<PAGE>

                                 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, 2001                 COMM FILE NO. 0-8483

                               CERES GROUP, INC.
             (Exact Name of Registrant as Specified in its Charter)

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<S>                                             <C>
                  DELAWARE                                       34-1017531
         ---------------------------                ------------------------------------
       (State of Other Jurisdiction of             (I.R.S. Employer Identification Number)
       Incorporation or Organization)

    17800 ROYALTON ROAD, CLEVELAND, OHIO                            44136
  -----------------------------------------                       ---------
  (Address of Principal Executive Offices)                       (Zip Code)
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                                 (440) 572-2400
                ------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

        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
                ------------------------------------------------
                                (Title of Class)

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $65,516,420 computed based on the closing price of the common
stock on March 1, 2002. (The Registrant considers affiliates to be directors,
executive officers, and those persons subject to the Voting and Stockholders'
Agreements.)

     The number of shares of common stock, par value $0.001 per share,
outstanding as of March 1, 2002 was 33,901,112.
--------------------------------------------------------------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE:

 Portions of the Registrant's Definitive Proxy Statement for the Annual Meeting
of Stockholders to be held May 15, 2002 are incorporated by reference into Part
                             III of this Form 10-K.
--------------------------------------------------------------------------------
<PAGE>

                               CERES GROUP, INC.
                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2001

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                                                                            PAGE
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<S>           <C>                                                           <C>
PART I
Item 1        Business....................................................    1
Item 2        Properties..................................................   20
Item 3        Legal Proceedings...........................................   20
Item 4        Submission of Matters to a Vote of Security Holders.........   20

PART II
Item 5        Market for Registrant's Common Equity and Related
              Stockholder Matters.........................................   21
Item 6        Selected Financial Data.....................................   23
Item 7        Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................   25
Item 7A       Quantitative and Qualitative Disclosures about Market
              Risk........................................................   42
Item 8        Financial Statements and Supplemental Data..................   43
              Schedule II - Condensed Financial Information of
              Registrant..................................................   79
              Schedule III - Supplemental Insurance Information...........   82
              Schedule IV - Reinsurance...................................   83
Item 9        Changes in and Disagreement with Accountants on Accounting
              and Financial Disclosure....................................   84

PART III
Item 10       Directors and Executive Officers of the Registrant..........   84
Item 11       Executive Compensation......................................   84
Item 12       Security Ownership of Certain Beneficial Owners and
              Management..................................................   84
Item 13       Certain Relationships and Related Transactions..............   84

PART IV
Item 14       Exhibits, Financial Statements, Financial Statement
              Schedules, and Reports on Form 8-K..........................   84

Signatures................................................................   90
</Table>
<PAGE>

                                     PART I

ITEM 1.   BUSINESS

OVERVIEW

     Ceres provides a wide array of health and life insurance products to
approximately 535,000 insureds through two primary business segments. Our senior
segment includes senior health, life and annuity products for Americans age 55
and over. The medical segment includes catastrophic and major medical health
insurance for individuals, associations and small businesses. To help control
medical costs, we also provide medical cost management services to our insureds.
Our nationwide distribution channels include approximately 48,000 independent
and exclusive agents and QQLink, our proprietary, patent pending electronic
distribution system.

     In 1998, a new management team led by Peter W. Nauert took control of Ceres
and its then only insurance subsidiary, Central Reserve Life Insurance Company.
The management team implemented a complete restructuring of the company and its
operations by initiating a series of remedial actions designed to stabilize our
operating performance, including repricing and eliminating unprofitable
products, improving underwriting and reducing administrative expenses.
Throughout the restructuring, we added experienced management personnel to our
financial, actuarial, underwriting, claims, marketing and operations areas. We
also initiated a growth strategy that included expanded distribution channels
and product offerings and a series of strategic acquisitions, which included our
entry into the senior market.

     We acquired Continental General Insurance Company, Provident American Life
& Health Insurance Company and United Benefit Life Insurance Company to
supplement our major medical platform at Central Reserve Life. In addition, we
acquired selected major medical insureds of Central Benefits Mutual Insurance
Company and a block of individual and small group health insurance written by
American Chambers Life Insurance Company. We entered into the senior market by
acquiring Continental General, with its significant senior health insurance
business, and Pyramid Life Insurance Company, a company primarily in the senior
market.

     The strategic acquisitions completed since 1998 have given us sufficient
size and scope to compete in our markets. Since 1998, we increased our
distribution channels from one to five, expanded our agent force from 16,000 to
approximately 48,000 and increased our product offerings from five to
approximately 40 in our major medical and senior markets. Assets increased from
$135.8 million at December 31, 1997 to $946.0 million at December 31, 2001, and
our gross premiums increased from $253.0 million for 1997 to $828.7 million for
the year ended 2001.

     Our operating results have been negatively impacted by the results of
United Benefit Life and Provident American Life. These companies have not met
our expectations due to significantly higher than anticipated claims and benefit
utilization and losses from unanticipated litigation. However, we limited our
losses by reinsuring portions of these businesses under various reinsurance
agreements and by halting new sales in these subsidiaries in July 2000. In
addition, in July 2001, we implemented a program to mitigate future losses of
these subsidiaries by notifying policyholders that their policies would be
terminated or replaced. The business in these two subsidiaries will be
substantially wound down by the early part of 2002.

     In addition, our operating results have been adversely impacted by
industry-wide and historically high medical inflation. This environment has
caused us to enhance and accelerate a number of programs to lessen the
inflationary impact, including:

     - premium rate increases;

     - modified product lines for new sales;

     - target marketing;

     - proactive medical cost management; and

     - lowered administrative and sales expenses.

                                        1
<PAGE>

     Our senior segment continued to produce increasing profits for 2001,
totaling $25.9 million in pre-tax segment profits for the year ended 2001. Our
medical segment improved from the first half of 2001, and without the losses
attributable to United Benefit Life and Provident American Life, this segment
would have shown a pre-tax gain of $4.7 million. However, our acquisitions and
internal growth have strained our capital levels. We have shifted our focus to
achieving internal growth while controlling our costs, although we will still be
open to selected strategic acquisitions.

     On December 27, 2001, we completed a follow-on public offering of
16,100,000 shares of our common stock, including the exercise of the
underwriters' over-allotment option, at $3.20 per share for net proceeds of
$46.5 million. The proceeds of the offering were used as follows:

     - $28.0 million contributed to the capital of our insurance subsidiaries;

     - $12.5 million to repay a portion of our bank debt;

     - $5.0 million to repurchase our convertible voting preferred stock; and

     - $1.0 million for working capital and general corporate purposes.

The offering significantly strengthened our balance sheet. We believe our focus
on internal growth, along with increased capital, will lead to more predictable
earnings, enhanced profitability and higher financial agency ratings of our
insurance subsidiaries, which in turn will support greater internal growth
capacity and enable us to enter into more favorable reinsurance agreements.

OUR CORE BUSINESSES

     SENIOR HEALTH, LIFE AND ANNUITY PRODUCTS.  We increasingly focus on the
senior segment because we believe this market has the potential for greater
revenue growth and higher profit potential than our medical segment. In 2001,
new sales of our senior health and life products rose 12.6% to $82.4 million of
new annualized sales premiums from $73.2 million in 2000.

     These products are designed specifically for Americans age 55 and over, one
of the country's fastest growing age segments that is projected to increase to
103 million people by 2025. In addition, the senior population controls 72% of
the nation's wealth. Our senior products supplement other programs, such as
Medicare, and also include specialty supplemental coverages and life insurance.
According to the Health Care Financing Administration (HCFA), the number of
Medicare enrollees, age 65 and over, nearly doubled between 1967 and 1999,
growing to 33.9 million from 19.5 million. By 2007, the Medicare population is
expected to exceed 44 million.

     CATASTROPHIC AND MAJOR MEDICAL INSURANCE.  Historically, major medical
insurance has been our core business, accounting for a greater percentage of our
revenue than our senior segment. Our major medical segment includes insurance
for individuals under age 65, associations and small businesses. With
increasingly stringent federal and state restrictions on small group insurance,
we now emphasize the sale of individual and association products, which offer
greater flexibility in both underwriting and design compared to small group
products. The associations we market to are groups that are formed for the
purpose of providing certain goods, services and information to individuals who
pay dues to be members in the association. Individual and association products,
which are individually underwritten for each applicant, offer greater regulatory
latitude in adjusting future premium rates, establishing premium rates based on
individual risk factors and rejecting applicants with risk factors that exceed
our pricing parameters. We plan to maintain the current premium level of our
medical segment by continuing the targeted market that we implemented in 2000
and 2001, adjusting premium rates as necessary to keep pace with medical
inflation and by focusing on increasing profit margins through our medical
management and expense management programs.

     We market and administer preferred provider organization (PPO) and
traditional indemnity medical plans. We believe that increased costs and
consumer dissatisfaction with limitations on choice of doctors and treatment
have caused health maintenance organization (HMO) enrollments to decrease.
Approximately 40% of U.S. workers have PPO coverage, providing them with greater
freedom of choice of doctors and opportunity to seek care from doctors and
facilities within networks to deliver healthcare at favorable rates compared to
                                        2
<PAGE>

HMOs and traditional indemnity plans. PPO members generally are charged periodic
prepaid premiums, co-payments and deductibles. Traditional indemnity insurance
usually allows policyholders substantial freedom of choice in selecting
healthcare providers but without the financial incentives or cost-control
measures typical of managed care plans.

     At the end of 2001, we restructured our management organization to increase
the responsibility and accountability of key senior officers and improve our
overall efficiency. We established three strategic business units: senior,
individual medical and group medical. Each unit has its own separate business
plans, goals, profit expectations and budgets. Individual medical and group
medical are both part of our medical segment but each has different marketing,
product development, underwriting, claims and administrative support needs. We
believe that managing these as separate business and administrative units
provides a greater opportunity to enhance the service we provide to our insureds
and agents.

BUSINESS STRATEGY

     Principal elements of our business strategy include:

     INCREASING SENIOR MARKET FOCUS.  Because of favorable demographics and
higher profit potential in the senior segment, we are focusing more of our
capital and sales efforts on this part of our business. We believe the senior
market will continue to produce more predictable earnings, particularly since
these products are designed to generate higher profit margins and are not as
sensitive to medical inflation as major medical products. With the July 2000
acquisition of Pyramid Life, we significantly increased our senior business. We
have been concentrating more of our agent recruiting and a significant amount of
our product development efforts on the senior market. We also intend to
transition our major medical insureds into our senior products as they age. For
the year ended December 31, 2001, our senior segment comprised 36% of our total
net premium revenues compared to 27% for 2000, and 33% of total new sales in
2001 compared to 25% in 2000.

     With our growing focus on the senior market, we have expanded our marketing
for this segment. In addition, in October, we consolidated all administrative
service functions for our senior segment into our Kansas City facility to
enhance service as well as help reduce administrative expenses in 2002.
Previously, part of our senior business was administered at our Omaha facility.

     ENHANCING MEDICAL COST MANAGEMENT.  Our approach is to manage the cost of
healthcare. We focus on reducing medical costs for our insureds by actively
managing medical inflation and utilization rate costs. National health
expenditures have grown from $41.0 billion, or $205 per capita, in 1965 to $1.1
trillion, or $4,164 per capita, in 1998, according to statistics compiled by
HCFA. Several factors have contributed to the dramatic increase in healthcare
expenditures, including increased costs and utilization of high-technology
diagnostic testing and treatments, the rising cost of malpractice insurance,
higher operating costs for hospitals and physicians, changes in federal and
state healthcare regulations, increased utilization and cost of pharmaceuticals
(which have increased almost 19% in 2000 to nearly $132 billion nationwide) and
the aging of the population.

     In addition to monthly reviews of premium rate adequacy and taking actions
to adjust rates on a product and state basis as needed, we also have numerous
programs designed to lower medical costs for our insureds. Some of these
programs include:

     - focusing our business with national and regional preferred provider
       organizations 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 50
       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;
                                        3
<PAGE>

     - strengthening of our program to detect fraud and abuse by medical
       providers, policyholders or agents;

     - limitation of medical fees to reasonable and customary standards;

     - per diem arrangements through some networks;

     - 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.

The purpose of these programs is to provide quality care and improved treatment
outcomes while reducing total costs. We also offer insureds opportunities to
make changes in their benefits to lower their premium payments. Our benefit
design department works with our insureds to structure benefit packages to meet
their budgets.

     Our "Personal Healthcare Management" program provides our insureds with
24-hour access to medical information, case management early intervention
programs and non-network negotiation processes to lower medical expenses, as
well as additional services to help them extend and make better use of insurance
benefits.

     In 2000, we also developed new medical provider network discount programs
to help our insureds maximize their insurance benefits. Since the beginning of
2001, we reduced our PPO networks from 51 to 23, without significantly reducing
the number of insureds. We expect this reduction to result in network access fee
savings and additional provider discounts, along with quicker claims processing
for our insureds.

     IMPROVING UNDERWRITING AND PRODUCT DESIGN.  We have improved our
underwriting through more consistent and rigorous risk evaluation and controls
that reflect current medical practices and treatment patterns. To anticipate and
respond to regulatory changes and actual market and profitability experience, we
closely monitor and manage premium rate adjustments and provide our
policyholders opportunities to adjust their co-insurance and deductible
provisions. We actively pursue product redesign and curtailment of unprofitable
product offerings, where necessary.

     In 2001, we made material changes to our underwriting process to improve
quality, timeliness and customer service. Changes in risk selection have been
made to improve profitability. An underwriting philosophy based on rational
selection of risks has produced a number of changes to our underwriting
guidelines. We have aligned our pricing decisions to more accurately reflect the
associated morbidity. Through review of claim charges, we have also made general
enhancements to our underwriting guidelines to better reflect current medical
practices and treatment patterns.

     The Health Insurance Portability and Accountability Act of 1996 (HIPAA) has
placed major restrictions on the sale of group insurance for small businesses
with two to 50 employees. In effect, the Act requires guaranteed issuance of
major medical insurance for small groups that meet continuing coverage and
participation guidelines. The act also includes specific rules on underwriting
and coverage of pre-existing conditions. See "Government
Regulation -- Healthcare Regulations."

     Within our current small group business, we are more strictly enforcing
group participation and eligibility requirements to maintain profitability
targets. HIPAA allows insurance companies to require specific levels of employee
participation in group health insurance plans offered by their employers. If
participation falls below these levels, a group policy can be terminated after a
required notification period. In addition, participants must be full-time
employees of the group. Through a re-certification process, we have improved
compliance with these requirements.

     Because of HIPAA and state regulatory restrictions, we place greater
emphasis on the sale of individual and association major medical products. For
2001, our major medical certificates included 70.6% for individual and
association products and 29.4% for small group products compared to 68.2% and
31.8%, respectively, in the year ended December 31, 2000.
                                        4
<PAGE>

     One advantage of marketing individual and association products is greater
flexibility in underwriting. We can accept, reject or apply higher premium rates
to specific individuals with higher health risks. We can restrict or limit
coverage for pre-existing conditions. We also have greater ability to raise
future premium rates, if necessary, based on medical inflation and actual claims
experience of our products.

     We have developed "Ceres Standards," a guideline of our best practices for
underwriting of new business. These standards were implemented for all major
medical business processed at our insurance subsidiaries, and include
standardization of organizational design, business rules, risk selection and
processing requirements.

     We selectively pursue geographic markets, products and sales agencies that
provide us the greatest potential for profitability. This strategy includes
exiting markets that are unprofitable for specific products. In addition, our
ongoing product design efforts in both of our business segments keeps our
product portfolio attractive to our sales force. In our medical segment, we are
emphasizing new product lines that provide consumers with lower monthly premiums
offset by greater out-of-pocket payments for routine and elective cases.

     REDUCING ADMINISTRATIVE COSTS.  We are committed to reducing administrative
costs through increases in efficiency, streamlined procedures and consolidation
of operations and services. Our areas of focus include reductions in facility
management costs, printing and supply costs, travel expenses and consolidation
of corporate services, such as accounting, marketing, and distribution.
Administrative changes in 2002 will involve the utilization of new electronic
technology. We expect to improve our efficiency and service as we move closer to
a paperless environment. Our COAST (Ceres Online Access SysTem) program was
implemented in 2000 to provide direct online communication for our agents who
are able to check the status of business they submit via their computers 24
hours a day.

     We review expense variances to budgets on a monthly basis and make needed
adjustments. If cost-effective, we outsource certain functions to independent
third parties. We outsource all information and telephone systems at our
Cleveland headquarters, the claims processing for our Central Reserve Life Ohio
insureds, and the claims processing and other administrative services for the
American Chambers Life Insurance Company business and for our insurance
subsidiaries, Provident American Life and United Benefit Life. We believe this
outsourcing offers us the following advantages:

     - predictable operational, administrative and systems costs;

     - variable expenses based upon volume of business;

     - the benefits of the vendors' expertise in specialized areas;

     - freeing our capital to be used for other aspects of growth strategy;

     - efficiency and economies of scale; and

     - system consolidation and integration.

     We began implementing a strong expense reduction program in the fourth
quarter of 2001. For 2002, we expect to further streamline operations and reduce
our general and administrative expenses through efficiency improvements and
elimination of functions that do not support our core businesses.

     In 2001, our selling, general and administrative expenses as a percentage
of consolidated revenue decreased to 31.4% compared to 32.3% in 2000.

     EXPANDING DISTRIBUTION CHANNELS.  We have five distribution channels with
approximately 48,000 independent agents. We believe that multiple distribution
channels provide the greatest sales opportunities for our products. We are
continuing to expand our marketing reach by recruiting new agents for our
existing distribution systems. Beginning in 2001, we initiated a systematic
program to focus our marketing expenses on more productive agents. We have also
implemented tighter controls of agent sales activities which are designed to
enhance the quality of business they generate for us.

                                        5
<PAGE>

     Our five distribution channels are:

     - senior career;

     - senior brokerage;

     - medical career;

     - medical brokerage; and

     - QQLink electronic distribution.

Our distribution channels are discussed in greater detail in "Marketing and
Sales." Through compensation incentives, we encourage our agents to cross-sell
our complementary, supplemental and non-insurance products and services that
typically have higher profit margins.

     We believe that health and other insurance products increasingly will be
marketed on the Internet. Other companies have launched a number of insurance
e-commerce initiatives, including health insurance, with and without agent
involvement in sales. Due to the complexity of health insurance and some life
insurance products, we believe agent involvement is critical to the success of
these ventures both for consumers and the insurance company. We believe our
proprietary, patent pending QQLink electronic distribution system, which
includes an agent interface to explain the complexity of many health and life
products, should be favorably positioned for this emerging trend.

     In addition, in this challenging business environment, we believe our
marketing and administrative structure provides us with competitive advantages
in the medical market, including distribution strength, selective marketing
programs, product design and cost management programs. We target our marketing
on products, geographic areas and marketing organizations that offer the best
opportunity for profitable growth. We have reduced our activities in a number of
strengths and focused product support in states that provide greater profit
potential.

     INCREASING FEE REVENUE.  We enhance our revenue by charging fees for
services such as:

     - medical care coordination programs;

     - claims processing on certain products;

     - administration for direct billing;

     - reinsurance management; and

     - management services for associations.

     Our fee revenue generates higher margins because fees are not generally
subject to premium tax or commission payments. In 2001, our fee and other income
increased 10.5% to $36.2 million from $32.7 million in 2000. Fee and other
income from our non-regulated subsidiaries accounted for $11.4 million in 2001.
Fees from our non-regulated subsidiaries, such as medical care coordination and
management services, are used by Ceres to meet our debt obligations.

     In addition, QQLink generates revenue from fees and is expected to generate
revenue from sales commissions. Fee income for QQLink includes:

     - monthly website hosting fees charged to participating agents for use of
       QQlink;

     - agent support service fees for training and certification programs; and

     - marketing fees from unaffiliated vendor companies.

PRODUCTS AND SERVICES

     We primarily market health, life and annuity insurance products tailored to
meet the needs of individuals, associations and small businesses, and senior
Americans. We have specialized teams that focus on new product development for
each of our markets. These teams review our current product offerings and
compare
                                        6
<PAGE>

them with our competitors' products and changing insured needs. We
systematically review our individual and small group major medical plans to help
us further develop our product mix.

     MAJOR MEDICAL.  Our major medical products include catastrophic,
comprehensive and basic coverage options from PPO benefit plans to traditional
indemnity health insurance plans. Our major medical plans can also be configured
as medical savings account plans.

     Because our PPO products provide for healthcare delivery at lower premium
costs than traditional indemnity plans, we emphasize our PPO products and
encourage our insureds to purchase them or convert from traditional indemnity
health insurance. Our medical networks provide favorable rates and include other
cost control measures to save money for our insureds.

     Our traditional indemnity health insurance products provide coverage for
services from any qualified medical provider. Like our PPO products, our
traditional indemnity health insurance products offer access to our negotiated
network savings. Although our indemnity insureds are not required to use our
network providers, we have established programs that reduce claims costs and
out-of-pocket expenses for our insureds who do use network providers. We
communicate these cost saving methods to our insureds.

     In July 1999, we also implemented a program to reduce claims costs for
prescription drugs on our medical products that include prescription drug
coverage. We developed a system with varying levels of co-payment amounts to
encourage insureds to use generic drugs and a money-saving mail-order program
for all maintenance prescription drugs.

