |                                                        |         |         |         |   |         |         |         |   |         |         
|                                                      | Direct                            |                                                        | $       | 508,445 |         |   | $       | 570,542 |         |   | $       | 652,967  |        
|                                                      | Assumed                           |                                                        |         | 988     |         |   |         | 851     |         |   |         | 122      |        
|                                                      | Ceded                             |                                                        |         | (79,211 | )       |   |         | (93,067 | )       |   |         | (112,953 | )      
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|                                                      |                                   | Total premiums, net                                    |         | $       | 430,222 |   |         | $       | 478,326 |   |         | $        | 540,136 | 
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|Benefits, claims, losses and settlement expenses, net |                                   |                                                        |         |         |         |   |         |         |         |   |         |         
|Benefits, claims, losses, and settlement expenses     |                                   | $                                                      | 368,383 |         |         | $ | 416,506 |         |         | $ | 498,130 |         
|Reinsurance recoveries                                |                                   |                                                        | (53,750 | )       |         |   | (62,766 | )       |         |   | (77,106 | )       
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|                                                      |                                   | Total benefits, claims, losses and settlement expenses |         | $       | 314,633 |   |         | $       | 353,740 |   |         | $        | 421,024 | 
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|Selling, general, and administrative expenses         |                                   |                                                        |         |         |         |   |         |         |         |   |         |         
|                                                      | Commissions                       |                                                        | $       | 68,073  |         |   | $       | 72,502  |         |   | $       | 97,655   |        
|                                                      | Salaries and benefits             |                                                        |         | 31,755  |         |   |         | 34,443  |         |   |         | 37,443   |        
|                                                      | Taxes, licenses, and fees         |                                                        |         | 13,152  |         |   |         | 17,198  |         |   |         | 18,658   |        
|                                                      | California litigation settlements |                                                        |         | 3,050   |         |   |         |        |         |   |         |         |        
|                                                      | Other operating expenses          |                                                        |         | 35,113  |         |   |         | 42,638  |         |   |         | 46,953   |        
|                                                      | Reinsurance allowances            |                                                        |         | (16,580 | )       |   |         | (19,924 | )       |   |         | (25,526  | )      
|                                                      |                                   |                                                        |         |         |         |   |         |         |        
|                                                      |                                   | Total selling, general and administrative expenses     |         | $       | 134,563 |   |         | $       | 146,857 |   |         | $        | 175,183 | 
|                                                      |                                   |                                                        |         |         |         |   |         |         |        



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|   |                              
|-- | -----------------------------
|L. | Contingencies and Commitments









|   |     
|-- | ----
|M. | Debt

|                     |  |                        |        |  |      |   |        | 
|-------------------- |  | ---------------------- | ------ |  | ---- | - | ------ | 
|                     |  | December 31,           |       
|                     |  |                        |       
|                     |  | 2004                   |        |  | 2003 |  
|                     |  |                        |        |  |      |  
|                     |  | (dollars in thousands) |       
|Bank credit facility |  | $                      | 10,750 |  |      | $ | 13,000 | 





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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002


















|   |               
|-- | --------------
|N. | Special Charge



| |     
| | ----
| | 2002





|   |            
|-- | -----------
|O. | Stock Plans



| |                   
| | ------------------
| | Stock Option Plans





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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002
















|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       |  |           |   |  |   |      | 
|-------------------------------------- |  | ----------------------- | --------- | -------- | ----- | - | ---- | ------- | -------- |  | ---------- | - |  | -------- | ---- |  | ----- |  | --------- | - |  | - | ---- | 
|                                       |  | Year Ended December 31, |          
|                                       |  |                         |          
|                                       |  | 2004                    |           |          | 2003  |   |      | 2002    |         
|                                       |  |                         |           |          |       |   |      |         |         
|                                       |  |                         |           | Weighted |       |   |      |         | Weighted |  |            |   |  | Weighted |     
|                                       |  |                         |           | Average  |       |   |      |         | Average  |  |            |   |  | Average  |     
|                                       |  |                         |           | Exercise |       |   |      |         | Exercise |  |            |   |  | Exercise |     
|                                       |  | Options                 |           |          | Price |   |      | Options |          |  | Price      |   |  | Options  |      |  | Price | 
|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       | 
|Outstanding at beginning of year       |  |                         | 1,740,267 |          |       | $ | 6.22 |         |          |  | 2,620,334  |   |  | $        | 7.00 |  |       |  | 2,878,632 |   |  | $ | 7.12 | 
|Options granted, with exercise prices: |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       |  |           |   |  |   |      | 
|Greater than fair value at grant date  |  |                         | 180,000   |          |       |   | 6.27 |         |          |  | 100,000    |   |  |          | 1.95 |  |       |  | 40,000    |   |  |   | 6.25 | 
|Equal to fair value at grant date      |  |                         | 116,457   |          |       |   | 6.11 |         |          |  | 107,500    |   |  |          | 3.13 |  |       |  | 140,000   |   |  |   | 4.11 | 
|Less than fair value at grant date     |  |                         |          |          |       |   |     |         |          |  | 5,000      |   |  |          | 4.10 |  |       |  |          |   |  |   |     | 
|Forfeited                              |  |                         | (135,976  | )        |       |   | 7.37 |         |          |  | (1,092,567 | ) |  |          | 7.38 |  |       |  | (438,298  | ) |  |   | 6.78 | 
|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       | 
|Outstanding at end of year             |  |                         | 1,900,748 |          |       |   | 6.13 |         |          |  | 1,740,267  |   |  |          | 6.22 |  |       |  | 2,620,334 |   |  |   | 7.00 | 
|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       | 
|Exercisable at end of year             |  |                         | 1,419,498 |          |       |   | 6.68 |         |          |  | 1,370,267  |   |  |          | 6.83 |  |       |  | 1,927,834 |   |  |   | 7.29 | 
|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       | 
|Shares available for future grants     |  |                         | 1,607,962 |          |       |   |      |         |          |  |            |   |  |          |      |  |       |  |           |   |  |   |      | 
|                                       |  |                         |           |          |       |   |      |         |          |  |            |   |  |          |      |  |       | 

77



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|               |  |                     |           |  |                     |   |      |                    |  |  |                  |  |  |   |      | 
|-------------- |  | ------------------- | --------- |  | ------------------- | - | ---- | ------------------ |  |  | ---------------- |  |  | - | ---- | 
|               |  | Options Outstanding |           |  | Options Exercisable |  
|               |  |                     |           |  |                     |  
|Range of       |  | Number Outstanding  |           |  | Weighted Average    |   |      | Number Exercisable |  |  | Weighted Average | 
|Exercise Price |  | December 31, 2004   |           |  | Exercise Price      |   |      | December 31, 2004  |  |  | Exercise Price   | 
|               |  |                     |           |  |                     |   |      |                    |  |  |                  | 
|$1.95 to $3.99 |  |                     | 287,500   |  |                     | $ | 2.92 |                    |  |  | 37,500           |  |  | $ | 2.48 | 
|$4.00 to $4.99 |  |                     | 60,000    |  |                     |   | 4.40 |                    |  |  | 60,000           |  |  |   | 4.40 | 
|$5.00 to $5.99 |  |                     | 185,163   |  |                     |   | 5.79 |                    |  |  | 185,163          |  |  |   | 5.79 | 
|$6.00 to $6.99 |  |                     | 886,000   |  |                     |   | 6.34 |                    |  |  | 654,750          |  |  |   | 6.39 | 
|$7.00 to $7.99 |  |                     | 125,085   |  |                     |   | 7.20 |                    |  |  | 125,085          |  |  |   | 7.20 | 
|$8.00 to $9.50 |  |                     | 357,000   |  |                     |   | 8.31 |                    |  |  | 357,000          |  |  |   | 8.31 | 
|               |  |                     |           |  |                     |   |      |                    |  |  |                  | 
|               |  |                     | 1,900,748 |  |                     |   |      |                    |  |  | 1,419,498        |  |  |   |      | 
|               |  |                     |           |  |                     |   |      |                    |  |  |                  | 



| |         
| | --------
| | Warrants





| |                    
| | -------------------
| | Stock Purchase Plan





| |                          
| | -------------------------
| | Agent Stock Purchase Plan