     Our new Simplicity Series catastrophic products, released in the fourth
quarter of 2001, are designed with higher profit margins. These products provide
higher deductibles and co-payments and are designed to shift to consumers a
greater portion of the risk for discretionary medical and brand-name
pharmaceutical benefits. This benefit structure reduces premium payments for
consumers and is designed to lower the level of future premium rate adjustments.
We are also emphasizing medical savings account plans, which enable insureds to
lower their insurance costs and have more control over their healthcare dollars.
In addition, we are marketing a new hospital-only plan.

     SHORT-TERM MAJOR MEDICAL.  This product provides major medical coverage for
a limited amount of time for people who, for example, are between jobs or are
recent graduates.

     SMALL GROUP PRODUCTS.  Our new Employer's Choice product provides higher
deductibles and co-payments and lower premium payments for our small business
customers. In addition, we offer small businesses with 2-100 employees a major
medical plan in which we share the medical cost risk with the employer. This
alternate funding mechanism allows the employer to limit expense and risk by
self-insuring part of the coverage. This product can produce a year-end refund
or carryover feature for low claims experience that is attractive to businesses
with healthy employees. The savings generated with this plan can be used to
provide other employee benefits, including coverage for vision care, dental,
critical illness coverage or supplemental life insurance.

     LIFE AND ANNUITY.  We also market group life insurance and annuity plans.
We offer term life insurance as an ancillary product to our major medical
insureds. We also offer various single premium deferred annuities.

     SENIOR HEALTH INSURANCE PRODUCTS.  Our senior market products include a
wide range of comprehensive and supplemental major medical benefit products. In
2000, we began releasing our new "Senior Power Portfolio," featuring 12 health,
life and annuity products for Americans age 55 and over. The medical benefit
products in this package include Medicare supplement, long-term care, home
healthcare, extended convalescent care, cancer coverage and acute recovery care
that includes shorter length facility care.

     We are focusing more product development attention in our senior segment on
long-term care insurance and Medicare Select products. Long-term care products
provide needed benefits to supplement Medicare and Medicare Supplement coverage
for nursing home and home healthcare expenses. Medicare Select is a specific
type of Medicare Supplement plan that provides lower premiums for consumers
through hospitals that have agreed to waive the Medicare Part A deductible
amount.
                                        7
<PAGE>

     SENIOR LIFE INSURANCE AND ANNUITIES.  The life insurance and annuity
products in our "Senior Power Portfolio" include lower face amount life
insurance policies offering coverages up to $50,000 and annuity plans with
first-year bonus interest or interest rate guarantees.

     SPECIALTY AND SUPPLEMENTAL INSURANCE PRODUCTS.  We enhance our base medical
insurance products with a select group of complementary supplemental products.
These products provide increased protection for our insureds and additional
commission income for our agents, and are designed with higher profit margins
for us. We provide compensation and marketing support programs to encourage our
agents to use these products for cross-selling purposes. These supplemental
products include:

     - dental coverage;

     - critical illness coverage which provides a one-time cash payment when an
       insured is diagnosed with a specified illness or when undergoing a
       specified surgery;

     - first diagnosis cancer coverage which provides a one-time cash payment
       when an insured is diagnosed with cancer;

     - accidental injury coverage which provides replacement income when an
       insured becomes disabled due to a covered off-the-job accident; and

     - accidental death benefit which provides payment directly to the insured's
       beneficiary in the event of accidental death.

     SERVICES AND NON-INSURANCE PRODUCTS.  In 1999, we developed the Ceres
Savers Plan as a non-insurance annual fee benefit package that provides
discounts on travel, prescription medicine, hearing aids and other
health-related products and services. In 2000, this product was changed to the
Senior Savers Plus Plan, which provides discounts on extended care and home
healthcare services in addition to the other product and service discounts. We
also added our Personal Healthcare Management Services program to most of our
major medical products to provide service enhancements for our insureds.

MARKETING AND SALES

     Our distribution channels are critical for our continued growth. We market
our products through approximately 48,000 agents in 49 states, the District of
Columbia and the U.S. Virgin Islands. In 2001, we recruited approximately 14,200
new agents. Our total number of agents has remained approximately the same as at
the beginning of 2001 because we initiated a systematic program to focus our
marketing expenses on more productive agents by reducing the number of low and
non-producing agents.

     We compensate our agents for business produced by them on a commission
basis at rates that we believe to be competitive with those of other life and
health insurance companies. Through training and incentive programs, we
encourage our agents to cross-sell our select group of complementary,
supplemental and non-insurance products. In addition, we have implemented
compensation structures that are designed to reward agents for multi-product
sales. We believe that these products and programs combine to enhance the value
and productivity of our agents.

     DISTRIBUTION CHANNELS.  We use a variety of distribution systems in
marketing our products, including independent agents, exclusive agents and
electronic distribution. Because product lines vary among many of these
distribution systems, we have some overlap of agents between channels. Some of
our agents are licensed and contracted with more than one of our distribution
channels.

     We base our five distribution channels on organization of the agents and
specific markets or products:

     1. SENIOR CAREER. With our acquisition of Pyramid Life, we gained a
        distribution system of agents who sell primarily for Pyramid Life. This
        distribution channel targets the 59 million Americans age 55 and over,
        with a product line including Medicare supplement, long-term care, home
        healthcare, convalescent and acute recovery care, and senior life and
        annuities. We are initiating a program to expand our senior marketing
        reach into new areas, including the Western and Mountain States and
        several Midwestern States.
                                        8
<PAGE>

     2. SENIOR BROKERAGE. Agents in this distribution channel target the 59
        million Americans age 55 and over with a comprehensive product line,
        similar to the career channel. However, these agents may represent
        multiple insurance carriers.

     3. MEDICAL CAREER. This channel is comprised of well-established marketing
        organizations and our newly-developed exclusive agent agency, HealthMark
        Sales, LLC. This operation concentrates on individual catastrophic
        health insurance and supplemental health insurance sales of specially
        designed products primarily in rural markets. At December 31, 2001,
        HealthMark had approximately 500 dedicated agents.

     4. MEDICAL BROKERAGE. This distribution system concentrates on individuals,
        associations and small business owners. The product portfolio creates
        cross-selling and package-selling opportunities and includes
        catastrophic medical coverage, individual medical plans, small group
        medical plans, medical savings account plans, basic medical coverage,
        short-term major medical, dental and supplemental products, including
        life insurance and annuities. These agents may represent multiple
        insurance carriers.

     5. QQLINK ELECTRONIC DISTRIBUTION. In addition to the traditional agent
        distribution channels, in the fall of 2000, we began enrolling agents to
        participate in our proprietary, patent pending electronic distribution
        system, QQLink. QQLink is 94% owned by Ceres with most of the remaining
        6% primarily owned by 16 of our agents.

        QQLink combines a traditional agent distribution system with direct
        online sales of insurance and other financial service products.
        Consumers are able to review and receive premium quotes and apply for
        insurance online, with or without the assistance of an agent. We believe
        that QQLink will enable agents to substantially increase the client base
        they serve.

        QQLink has established marketing alliances with unaffiliated insurance,
        financial service and other vendors of products and services. We are
        continuing to pursue additional alliances in order to position QQLink as
        a distributor of many products from a growing number of companies.

     MARKETING SUPPORT.  We compete with other insurance companies and other
sales operations for our agents. In addition, we compete with other companies
that our independent agents represent. Our marketing systems concentrate on
broad product portfolios and sales support to agents. Our strategy is to provide
the tools and resources needed by the sales force, so that our agents can devote
their time to selling.

     We provide comprehensive support programs to attract and retain agents,
including:

     - competitive products and commission structures;

     - advanced commissions on selected products for agents who qualify;

     - lead generation programs;

     - ongoing product development;

     - cross-selling opportunities;

     - special incentive awards to new agents;

     - website development for QQLink participating agents;

     - user-friendly proposal software;

     - training seminars to introduce new products and sales material for our
       agents; and

     - consistent agent communication and quality sales materials.

CUSTOMER BASE

     We had approximately 400,000 certificates and individual policies in force
as of December 31, 2001, representing approximately 535,000 insureds. One
association, Eagle Association, had approximately 44,000

                                        9
<PAGE>

certificate holders, or 11.0% of all our certificates and individual policies in
force as of December 31, 2001. Each group certificate represents an insured and
any spouse, children and other dependents. The following table reflects the
breakdown by product of the group certificates and individual policies for the
years ended December 31, 2001 and 2000.

<Table>
<Caption>
                                                 DECEMBER 31, 2001     DECEMBER 31, 2000
                                                -------------------   -------------------
                                                INDEMNITY     PPO     INDEMNITY     PPO
                                                ---------   -------   ---------   -------
<S>                                             <C>         <C>       <C>         <C>
Major Medical.................................    30,960    137,224     45,539    174,982
Senior and Supplemental Products..............   168,643         --    173,137         --
                                                 -------    -------    -------    -------
     Total Health.............................   199,603    137,224    218,676    174,982
Life and Annuity Products.....................    63,530         --     68,703         --
                                                 -------    -------    -------    -------
     Total....................................   263,133    137,224    287,379    174,982
                                                 =======    =======    =======    =======
</Table>

     The geographic distribution of direct and assumed premiums, before
reinsurance ceded, on a statutory basis of all of our subsidiaries in 2001 and
2000, including only five months for Pyramid Life in 2000, is presented in the
table below. The presentation on a statutory basis differs from generally
accepted accounting principles (GAAP) in that our fee income and annuity
considerations are considered premiums for statutory purposes.

<Table>
<Caption>
DECEMBER 31, 2001                                  DECEMBER 31, 2000
(IN THOUSANDS)                                     (IN THOUSANDS)
---------------------------------------------      ----------------------------------------------
                                     PERCENT                                             PERCENT
STATE                      AMOUNT    OF TOTAL      STATE                       AMOUNT    OF TOTAL
-----                     --------   --------      -----                      --------   --------
<S>                       <C>        <C>           <C>                        <C>        <C>
Ohio....................  $101,868     11.7%       Ohio....................   $104,179     13.0%
Texas...................    92,341     10.6        Florida.................     77,490      9.7
Florida.................    73,522      8.4        Texas...................     67,306      8.4
Indiana.................    56,831      6.5        Indiana.................     54,555      6.8
Pennsylvania............    44,250      5.1        Georgia.................     35,576      4.5
Tennessee...............    34,471      3.9        North Carolina..........     34,988      4.4
Georgia.................    34,429      3.9        Tennessee...............     29,896      3.7
Missouri................    30,755      3.5        Missouri................     28,424      3.6
Illinois................    28,721      3.3        South Carolina..........     28,356      3.6
Nebraska................    26,844      3.1        Kansas..................     27,711      3.5
Other...................   349,753     40.0        Other...................    310,082     38.8
                          --------    -----                                   --------    -----
          Total.........  $873,785    100.0%       Total...................   $798,563    100.0%
                          ========    =====                                   ========    =====
</Table>

PRICING AND UNDERWRITING

     Effective, consistent and accurate underwriting is an important element of
our profitability and depends on our ability to adequately predict claims
liability when determining the prices for our products. Premiums charged on
insurance products are based, in part, on assumptions about expected mortality
and morbidity experience and competitive factors. We have adopted and follow
"Ceres Standards," a guideline for underwriting of new business. These detailed
uniform underwriting procedures are designed to assess and quantify certain
insurance risks before issuing individual life insurance, certain health
insurance policies and certain annuity policies to individuals. These procedures
are generally based on industry practices, reinsurer underwriting manuals and
our prior underwriting experience. To implement these procedures, we employ an
experienced professional underwriting staff.

     In most circumstances, our pricing and underwriting decisions follow a
prospective rating process. A fixed premium rate is determined at the beginning
of the policy period. Unanticipated increases in medical costs may not be able
to be recovered in the current policy year. However, prior experience, in the
aggregate, is considered in determining premium rates for future periods.

                                        10
<PAGE>

     Applications for insurance are reviewed on the basis of answers to
application questions. Where appropriate based on the type and amount of
insurance applied for and the applicant's age and medical history, additional
information is required, such as medical examinations, statements from doctors
who have treated the applicant in the past and, where indicated, special medical
tests. For certain coverages, we may verify information with the applicant by
telephone. After reviewing the information collected, we either issue the policy
as applied for, issue the policy with an extra premium charge due to unfavorable
factors, issue the policy excluding benefits for certain conditions, either
permanently or for a period of time, or reject the application. For some of our
products, we have adopted simplified policy issue procedures in which the
applicant submits an application for coverage typically containing only a few
health-related questions instead of a complete medical history.

     Our profitability depends on our ability to adequately increase rates for
both new business and at renewal. We have implemented procedures that permit us
to apply to regulatory authorities for corrective rate actions on a timely basis
with respect to both new business rates and the current market rates. This
allows us to analyze whether these rates sufficiently cover benefits, expenses
and commissions. For renewal business, we analyze our loss ratios and compare
them to our target loss ratios. When this analysis is complete, we immediately
implement any necessary corrective action, including rate increases.

CLAIMS

     All claims for policy benefits are currently either processed by our claims
department or outsourced to third party administrators. We outsource claims
processing for our Central Reserve Life Ohio insureds and claims processing and
other administrative services for the Chambers business to Antares Management
Solutions, a division of Medical Mutual Services, which is a subsidiary of
Medical Mutual of Ohio. We also outsource claims processing for Provident
American Life and United Benefit Life policies prior to their termination or
replacement to HealthPlan Services Corporation. In 2001, as part of the
termination or replacement of United Benefit Life's and Provident American
Life's policies, we also outsource claims processing for the replacement
product, HealthEdge, to Antares.

     We periodically utilize the services of personnel from our medical cost
management subsidiary to review certain claims. When a claim is filed, we may
engage medical cost management personnel to review the claim, including the
specific health problem of the insured and the nature and extent of healthcare
services being provided. Medical cost management personnel often assist the
insured by determining that the services provided to the insured, and the
corresponding benefits paid, are appropriate under the circumstances.

     In 2001, we also expanded our claims review process by establishing a unit
that focuses on potential cases of fraud or abuse, including investigating fraud
or misrepresentation by medical providers, policyholders or agents. Claims that
exceed a certain dollar amount or fit a certain profile based on diagnosis or
time period following policy issuance are subject to detailed review.

     All of our claims processing, including the claims that are outsourced,
must apply the same claims management standards. In addition, we perform random
audits of both our internal and outsourced claims processing. Although from
time-to-time we experience backlogs in claims inventory, we, together with our
vendors, actively work to meet our goals relating to turnaround time, accuracy
and call response.

SYSTEMS

     Our ability to continue providing quality service to our insureds and
agents, including policy issuance, billing, claims processing, commission
reports and accounting functions is critical to our ongoing success. We believe
that our overall systems are an integral part in delivering that service. We
regularly evaluate, upgrade and enhance the information systems that support our
operations.

     Our business depends significantly on effective information systems. We
have many different information systems for our various businesses, including
the use of our third party vendors' systems. Our information systems require an
ongoing commitment of significant resources to maintain and enhance existing
systems and develop new systems or relationships with third party vendors in
order to keep pace with continuing changes in

                                        11
<PAGE>

information processing technology, evolving industry and regulatory standards,
and changing customer preferences. A significant portion of our systems is
obtained through third party vendors.

     Pursuant to an administrative services agreement with Antares Management
Solutions, we outsource all information and telephone systems at our Cleveland
headquarters, as well as claims processing for our Central Reserve Life Ohio
insureds. In addition, we outsource claims processing and other administrative
services for the Chambers business to Antares. The claims processing and other
administrative services for our insurance subsidiaries, Provident American Life
and United Benefit Life, prior to their termination or replacement, are
outsourced to HealthPlan Services. In 2001, as part of the termination or
replacement of United Benefit Life's and Provident American Life's policies, we
also outsource claims processing for the replacement product, HealthEdge, to
Antares. We receive regular reports from our third party vendors that enable us
to closely monitor our business on those systems.

INVESTMENTS

     We attempt to minimize our business risk through conservative investment
policies. Our investment objectives are to maximize yields, preserve principal
and maintain liquidity. Investments for insurance companies must comply with the
insurance laws of the state of domicile. These laws prescribe the kind, quality
and concentration of investments that may be made. Due to the restrictive nature
of these laws, there may be occasions when we may be precluded from making
certain otherwise attractive investments. We periodically evaluate these
securities. The effective durations of our investments vary from subsidiary to
subsidiary with the life insurance subsidiaries between four and five years and
the health companies between two and three years.

     At December 31, 2001, approximately 98.8% of our invested assets were fixed
maturity securities, including surplus notes. At December 31, 2001, 94.8% of our
fixed maturity securities were of investment grade quality with 80.6% in
securities rated A or better (typically National Association of Insurance
Commissioners (NAIC I) and 14.2% in securities rated BBB (typically NAIC II). We
do not invest in derivatives, such as futures, forwards, swaps, option contracts
or other financial instruments with similar characteristics.

     At December 31, 2001, our investments in mortgage-backed securities totaled
$138.0 million, or 28.6% of total invested assets. We minimize the credit risk
of our mortgage-backed securities by holding primarily issues of U.S. Government
agencies or high-quality non-agency issuers rated AA or better. Among the agency
mortgage-backed securities, which comprises 10.5% of the portfolio, the
securities are comprised of pass-through securities and planned amortization
class collateralized mortgage obligations. The pass-through securities primarily
are invested in current market coupons that should exhibit only moderate
prepayments in a declining interest rate environment, while the planned
amortization class collateralized mortgage obligations provide strong average
life protection over a wide range of interest rates. The non-agency
mortgage-backed securities, which represent 18.1% of the portfolio, consist of
commercial and jumbo residential mortgage securities. The commercial
mortgage-backed securities provide very strong prepayment protection through
lockout and yield maintenance provisions, while the residential mortgage-backed
securities are concentrated in non-accelerating securities that have several
years of principal lockout provisions.

                                        12
<PAGE>

     The amortized cost and estimated fair value of invested assets as of
December 31, 2001, were as follows:

<Table>
<Caption>
                                                            GROSS UNREALIZED
                                                AMORTIZED   ----------------   ESTIMATED
                                                  COST      GAINS    LOSSES    FAIR VALUE
                                                ---------   ------   -------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                             <C>         <C>      <C>       <C>
Available-for-sale
  U.S. Treasury securities....................  $ 29,051    $  611   $    (5)   $ 29,657
  U.S. Agencies...............................    10,323       347       (11)     10,659
  State and political subdivisions............     1,083        --       (11)      1,072
  Corporate bonds.............................   273,915     4,049    (5,137)    272,827
  Mortgage- and asset-backed securities.......   154,309     2,569    (1,303)    155,575
  Preferred stock.............................     1,520       182        (7)      1,695
                                                --------    ------   -------    --------
     Total available-for-sale.................   470,201     7,758    (6,474)    471,485
Surplus notes.................................     5,045       166        --       5,211
Mortgage loans................................        57        --        --          57
Policy notes..................................     5,869        --        --       5,869
                                                --------    ------   -------    --------
     Total investments........................  $481,172    $7,924   $(6,474)   $482,622
                                                ========    ======   =======    ========
</Table>

RESERVES

     We establish and report liabilities or reserves on our balance sheet for
unpaid healthcare costs by estimating the ultimate cost of incurred claims that
have not yet been reported to us by our policyholders or their providers and
reported claims that we have not yet paid. Since these reserves represent our
estimates, the process requires a degree of judgment. Reserves are established
according to Actuarial Standards of Practice and generally accepted actuarial
principles and are based on a number of factors, including experience derived
from historical claims payments and actuarial assumptions to arrive at loss
development factors.

     Such assumptions and other factors include:

     - healthcare cost trends;

     - the incidence of incurred claims;

     - the extent to which all claims have been reported; and

     - internal claims processing charges.

Due to the variability inherent in these estimates, reserves are sensitive to
changes in medical claims payment patterns and changes in medical cost trends. A
worsening, or improvement, of the medical cost trend or changes in claims
payment patterns from the trends and patterns assumed in estimating reserves
would trigger a change.

     The majority of Central Reserve's, Provident American Life's and United
Benefit Life's reserves and liabilities for claims are for the health insurance
business. The majority of Continental General's and Pyramid Life's reserves and
liabilities for claims are for the life and annuity business. For our individual
and group accident and health business, we establish an active life reserve plus
a liability for due and unpaid claims, claims in course of settlement and
incurred but not yet reported claims, as well as a reserve for the present value
of amounts not yet due on claims. These reserves and liabilities also are
impacted by many factors, such as economic and social conditions, inflation,
hospital and pharmaceutical costs, changes in doctrines of legal liability and
damage awards for pain and suffering. Therefore, the reserves and liabilities
established are necessarily based on extensive estimates and prior years'
statistics.

     Liabilities for future policy reserves on ordinary life insurance have
generally been provided on a net level premium method based upon estimates of
future investment yield, mortality, and withdrawals using our

                                        13
<PAGE>

experience and actuarial judgment with an allowance for possible unfavorable
deviation from the expected experience. The various actuarial factors are
determined from mortality tables and interest rates in effect when the policy is
issued.

     Liabilities for interest sensitive contracts such as deferred annuities and
universal life-type contracts are based on the retrospective deposit method.
This is the full account value before any surrender charges are applied.