78



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










| |             
| | ------------
| | Stock Awards







| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for
Stock-Based Compensation






|                         |  |                         |          |   |      |  |          |      |  |  |          |  
|------------------------ |  | ----------------------- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                         |  | Year Ended December 31, |         
|                         |  |                         |         
|                         |  | 2004                    |          |   | 2003 |  |          | 2002 | 
|                         |  |                         |          |   |      |  |          |      | 
|Risk-free rate of return |  |                         | 3.61     | % |      |  | 3.22     | %    |  |  | 2.73     | %
|Dividend yield           |  |                         | 0        | % |      |  | 0        | %    |  |  | 0        | %
|Volatility factor        |  |                         | 0.439    |   |      |  | 0.465    |      |  |  | 0.433    |  
|Expected life of award   |  |                         | 5  years |   |      |  | 5  years |      |  |  | 5  years |  





|   |                 
|-- | ----------------
|P. | Preferred Shares



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002














|   |                                
|-- | -------------------------------
|Q. | Statutory Financial Information





|                           |  |                           |        |                   |              |   |        |      |  |   |         |   |  |      |        |  |  |   |        | 
|-------------------------- |  | ------------------------- | ------ | ----------------- | ------------ | - | ------ | ---- |  | - | ------- | - |  | ---- | ------ |  |  | - | ------ | 
|                           |  |                           |        | Statutory Capital |             
|                           |  | Statutory Net Gain (Loss) |        |                   | and Surplus  |  
|                           |  | Year Ended December 31,   |        |                   | December 31, |  
|                           |  |                           |        |                   |              |  
|                           |  | 2004                      |        |                   | 2003         |   |        | 2002 |  |   | 2004    |   |  | 2003 |       
|                           |  |                           |        |                   |              |   |        |      |  |   |         |   |  |      |       
|                           |  | (dollars in thousands)    |       
|Central Reserve(1)         |  | $                         | 311    |                   |              | $ | 8,160  |      |  | $ | 6,767   |   |  | $    | 38,320 |  |  | $ | 40,961 | 
|Provident American Life(1) |  |                           | (1,572 | )                 |              |   | 2,210  |      |  |   | (1,329  | ) |  |      | 3,857  |  |  |   | 5,434  | 
|Continental General(2)     |  |                           | 10,259 |                   |              |   | 34,723 |      |  |   | (13,684 | ) |  |      | 68,966 |  |  |   | 59,506 | 
|United Benefit Life(1)     |  |                           | (1,968 | )                 |              |   | (244   | )    |  |   | (187    | ) |  |      | 2,982  |  |  |   | 3,145  | 
|Pyramid Life(3)            |  |                           |       |                   |              |   | 741    |      |  |   | (105    | ) |  |      |       |  |  |   |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Statutory capital and surplus for Central Reserve includes
    Provident American Life and United Benefit Life. Central
    Reserves statutory net gain for the years ended
    December 31, 2004 and 2002 includes the losses of Provident
    American Life and United Benefit Life. For the year ended
    December 31, 2003, the losses of United Benefit Life are
    included in Central Reserves statutory net gain.
|   
|(2) | Statutory capital and surplus for Continental General for the
    year ended December 31, 2003, includes an additional
    $21.0 million from the sale of Pyramid Life. Continental
    Generals statutory net gain for the year ended
    December 31, 2003 includes $31.0 million from the sale
    of Pyramid Life.                                                                                                      
|   
|(3) | Pyramid Lifes statutory net gain for the year ended
    December 31, 2003 includes statutory earnings through
    March 31, 2003. On March 31, 2003, we sold Pyramid
    Life to Pennsylvania Life Insurance Company, a subsidiary of
    Universal American Financial Corp. See Note D. Discontinued
    Operations for further information.                                                                               



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002














|   |                     
|-- | --------------------
|R. | Comprehensive Income



|                                        |                                                                                                                                                                |                         |        |     |        |   |        |        |        |   |        |        |       | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------ | --- | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ----- | 
|                                        |                                                                                                                                                                | Year Ended December 31, |       
|                                        |                                                                                                                                                                |                         |       
|                                        |                                                                                                                                                                | 2004                    |        |     | 2003   |   |        | 2002   |       
|                                        |                                                                                                                                                                |                         |        |     |        |   |        |        |       
|                                        |                                                                                                                                                                | (dollars in thousands)  |       
|Net income (loss)                       |                                                                                                                                                                | $                       | 19,117 |     |        | $ | 22,948 |        |        | $ | (2,401 | )     
|Other comprehensive income, net of tax: |                                                                                                                                                                |                         |        |     |        |   |        |        |        |   |        |       
|                                        | Unrealized gain on securities, net of tax expense of $18, $220
    and $6,524, respectively                                                                    |                         |        | 35  |        |   |        | 410    |        |   |        | 13,359 |      
|                                        | Reclassification adjustments for net losses (gains) included in
    net income, net of tax (benefit) expense of $(8), $512 and $639,
    respectively          |                         |        | 16  |        |   |        | (950   | )      |   |        | (1,186 | )    
|                                        | Unrealized (loss) gain adjustment to deferred acquisition costs
    and value of business acquired, net of tax (benefit) expense of
    $(17), $(832) and $100 |                         |        | (31 | )      |   |        | (1,546 | )      |   |        | 186    |      
|                                        | Realized gains due to the sale of Pyramid Life, net of tax
    expense of $2,016                                                                               |                         |        |    |        |   |        | (3,744 | )      |   |        |       |      
|                                        |                                                                                                                                                                |                         |        |     |        |   |        |        |       
|                                        |                                                                                                                                                                | Comprehensive income    |        | $   | 19,137 |   |        | $      | 17,118 |   |        | $      | 9,958 | 
|                                        |                                                                                                                                                                |                         |        |     |        |   |        |        |       



|   |                                           
|-- | ------------------------------------------
|S. | Computation of Net Income Per Common Share

Earnings per
Share


81



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                         |                                                                                |                         |  |            |      |  |  |            |  |  |  |            | 
|------------------------ | ------------------------------------------------------------------------------ | ----------------------- |  | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                         |                                                                                | Year Ended December 31, | 
|                         |                                                                                |                         | 
|                         |                                                                                | 2004                    |  |            | 2003 |  |  | 2002       | 
|                         |                                                                                |                         |  |            |      |  |  |            | 
|Weighted average shares: |                                                                                |                         |  |            |      |  |  |            |  |  |  |           
|                         | Basic                                                                          |                         |  | 34,466,865 |      |  |  | 34,311,152 |  |  |  | 34,019,063 | 
|                         | Stock awards and incremental shares from assumed exercise of
    stock options |                         |  | 437,079    |      |  |  | 36,028     |  |  |  |           | 
|                         |                                                                                |                         |  |            |      |  |  |            | 
|                         | Diluted                                                                        |                         |  | 34,903,944 |      |  |  | 34,347,180 |  |  |  | 34,019,063 | 
|                         |                                                                                |                         |  |            |      |  |  |            | 

T.     Employee Benefit Plan










U.     Operating Segments


Disclosures about Segments
of an Enterprise and Related Information,




82



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002










|                 |                                            |                             |                                                   |        |         |       |         |        |         |       |         |        |         |        |  
|---------------- | ------------------------------------------ | --------------------------- | ------------------------------------------------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ------ | -
|                 |                                            | Year Ended December 31,     |                                                  
|                 |                                            |                             |                                                  
|                 |                                            | 2004                        |                                                   |        | 2003    |       |         | 2002   |        
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            | (dollars in thousands)      |                                                  
|Medical          |                                            |                             |                                                   |        |         |       |         |        |         |       |         |       
|                 | Revenues                                   |                             |                                                   |        |         |       |         |        |         |       |         |        |        
|                 |                                            | Net premiums                |                                                   | $      | 247,002 |       |         | $      | 305,441 |       |         | $      | 370,029 |       
|                 |                                            | Net investment income       |                                                   |        | 4,392   |       |         |        | 5,598   |       |         |        | 7,317   |       
|                 |                                            | Net realized (losses) gains |                                                   |        | (36     | )     |         |        | 550     |       |         |        | 1,194   |       
|                 |                                            | Other income                |                                                   |        | 16,851  |       |         |        | 21,680  |       |         |        | 30,481  |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            |                             | 268,209                                           |        |         |       | 333,269 |        |         |       | 409,021 |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 | Expenses                                   |                             |                                                   |        |         |       |         |        |         |       |         |        |        
|                 |                                            | Benefits and claims         |                                                   |        | 176,143 |       |         |        | 226,249 |       |         |        | 291,789 |       
|                 |                                            | Other operating expenses    |                                                   |        | 86,888  |       |         |        | 98,186  |       |         |        | 123,134 |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            |                             | 263,031                                           |        |         |       | 324,435 |        |         |       | 414,923 |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            |                             | Segment profit (loss) before federal income taxes |        | $       | 5,178 |         |        | $       | 8,834 |         |        | $       | (5,902 | )
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|Senior and Other |                                            |                             |                                                   |        |         |       |         |        |         |       |         |       
|                 | Revenues                                   |                             |                                                   |        |         |       |         |        |         |       |         |        |        
|                 |                                            | Net premiums                |                                                   | $      | 183,220 |       |         | $      | 172,885 |       |         | $      | 170,107 |       
|                 |                                            | Net investment income       |                                                   |        | 21,820  |       |         |        | 19,487  |       |         |        | 16,932  |       
|                 |                                            | Net realized gains          |                                                   |        | 11      |       |         |        | 905     |       |         |        | 634     |       
|                 |                                            | Other income                |                                                   |        | 2,612   |       |         |        | 7,188   |       |         |        | 3,067   |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            |                             | 207,663                                           |        |         |       | 200,465 |        |         |       | 190,740 |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 | Expenses                                   |                             |                                                   |        |         |       |         |        |         |       |         |        |        
|                 |                                            | Benefits and claims         |                                                   |        | 138,490 |       |         |        | 127,491 |       |         |        | 129,235 |       
|                 |                                            | Other operating expenses    |                                                   |        | 50,689  |       |         |        | 53,058  |       |         |        | 46,637  |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 |                                            |                             | 189,179                                           |        |         |       | 180,549 |        |         |       | 175,872 |       
|                 |                                            |                             |                                                   |        |         |       |         |        |        
|                 | Segment profit before federal income taxes |                             | $                                                 | 18,484 |         |       | $       | 19,916 |         |       | $       | 14,868 |        
|                 |                                            |                             |                                                   |        |         |       |         |        |        