     We may from time to time need to increase our claims reserves significantly
in excess of our estimates. For example, in 2001, we increased claims reserves
for our medical segment to provide for an increase in medical benefit
utilization and increased medical inflation which emerged during the first
quarter. An inadequate estimate in reserves could have a material adverse impact
on our business, financial condition and results of operations.

REINSURANCE

     GENERAL.  Consistent with the general practice of the insurance industry,
we reinsure portions of the coverage provided by our insurance products to
unaffiliated insurance companies under reinsurance agreements. Reinsurance
provides a greater diversification of underwriting risk, minimizes our aggregate
exposure on major risks and limits our potential losses on reinsured business.
Reinsurance involves one or more insurance companies participating in the
liabilities or risks of another insurance company in exchange for a portion of
the premiums. Although the effect of reinsurance is to lessen our risks, it may
lower net income. We have entered into a variety of reinsurance arrangements
under which we cede business to other insurance companies to mitigate risk. We
also have assumed risk on a "quota share" basis from other insurance companies.

     Under quota share reinsurance, the reinsurer assumes or cedes an agreed
percentage of certain risks insured by the ceding insurer and shares premium
revenue and losses proportionately. When we cede business to others, reinsurance
does not discharge us from our primary liability to our insureds. However, the
reinsurance company that provides the reinsurance coverage agrees to become the
ultimate source of payment for the portion of the liability it is reinsuring and
indemnifies us for that portion. However, we remain liable to our insureds with
respect to ceded reinsurance if any reinsurer fails to meet its obligations to
us.

     EXISTING ARRANGEMENTS.  In the ordinary course of business, we maintain
reinsurance arrangements designed to limit the maximum amount of exposure that
we retain on a given policy. For ordinary and group life claims, Continental
General's maximum retention is $125,000, Pyramid Life's maximum retention is
$100,000, and Central Reserve's maximum retention is $50,000 with no retention
maintained over age 70. For accident and health claims, maximum retention on
individual claims is $500,000. For a complete discussion of our material
reinsurance agreements, including recent reinsurance agreements, see Note J,
Reinsurance Arrangements, to our consolidated financial statements.

     A significant portion of our risks are reinsured with a single reinsurance
company, Hannover Life Reassurance Company of America, a health and life
reinsurance company. Hannover accounted for 94.4% of the total premiums ceded by
our subsidiaries. Hannover has entered into reinsurance agreements with several
of our subsidiaries, including Central Reserve Life, Provident American Life,
United Benefit Life and Continental General. Our reinsurance agreements with
Hannover are not cancelable or terminable by Hannover. In recent years, we have
reduced our reliance on reinsurance. Our arrangements are generally for closed
blocks of business which means that Hannover, since we discontinued sales
activities of United Benefit Life and Provident American Life in July 2000, is
not reinsuring any new sales or business of any of our subsidiaries under these
reinsurance agreements, except for the new HealthEdge product as explained
below. Hannover is reinsuring the business under the reinsurance agreements
until those policies lapse or are terminated by us.

     In July 2001, we implemented a program to terminate or replace the United
Benefit Life and Provident American Life policies. Some policyholders in some
states were offered a replacement product, HealthEdge, underwritten by Provident
American Life. Hannover reinsures the HealthEdge product on the same basis as

                                        14
<PAGE>

the reinsurance under the old policy. United Benefit Life has no sales
activities, and, other than the HealthEdge replacement product, Provident
American Life has no sales activities. The business of United Benefit Life and
Provident American Life, other than HealthEdge, should be substantially wound
down by the early part of 2002.

     To evaluate the claims paying ability and financial strength of Hannover,
we review financial information provided to us by Hannover, and hold quarterly
meetings with its management to review operations, marketing, reinsurance and
financial issues. Hannover has suffered significant losses as a result of our
reinsurance agreements with respect to United Benefit Life and Provident
American Life.

     The total premiums ceded by our subsidiaries in 2001 to unaffiliated
reinsurers amounted to $193.7 million, of which Hannover represented
approximately 94.4%. Our gross reinsurance receivables from unaffiliated
reinsurers amounted to $223.3 million as of December 31, 2001, of which
approximately 86.0% was attributable to Hannover.

     Hannover is a subsidiary of Hannover Rueckversicherungs, a German
corporation, which had assets of $22.1 billion and total stockholders' equity of
$1.5 billion at December 31, 2000. Moody's has assigned Hannover
Rueckversicherungs a financial strength rating of A2 (good). Hannover maintains
an A (excellent) rating from A.M. Best Company, Inc. Other rating agencies have
maintained similar ratings of Hannover. At December 31, 2001, Standard & Poor's
has assigned Hannover a financial strength rating of AA (rated very strong).
There can be no assurance that Hannover will continue to pay in full and in a
timely manner the claims made against them in accordance with terms of our
reinsurance agreements. Hannover's failure to pay our claims in full, or on a
timely basis, could have a material adverse effect on our business, financial
condition and results of operations.

     Our future growth may be dependent on our ability to obtain reinsurance in
the future. While we expect to continue our relationship with Hannover in the
future, we will continue to seek out new companies with respect to new
reinsurance agreements. The amount and cost of reinsurance available to us would
be subject, in large part, to prevailing market conditions beyond our control.
We may be unable to obtain reinsurance in the future, if necessary, at
competitive rates or at all.

COMPETITION

     The insurance business is highly competitive. In our major medical
business, we compete with large national, regional and specialty health
insurers, including Golden Rule Resources Ltd., Mutual of Omaha Insurance Co.,
Fortis Benefits Insurance Company, American Medical Security Group, Inc.,
various Blue Cross/Blue Shield companies and United Healthcare Corporation. In
our senior business, we compete with other national, regional and specialty
insurers, including Universal American Financial Corp., Penn Treaty American
Corp., Mutual of Omaha and Conseco, Inc. Many of our competitors have
substantially greater financial resources, broader product lines, or greater
experience than we do. In addition to claims paying ratings, we compete on the
basis of price, reputation, diversity of product offerings and flexibility of
coverage, ability to attract and retain agents and the quality and level of
services provided to agents and insureds.

     We face competition from a trend among healthcare providers and insurance
companies to combine and form networks in order to contract directly with small
businesses and other prospective customers to provide healthcare services. In
addition, because many of our products are marketed through independent agents,
most of which represent more than one company, we experience competition with
other companies for the marketing focus of each agent.

RATINGS

     Our ratings assigned by A.M. Best Company, Inc. and other nationally
recognized rating agencies are important in evaluating our competitive position.
Best ratings are based on an analysis of the financial condition of the
companies rated. Best ratings are primarily based upon factors of concern to
policyholders and insurance agents. In August 2001, the Best ratings of our
insurance subsidiaries were downgraded, all with negative outlooks, due
primarily to the losses of United Benefit Life and our need to raise capital.
Central

                                        15
<PAGE>

Reserve's rating is a B (fair) rating. Continental General's and Pyramid Life's
ratings are B+ (very good). Provident American Life's and United Benefit Life's
ratings for 2001 were affirmed NR-3 (rating procedure inapplicable). This rating
is defined by Best to mean that normal rating procedures do not apply due to
unique or unusual business features. Provident American Life and United Benefit
Life fall into this category because, due to reinsurance, they both retain only
a small portion of their gross premiums.

     In August 2001, Fitch also downgraded Continental General to BBB (good
credit quality) with "rating watch evolving" and downgraded Central Reserve to
BB (speculative credit quality) with a negative outlook. In addition, Standard &
Poor recently downgraded the ratings of Provident American Life, Continental
General and Pyramid Life. In light of our recent capitalization and strengthened
balance sheet, we are hopeful that the major rating agencies will give favorable
consideration to our financial ratings in 2002.

GOVERNMENT REGULATION

     Government regulation of health and life insurance, annuities and
healthcare coverage and health plans is a changing area of law and varies from
state to state. We strive to maintain compliance with the various federal and
state regulations applicable to our operations. To maintain compliance with
these changing regulations, we may need to occasionally make changes to our
services, products, structure or operations. We are unable to predict what
additional government regulations affecting our business may be enacted in the
future or how existing or future regulations might be interpreted. Additional
governmental regulation or future interpretation of existing regulations could
increase the cost of our compliance or materially affect our operations,
products or profitability. We carefully monitor state and federal legislative
and regulatory activity as it affects our business. We believe that we are
compliant in all material respects with all applicable federal and state
regulations.

     INSURANCE REGULATION.  We are subject to regulation and supervision by
state insurance regulatory agencies. This regulation is primarily intended to
protect insureds rather than investors. These regulatory bodies have broad
administrative powers relating to standards of solvency which must be met on a
continuing basis, granting and revoking of licenses, licensing of agents,
approval of policy forms, approval of rate increases, maintenance of adequate
reserves, claim payment practices, form and content of financial statements,
types of investments permitted, issuance and sale of stock, payment of dividends
and other matters pertaining to insurance. We are required to file detailed
annual statements with the state insurance regulatory bodies and are subject to
periodic examination. The most recent completed regulatory examination for
Central Reserve, Provident American Life and United Benefit Life was performed
by the State of Ohio as of December 31, 1999. For Continental General and
Pyramid Life, the examinations were performed by the States of Nebraska and
Kansas, respectively, as of December 31, 1997. Continental General is currently
being examined by the State of Nebraska for the three year period ended December
31, 2000. The State of Kansas has indicated it will perform an examination of
Pyramid Life for the two year period ending December 31, 2001. State insurance
departments have also periodically conducted market conduct examinations of our
insurance subsidiaries.

     Although many states' insurance laws and regulations are based on models
developed by the NAIC and are therefore similar, variations among the laws and
regulations of different states are common. The NAIC is a voluntary association
of all of the state insurance commissioners in the United States. The primary
function of the NAIC is to develop model laws on key insurance regulatory issues
that can be used as guidelines for individual states in adopting or enacting
insurance legislation. While the NAIC model laws are accorded substantial
deference within the insurance industry, these laws are not binding on insurance
companies unless adopted by state, and variation from the model laws within the
state is common.

     The National Association of Insurance Commissioners revised the Accounting
Practices and Procedures Manual in a process referred to as Codification. The
revised manual was effective January 1, 2001. The domiciliary states of Ceres
and its insurance subsidiaries have adopted the provisions of the revised
manual. The revised manual has changed, to some extent, prescribed statutory
accounting practices and has resulted in changes to the accounting practices
that Ceres and its subsidiaries use to prepare their statutory-basis financial

                                        16
<PAGE>

statements. The impact of these changes to statutory-basis capital and surplus
of Ceres insurance subsidiaries was not significant.

     The NAIC has Risk-Based Capital (RBC) requirements for life and health
insurers to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks associated with asset quality, mortality and
morbidity, asset and liability matching and other business factors. The RBC
formula is used by state insurance regulators to monitor trends in statutory
capital and surplus for the purpose of initiating regulatory action. In general,
under these laws, an insurance company must submit a report of its RBC level to
the insurance department of its state of domicile as of the end of the previous
calendar year. These laws require increasing degrees of regulatory oversight and
intervention as an insurance company's RBC declines. The level of regulatory
oversight ranges from requiring the insurance company to inform and obtain
approval from the domiciliary insurance commissioner of a comprehensive
financial plan for increasing its RBC to mandatory regulatory intervention
requiring an insurance company to be placed under regulatory control in a
rehabilitation or liquidation proceeding.

     The RBC Model Act provides for four different levels of regulatory
attention depending on the ratio of a company's total adjusted capital, defined
as the total of its statutory capital, surplus and asset valuation reserve, to
its risk-based capital.

     - 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
       risk-based capital. 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 risk-based capital 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 risk-based capital) 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 risk-based capital 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
       risk-based capital. 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
       risk-based capital, 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 risk-based capital, at which level the
       regulatory authority is mandated to place the company under its control.

We calculated the risk-based capital for our insurance subsidiaries as of
December 31, 2001, using the applicable RBC formula. Based on these
calculations, our risk-based capital levels for each of our subsidiaries
exceeded the levels required by regulatory authorities.

     Dividends paid by our insurance subsidiaries to Ceres are limited by state
insurance regulations. The insurance regulator in the insurer's state of
domicile may disapprove any dividend which, together with other dividends paid
by an insurance company in the prior 12 months, exceeds the regulatory maximum
as computed for the insurance company based on its statutory surplus and net
income. As of December 31, 2001, none of our insurance subsidiaries could pay a
dividend to Ceres without prior approval of their respective state regulators as
a result of their respective statutory levels of unassigned surplus.

     Many states have also enacted insurance holding company laws, which require
registration and periodic reporting by insurance companies controlled by other
corporations. These laws vary from state to state but typically require periodic
disclosure concerning the corporation which controls the insurer and prior
notice to,

                                        17
<PAGE>

or approval by, the applicable regulator of inter-company transfers of assets
and other transactions, including payments of dividends in excess of specified
amounts by the insurer, within the holding company system. These laws often also
require the prior approval for the acquisition of a significant direct or
indirect ownership interest (for example, 10% or more) in an insurance company.
Our insurance subsidiaries are subject to these laws and we believe they are in
compliance in all material respects with all applicable insurance holding
company laws and regulations.

     Additional regulatory initiatives my be undertaken in the future, either at
the federal or state level, to engage in structural reform of the insurance
industry in order to reduce the escalation of insurance costs or to make
insurance more accessible. These future regulatory initiatives could have a
material adverse effect on our business, financial condition and results of
operations. For example, recently enacted Texas statutes require insurance
companies, with insureds in the state, to pay at least 85% of "clean claims," as
defined in the statutes, within 45 days of receipt. Failure to comply with the
prompt payment laws and clean claims rules may require the insurer to pay
restitution, such as the full amount of the billed charges or the contracted
penalty rate, and/or an administrative penalty that may not exceed $1,000 for
each day each claim remained unpaid. The Texas Department of Insurance recently
requested information from health maintenance organizations and insurers
operating in the state, including Central Reserve, Provident American Life and
Continental General, with respect to their respective claims payment practices.
Based on our evaluation of our Texas claims payment practices and in conjunction
with the review by the Texas Department of Insurance, we have made, and are
continuing to make, restitution payments to providers where we may not have
complied with the prompt pay laws. In addition, the Texas Department of
Insurance has recently notified us that they intend to impose a fine based on
our alleged failure to comply with the prompt pay laws. Texas has imposed
similar fines on HMOs and other insurance companies operating in the state.
Management does not believe that the final outcome of the Texas matter,
including the assessment of a fine, will have a material adverse impact on us.

     HEALTHCARE REGULATION.  Government regulation of the healthcare industry
also affects the manner in which we conduct our business. HIPAA mandates the
adoption of standards for the exchange of electronic health information in an
effort to encourage overall administrative simplification and enhance the
effectiveness and the efficiency of the healthcare industry. Ensuring privacy
and security of patient information -- "accountability" -- is one of the key
factors driving the legislation. The other factor -- "portability" -- refers to
Congress' intention to ensure that individuals may transfer insurability and
waiting periods for coverage if they change employers.

     Among other things, HIPAA:

     - addresses group and individual market reforms increasing the
       transferability of health insurance;

     - permits medical savings accounts on a trial basis; and

     - increases the deductibility of health insurance for self-employed
       persons.

     Compliance with HIPAA's simplification mandate is required within the next
two to three years. We must comply with the following:

     - standards for electronic transmission and medical procedure code sets;

     - national standard healthcare provider identifier; and

     - national standard employer identifier.

     We have recently developed an electronic data interface (EDI) system with
one of our network providers to expedite our claims processing. Using the EDI
system, claims handled through the system for many of our insureds will be sent
directly from the medical providers to our network provider, who will image and
automatically adjust the claims to network rates. These re-priced claims will
then be electronically transmitted to our administrative facilities for
processing and payment according to policy benefits.

     HIPAA's privacy requirements will govern who within our organization can
receive protected information, the manner in which it will be maintained, the
responsibility of third parties with whom we contract, and
                                        18
<PAGE>

appropriate identification at time of receipt of protected information so that
it may be appropriately controlled, maintained and retrieved as required.

     The new standards:

     - limit the routine and non-routine non-consensual use and release of
       private health information;

     - give patients new rights to access their medical records and to know who
       else has accessed them;

     - limit most disclosure of health information to the minimum needed for the
       intended purpose;

     - establish procedures to ensure the protection of private health
       information;

     - establish new criminal and civil sanctions for improper use or
       disclosure; and

     - establish new requirements for access to records by researchers and
       others.

     We are evaluating the effect of HIPAA and have formed a HIPAA task force to
begin systematic implementation of HIPAA's requirements and to ensure
compliance. The new federal and state regulations promulgated under HIPAA are
currently unsettled, making certainty of compliance impossible at this time. Due
to the uncertainty surrounding the regulatory requirements, we cannot be sure
that the systems and programs that we plan to implement will comply adequately
with the regulations that are ultimately approved. Implementation of additional
systems and programs may be required, the cost of which is unknown to us at this
time. Further, compliance with these regulations would require changes to many
of the procedures we currently use to conduct our business, which may lead to
additional costs that we have not yet identified. We do not know whether, or the
extent to which, we will be able to recover our costs of complying with these
new regulations.

     In addition to federal regulation, many states have enacted, or are
considering, various healthcare reform statutes. These reforms relate to, among
other things, managed care practices, such as requirements with respect to
maternity stays, waiting period restrictions on pre-existing conditions, credit
for certain prior coverage, and limitations on rate increases and guaranteed
renewability for small business plans and policies for individuals. Most states
have also enacted patient confidentiality laws that prohibit the disclosure of
confidential medical information. The federal privacy rule will establish
minimum standards and preempt conflicting state laws that are less restrictive
than HIPAA regarding health information privacy but will allow state laws that
are more restrictive than HIPAA. These laws or regulations may limit our
operations and our ability to control which providers are part of our networks
and may hinder our ability to effectively manage utilization and costs. We are
unable to predict what state reforms will be enacted or how they would affect
our business.

     Some states have also enacted small group insurance and rating reforms,
which generally limit the ability of insurers and health plans to use risk
selection as a method of controlling costs for small group businesses. These
laws may generally limit or eliminate use of pre-existing condition exclusions,
experience rating, and industry class rating and limit the amount of rate
increases from year to year. We have discontinued selling certain policies in
states where, due to these healthcare reform measures, we cannot function
profitably. We may discontinue sales in other states in the future. Our
operations also may be subject to PPO or managed care laws and regulations in
certain states. PPO and managed care regulations generally contain requirements
pertaining to provider networks, provider contracting, and reporting
requirements that vary from state to state.

     One of the significant techniques we use to manage healthcare costs and
facilitate care delivery is contracting with physicians, hospitals and other
providers. As of December 31, 2001, our largest network, First Health Group
Corporation, accounted for 31.6% of our PPO certificates and policies in force.
A number of organizations are advocating for legislation that would exempt some
providers from federal and state antitrust laws. In any particular market,
providers could refuse to contract, demand higher payments or take actions that
could result in higher healthcare costs, less desirable products for insureds or
difficulty meeting regulatory or accreditation requirements. In some markets,
some providers, particularly hospitals, physician/hospital organizations or
multi-specialty physician groups, may have significant market positions or near
monopolies. In addition, physician or practice management companies, that
aggregate physician practices for administra-

                                        19
<PAGE>

tive efficiency and marketing leverage, continue to expand. These providers may
compete directly with us. If these providers refuse to contract with us, use
their market position to negotiate favorable contracts or place us at a
competitive disadvantage, those activities could adversely affect our ability to
market products or to be profitable in those areas.

     Congress and various states are considering some form of the "Patients'
Bill of Rights." This legislation, if enacted, is designed to provide consumers
more freedom of choice in the selection of doctors, facilities, and treatments.
Although the bill was originally conceived to regulate HMOs, it will affect all
facets of the nation's healthcare delivery system, including medical providers,
PPOs, exclusive provider organizations, community-based healthcare organizations
and indemnity insurance plans. This pending federal legislation:

     - requires a more stringent timeframe for claims review and processing,
       utilization review and internal and external appeals processes;

     - provides that insureds have greater access to non-formulary drugs,
       clinical trials, physicians, specialists and emergency care; and

     - allows insureds to bring suit after exhaustion of the appeals process.

These changes, if enacted, are expected to result in higher total medical costs,
which could encourage more partnerships and associations between medical
providers and insurers to control costs, more community-based health
organizations, and greater use of higher deductibles to lower insurance costs
and reduce administrative expenses of smaller claims.

     Statutory and regulatory changes may also significantly alter our ability
to manage pharmaceutical costs through restricted formularies of products
available to our members.

     E-COMMERCE REGULATION.  We may be subject to additional federal and state
statutes and regulations in connection with our changing product strategy, which
includes Internet services and products. On an increasingly frequent basis,
federal and state legislators are proposing laws and regulations that apply to
Internet based commerce and communications. Areas being affected by this
regulation include user privacy, pricing, content, taxation, copyright
protection, distribution and quality of products and services. To the extent
that our products and services would be subject to these laws and regulations,
the sale of our products and our business could be harmed.

EMPLOYEES

     We had approximately 1,081 employees at December 31, 2001. We consider our
employee relations to be good. Our approximately 48,000 agents are independent
contractors and not employees.

ITEM 2.   PROPERTIES

     Since August 1, 2001, we have leased our headquarters building in
Cleveland, Ohio, consisting of 121,625 square feet. Since April 11, 2000, we
have leased a 19,484 square foot facility in Cleveland, Ohio that houses our new
business underwriting operations. Continental General owns and occupies a
building in Omaha, Nebraska, consisting of approximately 61,400 square feet.
Pyramid Life owns and occupies a building in Mission, Kansas, consisting of
approximately 45,000 square feet. Since August 1, 2000, we have also leased a
3,605 square foot office in Chicago, Illinois. Since January 10, 2001, we have
also leased a 4,365 square foot office in Dallas, Texas.

ITEM 3.   LEGAL PROCEEDINGS

     We are involved in litigation arising in the ordinary course of business.
In our opinion, the effects, if any, of such litigation are not expected to be
material to our consolidated financial condition.

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

     None.
                                        20
<PAGE>

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a) Our common stock has traded on the Nasdaq National Market under the
symbol CERG since December 1998 and under the symbol CRLC before that date. The
following table shows the high and low closing prices of our common stock for
the quarters listed. These prices were taken from the Nasdaq Monthly Statistical
Reports. On March 25, 2002, our common stock closed at $4.43 per share.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
2001
     First Quarter..........................................  $ 6.88   $5.44
     Second Quarter.........................................    5.45    4.70
     Third Quarter..........................................    5.44    2.90
     Fourth Quarter.........................................    3.75    2.90

2000
     First Quarter..........................................  $ 7.25   $6.00
     Second Quarter.........................................    6.63    5.75
     Third Quarter..........................................    7.25    5.81
     Fourth Quarter.........................................    7.00    5.50

1999
     First Quarter..........................................  $11.50   $8.25
     Second Quarter.........................................   11.00    8.50
     Third Quarter..........................................   10.25    6.56
     Fourth Quarter.........................................    8.00    5.94
</Table>

     (b) As of March 25, 2002, we had 2,174 record holders.

     (c) We have not paid any cash dividends on our common stock since the end
of 1996, and we do not anticipate paying any dividends in the foreseeable
future. Our credit agreement with The Chase Manhattan Bank, dated February 17,
1999, as amended, contains financial and other covenants that, among other
matters, prohibit the payment of cash dividends on our common stock. For more
information on our credit agreement with Chase, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

     Dividends paid by our insurance subsidiaries to us are limited by state
insurance regulations. The insurance regulator in the insurer's state of
domicile may disapprove any dividend which, together with other dividends paid
by an insurance company in the prior 12 months, exceeds the regulatory maximum
as computed for the insurance company based on its statutory surplus and net
income. In 2001, none of our direct insurance subsidiaries (Central Reserve Life
and Continental General) could pay a dividend to Ceres without the prior
approval of their respective state insurance regulators as a result of their
respective statutory levels of unassigned surplus at December 31, 2001. In 2002,
Central Reserve, United Benefit Life and Provident American Life cannot pay any
dividends without the prior approval of the Ohio Insurance Commissioner as a
result of their respective statutory levels of unassigned surplus at December
31, 2001. As of December 31, 2001, Continental General cannot pay any dividends
in 2002, without the prior approval of the Nebraska Insurance Commissioner. By
agreement with the Kansas Department of Insurance, Pyramid Life can pay
dividends to its parent Continental General Insurance only from net underwriting
profits of Pyramid Life, and, therefore, as of December 31, 2001, Pyramid Life
could pay approximately $1.0 million in dividends in 2002, without the prior
approval of the Kansas Insurance Commissioner.

                                        21
<PAGE>

     (d) On October 11, 2001, we issued 28,403 shares of our common stock to
Peter W. Nauert, our Chairman of the Board, President and Chief Executive
Officer, pursuant to the stock award provision of his employment agreement, as
amended. This issuance was exempt from registration in accordance with Section
4(2) of the Securities Act of 1933, as amended, and exemptions available under
applicable state securities laws.

     (e) On December 27, 2001, we completed a follow-on public offering of
16,100,000 shares of our common stock, including the exercise of the
underwriters' over-allotment option, at $3.20 per share for gross proceeds of
$51.5 million, or $46.5 million net of fees and expenses. The Form S-1
registration statement (Reg. No. 333-59784) was declared effective by the SEC on
December 20, 2001. The offering was lead managed by Friedman, Billings, Ramsey &
Co., Inc. and Sandler O'Neill & Partners, L.P. and Stifel, Nicolaus & Company,
Incorporated was co-manager. The net proceeds of the offering were used as
follows:

     - $28.0 million contributed to the capital of our insurance subsidiaries;

     - $12.5 million to repay a portion of our bank debt;

     - $5.0 million to repurchase our convertible voting preferred stock; and

     - $1.0 million for working capital and general corporate purposes.

                                        22
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The selected consolidated financial data presented below as of and for each
of the five years ended December 31, 2001, 2000, 1999, 1998, and 1997 have been
derived from our audited consolidated financial statements. The acquisitions of
Provident American Life, Continental General and Pyramid Life occurred on
December 31, 1998, February 17, 1999 and July 26, 2000, respectively. These
acquisitions had no impact on our results of operations in 1998. Results for
United Benefit Life are included from August 1, 1998 to July 20, 1999 under a
reinsurance agreement and thereafter as an acquired entity. The financial
information for the year ended December 31, 1999 includes the operations of
Continental General since February 1, 1999 and for Provident American Life and
United Benefit Life (through reinsurance) for the entire period, and the
financial information for the year ended December 31, 2000 includes the
operations of Pyramid Life since July 26, 2000. The financial information for
the year ended December 31, 2001 includes the operations of all our subsidiaries
for the entire year. This data should be read in conjunction with the more
detailed information contained in the consolidated financial statements and
accompanying notes, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other financial information included elsewhere in
this filing.

<Table>
<Caption>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                      ----------------------------------------------------------------
                                        2001          2000          1999          1998          1997
                                      --------      --------      --------      --------      --------
                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>           <C>           <C>           <C>           <C>
Premiums (net of reinsurance).......  $635,039      $511,542      $327,746      $154,188      $249,707
Net investment income...............    31,999        26,871        21,362         7,454         6,528
Net realized gains (losses).........     4,953           (98)          107           211           146
Fee and other income................    36,155        32,718        17,410         7,694         9,152
Amortization of deferred reinsurance
  gain..............................     4,958         6,093         5,468           600            --
                                      --------      --------      --------      --------      --------
     Total revenues.................  $713,104      $577,126      $372,093      $170,147      $265,533
                                      ========      ========      ========      ========      ========
Income (loss) before federal income
  taxes, minority interest, and
  preferred stock repurchase and
  dividends.........................  $  4,980      $ 24,804      $ 18,006      $ (2,769)     $(21,089)
Federal income tax expense
  (benefit).........................     2,703         8,380         6,302         1,067          (133)
                                      --------      --------      --------      --------      --------
Income (loss) after tax, before
  minority interest and preferred
  stock repurchase and dividends....     2,277        16,424        11,704        (3,836)      (20,956)
Minority interest...................       (55)          (26)           --            --            --
                                      --------      --------      --------      --------      --------
Net income (loss)...................     2,332        16,450        11,704        (3,836)      (20,956)
Gain on repurchase of the
  convertible voting preferred
  stock, net of dividends...........     2,827          (327)           --            --            --
                                      --------      --------      --------      --------      --------
  Net income (loss) attributable to
     common stockholders............  $  5,159      $ 16,123      $ 11,704      $ (3,836)     $(20,956)
                                      ========      ========      ========      ========      ========
Basic earnings (loss) per
  share(1)..........................  $   0.29      $   1.06      $   0.88      $  (0.49)     $  (5.01)
Diluted earnings (loss) per
  share(1)..........................      0.29          1.00          0.77         (0.49)(2)     (5.01)(2)
Cash dividends per share............        --            --            --            --            --
</Table>

                                        23
<PAGE>

<Table>
<Caption>
                                                            DECEMBER 31,
                                      --------------------------------------------------------
                                        2001        2000        1999        1998        1997
                                      --------    --------    --------    --------    --------
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
Investments.........................  $482,622    $426,111    $309,952    $ 89,826    $ 79,957
Reinsurance receivable..............   223,330     238,185     263,289      41,417      26,216
Total assets........................   946,016     880,529     717,868     180,233     135,804
Debt................................    31,000      57,018      48,157       8,284       8,399
Note payable........................        --          --          --          --      20,000
Future policy benefits and claims
  payable...........................   654,553     627,877     538,732      97,113      81,090
Retained earnings (accumulated
  deficit)..........................    23,831      18,672       2,549      (9,155)     (5,319)
Stockholders' equity(4).............   156,575     103,283      44,661      35,836       1,512
Equity per share:
  After accumulated other
     comprehensive income
     (loss)(3)......................      4.62        5.52        3.26        3.12        0.36
  Before accumulated other
     comprehensive income
     (loss)(3)......................      4.61        5.88        4.59        3.02        0.21
</Table>

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

(1) Loss per share amounts for 1997 and 1996 have been restated to comply with
    Statement of Financial Accounting Standard No. 128 "Earnings Per Share."

(2) The exercise of options and warrants is not assumed when a loss from
    operations is reported and the result would be antidilutive.

(3) "Accumulated other comprehensive income (loss)" relates primarily to the net
    unrealized gain (loss) on available-for-sale securities.

(4) We received proceeds from our December 2001 public offering and private
    placement offerings in 2000, 1999 and 1998. For more information, see Note
    B, Equity Transactions, to our consolidated financial statements.

                                        24
<PAGE>

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

     This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, future performance involves risks and uncertainties which
may cause actual results to differ materially from those expressed in the
forward-looking statements. See "Forward-Looking Statements."

OVERVIEW

     Since January 1, 1998, we:

     - restructured the company and its operations and initiated a growth
       strategy that included expanded distribution channels and product
       offerings and a series of strategic acquisitions, including our entry
       into the senior market;

     - entered into a quota share reinsurance agreement with Hannover, effective
       January 1, 1997, under which Hannover reinsured 50% of certain group
       health policies in force at Central Reserve and written during 1997;

     - underwent a change of control in July 1998;

     - completed a private placement of our common stock in July 1998 in which
       we issued and sold 7,300,000 shares of common stock at $5.50 per share
       and warrants to purchase an additional 3,650,000 shares of common stock
       at an exercise price of $5.50 per share for total proceeds of
       approximately $40.2 million, or $37.7 million net of expenses;

     - entered into an agreement with United Benefit Life Insurance Company as
       of August 1, 1998 to reinsure 100% of the major medical policies of
       United Benefit Life and entered into a reinsurance agreement with
       Hannover in which we ceded 80% of the risk for United Benefit Life
       policies in force before August 1, 1998 and 50% of the risk for United
       Benefit Life policies in force after August 1, 1998;

     - acquired Provident American Life and Health Insurance Company from
       Provident American Corporation on December 31, 1998 for $5.5 million in
       cash and, immediately prior to the sale, Provident American Life ceded
       100% of its policies in force to Provident Indemnity Life Insurance
       Company while in turn Hannover assumed from Provident Indemnity 100% of
       its health block of business with Central Reserve assuming 10% from
       Hannover;

     - entered into a reinsurance agreement with Hannover, in which Hannover
       reinsured 50% of Provident American Life's direct business written after
       December 31, 1998 and 50% of the business reinsured from Provident
       Indemnity;

     - acquired Continental General Insurance Company from The Western &
       Southern Life Insurance Company of Cincinnati, Ohio, on February 17, 1999
       for $84.5 million including $40.0 million from a credit facility with
       Chase, $15.0 million from a private placement of 2,000,000 shares of our
       common stock, $22.5 million from a special pre-closing dividend to
       Western & Southern from Continental General, and the balance in cash;

     - entered into a reinsurance agreement with Hannover, under which Hannover
       reinsured 50% of all insurance business in force at Continental General
       on February 1, 1999;

     - acquired United Benefit Life in July 1999 through foreclosure in order to
       satisfy, in part, a $19.4 million reserve shortfall at December 31, 1999,
       of which $17.8 million was recovered and $1.6 million was expensed by us;

     - acquired selected major medical insureds of Central Benefits Mutual
       Insurance Company beginning in January 2000;

                                        25
<PAGE>

     - discontinued new sales activities for United Benefit Life and Provident
       American Life, except for Internet sales of Provident American Life, in
       July 2000;

     - acquired a block of individual and small group health insurance written
       by American Chambers Life Insurance Company effective May 1, 2000;

     - acquired Pyramid Life Insurance Company from United Insurance Company of
       America, a subsidiary of Unitrin, Inc., on July 26, 2000 for $67.5
       million including $25.0 million from a special pre-closing dividend from
       Pyramid Life to Unitrin, $20.0 million from a private placement offering
       of 3,333,334 shares of our common stock, $15.0 million from cash at
       Continental General and financing provided by Chase, and $7.5 million
       from the sale of our convertible voting preferred stock to United
       Insurance Company;

     - implemented a program in July 2001 to mitigate losses at United Benefit
       Life and Provident American Life by notifying their policyholders that
       their policies would be terminated or replaced and the business in these
       two subsidiaries will be substantially wound down in the early part of
       2002; and

     - sold 16.1 million shares of our common stock, including the exercise of
       the underwriters' over-allotment option, on December 27, 2001 for $3.20
       per share in a follow-on public offering for net proceeds of $46.5
       million.

     All of our acquisitions were accounted for using the purchase method of
accounting. The acquisitions of Provident American Life and Continental General
had no impact on our results of operations in 1998. Results for United Benefit
Life are included from August 1, 1998 to July 20, 1999 under a reinsurance
agreement and thereafter as an acquired entity. The financial information for
the year ended December 31, 1999 includes the operations of Continental General
since February 1, 1999 and of Provident American Life for the entire year. The
financial information for the years ended December 31, 2000 and 2001 includes
the operations of Pyramid Life subsequent to its acquisition on July 26, 2000.
The financial information for the year ended December 31, 2001 includes the
operations of all our subsidiaries for the entire period.

     Our results of operations are affected by the following accounting and
insurance business factors:

     Level of required reserves for policies in force.  The amount of reserves
relating to reported and unreported claims incurred is determined by
periodically evaluating historical claims experience and statistical information
with respect to the probable number and nature of such claims. Claim reserves
reflect actual experience through the most recent time period and policy
reserves reflect expectations of claims related to a block of business over its
entire life. We compare actual experience with estimates and adjust our reserves
on the basis of such comparisons. Revisions to reserves are reflected in our
current results of operations through benefits, claims, losses and settlement
expenses.

     In addition to the reserves discussed above, we also maintain reserves for
policies that are not currently in claims based upon actuarial expectations that
a policy may become a claim in the future. These reserves are calculated based
on factors that include estimates for mortality, morbidity, interest rates and
persistency. Factor components generally include assumptions that are consistent
with both our experience and industry practices.

     Revenue Recognition.  Life insurance premiums are recognized as revenue
when they become due. Health premiums are recognized as revenue over the terms
of the policies. Amounts received from interest sensitive contracts, principally
universal life and annuity products, are not reflected in premium revenue;
rather, such amounts are accounted for as deposits with the related liabilities
included in future policy benefits, losses and claims.

     Deferred acquisition costs.  In connection with the sale of our insurance
policies, we defer and amortize a portion of the policy acquisition costs over
the related premium paying periods of the life of the policy. These costs
include all expenses directly related to the acquisition of the policy,
including commissions, underwriting and other policy issue expenses. The
amortization of deferred acquisition costs is determined using the same
projected actuarial assumptions used in computing policy reserves. Deferred
acquisition costs associated with traditional life and accident and health
contracts are charged to expense over the premium-paying period or as
                                        26
<PAGE>

premiums are earned over the life of the contract. Deferred acquisition costs
associated with interest-sensitive life and annuity products are charged to
expense over the estimated duration of the policies in relation to the present
value of the estimated gross profits from surrender charges and investments,
mortality, and expense margins. Amortized deferred acquisition costs are
affected by unanticipated termination of policies because, upon such
unanticipated termination, we expense fully the unamortized deferred acquisition
costs associated with the terminated policy.

     Value of business acquired.  A portion of the purchase price paid for
Pyramid Life and Continental General Corporation was allocated to the value of
business acquired based on the actuarially-determined present value of the
expected pre-tax future profits from the business assuming a discount rate of
15.0%. Interest is accrued on the balance annually at a rate consistent with the
rate credited on the acquired policies on the acquisition date, which ranges
from 4.0% to 8.75%. Recoverability of the value of business acquired is
evaluated periodically by comparing the current estimate of the present value of
expected pre-tax future profits to the unamoritized asset balance. If the
current estimate is less than the existing asset balance, the difference would
be charged to expense, and if the current estimate is higher than the existing
asset balance, the difference will emerge into profits as earned.

     For accident and health and ordinary life business, the value of business
acquired is amortized over the estimated life of the in force business using
assumptions consistent with those in computing reserves. Interest of 6.0% for
Continental General and 7.0% for Pyramid Life is credited to the unamortized
balance. For interest sensitive products such as universal life and deferred
annuities, the value of business acquired is amortized over the expected profit
stream of the in force business. The expected profit stream is based upon
actuarial assumptions as to mortality, lapses and expenses. Earned interest was
assumed to be 6.0% for Continental General and 7.0% for Pyramid Life, the market
rate at the time of acquisition.

     The number of years a policy has been in effect.  Claims costs tend to be
higher on policies that have been in force for a longer period of time. As the
policy ages, it is more likely that the insured will need services covered by
the policy. However, generally, the longer the policy is in effect, the more
premium we will receive for major medical and Medicare supplement policies. For
other health, life and annuity policies/contracts, reserve liabilities are
established for policy benefits expected to be paid for in future years.

     Lapsation and persistency.  Factors that affect our results of operations
are lapsation and persistency, both of which relate to the renewal of insurance
policies and certificates in force. Lapsation is the termination of a policy for
nonrenewal and, pursuant to our practice, is automatic if and when premiums
become more than 31 days overdue; however, policies may be reinstated, if
approved, within six months after the policy lapses. Persistency represents the
percentage of total certificates in force at the end of a period less any newly-
issued certificates divided by the total certificates in force at the beginning
of the period.

     Policies renew or lapse for a variety of reasons, due both to internal and
external causes. We believe that our efforts to address any concerns or
questions of our insureds in an expedient fashion help to ensure ongoing policy
renewal. We also believe that we enjoy a favorable reputation with our insureds
for providing desirable policy benefits and efficient claims processing. We work
closely with our licensed agents, who play an integral role in obtaining policy
renewals and communicating with our insureds.

     External factors also contribute to policy renewal or lapsation.  Economic
cycles can influence an insured's ability to continue the payment of insurance
premiums when due. New government initiatives have raised public awareness of
the escalating costs of healthcare, which we believe boosts new sales and
promotes renewal payments.

     Lapsation and persistency may positively or adversely impact future
earnings. Higher persistency generally results in higher renewal premium.
However, higher persistency may lead to increased claims in future periods.
Additionally, increased lapsation can result in reduced premium collection,
accelerated deferred acquisition cost amortization and anti-selection of
higher-risk insureds.

     Reinsurance.  Consistent with the general practice of the insurance
industry, we reinsure portions of the coverage provided by our insurance
products to unaffiliated insurance companies under reinsurance agreements.
Reinsurance provides a greater diversification of underwriting risk, minimizes
our aggregate exposure
                                        27
<PAGE>

on major risks and limits our potential losses on reinsured business.
Reinsurance involves one or more insurance companies participating in the
liabilities or risks of another insurance company in exchange for a portion of
the premiums. Although the effect of reinsurance is to lessen our risks, it may
lower net income. We have entered into a variety of reinsurance arrangements
under which we cede business to other insurance companies to mitigate risk. We
also have assumed risk on a "quota share" basis from other insurance companies.
Our results of operations are presented net of reinsurance.

RECENT EVENTS

     As previously reported, on May 8, 2001, Central Reserve entered into an
agreement to sell the stock of United Benefit Life, including United Benefit
Life's licenses and certain liabilities, to Pelagian, LLC, a Texas limited
liability company. The sale was subject to approval by the State of Ohio
Department of Insurance and other customary terms and conditions. Based on
recent discussions with the Ohio Department of Insurance, we believe that
approval of this transaction is unlikely. The parties mutually terminated the
stock purchase agreement on January 14, 2002.

     On December 27, 2001, we sold 16.1 million shares of common stock at $3.20
per share, which included the exercise of the underwriters' over-allotment
option of 2.1 million shares, in a follow-on public offering. We used the net
proceeds of $46.5 million from this sale to:

     - repay $10.0 million of our tranche A term loan;

     - repay the remaining balance of $2.5 million of our revolver on February
       17, 2002;

     - repurchase our convertible voting preferred stock for $5.0 million;

     - contribute $28.0 million to the capital of our insurance subsidiaries;
       and

     - $1.0 million for general corporate purposes and working capital.

RESULTS OF OPERATIONS

     Year-to-year financial results must be viewed in light of the change in
control, reinsurance, acquisitions, changes to our equity and debt and the other
factors described above.

     We have three reportable segments:

     - medical -- includes 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.