83



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








|                                                                  |                                          |                                      |        |        |       |   |        |        |       |   |       |        |       | 
|----------------------------------------------------------------- | ---------------------------------------- | ------------------------------------ | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ----- | ------ | ----- | 
|                                                                  |                                          | Year Ended December 31,              |       
|                                                                  |                                          |                                      |       
|                                                                  |                                          | 2004                                 |        |        | 2003  |   |        | 2002   |      
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  |                                          | (dollars in thousands)               |       
|Corporate and Other                                               |                                          |                                      |        |        |       |   |        |        |       |   |       |       
|                                                                  | Revenues                                 |                                      |        |        |       |   |        |        |       |   |       |        |      
|                                                                  |                                          | Net investment income                |        | $      | 4     |   |        | $      | 5     |   |       | $      | 9     | 
|                                                                  |                                          | Net realized gains                   |        |        | 448   |   |        |        | 436   |   |       |        | 434   | 
|                                                                  |                                          | Other income                         |        |        |      |   |        |        | 7     |   |       |        |      | 
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  |                                          |                                      | 452    |        |       |   | 448    |        |       |   | 443   |       
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  | Expenses                                 |                                      |        |        |       |   |        |        |       |   |       |        |      
|                                                                  |                                          | Interest expense and financing costs |        |        | 684   |   |        |        | 1,620 |   |       |        | 2,001 | 
|                                                                  |                                          | Other operating expenses             |        |        | 1,557 |   |        |        | 1,566 |   |       |        | 1,567 | 
|                                                                  |                                          | Special charge                       |        |        |      |   |        |        |      |   |       |        | 2,381 | 
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  |                                          |                                      | 2,241  |        |       |   | 3,186  |        |       |   | 5,949 |       
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|                                                                  | Segment loss before federal income taxes |                                      | $      | (1,789 | )     |   | $      | (2,738 | )     |   | $     | (5,506 | )    
|                                                                  |                                          |                                      |        |        |       |   |        |        |      
|Income from continuing operations before federal income
    taxes |                                          | $                                    | 21,873 |        |       | $ | 26,012 |        |       | $ | 3,460 |       
|                                                                  |                                          |                                      |        |        |       |   |        |        |      

V.     Fair Values of Financial
Instruments








Investment securities


Cash and cash equivalents, accrued investment income,
premiums receivable, surplus notes, mortgage loans and policy
notes


Annuity contracts


84



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








Other policyholders funds


Debt




|                           |                                      |                        |         |         |            |  |         |          |  |  |            |         |  |  |         |         | 
|-------------------------- | ------------------------------------ | ---------------------- | ------- | ------- | ---------- |  | ------- | -------- |  |  | ---------- | ------- |  |  | ------- | ------- | 
|                           |                                      | December 31,           |        
|                           |                                      |                        |        
|                           |                                      | 2004                   |         |         | 2003       | 
|                           |                                      |                        |         |         |            | 
|                           |                                      | Carrying               |         |         | Estimated  |  |         | Carrying |  |  | Estimated  |        
|                           |                                      | Amount                 |         |         | Fair Value |  |         | Amount   |  |  | Fair Value |        
|                           |                                      |                        |         |         |            |  |         |          |  |  |            |        
|                           |                                      | (dollars in thousands) |        
|Assets                     |                                      |                        |         |         |            |  |         |          |  |  |            |         |  |  |         |        
|Investments                |                                      |                        |         |         |            |  |         |          |  |  |            |         |  |  |         |        
|                           | Fixed maturities available-for-sale  |                        | $       | 456,075 |            |  | $       | 456,075  |  |  | $          | 479,089 |  |  | $       | 479,089 | 
|                           | Fixed maturities trading             |                        |         | 18,531  |            |  |         | 18,531   |  |  |            |        |  |  |         |        | 
|                           | Equity securities available-for-sale |                        |         | 7,658   |            |  |         | 7,658    |  |  |            |        |  |  |         |        | 
|                           | Equity securities trading            |                        |         | 4,938   |            |  |         | 4,938    |  |  |            |        |  |  |         |        | 
|                           | Surplus notes                        |                        |         |        |            |  |         |         |  |  |            | 1,006   |  |  |         | 1,006   | 
|                           | Policy notes                         |                        |         | 3,572   |            |  |         | 3,572    |  |  |            | 4,137   |  |  |         | 4,137   | 
|                           | Mortgage loans                       |                        |         | 11      |            |  |         | 11       |  |  |            | 48      |  |  |         | 48      | 
|Cash and cash equivalents  |                                      |                        | 22,635  |         |            |  | 22,635  |          |  |  | 26,394     |         |  |  | 26,394  |        
|Premiums receivable        |                                      |                        | 4,096   |         |            |  | 4,096   |          |  |  | 4,443      |         |  |  | 4,443   |        
|Accrued investment income  |                                      |                        | 5,389   |         |            |  | 5,389   |          |  |  | 5,658      |         |  |  | 5,658   |        
|Liabilities                |                                      |                        |         |         |            |  |         |          |  |  |            |         |  |  |         |        
|Annuity reserves           |                                      |                        | 157,255 |         |            |  | 155,191 |          |  |  | 156,626    |         |  |  | 154,061 |        
|Other policyholders funds |                                      |                        | 19,016  |         |            |  | 19,016  |          |  |  | 20,821     |         |  |  | 20,821  |        
|Debt                       |                                      |                        | 10,750  |         |            |  | 10,750  |          |  |  | 13,000     |         |  |  | 13,000  |        

W.     Concentrations of Credit
Risk








85



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CERES GROUP, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued


December 31, 2004, 2003 and 2002








X.     Quarterly Results of
Operations  (Unaudited)




|     |                                                        |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |      | 
|---- | ------------------------------------------------------ | -------------------------------------------------- | - | ------- | ------ | - | - | ------- | ---- | - | ------ | ------- | ---- |  | - | ------- | ---- | 
|     |                                                        | First                                              |   |         | Second |   |   | Third   |      |   | Fourth |        
|     |                                                        |                                                    |   |         |        |   |   |         |      |   |        |        
|     |                                                        | (dollars in thousands,                             |  
|     |                                                        | except per share amounts)                          |  
|2004 |                                                        |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |        
|     | Revenues                                               |                                                    | $ | 120,417 |        |   | $ | 119,041 |      |   | $      | 117,527 |      |  | $ | 119,339 |     
|     | Benefits, claims, losses and settlement expenses       |                                                    |   | 76,564  |        |   |   | 77,443  |      |   |        | 78,962  |      |  |   | 81,664  |     
|     | Selling, general and administrative and other expenses |                                                    |   | 33,611  |        |   |   | 32,963  |      |   |        | 34,528  |      |  |   | 33,461  |     
|     | Income from continuing operations                      |                                                    |   | 6,174   |        |   |   | 4,892   |      |   |        | 5,410   |      |  |   | 2,641   |     
|     | Discontinued operations:                               |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Income from operations of Pyramid Life, net of tax |   |         |       |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Loss on sale of Pyramid Life, net of tax           |   |         |       |   |   |         |     |   |        |         |     |  |   |         |     | 
|     | Income (loss) from discontinued operations             |                                                    |   |        |        |   |   |        |      |   |        |        |      |  |   |        |     
|     | Net income                                             |                                                    |   | 6,174   |        |   |   | 4,892   |      |   |        | 5,410   |      |  |   | 2,641   |     
|     | Basic earnings per share:                              |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Continuing operations                              |   |         | 0.18   |   |   |         | 0.14 |   |        |         | 0.16 |  |   |         | 0.08 | 
|     |                                                        | Discontinued operations                            |   |         |       |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Net income                                         |   |         | 0.18   |   |   |         | 0.14 |   |        |         | 0.16 |  |   |         | 0.08 | 
|     | Diluted earnings per share:                            |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Continuing operations                              |   |         | 0.18   |   |   |         | 0.14 |   |        |         | 0.16 |  |   |         | 0.08 | 
|     |                                                        | Discontinued operations                            |   |         |       |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Net income                                         |   |         | 0.18   |   |   |         | 0.14 |   |        |         | 0.16 |  |   |         | 0.08 | 
|2003 |                                                        |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |        
|     | Revenues                                               |                                                    | $ | 141,083 |        |   | $ | 136,281 |      |   | $      | 129,917 |      |  | $ | 126,901 |     
|     | Benefits, claims, losses and settlement expenses       |                                                    |   | 96,306  |        |   |   | 89,403  |      |   |        | 85,527  |      |  |   | 82,504  |     
|     | Selling, general and administrative and other expenses |                                                    |   | 38,170  |        |   |   | 37,218  |      |   |        | 35,713  |      |  |   | 35,756  |     
|     | Income from continuing operations                      |                                                    |   | 3,757   |        |   |   | 6,951   |      |   |        | 4,200   |      |  |   | 4,457   |     
|     | Discontinued operations:                               |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Income from operations of Pyramid Life, net of tax |   |         | 5,732  |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Loss on sale of Pyramid Life, net of tax           |   |         | (2,110 | ) |   |         | (39  | ) |        |         |     |  |   |         |     | 
|     | Income (loss) from discontinued operations             |                                                    |   | 3,622   |        |   |   | (39     | )    |   |        |        |      |  |   |        |     
|     | Net income                                             |                                                    |   | 7,379   |        |   |   | 6,912   |      |   |        | 4,200   |      |  |   | 4,457   |     
|     | Basic earnings per share:                              |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Continuing operations                              |   |         | 0.11   |   |   |         | 0.20 |   |        |         | 0.12 |  |   |         | 0.13 | 
|     |                                                        | Discontinued operations                            |   |         | 0.11   |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Net income                                         |   |         | 0.22   |   |   |         | 0.20 |   |        |         | 0.12 |  |   |         | 0.13 | 
|     | Diluted earnings per share:                            |                                                    |   |         |        |   |   |         |      |   |        |         |      |  |   |         |     
|     |                                                        | Continuing operations                              |   |         | 0.11   |   |   |         | 0.20 |   |        |         | 0.12 |  |   |         | 0.13 | 
|     |                                                        | Discontinued operations                            |   |         | 0.11   |   |   |         |     |   |        |         |     |  |   |         |     | 
|     |                                                        | Net income                                         |   |         | 0.22   |   |   |         | 0.20 |   |        |         | 0.12 |  |   |         | 0.13 | 

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Schedule II


CERES GROUP, INC. AND SUBSIDIARIES


Condensed Financial Information of Registrant


Ceres Group, Inc. (Parent Only)


Balance Sheets


December 31, 2004 and 2003


(dollars in thousands)








|                                       |                                        |                            |                                            |         |         |         |         |         |         |         | 
|-------------------------------------- | -------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                       |                                        | 2004                       |                                            |         | 2003    |        
|                                       |                                        |                            |                                            |         |         |        
|Assets                                 |                                        |                            |                                            |         |         |         |         |        
|Investment in subsidiaries(1)          |                                        | $                          | 220,703                                    |         |         | $       | 204,495 |        
|Cash and cash equivalents              |                                        |                            | 183                                        |         |         |         | 1,480   |        
|Due from non-regulated subsidiaries(1) |                                        |                            | 5,945                                      |         |         |         | 2,559   |        
|Other assets                           |                                        |                            | 4,427                                      |         |         |         | 7,964   |        
|                                       |                                        |                            |                                            |         |         |        
|                                       |                                        |                            | Total assets                               |         | $       | 231,258 |         |         | $       | 216,498 | 
|                                       |                                        |                            |                                            |         |         |        
|                                      
|Liabilities and stockholders equity  
|                                      
|Liabilities                           
|                                       | Debt                                   |                            | $                                          | 10,750  |         |         | $       | 13,000  |        
|                                       | Due to non-regulated subsidiaries(1)   |                            |                                            | 9,247   |         |         |         | 11,625  |        
|                                       | Other liabilities                      |                            |                                            | 6,443   |         |         |         | 6,734   |        
|                                       |                                        |                            |                                            |         |         |        
|                                       |                                        | Total liabilities          |                                            |         | 26,440  |         |         |         | 31,359  |        
|                                       |                                        |                            |                                            |         |         |        
|Stockholders equity                   |                                        |                            |                                            |         |         |         |         |        
|                                       | Non-voting preferred stock             |                            |                                            |        |         |         |         |        |        
|                                       | Convertible voting preferred stock     |                            |                                            |        |         |         |         |        |        
|                                       | Common stock                           |                            |                                            | 35      |         |         |         | 34      |        
|                                       | Additional paid-in capital             |                            |                                            | 134,090 |         |         |         | 133,549 |        
|                                       | Retained earnings                      |                            |                                            | 63,495  |         |         |         | 44,378  |        
|                                       | Accumulated other comprehensive income |                            |                                            | 7,198   |         |         |         | 7,178   |        
|                                       |                                        |                            |                                            |         |         |        
|                                       |                                        | Total stockholders equity |                                            |         | 204,818 |         |         |         | 185,139 |        
|                                       |                                        |                            |                                            |         |         |        
|                                       |                                        |                            | Total liabilities and stockholders equity |         | $       | 231,258 |         |         | $       | 216,498 | 
|                                       |                                        |                            |                                            |         |         |        






|    |                             
|--- | ----------------------------
|(1) | Eliminated in consolidation.



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Schedule II (continued)


CERES GROUP, INC. AND SUBSIDIARIES


Condensed Financial Information of Registrant


Ceres Group, Inc. (Parent Only)


Statements of Operations


For the Years Ended December 31, 2004, 2003 and 2002


(dollars in thousands)








|                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                               |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                                                                               |  |      |        |   |      |   |        |      | 
|Revenues                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Dividend income(1)                                                                             |  | $    | 4,100  |   |      | $ | 5,200  |      |  | $ | 6,300  |  
|Rental income(2)                                                                               |  |      | 1,804  |   |      |   | 1,751  |      |  |   | 1,736  |  
|Net realized gains                                                                             |  |      | 448    |   |      |   | 436    |      |  |   | 434    |  
|Net investment income                                                                          |  |      | 4      |   |      |   | 5      |      |  |   | 9      |  
|Fee and other income                                                                           |  |      |       |   |      |   | 7      |      |  |   |       |  
|                                                                                               |  |      |        |   |      |   |        |      | 
|                                                                                               |  |      | 6,356  |   |      |   | 7,399  |      |  |   | 8,479  |  
|Expenses                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Selling, general and administrative expenses                                                   |  |      | 4,045  |   |      |   | 5,082  |      |  |   | 5,580  |  
|                                                                                               |  |      |        |   |      |   |        |      | 
|Income before income tax benefit and equity in undistributed
    income (loss) of subsidiaries |  |      | 2,311  |   |      |   | 2,317  |      |  |   | 2,899  |  
|Income tax benefit                                                                             |  |      | (619   | ) |      |   | (1,008 | )    |  |   | (1,186 | )
|                                                                                               |  |      |        |   |      |   |        |      | 
|Income before equity in undistributed income (loss) of
    subsidiaries                        |  |      | 2,930  |   |      |   | 3,325  |      |  |   | 4,085  |  
|Equity in undistributed income (loss) of subsidiaries(3)                                       |  |      | 16,187 |   |      |   | 19,623 |      |  |   | (6,486 | )
|                                                                                               |  |      |        |   |      |   |        |      | 
|Net income (loss)                                                                              |  | $    | 19,117 |   |      | $ | 22,948 |      |  | $ | (2,401 | )
|                                                                                               |  |      |        |   |      |   |        |      | 






|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | Represents dividend income from non-regulated subsidiaries,
    which is eliminated in consolidation.                      
|   
|(2) | Eliminated in consolidation.                                                                                               
|   
|(3) | Includes the parent companys equity of regulated and
    non-regulated subsidiaries, which is eliminated in consolidation.



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Schedule II (continued)


CERES GROUP, INC. AND SUBSIDIARIES


Condensed Financial Information of Registrant


Ceres Group, Inc. (Parent Only)


Statements of Cash Flows


For the Years Ended December 31, 2004, 2003 and 2002


(dollars in thousands)








|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |   |   |         |        |  
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- | ------ | ------- | ---- | - | ------- | ------- | - | - | ------- | ------ | -
|                                                                                                   |                                                                                                      | 2004 |        |         | 2003 |   |         | 2002    |  
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Operating activities                                                                               |                                                                                                      |      |        |         |      |   |         |         |   |   |         |       
|Net income (loss)                                                                                  |                                                                                                      | $    | 19,117 |         |      | $ | 22,948  |         |   | $ | (2,401  | )     
|Adjustments to reconcile net income (loss) to cash provided by
    (used in) operating activities: |                                                                                                      |      |        |         |      |   |         |         |   |   |         |       
|                                                                                                   | Equity in undistributed (income) loss of subsidiaries(1)                                             |      |        | (16,187 | )    |   |         | (19,623 | ) |   |         | 6,486  |  
|                                                                                                   | Depreciation                                                                                         |      |        |        |      |   |         | 272     |   |   |         | 109    |  
|                                                                                                   | Net realized gains                                                                                   |      |        | (448    | )    |   |         | (436    | ) |   |         | (434   | )
|                                                                                                   | Decrease (increase) in other assets                                                                  |      |        | 3,537   |      |   |         | 1,701   |   |   |         | (4,940 | )
|                                                                                                   | Increase (decrease) in other liabilities                                                             |      |        | 156     |      |   |         | (668    | ) |   |         | (1,160 | )
|                                                                                                   | (Decrease) increase in advances to/from non-regulated
    subsidiaries(1)                            |      |        | (5,764  | )    |   |         | (418    | ) |   |         | 1,463  |  
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Net cash provided by (used in) operating activities                                                |                                                                                                      |      | 411    |         |      |   | 3,776   |         |   |   | (877    | )     
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Investing activities                                                                               |                                                                                                      |      |        |         |      |   |         |         |   |   |         |       
|                                                                                                   | Capital contributions to regulated subsidiaries(1)                                                   |      |        |        |      |   |         |        |   |   |         | (8,000 | )
|                                                                                                   | Capital contributions to non-regulated subsidiaries(1)                                               |      |        |        |      |   |         | (928    | ) |   |         |       |  
|                                                                                                   | Special distribution from Continental General from the sale of
    Pyramid Life Insurance Company(1) |      |        |        |      |   |         | 10,000  |   |   |         |       |  
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Net cash provided by (used) in investing activities                                                |                                                                                                      |      |       |         |      |   | 9,072   |         |   |   | (8,000  | )     
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Financing activities                                                                               |                                                                                                      |      |        |         |      |   |         |         |   |   |         |       
|                                                                                                   | Increase in debt borrowings                                                                          |      |        |        |      |   |         | 13,000  |   |   |         |       |  
|                                                                                                   | Principal payments on debt                                                                           |      |        | (2,250  | )    |   |         | (25,003 | ) |   |         | (5,997 | )
|                                                                                                   | Proceeds from issuance of common stock                                                               |      |        | 542     |      |   |         | 497     |   |   |         | 991    |  
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Net cash used in financing activities                                                              |                                                                                                      |      | (1,708 | )       |      |   | (11,506 | )       |   |   | (5,006  | )     
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Net (decrease) increase in cash                                                                    |                                                                                                      |      | (1,297 | )       |      |   | 1,342   |         |   |   | (13,883 | )     
|Cash and cash equivalents at beginning of year                                                     |                                                                                                      |      | 1,480  |         |      |   | 138     |         |   |   | 14,021  |       
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  
|Cash and cash equivalents at end of year                                                           |                                                                                                      | $    | 183    |         |      | $ | 1,480   |         |   | $ | 138     |       
|                                                                                                   |                                                                                                      |      |        |         |      |   |         |         |  






|    |                             
|--- | ----------------------------
|(1) | Eliminated in consolidation.