                                        28
<PAGE>

  2001 COMPARED TO 2000

<Table>
<Caption>
                                                                                       INCREASE
                                                                                    (DECREASE) FROM
                                              % OF                      % OF         PREVIOUS YEAR
                                          CONSOLIDATED              CONSOLIDATED   -----------------
                                 2001       REVENUES       2000       REVENUES     DOLLARS      %
                               --------   ------------   --------   ------------   --------   ------
                                                      (DOLLARS IN THOUSANDS)
<S>                            <C>        <C>            <C>        <C>            <C>        <C>
Premiums, net
  Medical....................  $408,215       57.2%      $375,804       65.1%      $ 32,411      8.6%
  Senior and other...........   226,824       31.8%       135,738       23.5%        91,086     67.1%
                               --------      -----       --------      -----       --------
       Total.................   635,039       89.0%       511,542       88.6%       123,497     24.1%
Net investment income........    31,999        4.5%        26,871        4.7%         5,128     19.1%
Net realized gains
  (losses)...................     4,953        0.7%           (98)        --          5,051      N/M
Fee and other income.........    36,155        5.1%        32,718        5.7%         3,437     10.5%
Amortization of deferred
  reinsurance gain...........     4,958        0.7%         6,093        1.0%        (1,135)   (18.6)%
                               --------      -----       --------      -----       --------
       Consolidated
          revenues...........   713,104      100.0%       577,126      100.0%       135,978     23.6%
                               --------      -----       --------      -----       --------
Benefits, claims, losses and
  settlement expenses
  Medical....................   333,740       46.8%       288,260       49.9%        45,480     15.8%
  Senior and other...........   166,735       23.4%       101,551       17.6%        65,184     64.2%
                               --------      -----       --------      -----       --------
       Total.................   500,475       70.2%       389,811       67.5%       110,664     28.4%
Selling, general and
  administrative expenses....   223,941       31.4%       186,389       32.3%        37,552     20.1%
Net (deferral) amortization
  and change in acquisition
  costs and value of business
  acquired...................   (29,172)      (4.1)%      (30,513)      (5.3)%        1,341      4.4%
Amortization of goodwill.....     1,104        0.2%         1,069        0.2%            35      3.3%
Interest expense and
  financing costs............     4,679        0.6%         5,566        1.0%          (887)   (15.9)%
Special charges..............     7,097        1.0%            --         --          7,097       --
Federal income tax expense...     2,703        0.4%         8,380        1.4%        (5,677)   (67.7)%
Minority interest............       (55)        --            (26)        --            (29)  (111.5)%
                               --------      -----       --------      -----       --------
Net income...................     2,332        0.3%        16,450        2.9%       (14,118)   (85.8)%
Gain on repurchase of the
  convertible voting
  preferred stock, net of
  dividends..................     2,827        0.4%          (327)      (0.1)%        3,154      N/M
                               --------      -----       --------      -----       --------
Net income attributable to
  common stockholders........  $  5,159        0.7%      $ 16,123        2.8%      $(10,964)   (68.0)%
                               ========      =====       ========      =====       ========
Net income per share
  attributable to common
  stockholders
     Basic...................  $   0.29                  $   1.06
     Diluted.................      0.29                      1.00
</Table>

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

N/M = not meaningful

                                        29
<PAGE>

  NET PREMIUMS (NET OF REINSURANCE CEDED)

     For the year ended December 31, 2001, total net premiums were $635.0
million, an increase of 24.1%, from $511.5 million for 2000.

     Medical premiums for 2001 were $408.2 million compared to $375.8 million
for 2000, an increase of 8.6%. The increase in medical premiums was primarily
the result of new sales, premium rate increases and reduced premiums ceded under
reinsurance agreements. This increase was offset by our decision to terminate or
replace the policies at United Benefit Life and Provident American Life and the
cancellation of other medical business in certain states.

     Senior and other premiums were $226.8 million for 2001 compared to $135.7
million for 2000, an increase of 67.1%. The increase in senior and other
premiums was primarily the result of $47.3 million attributable to a full year
of Pyramid Life premiums, increased new sales and premium rate increases.

  OTHER REVENUES

     Net investment income increased to $32.0 million for 2001 from $26.9
million for 2000, an increase of 19.1%, due primarily to an increased investment
base from the addition of Pyramid Life.

     Net realized gains increased to $5.0 million for 2001 from zero for 2000 as
a result of the sale of 30-year mortgage pass-through securities which reduced
prepayment risk, and the sale of callable agency bonds which reduced call risk.
Portfolio durations were also shortened to reduce the impact on bond values in a
potentially rising interest rate environment. Cash was reinvested in corporate
bonds and planned amortization class non-agency mortgage securities, which
provide average life protection in a fluctuating interest rate environment.
These gains were marginally offset by the write-down for other than temporary
impairment of $0.8 million recorded on two commercial collateralized,
mortgage-backed bonds with leasehold interests in the World Trade Center
complex, most of which was destroyed by terrorists on September 11, 2001. No
default has occurred on contractual payments for these securities.

     Fee and other income increased to $36.2 million for 2001 compared to $32.7
million for 2000, an increase of 10.5%. This net increase was attributable to
new administrative fees introduced at Continental General in May 2000, fees
received on a larger volume of business in force and partially offset by the
United Benefit Life and Provident American Life termination or replacement
program and the cancellation of other medical business in certain states.

     The amortization of deferred reinsurance gain of $5.0 million for 2001
represented the recognition of the ceding commission allowances received under
our reinsurance agreements. The unamortized amount of $13.9 million at December
31, 2001 was accounted for as a deferred reinsurance gain on the consolidated
balance sheet.

  BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES

     Total benefits, claims, losses and settlement expenses increased to $500.5
million for 2001 compared to $389.8 million for 2000, an increase of 28.4%.

     Medical benefits, claims, losses and settlement expenses were $333.7
million for 2001 compared to $288.3 million for 2000, an increase of 15.8%. The
increase was a result of higher than anticipated benefit utilization in 2001
versus 2000 in the medical segment related to increased costs of services,
greater utilization of medical services and greatly increased expenditures on
prescription drugs, a larger volume of business in force at Continental General,
and $3.1 million attributable to a full year of Pyramid Life. Additionally, for
these same reasons, a $12.4 million deficiency in 2000 reserves emerged in 2001.
The medical loss ratio was 81.8% for 2001 compared to 76.7% for 2000. The
medical loss ratio without United Benefit Life and Provident American Life was
79.1% compared to 76.6% for 2001 and 2000, respectively. The increase was due to
the above mentioned items.

     Senior and other benefits, claims, losses and settlement expenses were
$166.7 million for 2001 compared to $101.6 million for 2000, an increase of
64.2%. The increase was a result of $34.3 million attributable to
                                        30
<PAGE>

Pyramid Life being included for a full year in 2001 and claims and benefits paid
on a larger volume of business in force. The senior and other loss ratio
decreased to 73.5% for 2001 compared to 74.8% for 2000, primarily attributable
to increased volume of new premiums and lower benefit utilization.

  OTHER EXPENSES AND NET INCOME

     Selling, general and administrative expenses increased to $223.9 million in
2001 compared to $186.4 million in 2000, an increase of 20.1%. The increase in
selling, general and administrative expenses represented a $3.0 million increase
in commissions, a $14.3 million increase in other operating and reinsurance
expenses attributable to our increased business base, and reduced reinsurance
allowances of $20.2 million resulting from a lower volume of ceded premiums. The
inclusion of Pyramid Life for a full year accounted for $17.0 million of the
$37.5 million increase. As a percentage of revenues, selling, general and
administrative expenses have decreased to 31.4% in 2001 compared to 32.3% in
2000.

     The net (deferral) amortization and change in acquisition costs and value
of business acquired resulted in a net deferral of $29.2 million for 2001
compared to a net deferral of $30.5 million for 2000. Pyramid Life accounted for
$4.9 million of the net deferral. The decrease was primarily attributable to the
write-off of Central Reserve's deferred acquisition costs (DAC) asset of
approximately $6.7 million in six states due to the continuing unprofitability
of the business in those states.

     Interest expense and financing costs decreased to $4.7 million in 2001
compared to $5.6 million in 2000 as a result of lower interest rates and lower
debt outstanding.

     Special charges of $7.1 million in the first quarter of 2001 represented a
$5.9 million write-off of the DAC asset for United Benefit Life and Provident
American Life and a $1.2 million write-off of costs associated with United
Benefit Life (see Note M, Special Charges for further information). The DAC
asset was written off due to the planned termination of the business.

     A federal income tax expense of $2.7 million, or 54.3% of the income before
federal taxes, was established for 2001. The 2000 effective rate was 33.8%. The
increase in the effective tax rate resulted from permanent tax differences,
which are proportionately higher compared to income in 2001 versus 2000.

     As a result of the foregoing, for 2001, net income was $2.3 million and net
income attributable to common stockholders was $5.2 million, or $0.29 basic and
diluted earnings per share of common stock, compared to net income of $16.5
million, or $1.06 basic and $1.00 diluted earnings per share of common stock,
for 2000. Excluding the United Benefit Life and Provident American Life
operating losses and special charges, net income attributable to common
stockholders would have been $17.9 million, or $1.00 per diluted share, for
2001.

                                        31
<PAGE>

  2000 COMPARED TO 1999

<Table>
<Caption>
                                                                                        INCREASE
                                                                                    (DECREASE) FROM
                                               % OF                      % OF        PREVIOUS YEAR
                                           CONSOLIDATED              CONSOLIDATED   ----------------
                                  2000       REVENUES       1999       REVENUES     DOLLARS      %
                                --------   ------------   --------   ------------   --------   -----
                                                       (DOLLARS IN THOUSANDS)
<S>                             <C>        <C>            <C>        <C>            <C>        <C>
Premiums, net
  Medical.....................  $375,804       65.1%      $251,876       67.7%      $123,928    49.2%
  Senior and other............   135,738       23.5%        75,870       20.4%        59,868    78.9%
                                --------      -----       --------      -----       --------
       Total..................   511,542       88.6%       327,746       88.1%       183,796    56.1%
Net investment income.........    26,871        4.7%        21,362        5.7%         5,509    25.8%
Net realized gains (losses)...       (98)        --            107         --           (205)    N/M
Fee and other income..........    32,718        5.7%        17,410        4.7%        15,308    87.9%
Amortization of deferred
  reinsurance gain............     6,093        1.0%         5,468        1.5%           625    11.4%
                                --------      -----       --------      -----       --------
       Consolidated
          revenues............   577,126      100.0%       372,093      100.0%       205,033    55.1%
                                --------      -----       --------      -----       --------
Benefits, claims, losses and
  settlement expenses
  Medical.....................   288,260       49.9%       176,531       47.5%       111,729    63.3%
  Senior and other............   101,551       17.6%        56,572       15.2%        44,979    79.5%
                                --------      -----       --------      -----       --------
       Total..................   389,811       67.5%       233,103       62.7%       156,708    67.2%
Selling, general and
  administrative expenses.....   186,389       32.3%       137,932       37.1%        48,457    35.1%
Net (deferral) amortization
  and change in acquisition
  costs and value of business
  acquired....................   (30,513)      (5.3)%      (21,892)      (5.9)%       (8,621)  (39.4)%
Amortization of goodwill......     1,069        0.2%           854        0.2%           215    25.2%
Interest expense and financing
  costs.......................     5,566        1.0%         4,090        1.1%         1,476    36.1%
Federal income tax expense....     8,380        1.4%         6,302        1.7%         2,078    33.0%
Minority interest.............       (26)        --             --         --            (26)    N/M
                                --------      -----       --------      -----       --------
Net income....................    16,450        2.9%        11,704        3.1%         4,746    40.6%
Convertible voting preferred
  stock dividends.............      (327)      (0.1)            --         --           (327)    N/M
                                --------      -----       --------      -----       --------
Net income attributable to
  common stockholders.........  $ 16,123        2.8%      $ 11,704        3.1%      $  4,419    37.8%
                                ========      =====       ========      =====       ========
Net income per share
  attributable to common
  stockholders
     Basic....................  $   1.06                  $   0.88
     Diluted..................      1.00                      0.77
</Table>

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

N/M = not meaningful

                                        32
<PAGE>

  NET PREMIUMS (NET OF REINSURANCE CEDED)

     For the year ended December 31, 2000, total net premiums were $511.5
million, an increase of 56.1%, from $327.7 million for 1999.

     Medical premiums for 2000 were $375.8 million compared to $251.9 million
for 1999, an increase of 49.2%. The increase in medical premiums was primarily
the result of increased new sales including sales arising from the selected
major medical insureds of Central Benefits, premium rate increases, additional
reinsurance assumed from American Chambers and the inclusion of Continental
General's results for twelve months in 2000 compared to eleven months in 1999.

     Senior and other premiums were $135.7 million for 2000 compared to $75.9
million for 1999, an increase of 78.9%. The increase in senior and other
premiums was primarily the result of increased Medicare supplement sales,
premium rate increases, $26.2 million attributable to Pyramid Life, and the
inclusion of Continental General's results for twelve months in 2000 compared to
eleven months in 1999.

  OTHER REVENUES

     Net investment income increased to $26.9 million for 2000 from $21.4
million for 1999, an increase of 25.8%, due primarily to an increased investment
base from the addition of Pyramid Life and the inclusion of Continental
General's results for twelve months in 2000 compared to eleven months in 1999.

     Fee and other income increased to $32.7 million for 2000 compared to $17.4
million for 1999, an increase of 87.9%, primarily attributable to additional
fees charged for new services, such as care coordination fees, as well as fees
received on a larger volume of business. Fee and other income from non-regulated
subsidiaries accounted for $10.4 million in 2000.

     The amortization of deferred reinsurance gain of $6.1 million for 2000
represented the recognition and amortization of the ceding commission allowances
received on our reinsurance agreements. The unamortized amount of $18.8 million
at December 31, 2000 was accounted for as a deferred reinsurance gain on our
consolidated balance sheet.

  BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES

     Total benefits, claims, losses and settlement expenses increased to $389.8
million for 2000 compared to $233.1 million for 1999, an increase of 67.2%.

     Medical benefits, claims, losses and settlement expenses were $288.3
million for 2000 compared to $176.5 million for 1999, an increase of 63.3%. The
increase was primarily a result of higher benefit utilization in 2000 versus
1999 on a larger volume of business and increased medical costs. The medical
loss ratio was 76.7% for the year ended December 31, 2000 compared to 70.1% for
1999. Our loss ratios are defined as policy benefits, claims, losses and
settlement expenses as a percentage of net premiums for each segment.

     Senior and other benefits, claims, losses and settlement expenses were
$101.6 million for 2000 compared to $56.6 million for 1999, an increase of
79.5%. The increase was a result of $17.4 million attributable to Pyramid Life
for five months, claims and benefits paid on a larger volume of business and the
inclusion of Continental General's results for twelve months in 2000 compared to
eleven months in 1999. The senior loss ratio was 74.8% for 2000 compared to
74.6% for 1999.

  OTHER EXPENSES AND NET INCOME

     Selling, general and administrative expenses increased $48.5 million to
$186.4 million in 2000 compared to $137.9 million in 1999, an increase of 35.1%.
The increase in selling, general and administrative expenses resulted from a
$42.6 million increase in commissions and a $13.8 million increase in other
operating expenses and a $5.4 million increase in premium taxes, licenses and
fees attributable to our increased business base. This increase was partially
offset by a net change in reinsurance expenses and allowances of $13.3 million.
The addition of Pyramid Life accounted for $10.0 million of the $48.5 million
increase. As a percentage of

                                        33
<PAGE>

consolidated revenues, selling, general and administrative expenses decreased to
32.3% in 2000 compared to 37.1% in 1999.

     The net amortization and change in deferral of acquisition costs and value
of business acquired resulted in a net deferral of $30.5 million for 2000
compared to a net deferral of $21.9 million for 1999. Pyramid Life accounted for
$2.5 million of the net deferral in 2000. The remaining increase in the deferral
was a result of capitalized acquisition expenses on new business, including
Continental General's new business for twelve months in 2000 versus eleven
months in 1999.

     Interest expense and financing costs increased to $5.6 million in 2000
compared to $4.1 million in 1999 as a result of the interest expense incurred
under our credit agreement for twelve months in 2000 compared to interest
expense for 1999 which did not begin to accrue until February 17, 1999, the
closing date of the purchase of Continental General, and a higher outstanding
balance. Interest rates charged under the credit agreement in 2000 were also
higher than those charged in 1999.

     For the year ended December 31, 2000, the provision for federal income
taxes was $8.4 million, or 33.8% of income before federal income taxes of $24.8
million. The 1999 effective rate was 35.0%.

     Net income for the year ended December 31, 2000 was $16.5 million, or $1.06
basic earnings per share and $1.00 diluted earnings per share, compared to $11.7
million, or $0.88 basic earnings per share and $0.77 diluted earnings per share,
for 1999. Our net income for 2000 was adversely affected by a net loss of $4.9
million at United Benefit Life due to high benefit and claims loss ratios and
other related expenses. New sales activities for United Benefit Life were
discontinued in July 2000. We have taken a number of actions to mitigate future
adverse results, but future losses at United Benefit Life could continue to have
a material adverse effect on our financial performance. In addition, new sales
activities for Provident American Life, except for Internet sales, also were
discontinued in July 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Liquidity is our ability to generate adequate amounts of cash to meet our
financial commitments. Our major needs for cash are to enable our insurance
subsidiaries to pay claims and expenses as they come due and for Ceres to pay
interest on, and to repay principal of, its indebtedness. The primary sources of
cash are premiums, investment income, fee income, equity and debt financings,
and reimbursements from reinsurers. Payments consist of current claim payments
to insureds, medical cost management expenses, operating expenses such as
salaries, employee benefits, commissions, taxes and interest on debts.

     Assets increased 7.4% to $946.0 million at December 31, 2001 from $880.5
million at December 31, 2000. Assets of $482.6 million, or 51.0% of the total
assets, were in investments at December 31, 2001. Fixed maturities, our primary
investment, were $471.5 million, or 97.7% of total investments, at December 31,
2001. Other investments consist of surplus notes, policy loans and mortgage
loans. We have classified all of our fixed maturities as "available-for-sale"
and accordingly have reported them at estimated fair value at December 31, 2001.

     Approximately 94.8% of our bonds were of investment grade quality at
December 31, 2001. In addition to the fixed maturities, we also had $74.6
million in cash and cash equivalents, and a $2.5 million revolver, at December
31, 2001. At December 31, 2001, there was no amount available for additional
borrowings under the revolver. On February 17, 2002, the revolver balance of
$2.5 million was paid in full with proceeds from our December 2001 public
offering.

     The total reinsurance receivable was $223.3 million at December 31, 2001.
Of this amount, $185.5 million represents reserves held by our reinsurers under
our various reinsurance treaties in place. Hannover holds most of these
reserves.

     The total policy liabilities and accruals (reserves) were 82.9% of the
total liabilities at December 31, 2001 compared to 80.8% at December 31, 2000.

     On May 25, 2001, we entered into an agreement with Royalton Investors, LLC
and Big T Investments, LLC to sell our Cleveland headquarters. The transaction
was effective July 31, 2001. The building was sold to
                                        34
<PAGE>

Royalton Investors, LLC and Big T Investments, LLC for $16.0 million and
concurrently we leased it back for a term of 15 years with four optional
five-year extensions. Monthly rent payments began in August 2001 and annually
total $1.7 million through July 2003, $1.8 million through July 2006, $2.0
million through July 2011, and $2.1 million through July 2016. The net proceeds
were used to:

     - prepay in full the outstanding $7.9 million mortgage note on the building
       on August 3, 2001;

     - permanently reduce our revolving line of credit by $2.5 million on August
       6, 2001; and

     - contribute $5.0 million to the capital of Central Reserve.

     To provide funds for the acquisition of Continental General, on February
17, 1999, we entered into a credit agreement among Ceres', various lending
institutions, and JPMorgan Chase (formerly the Chase Manhattan Bank) as
Administrative Agent. Under the agreement, Ceres borrowed $40.0 million under a
tranche A term loan and secured a $10.0 million revolver.

     Interest on the outstanding balance of the term loan and revolver are
determined based on our selection each quarter of either a Base Rate Loan or a
Eurodollar Loan. Under the Base Rate Loan, the interest rate will be 2.5% per
annum plus the higher of (a) the rate which is 0.50% of 1.0% in excess of a
federal funds rate or (b) Chase's prime rate as in effect from time to time.
Under the Eurodollar Loan, the interest rate will be 3.5% per annum plus a
Eurodollar rate, which is the arithmetic average of the offered quotation to
first-class banks in the interbank Eurodollar market by Chase, adjusted for
certain reserve requirements.

     The credit agreement was amended on July 25, 2000 to increase the revolver
from $10.0 million to $15.0 million in connection with the acquisition of
Pyramid Life. Any amount outstanding on the revolver had to be repaid on
February 17, 2002. The revolver bore interest at the same rate choices as the
$40.0 million tranche A term loan. At December 31, 2001, the interest rate on
the revolver was 5.7% on the outstanding balance of $2.5 million. On February
17, 2002, the balance of the revolver was repaid from proceeds of our December
2001 public offering.

     On March 30, 2001, our credit agreement was again amended to enter into a
new $10.0 million term loan with CIT Equipment Financing, Inc. The proceeds of
this term loan, the tranche B term loan, were used to permanently pay down $10.0
million of our then fully-drawn $15.0 million revolver under the credit
agreement. The terms of the amendment provide for CIT Group to participate
equally with the syndicate of banks and Chase under the credit agreement. At
December 31, 2001, the interest rate on our tranche A term loan balance of $18.5
million was 6.0% per annum and our $10.0 million CIT tranche B term loan was
6.5% per annum. The first principal payment on the CIT tranche B term loan of
$0.3 million will be due on June 17, 2002. Quarterly principal payments will be
due thereafter as follows: $0.3 million through March 17, 2004; $0.6 million
thereafter through March 17, 2005; and $1.2 million thereafter through March 17,
2006.

     On December 27, 2001, our credit agreement again was amended in connection
with the stock offering. The credit agreement, as amended, contains financial
and other covenants that among other things:

     - prohibit the payment of cash dividends on our shares of common stock;

     - restrict the creation of liens and sales of assets; and

     - require that we, at a minimum, maintain:

      - a leverage ratio (consolidated debt to consolidated total capital) of
        0.35 to 1.00 through December 31, 2001, and 0.30 to 1.00 thereafter;

      - an interest coverage ratio (consolidated earnings before interest,
        income taxes, depreciation, and amortization to consolidated interest
        expense) of 3.00 to 1.00;

      - a risk-based capital (RBC) ratio for any of our regulated insurance
        company subsidiaries of not less than 125.0% of the RBC Company Action
        Level;

      - consolidated net worth of $110.0 million through December 31, 2001, and
        beginning in 2002, consolidated net worth, excluding goodwill, of no
        less than the sum of (i) $85.0 million plus (ii) 80% of the net proceeds
        from the equity offering excluding the $5.0 million repurchase of our
        convertible

                                        35
<PAGE>

        voting preferred stock plus (iii) 50% of our aggregate consolidated net
        income calculated quarterly; and

      - a fixed charge coverage ratio of not less than 1.05 to 1.00 through June
        30, 2003, and 1.10 to 1.00 thereafter.

In addition, the amended agreement required us to:

     - repay a portion of our tranche A term loan with $10.0 million of the
       proceeds from the December 2001 equity offering;

     - repay the term loans with 25% of the net cash proceeds from any future
       sale or issuance of our equity, excluding warrants and compensation
       awards or plans;

     - set aside $2.5 million of the proceeds from the equity offering for the
       permanent repayment of the balance of our revolver due February 17, 2002;
       and

     - increase the interest rate of the tranche B term loan by 0.5% per annum.

Finally, the credit agreement, as amended:

     - restructured our scheduled tranche A term loan debt payments as follows:
       quarterly principal payments of $0.5 million through May 17, 2002, $0.8
       million through November 17, 2002, $0.9 million through November 17,
       2004, and a payment of $8.5 million on February 17, 2005;

     - allowed repurchase of all of our convertible voting preferred stock with
       $5.0 million of the proceeds from the equity offering; and

     - allowed capital contributions to our insurance subsidiaries with proceeds
       from the equity offering after the repayments to the banks and repurchase
       of our convertible voting preferred stock.

     At December 31, 2001, the balance of our fully drawn revolver was $2.5
million. The pay-off and final maturity of this revolver was February 17, 2002.

     The following schedule summarizes current and future contractual
obligations as of December 31, 2001:

<Table>
<Caption>
                                                               PAYMENTS DUE BY YEAR
                                               -----------------------------------------------------
                                                         LESS THAN                            AFTER
CONTRACTUAL OBLIGATIONS                         TOTAL     1 YEAR     1-3 YEARS   4-5 YEARS   5 YEARS
-----------------------                        -------   ---------   ---------   ---------   -------
                                                                  (IN THOUSANDS)
<S>                                            <C>       <C>         <C>         <C>         <C>
Long-Term Debt...............................  $28,500    $3,497      $11,068     $13,935    $    --
Operating Leases.............................   32,581     3,383        5,500       4,351     19,347
Bank Revolver................................    2,500     2,500           --          --         --
                                               -------    ------      -------     -------    -------
  Total Contractual Obligations..............  $63,581    $9,380      $16,568     $18,286    $19,347
                                               =======    ======      =======     =======    =======
</Table>

     In addition, the common stock of Central Reserve, Continental General, and
most of our non-regulated subsidiaries are pledged as security for the credit
agreement. At December 31, 2001, we were in compliance with our credit
agreement, as amended.

     We believe that cash flow from operating activities will be sufficient to
meet the currently anticipated operating and capital expenditure requirements of
our subsidiaries over the next 12 months. Due to the equity offering and the
amendment to our credit agreement, we believe that funds should be sufficient to
meet all our debt obligations over the next 12 months. Funds to meet our debt
obligations are generated from fee income from our non-regulated subsidiaries
and from dividends of our insurance subsidiaries, if available. Our ability to
make scheduled payments of the principal and interest on our indebtedness
depends on our future performance and the future performance of our
non-regulated subsidiaries, which are subject to economic, financial,
competitive and other factors beyond our control. Dividends from our regulated
insurance subsidiaries are subject to, and limited by, state insurance
regulations. As of December 31, 2001, none of our direct insurance subsidiaries
(Central Reserve and Continental General) could pay a dividend to Ceres Group,
the parent company, without prior approval of their respective state regulators
as a result of their
                                        36
<PAGE>

respective statutory levels of unassigned surplus. If our non-regulated
subsidiaries do not generate sufficient fee income to service all of our debt
obligations, there may be a material adverse effect on our business, financial
condition and results of operations, and a significant adverse effect on the
market value of our common stock. In addition, if necessary, additional
financing may not be available on terms favorable to us or at all.

NET OPERATING LOSS CARRYFORWARD

     At December 31, 2001, we had a tax net operating loss, or NOL, carryforward
of approximately $26.6 million for federal income tax purposes, which expires
through 2015. Changes in ownership, as defined by Sections 382 and 383 of the
Internal Revenue Code, could limit the amount of NOL carryforwards used in any
one year. The December 2001 public offering resulted in an "ownership change" of
our company, as defined in Section 382 of the Code and the regulations issued
thereunder. Pursuant to Section 382, our ability to use our NOLs originating
prior to the offering, accounting for approximately $26.6 million, is subject to
certain restrictions, including an annual limitation of approximately $5.4
million. Losses incurred subsequent to this offering are available without
annual limitation to offset future income.

     We determine a valuation allowance of our deferred tax asset based on an
analysis of amounts recoverable in the statutory carryback period and available
tax planning strategies. In assessing the valuation allowance established at
December 31, 2001 and 2000, estimates were made as to the potential financial
impact of recent NOLs and our financial condition. Management believes that we
will generate sufficient future taxable income to realize the $1.1 million net
deferred tax asset, recorded as of December 31, 2001, prior to the expiration of
any NOLs.

                                        37
<PAGE>

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     The following tables present the revenues, expenses and profit (loss)
before federal income taxes, for the last three years attributable to our
industry segments. We do not separately allocate investment assets or other
identifiable assets by industry segment, nor are income tax (benefit) expenses
allocated by industry segment.

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
MEDICAL
  Revenues
     Net premiums...........................................  $408,215   $375,804   $251,876
     Investment income, realized gains......................    11,984      9,101      6,985
     Other income...........................................    37,772     36,103     21,307
                                                              --------   --------   --------
                                                               457,971    421,008    280,168
                                                              --------   --------   --------
  Expenses
     Benefits and claims....................................   333,740    288,260    176,531
     Other operating expenses...............................   130,306    122,483     96,357
     Special charges........................................     7,097         --         --
                                                              --------   --------   --------
                                                               471,143    410,743    272,888
                                                              --------   --------   --------
  Segment profit (loss) before federal income taxes,
     minority interest and preferred stock transactions.....  $(13,172)  $ 10,265   $  7,280
                                                              ========   ========   ========
SENIOR AND OTHER
  Revenues
     Net premiums...........................................  $226,824   $135,738   $ 75,870
     Investment income, realized gains......................    24,345     16,615     14,233
     Other income...........................................     3,341      2,686      1,364
                                                              --------   --------   --------
                                                               254,510    155,039     91,467
                                                              --------   --------   --------
  Expenses
     Benefits and claims....................................   166,735    101,551     56,572
     Other operating expenses...............................    61,871     32,265     18,510
                                                              --------   --------   --------
                                                               228,606    133,816     75,082
                                                              --------   --------   --------
  Segment profit before federal income taxes, minority
     interest and preferred stock transactions..............  $ 25,904   $ 21,223   $ 16,385
                                                              ========   ========   ========
CORPORATE AND OTHER
  Revenues
     Investment income, realized gains......................  $    623   $  1,057   $    251
     Other income...........................................        --         22        207
                                                              --------   --------   --------
                                                                   623      1,079        458
                                                              --------   --------   --------
  Expenses
     Interest and financing expenses........................     4,679      5,566      4,090
     Other operating expenses...............................     3,696      2,197      2,027
                                                              --------   --------   --------
                                                                 8,375      7,763      6,117
                                                              --------   --------   --------
  Segment loss before federal income taxes, minority
     interest and preferred stock transactions..............  $ (7,752)  $ (6,684)  $ (5,659)
                                                              ========   ========   ========
INCOME BEFORE FEDERAL INCOME TAXES, MINORITY INTEREST AND
PREFERRED STOCK TRANSACTIONS................................  $  4,980   $ 24,804   $ 18,006
                                                              ========   ========   ========
</Table>

                                        38
<PAGE>

MARKET RISK AND MANAGEMENT POLICIES

     The following is a description of certain risks facing health and life
insurers and how we mitigate those risks:

     Inadequate Pricing Risk is the risk that the premium charged for insurance
and insurance related products is insufficient to cover the costs associated
with the distribution of such products, including benefits, claims and losses,
settlement expenses, acquisition expenses and other corporate expenses. We
utilize a variety of actuarial and qualitative methods to set such pricing
levels. Recent increased medical inflation and higher than anticipated
utilization had the effect in the year ended December 31, 2001 of exceeding
premium rate increases. Any negative fluctuation in our estimates of the effect
of continued medical inflation and high benefit utilization could have a
material adverse impact on our results of operations.

     Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. For example, regulatory
initiatives designed to reduce insurer profits or otherwise affecting the
industry in which the insurer operates, new legal theories or insurance company
insolvencies through guaranty fund assessments, may create costs for the insurer
beyond those recorded in the financial statements. We attempt to mitigate this
risk by offering a wide range of products and by operating in many states, thus
reducing our exposure to any single product and by employing underwriting
practices that identify and minimize the adverse impact of this risk.

     In addition, insurance companies are subject to extensive federal and state
regulation and compliance with these regulations could increase the insurance
companies' operating costs. In some circumstances, failure to comply with
certain insurance regulations could subject an insurance company to regulatory
actions by such insurance company's state of domicile. For example, states have
statutory risk-based capital, or RBC, requirements for health and other
insurance companies based on the RBC Model Act. These RBC requirements are
intended to assess the capital adequacy of life and health insurers, taking into
account the risk characteristics of an issuer's investments and products. In
general, under these laws, an insurance company must submit a report of its RBC
level to the insurance department of its state of domicile as of the end of the
previous calendar year. These laws provide for four different levels of
regulatory attention depending on the ratio of an insurance company's total
adjusted capital (defined as the total of its statutory capital, surplus and
asset valuation reserve) to its risk-based capital. As of December 31, 2001, our
risk-based capital levels for each of our insurance subsidiaries exceeded the
levels required by regulatory authorities.

     Credit Risk is the risk that issuers of securities owned by us will default
or that other parties, including reinsurers that have obligations to us, will
not pay or perform. We attempt to minimize this risk by adhering to a
conservative investment strategy and by maintaining sound reinsurance and credit
and collection policies.

     Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation if we attempt to mitigate this risk by charging fees for
non-conformance with certain policy provisions and/or by attempting to match the
maturity schedule of our assets with the expected payouts of its liabilities. To
the extent that liabilities come due more quickly than assets mature, we would
have to sell assets prior to maturity and recognize a gain or loss. Assuming an
immediate increase of 100 basis points in interest rates, the net hypothetical
decline in fair value of stockholders' equity is estimated to be $19.7 million
after-tax at December 31, 2001. This amount represents approximately 12.6% of
our stockholders' equity at such date.

     We also have long-term debt that bears interest at variable rates.
Therefore, our results of operations would be affected by interest rate changes.
We do not expect a significant rate change in the near future that would have a
material effect on our near-term results of operations.

     Seasonality is the risk of fluctuations of revenues and operating results.
Historically, our revenues and operating results have varied from quarter to
quarter and are expected to continue to fluctuate in the future. These
fluctuations have been due to a number of factors, including higher benefit
utilization by our insureds

                                        39
<PAGE>

during the winter months and the use of deductibles. More specifically, our
senior segment seasonality is the opposite of our medical segment's, meaning
that earnings in the senior segment are generally lower in the first quarter and
higher later in the year. This is mainly a factor of our Medicare Supplement
products; that pay the Medicare deductible for our insureds generally during the
early months of the year.

IMPACT OF INFLATION

     Inflation rates impact our financial condition and operating results in
several areas. Changes in inflation rates impact the market value of the
investment portfolio and yields on new investments.

     Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation, especially
prescription drug costs. New, more expensive and wider use of pharmaceuticals is
inflating health care costs. We will continue to establish premium rates in
accordance with trends in hospital and medical costs along with concentrating on
various cost containment programs. However, as evidenced by the year ended
December 31, 2001, there can be no assurance that these efforts by us will fully
offset the impact of inflation or that premiums will equal or exceed increasing
healthcare costs.

FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which, with
respect to future business decisions, are subject to change. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, us.

     In particular, forward-looking statements can be identified by the use of
words such as "may," "will," "should," "expect," "anticipate," "estimate,"
"continue" or similar words. In light of the risks and uncertainties inherent in
all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by us or any other person
that our objectives or plans will be achieved. Numerous factors could cause our
actual results to differ materially and adversely from those in the
forward-looking statements, including those risks outlined above in "Market Risk
and Management Policies," and the following:

     - rising healthcare costs, especially the rising costs of prescription drug
       costs that are rising faster than other medical costs, and rising
       utilization rates;

     - 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;

     - developments in healthcare reform and other regulatory issues, including
       the Health Insurance Portability and Accountability Act of 1996 and
       increased privacy regulation, and changes in laws and regulations in key
       states in which we operate;

     - our ability to implement increases in premium rates and to develop,
       distribute and administer competitive products and services in a timely,
       cost-effective manner;

     - our ability to maintain our current PPO network arrangements;

     - the performance of others on whom we rely for reinsurance, particularly
       Hannover Life Reassurance Company of America upon whom we have relied for
       substantially all of our reinsurance;

     - our ability to meet risk-based capital requirements;

     - the adequacy of funds, including fee income, received from our
       non-regulated subsidiaries to meet Ceres' debt obligations;
                                        40
<PAGE>

     - the risk of material adverse outcomes in litigation;

     - dependence on senior management and key personnel;

     - the failure to successfully manage our expanding operations and integrate
       future acquisitions, if any, including the failure to achieve cost
       savings;

     - our financial and claims paying ratings, including any potential
       downgrades;

     - the performance of others on whom we rely for administrative and
       operations services;

     - restrictions on our insurance subsidiaries' ability to pay dividends to
       Ceres;

     - the failure to comply with financial and other covenants in our loan
       agreements;

     - payments to state assessment funds;

     - business conditions and competition in the healthcare industry;

     - changes in tax laws;

     - the risk of selling investments to meet liquidity requirements;

     - the risk that issuers of securities owned by Ceres will default or that
       other parties will not pay or perform;

     - changes in accounting and reporting practices;

     - our ability to fully collect all agent advances; and

     - our ability to obtain additional debt or equity financing on terms
       favorable to us to facilitate our long-term growth.

     The factors listed above should not be constructed as exhaustive. We
undertake no obligation to release publicly the results of any future revisions
we may make to forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In August 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This Statement will supersede,
effective January 1, 2002, SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the
accounting and reporting provisions of Accounting Principles Board Opinion, or
APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. This Statement also amended Accounting Research Bulletin No. 51,
Consolidated Financial Statements.

     This Statement required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. The provisions of this Statement generally
are to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002
is not expected to have a significant effect on our results of operations,
financial position or liquidity.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addressed financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. We anticipate that the
adoption of this standard will not have a significant effect on our results of
operations, financial position or liquidity.

     In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which replaces APB Opinion No. 17, Intangible Assets. This Statement
addressed how intangible assets that are acquired

                                        41
<PAGE>

individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. Additionally, this Statement discussed how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. This Statement:

     - specifies that goodwill and intangible assets that have indefinite useful
       lives will not be amortized but rather will be tested at least annually
       for impairment;

     - provides specific guidance for testing goodwill for impairment; and

     - requires additional disclosures not previously required.

     The provisions of SFAS No. 142 were adopted by the Company as required
effective January 1, 2002. Application of the nonamortization provisions of this
Statement is expected to reduce annual expense by approximately $1.1 million,
which is projected to result in an increase in net income of approximately $0.7
million, or $0.02 per diluted share, in 2002 and subsequent periods, subject to
the impairment test described herein. SFAS No. 142, as part of its adoption
provisions, requires a transitional impairment test to be applied to all
goodwill and other indefinite-lived intangible assets within the first half of
2002 and any resulting impairment loss be reported as a change in accounting
principle. The Company is in the process of evaluating the potential impact of
this Statement on its results of operations, financial position, and liquidity.

     In general, application of the new provisions for goodwill and other
indefinite-lived intangible assets may result in more income statement
volatility due to the potential for periodic recognition of impairment losses,
which could vary in amount and regularity versus reducing those assets through
systematic amortization over a finite period of time.

     In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addressed the accounting and reporting for business combinations and expanded
the criteria for recording intangible assets separate from goodwill. On July 1,
2001, we adopted this Statement which requires us to use the purchase method of
accounting for all business combinations initiated after June 30, 2001.

     In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement revised the methods
for accounting for securitizations and other transfers of financial assets and
collateral as outlined in SFAS No. 125, and required certain additional
disclosures. The adoption of this Statement did not have a material effect on
our results of operations, financial position or liquidity.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. We adopted the new statement effective
January 1, 2001. If in the future we have derivative instruments, this Statement
will require us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS No. 133 did not have a
significant effect on our results of operations, financial position or
liquidity.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See "Market Risk and Management Policies" section under Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.

                                        42
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                       CERES GROUP, INC. AND SUBSIDIARIES
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                         FINANCIAL STATEMENT SCHEDULES

<Table>
<Caption>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Auditors..............................    44

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2001 and
  2000......................................................    45
Consolidated Statements of Income for the years ended
  December 31, 2001, 2000 and 1999..........................    46
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 2001, 2000 and 1999..............    47
Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2000 and 1999..........................    48
Notes to Consolidated Financial Statements for the years
  ended December 31, 2001, 2000 and 1999....................    49

FINANCIAL STATEMENT SCHEDULES
Schedule II -- Condensed Financial Information of Registrant
  - Ceres Group, Inc. (Parent Only).........................    79
Schedule III -- Supplemental Insurance Information..........    82
Schedule IV -- Reinsurance..................................    83
</Table>

                                        43
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Ceres Group, Inc.