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Schedule III


CERES GROUP, INC. AND SUBSIDIARIES


SUPPLEMENTAL INSURANCE INFORMATION


(dollars in thousands)








|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |   |         |         |  |   |        |        |   |   |         |         | 
|---------------------------- | ------------------- | ----------- | - | ------------- | ---------- |  | - | -------- | ------------ | ---------- | -------- | ------ | ------ | --------- | --- | -------------- | ------------- | ---------- | ----------- | ---------- | --------------- |  | ----------- | ------ | ------ | --------- | - | ------- | ------- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     | Net (Deferral) |               |            |            
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     | Amortization   |               |            |            
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        | Benefits, |     |                | and Change in |            |             |           
|                             |                     |             |   | Future Policy |            |  |   |          | Other Policy |            |          |        |        |           |     | Claims,        |               |            | Acquisition |            |                 | 
|                             |                     | Deferred    |   |               | Benefits,  |  |   |          |              | Claims and |          |        |        |           | Net |                |               | Losses and |             |            | Costs and Value |  |             | Other  |       
|                             |                     | Acquisition |   |               | Losses and |  |   | Unearned |              |            | Benefits |        |        | Premium   |     |                | Investment    |            |             | Settlement |                 |  | of Business |        |        | Operating |  
|                             |                     | Costs       |   |               | Claims     |  |   | Premiums |              |            | Payable  |        |        | Revenue   |     |                | Income        |            |             | Expenses   |                 |  | Acquired    |        |        | Expenses  |  
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|Year ended December 31, 2004 |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |   |         |         |  |   |        |        |   |   |        
|                             | Medical             |             | $ | 29,583        |            |  | $ | 4,756    |              |            | $        | 6,701  |        |           | $   | 44,041         |               |            | $           | 247,002    |                 |  | $           | 4,392  |        |           | $ | 176,143 |         |  | $ | 7,841  |        |   | $ | 79,047  |        
|                             | Senior and Other    |             |   | 37,491        |            |  |   | 347,431  |              |            |          | 28,238 |        |           |     | 58,662         |               |            |             | 183,220    |                 |  |             | 21,820 |        |           |   | 138,490 |         |  |   | (3,270 | )      |   |   | 53,959  |        
|                             | Corporate and Other |             |   |              |            |  |   |         |              |            |          |       |        |           |     |               |               |            |             |           |                 |  |             | 4      |        |           |   |        |         |  |   |       |        |   |   | 2,241   |        
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|                             |                     | Total       |   | $             | 67,074     |  |   | $        | 352,187      |            |          | $      | 34,939 |           |     | $              | 102,703       |            |             | $          | 430,222         |  |             | $      | 26,216 |           |   | $       | 314,633 |  |   | $      | 4,571  |   |   | $       | 135,247 | 
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|Year ended December 31, 2003 |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |   |         |         |  |   |        |        |   |   |        
|                             | Medical             |             | $ | 37,293        |            |  | $ | 7,605    |              |            | $        | 7,940  |        |           | $   | 68,276         |               |            | $           | 305,441    |                 |  | $           | 5,598  |        |           | $ | 226,249 |         |  | $ | 4,751  |        |   | $ | 93,435  |        
|                             | Senior and Other    |             |   | 32,316        |            |  |   | 333,658  |              |            |          | 26,053 |        |           |     | 60,961         |               |            |             | 172,885    |                 |  |             | 19,487 |        |           |   | 127,491 |         |  |   | 1,202  |        |   |   | 51,856  |        
|                             | Corporate and Other |             |   |              |            |  |   |         |              |            |          |       |        |           |     |               |               |            |             |           |                 |  |             | 5      |        |           |   |        |         |  |   |       |        |   |   | 3,186   |        
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|                             |                     | Total       |   | $             | 69,609     |  |   | $        | 341,263      |            |          | $      | 33,993 |           |     | $              | 129,237       |            |             | $          | 478,326         |  |             | $      | 25,090 |           |   | $       | 353,740 |  |   | $      | 5,953  |   |   | $       | 148,477 | 
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|Year ended December 31, 2002 |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |   |         |         |  |   |        |        |   |   |        
|                             | Medical             |             | $ | 41,869        |            |  | $ | 9,281    |              |            | $        | 10,535 |        |           | $   | 97,050         |               |            | $           | 370,029    |                 |  | $           | 7,317  |        |           | $ | 291,789 |         |  | $ | (2,450 | )      |   | $ | 125,584 |        
|                             | Senior and Other    |             |   | 33,022        |            |  |   | 318,104  |              |            |          | 26,145 |        |           |     | 50,888         |               |            |             | 170,107    |                 |  |             | 16,932 |        |           |   | 129,235 |         |  |   | (1,395 | )      |   |   | 48,032  |        
|                             | Corporate and Other |             |   |              |            |  |   |         |              |            |          |       |        |           |     |               |               |            |             |           |                 |  |             | 9      |        |           |   |        |         |  |   |       |        |   |   | 5,949   |        
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  
|                             |                     | Total       |   | $             | 74,891     |  |   | $        | 327,385      |            |          | $      | 36,680 |           |     | $              | 147,938       |            |             | $          | 540,136         |  |             | $      | 24,258 |           |   | $       | 421,024 |  |   | $      | (3,845 | ) |   | $       | 179,565 | 
|                             |                     |             |   |               |            |  |   |          |              |            |          |        |        |           |     |                |               |            |             |            |                 |  |             |        |        |           |  



90



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Schedule IV


CERES GROUP, INC. AND SUBSIDIARIES


REINSURANCE


(dollars in thousands)








|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |     |  
|---------------------------- | ----------------------------- | ------ | --------- | -------- | --------- | - | --------- | ---------- |  | ---------- | ------ | ------ | - | ---------- | --------- | ------- |  |  | --- | --- | -
|                             |                               |        |           |          |           |   |           |            |  | Percentage |       
|                             |                               |        |           |          |           |   |           |            |  | of         |       
|                             |                               |        |           | Ceded to |           |   | Assumed   |            |  |            |        | Amount |  
|                             |                               | Gross  |           |          | Other     |   |           | From Other |  |            | Net    |        |   | Assumed to |          
|                             |                               | Amount |           |          | Companies |   |           | Companies  |  |            | Amount |        |   | Net        |          
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Year ended December 31, 2004 |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|Life insurance in force      |                               | $      | 2,830,222 |          |           | $ | 1,253,979 |            |  | $          | 69,255 |        |   | $          | 1,645,498 |         |  |  | 4.2 | %  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Premiums                     |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|                             | Life insurance                |        | $         | 20,874   |           |   | $         | 6,254      |  |            | $      | 988    |   |            | $         | 15,608  |  |  |     | 6.3 | %
|                             | Accident and health insurance |        |           | 487,571  |           |   |           | 72,957     |  |            |        |       |   |            |           | 414,614 |  |  |     | N/M |  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|                             |                               | $      | 508,445   |          |           | $ | 79,211    |            |  | $          | 988    |        |   | $          | 430,222   |         |  |  | 0.2 | %  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Year ended December 31, 2003 |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|Life insurance in force      |                               | $      | 3,002,439 |          |           | $ | 1,390,950 |            |  | $          | 74,510 |        |   | $          | 1,685,999 |         |  |  | 4.4 | %  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Premiums                     |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|                             | Life insurance                |        | $         | 23,679   |           |   | $         | 6,726      |  |            | $      | 851    |   |            | $         | 17,804  |  |  |     | 4.8 | %
|                             | Accident and health insurance |        |           | 546,863  |           |   |           | 86,341     |  |            |        |       |   |            |           | 460,522 |  |  |     | N/M |  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|                             |                               | $      | 570,542   |          |           | $ | 93,067    |            |  | $          | 851    |        |   | $          | 478,326   |         |  |  | 0.2 | %  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Year ended December 31, 2002 |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|Life insurance in force      |                               | $      | 3,296,906 |          |           | $ | 1,603,135 |            |  | $          |       |        |   | $          | 1,693,771 |         |  |  | N/M |    
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|Premiums                     |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |           |         |  |  |     |    
|                             | Life insurance                |        | $         | 18,742   |           |   | $         | 8,301      |  |            | $      | 135    |   |            | $         | 10,576  |  |  |     | 1.3 | %
|                             | Accident and health insurance |        |           | 634,225  |           |   |           | 104,652    |  |            |        | (13    | ) |            |           | 529,560 |  |  |     | N/M |  
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          
|                             |                               | $      | 652,967   |          |           | $ | 112,953   |            |  | $          | 122    |        |   | $          | 540,136   |         |  |  | N/M |    
|                             |                               |        |           |          |           |   |           |            |  |            |        |        |   |            |          








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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURE





|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.


Managements Report on Internal Control over Financial
Reporting.




Changes in internal control.




|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION



PART III




|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Section 16(a) Beneficial Ownership Reporting
Compliance




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|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION



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|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan
Information




|                                       |       |                     |                  |                  |                   |                     |                  |                     |  |  |                   |                  | 
|-------------------------------------- | ----- | ------------------- | ---------------- | ---------------- | ----------------- | ------------------- | ---------------- | ------------------- |  |  | ----------------- | ---------------- | 
|                                       |       |                     |                  |                  |                   | Number of Shares of |                 
|                                       |       | Number of Shares of |                  |                  |                   |                     | Our Common Stock |                    
|                                       |       | Our Common Stock    |                  |                  | Weighted-Average  |                     |                  | Remaining Available | 
|                                       |       | to be Issued Upon   |                  |                  | Exercise Price of |                     |                  | for Future Issuance | 
|                                       |       | Exercise of         |                  |                  | Outstanding       |                     |                  | Under Each          | 
|Plan Name                              |       | Outstanding Options |                  |                  | Options           |                     |                  | Plan/Award          | 
|                                       |       |                     |                  |                  |                   |                     |                  |                     | 
|1998 Key Employee Share Incentive Plan |       |                     | 1,309,042 shares |                  |                   | $                   | 5.66             |                     |  |  | 1,067,962 shares* |                 
|                                       |       |                     |                  |                  |                   |                     |                  |                     | 
|                                       | Total |                     |                  | 1,309,042 shares |                   |                     |                  |                     |  |  |                   | 1,067,962 shares | 
|                                       |       |                     |                  |                  |                   |                     |                  |                     | 






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The plan was amended on May 19, 2004 to increase the number
    of shares reserved for issuance under the plan by an additional
    1,000,000 shares to a total of 3,000,000 shares and
    allow for the grant of stock and restricted stock awards to
    officers, non-employee directors, consultants and advisors. In
    2004, 82,996 shares of stock and restricted stock awards
    were granted under this plan to officers and non-employee
    directors.



|                                                          |       |                     |                |                |                   |   |                     |                         |  |  |            |            | 
|--------------------------------------------------------- | ----- | ------------------- | -------------- | -------------- | ----------------- | - | ------------------- | ----------------------- |  |  | ---------- | ---------- | 
|                                                          |       | Number of Shares of |                |                |                   |   |                    
|                                                          |       | Our Common Stock    |                |                |                   |   | Number of Shares of |                        
|                                                          |       | to be Issued Upon   |                |                | Weighted-Average  |   |                     | Our Common Stock        | 
|                                                          |       | Exercise of         |                |                | Exercise Price of |   |                     | Remaining Available for | 
|                                                          |       | Outstanding         |                |                | Outstanding       |   |                     | Future Issuance Under   | 
|Plan Name                                                 |       | Options             |                |                | Options           |   |                     | Each Plan/Award         | 
|                                                          |       |                     |                |                |                   |   |                     |                         | 
|1998 Employee Stock Option Plan                           |       |                     | 198,000 shares |                |                   | $ | 7.99                |                         |  |  | -0- shares | *         
|1999 Special Agents Stock Option Plan                    |       |                     | 78,706 shares  |                |                   |   | 5.94                |                         |  |  | -0- shares | *         
|Employment Agreement for Val Rajic (8/10/99)              |       |                     | 75,000 shares  |                |                   |   | 6.50                |                         |  |  | -0- shares |           
|Employment Agreement for Charles E. Miller, Jr. (10/1/98) |       |                     | 100,000 shares |                |                   |   | 6.50                |                         |  |  | -0- shares |           
|Retainer Agreement for Billy B. Hill, Jr. (7/3/98)        |       |                     | 125,000 shares |                |                   |   | 7.50                |                         |  |  | -0- shares |           
|Andrew A. Boemi                                           |       |                     | 15,000 shares  |                |                   |   | 8.25                |                         |  |  | -0- shares |           
|                                                          |       |                     |                |                |                   |   |                     |                         | 
|                                                          | Total |                     |                | 591,706 shares |                   |   |                     |                         |  |  |            | -0- shares | 
|                                                          |       |                     |                |                |                   |   |                     |                         | 






| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The plan was terminated by Board of Directors and no future
    grants will be made. The outstanding grants under the plan were
    not affected by the termination.





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|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



PART IV




|         |                                                                    
|-------- | -------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
    8-K



|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(a) | Filed documents. The following documents are filed as part of
    this report:





| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Ceres Group, Inc. and Subsidiaries: Audit Reports.                                       
|
| | Consolidated Balance Sheets  December 31, 2004
    and 2003.                            
|
| | Consolidated Statements of Operations  Years ended
    December 31, 2004, 2003 and 2002.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Consolidated Statements of Stockholders Equity 
    Years ended December 31, 2004, 2003 and 2002.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Consolidated Statements of Cash Flows  Years ended
    December 31, 2004, 2003 and 2002.
|
| | Notes to Audited Consolidated Financial Statements.                                      





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Ceres Group, Inc.:                                                                      
|
| | II. Condensed Financial Information of
    Registrant  Ceres Group, Inc. (Parent Only).
|
| | III. Supplementary Insurance Information.                                               
|
| | IV. Reinsurance.                                                                        



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other schedules are omitted because of the absence of conditions
    under which they are required or because the required
    information is given in the audited consolidated financial
    statements or notes thereto.



|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(b) | Reports on Form 8-K: Form 8-K report filed on
    November 4, 2004 relating to the announcement of third
    quarter earnings.
|   
|(c) | Exhibits.                                                                                                                     

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|                                                                                  |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |     | 
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- |  | ------ | ------- |  |  | ---- |  | ------- | ------ | --------- |  |  |  | --- | 
|                                                                                  |                                                                                                                                                                                                                                                                       | INCORPORATED BY |  |        |         |  |  |      | 
|                                                                                  |                                                                                                                                                                                                                                                                       | REFERENCE TO    |  |        |         |  |  |      | 
|                                                                                  |                                                                                                                                                                                                                                                                       | REGISTRATION OR |  |        | FORM OR |  |  |      |  | EXHIBIT |       
|EXHIBITS                                                                          |                                                                                                                                                                                                                                                                       | FILE NUMBER     |  |        | REPORT  |  |  | DATE |  |         | NUMBER |          
|                                                                                  |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |          
|Plan of acquisition, reorganization, arrangement, liquidation,
    or succession. |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Amended and Restated Stock                                                                                                                                                                                                                                            |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1998 |  |  |  | 2.2 | 
|                                                                                  | Purchase Agreement, dated March 30, 1998, by and among
    Strategic Partners, Insurance Partners, L.P., Insurance Partners
    Offshore (Bermuda), L.P., and Central Reserve.                                                                                        |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |     | 
|                                                                                  | Merger Agreement and Plan of Reorganization dated
    December 8, 1998 between Central Reserve Life Corporation
    and Ceres Group, Inc.                                                                                                                             |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 1998 |  |  |  | 2.1 | 
|                                                                                  | Stock Purchase Agreement dated as of November 4, 1998
    between The Western & Southern Life Insurance Company
    and Ceres Group, Inc.                                                                                                                             |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Feb. 1999 |  |  |  | 2.2 | 
|                                                                                  | Purchase Agreement, dated December 20, 2002, by and among
    Continental General Insurance Company, Ceres Group, Inc.,
    Pennsylvania Life Insurance Company, and Universal American
    Financial Corp.                                                           |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 2002 |  |  |  | 2.4 | 
|Articles of Incorporation and By-laws                                             |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Certificate of Incorporation of Ceres Group, Inc. as filed with
    Secretary of Delaware on October 22, 1998.                                                                                                                                                        |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 1998 |  |  |  | 3.1 | 
|                                                                                  | Certificate of Amendment of the Certificate of Incorporation of
    Ceres Group, Inc. dated July 25, 2000.                                                                                                                                                            |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Aug. 2000 |  |  |  | 3.1 | 
|                                                                                  | Amended and Restated Bylaws of Ceres Group, Inc.                                                                                                                                                                                                                      |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2002 |  |  |  | 3.2 | 
|Instruments defining the rights of security holders, including
    indentures     |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Amended and Restated Registration Rights Agreement dated as of
    July 25, 2000 between Ceres Group, Inc. (as
    successor-in-interest to Central Reserve Life Corporation) and
    the persons and entities set forth on the signature pages
    attached thereto. |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Aug. 2000 |  |  |  | 4.1 | 
|                                                                                  | Form of Stockholders Agreement between QQLink.com, Inc., Ceres
    Group, Inc. and the persons and entities listed on the signature
    pages thereto.                                                                                                                |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 4.5 | 