     We have audited the accompanying consolidated balance sheets of Ceres
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. We have also audited
the information presented in the financial statement schedules listed in the
Index at Item 14(a). These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ceres Group,
Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the related
financial statement schedules when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

                                                               Ernst & Young LLP

Cleveland, Ohio
March 11, 2002

                                        44
<PAGE>

                       CERES GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2001 AND 2000
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
Investments
  Fixed maturities available-for-sale, at fair value........  $471,485   $415,287
  Surplus notes.............................................     5,211      4,995
  Policy and mortgage loans.................................     5,926      5,829
                                                              --------   --------
     Total investments -- Note D............................   482,622    426,111
Cash and cash equivalents (of which $9,881 and $9,397 is
  restricted, respectively) -- Note D.......................    74,573     59,512
Accrued investment income...................................     7,200      7,496
Premiums receivable.........................................     5,230      5,852
Reinsurance receivable -- Note J............................   223,330    238,185
Property and equipment, net -- Note E.......................     8,100     17,531
Deferred federal income taxes -- Note H.....................     1,112      3,797
Deferred acquisition costs -- Note F........................    77,377     55,989
Value of business acquired -- Note G........................    33,470     32,254
Goodwill....................................................    24,443     25,425
Other assets................................................     8,559      8,377
                                                              --------   --------
     Total assets...........................................  $946,016   $880,529
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accrual
  Future policy benefits, losses and claims.................  $408,918   $408,890
  Unearned premiums.........................................    47,339     42,751
  Other policy claims and benefits payable -- Note I........   198,296    176,236
                                                              --------   --------
                                                               654,553    627,877
Deferred reinsurance gain -- Note J.........................    13,881     18,839
Other policyholders' funds..................................    28,659     24,246
Federal income taxes payable -- Note H......................     1,259      1,464
Mortgage note payable -- Note L.............................        --      8,018
Debt -- Note L..............................................    31,000     49,000
Other liabilities...........................................    60,089     47,802
                                                              --------   --------
     Total liabilities......................................   789,441    777,246
                                                              --------   --------
Stockholders' equity
  Non-voting preferred stock, $.001 par value, 1,900,000
     shares authorized, none issued -- Note O...............        --         --
  Convertible voting preferred stock, $.001 par value, at
     stated value, 100,000 shares authorized, 0 and 75,000
     shares issued and outstanding, respectively -- Notes B
     and O..................................................        --      7,500
  Common stock, $.001 par value, 50,000,000 shares
     authorized, 33,857,895 and 17,278,704 shares issued and
     outstanding, respectively -- Note B....................        34         17
  Additional paid-in capital................................   132,061     82,943
  Dividends distributable, convertible voting preferred
     stock -- Note B........................................        --        327
  Retained earnings.........................................    23,831     18,672
  Accumulated other comprehensive income (loss).............       649     (6,176)
                                                              --------   --------
       Total stockholders' equity...........................   156,575    103,283
                                                              --------   --------
       Total liabilities and stockholders' equity...........  $946,016   $880,529
                                                              ========   ========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        45
<PAGE>

                       CERES GROUP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                2001       2000       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
REVENUES
Premiums, net -- Note J
  Medical...................................................  $408,215   $375,804   $251,876
  Senior and other..........................................   226,824    135,738     75,870
                                                              --------   --------   --------
     Total premiums, net....................................   635,039    511,542    327,746
Net investment income -- Note D.............................    31,999     26,871     21,362
Net realized gains (losses).................................     4,953        (98)       107
Fee and other income........................................    36,155     32,718     17,410
Amortization of deferred reinsurance gain -- Note J.........     4,958      6,093      5,468
                                                              --------   --------   --------
                                                               713,104    577,126    372,093
                                                              --------   --------   --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses -- Note J
  Medical...................................................   333,740    288,260    176,531
  Senior and other..........................................   166,735    101,551     56,572
                                                              --------   --------   --------
     Total benefits, claims, losses and settlement
       expenses.............................................   500,475    389,811    233,103
Selling, general and administrative expenses -- Note J......   223,941    186,389    137,932
Net (deferral) amortization and change in acquisition costs
  and value of business acquired -- Notes F and G...........   (29,172)   (30,513)   (21,892)
Amortization of goodwill....................................     1,104      1,069        854
Interest expense and financing costs........................     4,679      5,566      4,090
Special charges -- Note M...................................     7,097         --         --
                                                              --------   --------   --------
                                                               708,124    552,322    354,087
                                                              --------   --------   --------
Income before federal income taxes, minority interest, and
  preferred stock repurchase and dividends..................     4,980     24,804     18,006
Federal income tax expense -- Note H........................     2,703      8,380      6,302
                                                              --------   --------   --------
Income after tax, before minority interest and preferred
  stock repurchase and dividends............................     2,277     16,424     11,704
Minority interest...........................................       (55)       (26)        --
                                                              --------   --------   --------
NET INCOME..................................................     2,332     16,450     11,704
Gain on repurchase of the convertible voting preferred
  stock, net of dividends -- Notes B and O..................     2,827       (327)        --
                                                              --------   --------   --------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS..............  $  5,159   $ 16,123   $ 11,704
                                                              ========   ========   ========
NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
  Basic.....................................................  $   0.29   $   1.06   $   0.88
  Diluted...................................................      0.29       1.00       0.77
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        46
<PAGE>

                       CERES GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                 2001         2000         1999
                                                              ----------   ----------   ----------
<S>                                                           <C>          <C>          <C>
CONVERTIBLE VOTING PREFERRED STOCK
Balance at beginning of year................................  $    7,500   $       --   $       --
Issuance of stock...........................................          --        7,500           --
Dividends distributed.......................................         699           --           --
Repurchase of stock.........................................      (8,199)          --           --
                                                              ----------   ----------   ----------
      Balance at end of year................................  $       --   $    7,500   $       --
                                                              ==========   ==========   ==========
COMMON STOCK
Balance at beginning of year................................  $       17   $       14   $       12
Issuance of common stock:
  Public equity offering....................................          16           --           --
  Employee benefit plans and private placement..............           1            3            2
                                                              ----------   ----------   ----------
      Balance at end of year................................  $       34   $       17   $       14
                                                              ==========   ==========   ==========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year................................  $   82,943   $   60,290   $   43,883
Issuance of stock:
  Public equity offering....................................      46,495           --           --
  Private placement.........................................          --       21,093       14,998
  Employee benefit plans....................................       2,623        1,560        1,409
                                                              ----------   ----------   ----------
      Balance at end of year................................  $  132,061   $   82,943   $   60,290
                                                              ==========   ==========   ==========
DIVIDENDS DISTRIBUTABLE, CONVERTIBLE VOTING PREFERRED STOCK
Balance at beginning of year................................  $      327   $       --   $       --
Dividends distributable.....................................         774          327           --
Dividends distributed.......................................        (699)          --           --
Repurchase of stock.........................................        (402)          --           --
                                                              ----------   ----------   ----------
      Balance at end of year................................  $       --   $      327   $       --
                                                              ==========   ==========   ==========
RETAINED EARNINGS
Balance at beginning of year................................  $   18,672   $    2,549   $   (9,155)
Net income..................................................       2,332       16,450       11,704
Dividends distributable, convertible voting preferred
  stock.....................................................        (774)        (327)          --
Repurchase of convertible voting preferred stock............       3,601           --           --
                                                              ----------   ----------   ----------
      Balance at end of year................................  $   23,831   $   18,672   $    2,549
                                                              ==========   ==========   ==========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year................................  $   (6,176)  $  (18,192)  $    1,096
Unrealized gain (loss) on securities, net of tax of $37, $0
  and $0, respectively......................................       7,280       11,806      (19,650)
Other.......................................................        (455)         210          362
                                                              ----------   ----------   ----------
      Balance at end of year................................  $      649   $   (6,176)  $  (18,192)
                                                              ==========   ==========   ==========
TOTAL STOCKHOLDERS' EQUITY..................................  $  156,575   $  103,283   $   44,661
                                                              ==========   ==========   ==========
NUMBER OF SHARES OF CONVERTIBLE VOTING PREFERRED STOCK
Balance at beginning of year................................      75,000           --           --
Issuance of stock...........................................          --       75,000           --
Dividends distributed.......................................       6,986           --           --
Repurchase of stock.........................................     (81,986)          --           --
                                                              ----------   ----------   ----------
      Balance at end of year................................          --       75,000           --
                                                              ==========   ==========   ==========
NUMBER OF SHARES OF COMMON STOCK
Balance at beginning of year................................  17,278,704   13,706,726   11,495,172
Issuance of stock:
  Public equity offering....................................  16,100,000           --           --
  Private placement.........................................          --    3,333,334    2,000,000
  Employee benefit plans....................................     479,191      238,644      211,554
                                                              ----------   ----------   ----------
      Balance at end of year................................  33,857,895   17,278,704   13,706,726
                                                              ==========   ==========   ==========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        47
<PAGE>

                       CERES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                2001        2000       1999
                                                              ---------   --------   ---------
<S>                                                           <C>         <C>        <C>
OPERATING ACTIVITIES
  Net income................................................  $   2,332   $ 16,450   $  11,704
  Adjustments to reconcile net income to cash provided by
    operating activities:
      Depreciation and amortization.........................      3,660      2,418       2,395
      Net realized (gains) losses...........................     (4,953)        98        (107)
      Deferred federal income tax expense...................      2,893      1,573       5,587
      Changes in assets and liabilities:
         Premiums receivable................................        622       (724)         85
         Reinsurance receivable.............................     14,855     28,350    (221,744)
         Value of business acquired.........................     (1,216)    (2,841)       (902)
         Goodwill...........................................        982      6,495        (423)
         Federal income taxes payable/recoverable...........       (205)        15      (6,256)
         Accrued investment income..........................        296       (350)        250
         Other assets.......................................       (182)       627      (1,376)
         Future policy benefits, claims and funds payable...     26,813     11,998     248,382
         Unearned premium...................................      4,588      9,530      17,525
         Other liabilities..................................      5,219      4,861       8,454
         Deferred acquisition costs.........................    (22,088)   (27,672)    (22,283)
         Deferred reinsurance gain..........................     (4,958)    (2,093)     (5,468)
                                                              ---------   --------   ---------
Net cash provided by operating activities...................     28,658     48,735      35,823
                                                              ---------   --------   ---------
INVESTING ACTIVITIES
  Net purchases of furniture and equipment..................       (766)    (1,909)       (739)
  Purchase of fixed maturities available-for-sale...........   (232,594)   (66,337)    (30,323)
  Proceeds from sale of Cleveland headquarters..............     15,586         --          --
  Acquisition of Continental General Corporation, net of
    $2,212 cash acquired....................................         --         --     (59,788)
  Acquisition of Pyramid Life Insurance Company, net of
    $7,159 cash acquired....................................         --    (37,339)         --
  Increase in surplus notes.................................         --         --      (5,042)
  Decrease (increase) in mortgage and policy loans, net.....        (97)       366         (20)
  Proceeds from sales of fixed maturities
    available-for-sale......................................    117,129     11,569      29,811
  Proceeds from calls and maturities of fixed maturities
    available-for-sale......................................     69,340     31,258      12,991
  Proceeds from sales, calls and maturities of fixed
    maturities held-to-maturity.............................         --         --       3,923
  Proceeds from sale of property held for sale..............         --      2,115          --
                                                              ---------   --------   ---------
Net cash used in investing activities.......................    (31,402)   (60,277)    (49,187)
                                                              ---------   --------   ---------
FINANCING ACTIVITIES
  Increase in annuity account balances......................     23,367     23,223      18,446
  Decrease in annuity account balances......................    (23,679)   (34,107)    (37,819)
  Principal payments on mortgage note payable...............     (8,018)      (139)       (127)
  Increase in debt borrowings...............................     10,000     15,000      40,000
  Principal payments on debt................................    (28,000)    (6,000)         --
  Proceeds from public equity offering......................     46,511         --          --
  Proceeds from issuance of common stock related to employee
    benefit plans...........................................      2,624      1,560       1,409
  Proceeds from private placement of common stock, net of
    acquisition costs.......................................         --     21,096      15,000
  Proceeds from private placement of convertible voting
    preferred stock.........................................         --      7,500          --
  Repurchase of convertible voting preferred stock..........     (5,000)        --          --
                                                              ---------   --------   ---------
Net cash provided by financing activities...................     17,805     28,133      36,909
                                                              ---------   --------   ---------
NET INCREASE IN CASH........................................     15,061     16,591      23,545
Cash and cash equivalents at beginning of year..............     59,512     42,921      19,376
                                                              ---------   --------   ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $  74,573   $ 59,512   $  42,921
                                                              =========   ========   =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the year for interest....................  $   4,193   $  6,051   $   2,940
  Cash paid during the year for federal income taxes........        450      1,100       2,078
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        48
<PAGE>

                       CERES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

A.  SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF BUSINESS

     Ceres Group, Inc. and its subsidiaries operated in 1998 and prior periods
primarily through its wholly owned subsidiary, Central Reserve Life Insurance
Company. As of December 31, 2000, the Company's consolidated statements also
include the accounts of Provident American Life & Health Insurance Company
acquired on December 31, 1998, Continental General Corporation and its
wholly-owned subsidiary, Continental General Insurance Company, acquired on
February 17, 1999, United Benefit Life Insurance Company under a reinsurance
arrangement effective August 1, 1998 and acquired on July 21, 1999 (through
foreclosure), and Pyramid Life Insurance Company acquired on July 26, 2000. As
of December 31, 2001, the Company's consolidated statements include the
operations of all these subsidiaries for the entire year. These acquisitions are
discussed further in Note C, Business Combinations and Note J, Reinsurance
Arrangements.

     The Company provides through its wholly-owned subsidiaries a wide array of
health and life insurance products to over 535,000 insureds. While the Company
through its subsidiaries is licensed in 49 states, the District of Columbia and
the U.S. Virgin Islands, approximately 60.0% of premium volume is generated from
ten states: Ohio, Texas, Florida, Indiana, Pennsylvania, Tennessee, Georgia,
Missouri, Illinois and Nebraska.

SIGNIFICANT ACCOUNTING POLICIES

     The accompanying consolidated financial statements include the accounts of
Ceres and its wholly-owned subsidiaries. The consolidated statement of income
for the year ended December 31, 2000 reflects the results of operations for
Pyramid Life for the period subsequent to its acquisition on July 26, 2000. The
consolidated statement of income for the year ended December 31, 1999 reflects
the results of operations for Continental General Corporation for the period
subsequent to its acquisition on February 17, 1999 and United Benefit Life for
the period subsequent to its acquisition on July 21, 1999. All intercompany
transactions have been eliminated in consolidation.

     The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which differ from accounting practices
prescribed or permitted by the various state departments of insurance in which
the insurance subsidiaries are domiciled. See Note P, Statutory Financial
Information for further information.

     A summary of significant accounting policies is as follows:

  Cash and Cash Equivalents

     Cash and cash equivalents include cash and all liquid securities with
maturities of 90 days or less when purchased. See Note D, Cash and Investments
for further information.

  Investments

     Investments in bonds and mandatorily redeemable preferred stocks are
designated at purchase as held-to-maturity or available-for-sale.
Held-to-maturity investments are securities which management has the positive
intent and ability to hold until maturity, and are reported at amortized cost.
Available-for-sale investments and surplus notes are reported at fair value,
with unrealized holding gains and losses reported in accumulated other
comprehensive income (losses), net of deferred federal income taxes. All
investments as of December 31, 2001 are designated as available-for-sale.

     Investments in policy notes and mortgage loans are reported at cost which
approximates fair value.
                                        49
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     Premiums and discounts arising from the purchase of mortgage-backed
securities are amortized using the interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments. Premiums and
discounts on other debt instruments are amortized using the interest method over
the remaining term of the security.

     Realized gains and losses on the sale of investments are determined using
the specific-identification method, and are credited or charged to income. Also
charged to income are unrealized losses on investment securities for which a
decline in fair market value is deemed to be other than temporary.

     The estimated fair value of investments is based upon quoted market prices,
where available, or on values obtained from independent pricing services.

  Deferred Acquisition Costs

     Certain excess first year costs associated with issuing an insurance
policy, including commissions and underwriting, all of which vary with and are
primarily related to the production of new business, have been deferred and
reported as deferred acquisition costs. Deferred acquisition costs associated
with traditional life and accident and health contracts are charged to expense
over the premium-paying period or as premiums are earned over the life of the
contract. Deferred acquisition costs associated with interest-sensitive life and
annuity products are charged to expense over the estimated duration of the
policies in relation to the present value of the estimated gross profits from
surrender charges and investments, mortality, and expense margins.

     The Company evaluates the recoverability of deferred acquisition costs on a
quarterly basis and determined that these amounts are recoverable.

  Goodwill

     Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is being amortized on a straight-line basis over periods of
25 years or less. On a periodic basis, management reviews goodwill to determine
if events or changes in circumstances indicate the carrying value of such assets
is not recoverable, in which case an impairment charge would be recorded in
current operations. Management believes that no impairment of goodwill exists at
December 31, 2001. See New Accounting Pronouncements for further information.

  Property and Equipment and Property Held for Sale

     Property and equipment are carried at cost less allowances for depreciation
and amortization. Office buildings are depreciated on the straight-line method
over 31.5 years, except for certain components, which are depreciated over 15
years. Depreciation for other property and equipment is computed on the
straight-line basis over the estimated useful lives of the equipment,
principally five and seven years. Property held for sale is stated at estimated
fair value less cost to sell. No depreciation or amortization is provided for
property held for sale.

     Management periodically reviews the carrying value of property and
equipment for impairment. Any impaired property and equipment is valued using an
undiscounted cash flow methodology.

  Future Policy Benefits, Losses and Claims

     Liabilities for future policy reserves for accident and health and ordinary
life business are based on the net level premium basis and estimates of future
claims, investment yield, lapses using the Company's experience and actuarial
judgment with an allowance for possible future adverse deviations from expected
experience. Interest rates used range from 4.5% to 6.0%. Liabilities for
interest sensitive products such as deferred

                                        50
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

annuities and universal life are based on the retrospective deposit method. This
is the policyholder fund balance before adjusting for any surrender charges.
Guaranteed minimum rates for universal life contracts are 4.0% to 4.5%. At
December 31, 2001, credited rates ranged from 4.0% to 6.0%. Guaranteed base
minimum rates for deferred annuities range from 3.0% to 5.0% depending on the
duration of the contract. Current rates credited range from 4.0% to 7.0%.

  Other Policy Claims and Benefits Payable

     Liabilities for unpaid life and accident and health claims, which include a
provision for estimated costs to investigate and settle claims, are estimated
based upon past experience for pending, incurred but not reported, and reopened
claims. Accident and health claims incurred but not reported are computed using
actuarially-determined factors based on a combination of claim completion and
projected claim cost methods, utilizing durational experience, seasonal cycle,
changes in health care practice, changes in inflation rates, and the claims
backlog.

     Claim liabilities with a long pay out period, such as long term care and
disability income claims, are discounted at interest rates ranging from 3.0% to
6.0%. Although considerable variability is inherent in such computations,
management believes that the liabilities for unpaid life and accident and health
claims are adequate. The estimates are continually reviewed and adjusted as
necessary as experience develops or new information becomes known with such
adjustments included in current operations.

  Other Policyholders' Funds

     Other policyholders' funds consist of supplementary contracts without life
contingencies, premiums, and annuity considerations received in advance and
remittance and items not allocated.

  Insurance Related Assessments

     Statement of Position No. 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, provides guidance for determining
when an insurance or other enterprise should recognize a liability for
guaranty-fund and other insurance-related assessments and guidance for measuring
the liability. The adoption of this statement effective January 1, 1999 resulted
in a $0.2 million charge to general operating expenses.

  Comprehensive Income

     Comprehensive income in 2001, 2000 and 1999 includes a change in unrealized
gains or losses on available-for-sale securities, in addition to reported net
income. See Note Q, Comprehensive Income (Loss) for further information.

  Premium Revenue

     Life premiums are recognized as revenue when they become due. Accident and
health premiums are recognized as revenue over the terms of the policies.
Amounts received from interest sensitive contracts, principally universal life
and annuity products, are not reflected in premium revenue; rather, such amounts
are accounted for as deposits with the related liabilities included in future
policy benefits, losses and claims.

  Fee and Other Income

     Fee and other income consist of association, collection, management, and
administrative fees, and are recognized when earned.

                                        51
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

  Deferred Reinsurance Gain

     Deferred reinsurance gain consists of initial ceding allowances received
from reinsurers, less amounts amortized into income over the estimated remaining
life of the underlying policies reinsured, except for interest sensitive
products that are amortized over the expected profit stream of the in force
business.

  Federal Income Taxes

     Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reviewed for
recoverability and a valuation allowance is established, if necessary.

  Stock-Based Compensation

     The intrinsic value method of accounting is used for stock-based
compensation plans. In accordance with the intrinsic value method, compensation
cost is measured as the excess, if any, of the quoted market price of the equity
instrument awarded at the measurement date over the amount an employee must pay
to acquire the equity instrument. Stock-based compensation costs are recognized
over the period in which employees render services associated with the awards.

  Earnings per Share

     Basic earnings per share is computed by dividing the income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if common stock equivalents were exercised and shared in the
earnings of the Company. Only those potential common shares, which are dilutive,
are included in the computation of diluted earnings per share. See Note R,
Computation of Net Income Per Common Share for further information.

  Related Party Transactions

     Pursuant to an administrative services agreement with Antares Management
Solutions, we outsource all information and telephone systems at our Cleveland
headquarters, as well as claims processing and network access for our Central
Reserve Ohio insureds. Antares is a division of Medical Mutual Services, which
is a subsidiary of Medical Mutual of Ohio, a 2.0% stockholder of the Company on
a diluted basis and a party to the Company's voting agreement. Under the
administrative services agreement, we have paid $18.4 million in 2001, $21.4
million in 2000 and $18.8 million in 1999.

  Use of Estimates

     The consolidated financial statements reflect estimates and judgments made
by management that affect the amounts reported herein and the disclosure of
contingent assets and liabilities. Actual results could differ significantly
from those estimates.

  Reclassification

     Certain amounts presented in the prior years' financial statements have
been reclassified to conform to the current year's method of presentation.

                                        52
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

  New Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This Statement will supersede,
effective January 1, 2002, SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the
accounting and reporting provisions of Accounting Principles Board Opinion, or
APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. This Statement also amended Accounting Research Bulletin No. 51,
Consolidated Financial Statements.

     This Statement required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. The provisions of this Statement generally
are to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002
is not expected to have a significant effect on our results of operations,
financial position or liquidity.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addressed financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. We anticipate that the
adoption of this standard will not have a significant effect on our results of
operations, financial position or liquidity.

     In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which replaces APB Opinion No. 17, Intangible Assets. This Statement
addressed how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. Additionally, this
Statement discussed how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements. This
Statement:

     - specifies that goodwill and intangible assets that have indefinite useful
       lives will not be amortized but rather will be tested at least annually
       for impairment;

     - provides specific guidance for testing goodwill for impairment; and

     - requires additional disclosures not previously required.

     The provisions of SFAS No. 142 were adopted by the Company as required
effective January 1, 2002. Application of the nonamortization provisions of this
Statement is expected to reduce annual expense by approximately $1.1 million,
which is projected to result in an increase in net income of approximately $0.7
million, or $0.02 per diluted share, in 2002 and subsequent periods, subject to
the impairment test described herein. SFAS No. 142, as part of its adoption
provisions, requires a transitional impairment test to be applied to all
goodwill and other indefinite-lived intangible assets within the first half of
2002 and any resulting impairment loss be reported as a change in accounting
principle. The Company is in the process of evaluating the potential impact of
this Statement on its results of operations, financial position, and liquidity.