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|                   |                                                                                                                                                                                                        |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |       | 
|------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------- |  | ------ | ------- |  |  | ---- |  | ------- | ------ | --------- |  |  |  | ----- | 
|                   |                                                                                                                                                                                                        | INCORPORATED BY |  |        |         |  |  |      | 
|                   |                                                                                                                                                                                                        | REFERENCE TO    |  |        |         |  |  |      | 
|                   |                                                                                                                                                                                                        | REGISTRATION OR |  |        | FORM OR |  |  |      |  | EXHIBIT |       
|EXHIBITS           |                                                                                                                                                                                                        | FILE NUMBER     |  |        | REPORT  |  |  | DATE |  |         | NUMBER |          
|                   |                                                                                                                                                                                                        |                 |  |        |         |  |  |      |  |         |        |          
|Material Contracts |                                                                                                                                                                                                        |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |      
|                   | Reinsurance Agreement between Central Reserve Life Insurance
    Company and Hannover Life Reassurance Company of America (f/k/a
    Reassurance Company of Hannover).                                 |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1998 |  |  |  | 10.10 | 
|                   | Reinsurance Agreement dated February 1, 1999, between
    Continental General Life Insurance Company and Hannover Life
    Reassurance Company of America (f/k/a Reassurance Company of
    Hannover). |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1999 |  |  |  | 10.21 | 
|                   | Ceres Group, Inc. 1998 Key Employee Share Incentive Plan.                                                                                                                                              |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.26 | 
|                   | Ceres Group, Inc. 1998 Employee Stock Option Plan.                                                                                                                                                     |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.27 | 
|                   | Ceres Group, Inc. 1999 Special Agents Stock Option Plan.                                                                                                                                              |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.28 | 
|                   | Ceres Group, Inc. 2000 Employee Stock Purchase Plan.                                                                                                                                                   |                 |  | 0-8483 |         |  |  | S-8  |  |         |        | Apr. 2001 |  |  |  | 4.1   | 
|                   | Ceres Group, Inc. 2000 Agent Stock Purchase Plan.                                                                                                                                                      |                 |  | 0-8483 |         |  |  | S-8  |  |         |        | Apr. 2001 |  |  |  | 4.2   | 
|                   | Lease Agreement, dated as of July 31, 2001, between
    Royalton Investors, LLC and Big T Investments, LLC and Ceres
    Group, Inc.                                                                   |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2001 |  |  |  | 10.37 | 
|                   | Transition Agreement, dated as of April 15, 2002, between
    Ceres Group, Inc. and Peter W. Nauert.                                                                                                   |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | May 2002  |  |  |  | 10.38 | 
|                   | Employment Agreement, dated as of July 9, 2002, between
    Ceres Group, Inc. and Thomas J. Kilian.                                                                                                    |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2002 |  |  |  | 10.39 | 
|                   | Employment Agreement, effective as of December 17, 2002
    between Ceres Group, Inc. and David I. Vickers.                                                                                            |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 2003 |  |  |  | 10.40 | 
|                   | Employment Agreement, effective as of August 18, 2003
    between Ceres Group, Inc. and Bradley A. Wolfram.                                                                                            |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Nov. 2003 |  |  |  | 10.42 | 

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|                                                                                                                           |                                                                                                                                                                                                                                                                                                                              |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |       | 
|-------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------ | ------ | ------- |  | ---- | ---- |  | ------- | --------- | --------- |  |  | ----- | ----- | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                                              | INCORPORATED BY |        |        |         |  |      |      | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                                              | REFERENCE TO    |        |        |         |  |      |      | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                                              | REGISTRATION OR |        |        | FORM OR |  |      |      |  | EXHIBIT |          
|EXHIBITS                                                                                                                   |                                                                                                                                                                                                                                                                                                                              | FILE NUMBER     |        |        | REPORT  |  |      | DATE |  |         | NUMBER    |          
|                                                                                                                           |                                                                                                                                                                                                                                                                                                                              |                 |        |        |         |  |      |      |  |         |           |          
|                                                                                                                           | Credit and Security Agreement, dated as of December 23,
    2003, among Ceres Group, Inc., as Borrower, the subsidiaries of
    the Borrower which are signatories thereto, as Subsidiary
    Guarantors, and National City Bank, The CIT Group/ Equipment
    Financing, Inc., as Lenders and National City Bank, as Agent. |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.43 | 
|                                                                                                                           | Form of Pledge and Security Agreement, dated as of
    December 23, 2003, between each of Ceres Group, Inc., Ceres
    Administrators, LLC, Ceres Health Care, Inc., Continental
    General Corporation, and Western Reserve Administrative
    Services, Inc., and National City Bank as Agent.                            |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.44 | 
|                                                                                                                           | Term Loan A Note, dated December 23, 2003.                                                                                                                                                                                                                                                                                   |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.45 | 
|                                                                                                                           | Term Loan B Note, dated December 23, 2003.                                                                                                                                                                                                                                                                                   |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.46 | 
|Employment Agreement, effective as of July 1, 2004, between
    Ceres Group, Inc. and Ernest T. Giambra, Jr.               |                                                                                                                                                                                                                                                                                                                              |                 | 0-8483 |        |         |  | 10-Q |      |  |         | Aug. 2004 |           |  |  | 10.47 |      
|Code of Conduct and Ethics, dated March 10, 2004.                                                                          |                                                                                                                                                                                                                                                                                                                              |                 | 0-8483 |        |         |  | 10-K |      |  |         | Mar. 2004 |           |  |  | 14.1  |      
|Subsidiaries of the registrant.                                                                                            |                                                                                                                                                                                                                                                                                                                              |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |      
|                                                                                                                           | Subsidiaries.                                                                                                                                                                                                                                                                                                                |                 |        | 0-8483 |         |  |      | 10-K |  |         |           | Mar. 2003 |  |  |       | 21.1  | 
|Consents of expert and counsel.                                                                                            |                                                                                                                                                                                                                                                                                                                              |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |      
|                                                                                                                           | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                         |                 |        | *      |         |  |      |      |  |         |           |           |  |  |       | 23.1  | 
|                                                                                                                           | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                |                 |        | *      |         |  |      |      |  |         |           |           |  |  |       | 23.2  | 
|CEO certification pursuant to Section 302 of Sarbanes-Oxley
    Act of 2002.                                               |                                                                                                                                                                                                                                                                                                                              |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 31.1  |      
|CFO certification pursuant to Section 302 of Sarbanes-Oxley
    Act of 2002.                                               |                                                                                                                                                                                                                                                                                                                              |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 31.2  |      
|Certification pursuant to 18 U.S.C Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |                                                                                                                                                                                                                                                                                                                              |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 32    |      






|  |                
|- | ---------------
|* | Filed herewith.

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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


|                     |  |                                                                                        
|-------------------- |  | ---------------------------------------------------------------------------------------
|                     |  | CERES GROUP, INC.                                                                      
|                    
|Date: March 18, 2005 |  | By: /s/ Thomas
    J. KilianThomas
    J. Kilian, President and Chief Executive 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 Company and in the capacities and on
the dates indicated.


|               |  |                                                                                                                                                                       
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date           |  | Signature and Capacity                                                                                                                                                
|               |  |                                                                                                                                                                       
|              
|March 18, 2005 |  | By: /s/ Thomas J.
    KilianThomas
    J. Kilian, President,
    Chief Executive Officer and Director
    (Principal Executive Officer)                               
|              
|March 18, 2005 |  | By: /s/ David I.
    VickersDavid
    I. Vickers, Executive Vice President,
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)
|              
|March 18, 2005 |  | By: /s/ Roland C.
    BakerRoland
    C. Baker, Director                                                                                                              
|              
|March 18, 2005 |  | By: /s/ Michael A.
    CavataioMichael
    A. Cavataio, Director                                                                                                      
|              
|               |  | By: Bradley
    E. Cooper, Director                                                                                                                                   
|              
|March 18, 2005 |  | By: /s/ Susan F.
    CabreraSusan
    F. Cabrera, Director                                                                                                            
|              
|March 18, 2005 |  | By: /s/ Lynn C.
    MillerLynn
    C. Miller, Director                                                                                                                
|              
|March 18, 2005 |  | By: /s/ James J.
    RitchieJames
    J. Ritchie, Director                                                                                                            
|              
|March 18, 2005 |  | By: /s/ William J.
    RuhWilliam
    J. Ruh, Chairman of the Board                                                                                                   
|              
|March 18, 2005 |  | By: /s/ Robert A.
    SpassRobert
    A. Spass, Director                                                                                                              

99



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EXHIBIT INDEX


|                                                                                  |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |     | 
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- |  | ------ | ------- |  |  | ---- |  | ------- | ------ | --------- |  |  |  | --- | 
|                                                                                  |                                                                                                                                                                                                                                                                       | INCORPORATED BY |  |        |         |  |  |      | 
|                                                                                  |                                                                                                                                                                                                                                                                       | REFERENCE TO    |  |        |         |  |  |      | 
|                                                                                  |                                                                                                                                                                                                                                                                       | REGISTRATION OR |  |        | FORM OR |  |  |      |  | EXHIBIT |       
|EXHIBITS                                                                          |                                                                                                                                                                                                                                                                       | FILE NUMBER     |  |        | REPORT  |  |  | DATE |  |         | NUMBER |          
|                                                                                  |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |          
|Plan of acquisition, reorganization, arrangement, liquidation,
    or succession. |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Amended and Restated Stock Purchase Agreement, dated
    March 30, 1998, by and among Strategic Partners, Insurance
    Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., and
    Central Reserve.                                                         |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1998 |  |  |  | 2.2 | 
|                                                                                  | Merger Agreement and Plan of Reorganization dated
    December 8, 1998 between Central Reserve Life Corporation
    and Ceres Group, Inc.                                                                                                                             |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 1998 |  |  |  | 2.1 | 
|                                                                                  | Stock Purchase Agreement dated as of November 4, 1998
    between The Western & Southern Life Insurance Company
    and Ceres Group, Inc.                                                                                                                             |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Feb. 1999 |  |  |  | 2.2 | 
|                                                                                  | Purchase Agreement, dated December 20, 2002, by and among
    Continental General Insurance Company, Ceres Group, Inc.,
    Pennsylvania Life Insurance Company, and Universal American
    Financial Corp.                                                           |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 2002 |  |  |  | 2.4 | 
|Articles of Incorporation and By-laws                                             |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Certificate of Incorporation of Ceres Group, Inc. as filed with
    Secretary of Delaware on October 22, 1998.                                                                                                                                                        |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Dec. 1998 |  |  |  | 3.1 | 
|                                                                                  | Certificate of Amendment of the Certificate of Incorporation of
    Ceres Group, Inc. dated July 25, 2000.                                                                                                                                                            |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Aug. 2000 |  |  |  | 3.1 | 
|                                                                                  | Amended and Restated Bylaws of Ceres Group, Inc.                                                                                                                                                                                                                      |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2002 |  |  |  | 3.2 | 
|Instruments defining the rights of security holders, including
    indentures     |                                                                                                                                                                                                                                                                       |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |    
|                                                                                  | Amended and Restated Registration Rights Agreement dated as of
    July 25, 2000 between Ceres Group, Inc. (as
    successor-in-interest to Central Reserve Life Corporation) and
    the persons and entities set forth on the signature pages
    attached thereto. |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Aug. 2000 |  |  |  | 4.1 | 
|                                                                                  | Form of Stockholders Agreement between QQLink.com, Inc., Ceres
    Group, Inc. and the persons and entities listed on the signature
    pages thereto.                                                                                                                |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 4.5 | 



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##### Table of Contents



|                   |                                                                                                                                                                                                                                                                                                                              |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |       | 
|------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- |  | ------ | ------- |  |  | ---- |  | ------- | ------ | --------- |  |  |  | ----- | 
|                   |                                                                                                                                                                                                                                                                                                                              | INCORPORATED BY |  |        |         |  |  |      | 
|                   |                                                                                                                                                                                                                                                                                                                              | REFERENCE TO    |  |        |         |  |  |      | 
|                   |                                                                                                                                                                                                                                                                                                                              | REGISTRATION OR |  |        | FORM OR |  |  |      |  | EXHIBIT |       
|EXHIBITS           |                                                                                                                                                                                                                                                                                                                              | FILE NUMBER     |  |        | REPORT  |  |  | DATE |  |         | NUMBER |          
|                   |                                                                                                                                                                                                                                                                                                                              |                 |  |        |         |  |  |      |  |         |        |          
|Material Contracts |                                                                                                                                                                                                                                                                                                                              |                 |  |        |         |  |  |      |  |         |        |           |  |  |  |      
|                   | Reinsurance Agreement between Central Reserve Life Insurance
    Company and Hannover Life Reassurance Company of America (f/k/a
    Reassurance Company of Hannover).                                                                                                                                                       |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1998 |  |  |  | 10.10 | 
|                   | Reinsurance Agreement dated February 1, 1999, between
    Continental General Life Insurance Company and Hannover Life
    Reassurance Company of America (f/k/a Reassurance Company of
    Hannover).                                                                                                                       |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 1999 |  |  |  | 10.21 | 
|                   | Ceres Group, Inc. 1998 Key Employee Share Incentive Plan.                                                                                                                                                                                                                                                                    |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.26 | 
|                   | Ceres Group, Inc. 1998 Employee Stock Option Plan.                                                                                                                                                                                                                                                                           |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.27 | 
|                   | Ceres Group, Inc. 1999 Special Agents Stock Option Plan.                                                                                                                                                                                                                                                                    |                 |  | 0-8483 |         |  |  | S-1  |  |         |        | Apr. 2001 |  |  |  | 10.28 | 
|                   | Ceres Group, Inc. 2000 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                         |                 |  | 0-8483 |         |  |  | S-8  |  |         |        | Apr. 2001 |  |  |  | 4.1   | 
|                   | Ceres Group, Inc. 2000 Agent Stock Purchase Plan.                                                                                                                                                                                                                                                                            |                 |  | 0-8483 |         |  |  | S-8  |  |         |        | Apr. 2001 |  |  |  | 4.2   | 
|                   | Lease Agreement, dated as of July 31, 2001, between
    Royalton Investors, LLC and Big T Investments, LLC and Ceres
    Group, Inc.                                                                                                                                                                                         |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2001 |  |  |  | 10.37 | 
|                   | Transition Agreement, dated as of April 15, 2002, between
    Ceres Group, Inc. and Peter W. Nauert.                                                                                                                                                                                                                         |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | May 2002  |  |  |  | 10.38 | 
|                   | Employment Agreement, dated as of July 9, 2002, between
    Ceres Group, Inc. and Thomas J. Kilian.                                                                                                                                                                                                                          |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Aug. 2002 |  |  |  | 10.39 | 
|                   | Employment Agreement, effective as of December 17, 2002
    between Ceres Group, Inc. and David I. Vickers.                                                                                                                                                                                                                  |                 |  | 0-8483 |         |  |  | 10-K |  |         |        | Mar. 2003 |  |  |  | 10.40 | 
|                   | Employment Agreement, effective as of August 18, 2003
    between Ceres Group, Inc. and Bradley A. Wolfram.                                                                                                                                                                                                                  |                 |  | 0-8483 |         |  |  | 10-Q |  |         |        | Nov. 2003 |  |  |  | 10.42 | 
|                   | Credit and Security Agreement, dated as of December 23,
    2003, among Ceres Group, Inc., as Borrower, the subsidiaries of
    the Borrower which are signatories thereto, as Subsidiary
    Guarantors, and National City Bank, The CIT Group/ Equipment
    Financing, Inc., as Lenders and National City Bank, as Agent. |                 |  | 0-8483 |         |  |  | 8-K  |  |         |        | Jan. 2004 |  |  |  | 10.43 | 



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##### Table of Contents



|                                                                                                                           |                                                                                                                                                                                                                                                                                                   |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |       | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------ | ------ | ------- |  | ---- | ---- |  | ------- | --------- | --------- |  |  | ----- | ----- | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                   | INCORPORATED BY |        |        |         |  |      |      | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                   | REFERENCE TO    |        |        |         |  |      |      | 
|                                                                                                                           |                                                                                                                                                                                                                                                                                                   | REGISTRATION OR |        |        | FORM OR |  |      |      |  | EXHIBIT |          
|EXHIBITS                                                                                                                   |                                                                                                                                                                                                                                                                                                   | FILE NUMBER     |        |        | REPORT  |  |      | DATE |  |         | NUMBER    |          
|                                                                                                                           |                                                                                                                                                                                                                                                                                                   |                 |        |        |         |  |      |      |  |         |           |          
|                                                                                                                           | Form of Pledge and Security Agreement, dated as of
    December 23, 2003, between each of Ceres Group, Inc., Ceres
    Administrators, LLC, Ceres Health Care, Inc., Continental
    General Corporation, and Western Reserve Administrative
    Services, Inc., and National City Bank as Agent. |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.44 | 
|                                                                                                                           | Term Loan A Note, dated December 23, 2003.                                                                                                                                                                                                                                                        |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.45 | 
|                                                                                                                           | Term Loan B Note, dated December 23, 2003.                                                                                                                                                                                                                                                        |                 |        | 0-8483 |         |  |      | 8-K  |  |         |           | Jan. 2004 |  |  |       | 10.46 | 
|Employment Agreement, effective as of July 1, 2004, between
    Ceres Group, Inc. and Ernest T. Giambra, Jr.               |                                                                                                                                                                                                                                                                                                   |                 | 0-8483 |        |         |  | 10-Q |      |  |         | Aug. 2004 |           |  |  | 10.47 |      
|Code of Conduct and Ethics, dated March 10, 2004.                                                                          |                                                                                                                                                                                                                                                                                                   |                 | 0-8483 |        |         |  | 10-K |      |  |         | Mar. 2004 |           |  |  | 14.1  |      
|Subsidiaries of the registrant                                                                                             |                                                                                                                                                                                                                                                                                                   |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |      
|                                                                                                                           | Subsidiaries.                                                                                                                                                                                                                                                                                     |                 |        | 0-8483 |         |  |      | 10-K |  |         |           | Mar. 2003 |  |  |       | 21.1  | 
|Consents of expert and counsel.                                                                                            |                                                                                                                                                                                                                                                                                                   |                 |        |        |         |  |      |      |  |         |           |           |  |  |       |      
|                                                                                                                           | Consent of KPMG LLP.                                                                                                                                                                                                                                                                              |                 |        | *      |         |  |      |      |  |         |           |           |  |  |       | 23.1  | 
|                                                                                                                           | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                     |                 |        | *      |         |  |      |      |  |         |           |           |  |  |       | 23.2  | 
|CEO certification pursuant to Section 302 of Sarbanes-Oxley
    Act of 2002.                                               |                                                                                                                                                                                                                                                                                                   |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 31.1  |      
|CFO certification pursuant to Section 302 of Sarbanes-Oxley
    Act of 2002.                                               |                                                                                                                                                                                                                                                                                                   |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 31.2  |      
|Certification pursuant to 18 U.S.C Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |                                                                                                                                                                                                                                                                                                   |                 | *      |        |         |  |      |      |  |         |           |           |  |  | 32    |      






|  |                
|- | ---------------
|* | Filed herewith.