     In general, application of the new provisions for goodwill and other
indefinite-lived intangible assets may result in more income statement
volatility due to the potential for periodic recognition of impairment losses,
which could vary in amount and regularity versus reducing those assets through
systematic amortization over a finite period of time.

     In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addressed the accounting and reporting for business combinations and expanded
the criteria for recording intangible assets separate from

                                        53
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

goodwill. On July 1, 2001, we adopted this Statement which requires us to use
the purchase method of accounting for all business combinations initiated after
June 30, 2001.

     In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement revised the methods
for accounting for securitizations and other transfers of financial assets and
collateral as outlined in SFAS No. 125, and required certain additional
disclosures. The adoption of this Statement did not have a material effect on
our results of operations, financial position or liquidity.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and certain Hedging Activities and SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133. We adopted the new statement effective
January 1, 2001. If in the future we have derivative instruments, this Statement
will require us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS No. 133 did not have a
significant effect on our results of operations, financial position or
liquidity.

B.  EQUITY TRANSACTIONS

     On December 27, 2001, we sold 16.1 million shares of common stock, at $3.20
per share, which included the exercise of the underwriter's over-allotment
option of 2.1 million shares, in a follow-on public offering or the December
2001 public offering. We used the net proceeds of $46.5 million from this sale
to:

     - repay $10.0 million of our tranche A term loan (See Note L, Debt, for
       further information);

     - repay the remaining balance of $2.5 million of our revolver on February
       17, 2002;

     - repurchase our convertible voting preferred stock for $5.0 million (See
       Note O, Preferred Shares, for more information);

     - contribute $28.0 million to the capital of our insurance subsidiaries;
       and

     - $1.0 million for general corporate purposes and working capital.

     On July 25, 2000, we sold 3,333,334 shares of our common stock at $6.00 per
share in a private placement offering, and, on July 26, 2000, we sold 75,000
shares of our convertible voting preferred stock at $100.00 per share to United
Insurance Company of America in a private placement offering. The $27.5 million
proceeds from these sales were used for the purchase of Pyramid Life from United
Insurance, a subsidiary of Unitrin, Inc. See Note C, Business Combinations and
Note O, Preferred Shares, for further information.

     On February 17, 1999, the Company entered into a series of stock
subscription agreements with a group of investors, principally Peter W. Nauert
and Insurance Partners, wherein the Company issued 2,000,000 common shares at
$7.50 per share for $15.0 million. The $15.0 million proceeds from these sales
were used for the purchase of Continental General Corporation from the Western &
Southern Life Insurance Company. See Note C, Business Combinations, for further
information.

     In November 1997, the Company entered into a stock purchase agreement, or
Original Stock Purchase Agreement, with Strategic Acquisition Partners, LLC, or
Strategic, wherein the Company agreed to issue and

                                        54
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

sell 5,000,000 common shares and warrants to purchase an additional 2,500,000
common shares at an exercise price of $6.50 per share, for aggregate proceeds of
$27.5 million. On March 30, 1998, the Company entered into an amended and
restated Stock Purchase Agreement, or New Stock Purchase Agreement, with
Strategic and two additional investors: Insurance Partners, L.P. and Insurance
Partners Offshore (Bermuda), L.P., collectively, Insurance Partners. The New
Stock Purchase Agreement was subsequently approved by stockholders, and
accordingly, in July 1998 the Company issued and sold 7,300,000 common shares at
$5.50 per share and warrants to purchase an additional 3,650,000 common shares
at an exercise price of $5.50 per share, which expire July 2, 2005, and received
proceeds of $37.7 million, which are net of transaction expenses.

     In connection with the Original Stock Purchase Agreement, Strategic
arranged an interim loan, or the Bridge Loan of $20.0 million to the Company.
The Bridge Loan was due June 30, 1998, and bore interest at the prime rate of a
major commercial bank. As consideration for the arrangement, the Company issued
Strategic and Richard M. Osborne warrants to purchase 800,000 common shares at
$6.00 per share in December 1997, which expire December 17, 2002, and additional
warrants to purchase 200,000 common shares at $6.00 per share on July 3, 1998,
which expire on December 17, 2002. Proceeds from the Bridge Loan were used as
follows:

     - $5.2 million was used to repay outstanding bank debt;

     - $14.0 million was used by the Company to invest in the statutory surplus
       of Central Reserve, and was evidenced by a surplus note in favor of the
       Company from Central Reserve; and

     - $0.8 million was used to establish an interest reserve at the Company and
       to pay transaction expenses.

The Bridge Loan was repaid in full by the Company in July 1998 from the proceeds
received in accordance with the New Stock Purchase Agreement.

C.  BUSINESS COMBINATIONS

  The Pyramid Life Insurance Company Acquisition

     On July 26, 2000, the Company, through Continental General Corporation,
completed the purchase of Pyramid Life from United Insurance. Pyramid Life,
based in Mission, Kansas, provides health and life insurance primarily for the
senior market, including Medicare supplement, long-term care, home health care,
and senior life insurance products. At June 30, 2000 (prior to payment of the
$25.0 million pre-closing dividend), Pyramid Life had assets of $140.9 million
and total revenues of $37.0 million for the first six months of 2000. Pyramid
Life markets senior insurance products through approximately 2,500 independent
agents in 40 states.

     The $67.5 million purchase price was financed as follows:

     - $20.0 million from the sale of 3,333,334 newly-issued shares of common
       stock at $6.00 per share, in a private placement offering;

     - $7.5 million from the sale to United of 75,000 newly-issued shares of
       convertible voting preferred stock, which shares (1) are entitled to vote
       on all matters presented to stockholders as if conversion has occurred,
       (2) are convertible into common stock by dividing the $100.00 per share
       purchase price, plus any accrued and unpaid dividends, by the initial
       conversion price of $6.145 (the average market price of our common stock
       at the time of issuance), (3) receive cumulative stock dividends of 10%
       per annum in additional shares of convertible voting preferred stock, (4)
       prohibit the payment of dividends on shares of common stock unless all
       previous dividends on the convertible voting preferred stock have been
       paid, and (5) as of December 31, 2000, $0.3 million in dividends were
       accrued or $4.36 per convertible voting preferred share;
                                        55
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     - $25.0 million from a special pre-closing dividend paid by Pyramid Life to
       United in connection with the acquisition; and

     - $15.0 million from a combination of funds from Continental General and
       financing provided by The Chase Manhattan Bank and associated banks.

     In connection with purchase accounting rules, the total purchase cost for
the acquisition has been allocated to the assets and liabilities of Pyramid Life
based on their fair values.

  Continental General Corporation

     Effective February 1, 1999, the Company acquired 100% of the outstanding
common stock of Continental General Corporation from The Western & Southern Life
Insurance Company. Continental General Corporation is a holding company that
primarily conducts business through its wholly-owned subsidiary, Continental
General, a life and accident and health insurer domiciled in Nebraska, which is
licensed in 49 states, the District of Columbia, and the U.S. Virgin Islands.
Continental General offers Medicare supplement and individual major medical
products, distributed through independent agents. Continental General also
offers long-term care, Medicare supplement, ordinary life, universal life, and
annuity policies. Total consideration paid by the Company for the common stock
was $84.5 million, and was financed through reinsurance, debt, cash, an equity
offering as described further below and a pre-closing dividend of $22.5 million
paid to Western & Southern. This transaction was accounted for in accordance
with the purchase method, and accordingly, the purchase price was allocated to
assets and liabilities acquired based upon estimates of their fair value.

     The acquisition was partially funded by a reinsurance treaty with Hannover
Life Reassurance Company of America (formerly Reassurance Company of Hannover),
whereby Continental General ceded 50% of its in force life, accident and health,
and annuity policies to Hannover, and retained the remaining risk. The treaty
provided an initial ceding allowance of $13.0 million, which was accounted for
as a deferred reinsurance gain.

     Other fundings were provided by a $40.0 million credit facility with a
syndicate of major commercial banks led by The Chase Manhattan Bank. The Company
has pledged the common stock of Continental General Corporation and Central
Reserve as security for the loan. See Note M, Debt for further discussion of the
credit facility.

  Provident American Life & Health Insurance Company

     On December 31, 1998, Central Reserve acquired 100% of the outstanding
common stock of Provident American Life from Provident American Corporation for
$5.5 million. Provident American Life is a life and accident and health insurer,
domiciled in Ohio, licensed in 40 states and the District of Columbia, that
markets managed care health insurance products to individuals and small
businesses, and critical illness coverage. Funds for the acquisition were
provided from Central Reserve's working capital. This transaction was accounted
for in the accompanying consolidated financial statements in accordance with the
purchase method and accordingly, the purchase price was allocated to assets and
liabilities acquired based upon estimates of their fair values. There was no
impact on the accompanying consolidated statement of operations for 1998 as a
result of this transaction.

     Immediately prior to the completion of this transaction, Provident American
Life ceded 100% of its insurance in force to Provident Indemnity Life Insurance
Company, a subsidiary of Provident American Corporation.

     Effective January 1, 1999, Hannover assumed from Provident Indemnity 100%
of its accident and health block of business. As of January 1, 1999, Central
Reserve entered into a separate reinsurance agreement with Hannover, wherein
Central Reserve assumed from Hannover 10% of the block acquired by Hannover from

                                        56
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Provident Indemnity. Also, at January 1, 1999, Provident American Life ceded 50%
of all business written after December 31, 1998 to Hannover.

D. CASH AND INVESTMENTS

     The amortized cost and estimated fair value of invested assets as of
December 31, 2001 were as follows:

<Table>
<Caption>
                                                            GROSS UNREALIZED
                                                AMORTIZED   ----------------   ESTIMATED
                                                  COST      GAINS    LOSSES    FAIR VALUE
                                                ---------   ------   -------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                             <C>         <C>      <C>       <C>
Available-for-sale
  U.S. Treasury securities....................  $ 29,051    $  611   $    (5)   $ 29,657
  U.S. Agencies...............................    10,323       347       (11)     10,659
  State and political subdivisions............     1,083        --       (11)      1,072
  Corporate bonds.............................   273,915     4,049    (5,137)    272,827
  Mortgage- and asset-backed securities.......   154,309     2,569    (1,303)    155,575
  Preferred stock.............................     1,520       182        (7)      1,695
                                                --------    ------   -------    --------
     Total available-for-sale.................   470,201     7,758    (6,474)    471,485
Surplus notes.................................     5,045       166        --       5,211
Mortgage loans................................        57        --        --          57
Policy notes..................................     5,869        --        --       5,869
                                                --------    ------   -------    --------
     Total investments........................  $481,172    $7,924   $(6,474)   $482,622
                                                ========    ======   =======    ========
</Table>

     The amortized cost and estimated fair value of invested assets as of
December 31, 2000 were as follows:

<Table>
<Caption>
                                                           GROSS UNREALIZED
                                               AMORTIZED   -----------------   ESTIMATED
                                                 COST      GAINS     LOSSES    FAIR VALUE
                                               ---------   ------   --------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                            <C>         <C>      <C>        <C>
Available-for-sale
  U.S. Treasury securities...................  $ 35,996    $  347   $    (37)   $ 36,306
  U.S. Agencies..............................    37,619     1,634         (7)     39,246
  State and political subdivisions...........     3,672        20        (16)      3,676
  Corporate bonds............................   268,239     2,652    (10,746)    260,145
  Mortgage- and asset-backed securities......    72,082       847       (533)     72,396
  Preferred stock............................     3,470       135        (87)      3,518
                                               --------    ------   --------    --------
     Total available-for-sale................   421,078     5,635    (11,426)    415,287
Surplus notes................................     5,071        --        (76)      4,995
Mortgage loans...............................        89        --         --          89
Policy notes.................................     5,740        --         --       5,740
                                               --------    ------   --------    --------
     Total investments.......................  $431,978    $5,635   $(11,502)   $426,111
                                               ========    ======   ========    ========
</Table>

     Except for bonds and notes of the U.S. Government or of a U.S. Government
agency or authority, no investment of the Company exceeds 10% of total
stockholders' equity at December 31, 2001 and 2000.

                                        57
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     The amortized cost and estimated fair value of invested assets as of
December 31, 2001 by contractual maturity were as follows:

<Table>
<Caption>
                                                              AMORTIZED   ESTIMATED
                                                                COST      FAIR VALUE
                                                              ---------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Fixed maturities
  Due in one year or less...................................  $ 20,427     $ 20,709
  Due after one year through five years.....................   140,782      142,877
  Due after five years through ten years....................    75,929       75,455
  Due after ten years.......................................    83,799       82,080
  Mortgage- and asset-backed securities.....................   154,309      155,575
                                                              --------     --------
     Total fixed maturities.................................   475,246      476,696
Mortgage loans..............................................        57           57
Policy notes................................................     5,869        5,869
                                                              --------     --------
     Total invested assets..................................  $481,172     $482,622
                                                              ========     ========
</Table>

     Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.

     Proceeds, gross realized gains and gross realized losses from the sales
(excluding calls, maturities and pay downs) of fixed maturities
available-for-sale during each year were as follows:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           2001      2000      1999
                                                         --------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                      <C>        <C>       <C>
Proceeds...............................................  $117,129   $11,569   $29,811
Gross realized gains...................................     5,774       161        27
Gross realized losses..................................       998        80        74
</Table>

     The following is a summary of net investment income by category of
investment:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Fixed maturities........................................  $29,995   $23,390   $19,359
Policy loans............................................      399       356       244
Cash equivalents........................................    2,339     3,378     1,637
Other...................................................      346       831     1,345
                                                          -------   -------   -------
  Investment income.....................................   33,079    27,955    22,585
Investment expenses.....................................   (1,080)   (1,084)   (1,223)
                                                          -------   -------   -------
  Net investment income.................................  $31,999   $26,871   $21,362
                                                          =======   =======   =======
</Table>

     At December 31, 2001 and 2000, the Company's insurance subsidiaries had
certificates of deposit and fixed maturity securities with a carrying value of
$39.3 million and $32.6 million, respectively, on deposit with various state
insurance departments to satisfy regulatory requirements.

                                        58
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     At December 31, 2001 and 2000, $7.4 million and $9.4 million, respectively,
of cash was held for fully insured employer shared risk plans, which is
restricted to use. Ceres Group is entitled to investment income from these
funds. Additionally, at December 31, 2001, $2.5 million of cash was held in
escrow for the permanent repayment of the balance of the revolver due February
17, 2002. A corresponding liability is included in the accompanying consolidated
financial statements.

     At December 31, 2001, the Company held no unrated bonds and 5.2% of fixed
maturity investments were in less-than-investment grade securities. Corporate
bonds representing approximately 1.1% of fixed maturities were downgraded by
rating agencies. Approximately 4.1% of the portfolio was invested in BB rated
subordinated non-agency residential and commercial mortgage-backed securities.
These securities include jumbo residential mortgages and commercial mortgages
with strong prepayment protection. The Company has, however, taken a $0.8
million write-down for other than temporary impairment on securities backed by
leasehold interests in the World Trade Center complex--most of which was
destroyed by terrorists on September 11, 2001. No default has occurred on
contractual payments for these securities, which represent less than 0.1% of
total invested assets. The Company performs periodic evaluations of the relative
credit standings of the issuers of the bonds held in the Company's portfolio.
The Company considers these evaluations in its overall investment strategy.

E.  PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost and are summarized by category as
follows:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                2001          2000
                                                              ---------    ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Home office building........................................   $4,825       $16,153
Land........................................................    1,261         2,871
Furniture and fixtures......................................    2,538         2,499
Information technology equipment............................    3,902         3,705
Other property and equipment................................    3,738         3,229
                                                               ------       -------
                                                               16,264        28,457
Accumulated depreciation....................................   (8,164)      (10,926)
                                                               ------       -------
  Total.....................................................   $8,100       $17,531
                                                               ======       =======
</Table>

     Other property and equipment consists principally of software, leasehold
improvements and office equipment. Depreciation expense for the years ended
December 31, 2001, 2000 and 1999 was $1.9 million, $1.5 million, and $1.1
million, respectively.

                                        59
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

F.  DEFERRED ACQUISITION COSTS

     Unamortized deferred policy acquisition costs are summarized as follows:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Balance at beginning of year............................  $55,989   $26,650   $ 3,810
Current year's costs deferred...........................   50,062    46,171    27,379
                                                          -------   -------   -------
                                                          106,051    72,821    31,189
Amortization for the year...............................  (22,806)  (16,832)   (4,539)
Write-off of deferred acquisition costs related to
  United Benefit Life and Provident American Life(1)....   (5,868)       --        --
                                                          -------   -------   -------
Balance at end of the year..............................  $77,377   $55,989   $26,650
                                                          =======   =======   =======
</Table>

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

(1) See Note M, Special Charges for further information.

G.  VALUE OF BUSINESS ACQUIRED

     A portion of the purchase price paid by the Company for Pyramid Life and
Continental General Corporation was allocated to the value of business acquired
based on the actuarially-determined present value of the expected pre-tax future
profits from the business assuming a discount rate of 15.0%. Interest is accrued
on the balance annually at a rate consistent with the rate credited on the
acquired policies on the acquisition date, which ranges from 4.0% to 8.75%.
Recoverability of the value of business acquired is evaluated periodically by
comparing the current estimate of the present value of expected pre-tax future
profits to the unamoritized asset balance. If such current estimate is less than
the existing asset balance, the difference would be charged to expense.

     For accident and health and ordinary life business, the value of business
acquired is amortized over the estimated life of the in force business using
assumptions consistent with those in computing reserves. Interest of 6.0% and
7.0% is credited to the unamortized balance for Continental General Corporation
and Pyramid Life, respectively. For interest sensitive products such as
universal life and deferred annuities, the value of business acquired is
amortized over the expected profit stream of the in force business. The expected
profit stream is based upon actuarial assumptions as to mortality, lapses and
expenses. Earned interest was assumed to be 6.0% for Continental General
Corporation and 7.0% for Pyramid Life which was the market rate at the time of
acquisition.

     The value of business acquired is summarized as follows:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Balance at beginning of year............................  $32,254   $16,731   $    --
Additions from acquisitions.............................       --    12,683    14,182
Amortization............................................   (3,626)   (2,263)   (1,901)
Additional expense reserve..............................    4,842     5,103     4,450
                                                          -------   -------   -------
Balance at end of the year..............................  $33,470   $32,254   $16,731
                                                          =======   =======   =======
</Table>

                                        60
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     The increased expense reserve is primarily a result of the higher
commission rates paid in the initial policy years of the Medicare supplement
business acquired. Under the current assumptions, amortization for the next five
years is expected to be as follows (dollars in thousands):

<Table>
<Caption>
                                                              AMORTIZATION
                                                              ------------
<S>                                                           <C>
2002........................................................     $  549
2003........................................................      1,885
2004........................................................      2,715
2005........................................................      3,228
2006........................................................      3,541
</Table>

H.  FEDERAL INCOME TAXES

     The Company files a consolidated federal income tax return with its
subsidiaries, except for Continental General and Pyramid Life, which are
required to file separate returns through fiscal years 2003 and 2004,
respectively.

     Federal income tax expense is composed of the following:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Current....................................................  $1,642   $1,022   $  715
Deferred...................................................   1,061    7,358    5,587
                                                             ------   ------   ------
     Total.................................................  $2,703   $8,380   $6,302
                                                             ======   ======   ======
</Table>

     Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. federal income tax rate of 35%. Those
effects are summarized as follows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Expected tax expense at 35%................................  $1,743   $8,681   $6,302
Tax exempt interest........................................      (8)      (4)    (135)
Valuation allowance for deferred tax assets................      --       --     (158)
Meals and entertainment....................................     381       --       --
Non deductible goodwill....................................     416      318       --
Alternative minimum tax....................................      --       --      332
Other......................................................     171     (615)     (39)
                                                             ------   ------   ------
                                                             $2,703   $8,380   $6,302
                                                             ======   ======   ======
</Table>

     The federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service through 1997.

                                        61
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000 are presented below:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2001         2000
                                                              ---------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Deferred tax assets
  Ceding commission.........................................   $ 2,475      $ 4,257
  Reinsurance transactions..................................     2,792        5,262
  Depreciation..............................................     2,607           --
  Severance pay.............................................         7          266
  Alternative minimum tax...................................       624          624
  Reserves..................................................    10,489       12,094
  Net operating loss carryforward...........................     9,124        5,506
  Advance premium...........................................       854          636
  Other.....................................................     8,317        1,469
                                                               -------      -------
                                                                37,289       30,114
                                                               -------      -------
Deferred tax liabilities
  Value of business acquired................................    11,715       11,289
  Deferred acquisition costs................................    12,803        5,283
  Unrealized gain adjustment................................       349          359
  Other.....................................................     2,922          557
                                                               -------      -------
                                                                27,789       17,488
Less: Valuation allowance...................................     8,388        8,829
                                                               -------      -------
Net deferred tax assets.....................................   $ 1,112      $ 3,797
                                                               =======      =======
</Table>

     At December 31, 2001, the Company had a tax net operating loss
carryforward, or NOL, of approximately $26.6 million for federal income tax
purposes, which expires through 2015. Future changes in ownership, as defined by
Sections 382 and 383 of the Internal Revenue Code, could limit the amount of NOL
carryforwards used in any one year. The December 2001 public offering resulted
in an "ownership change" of our company, as defined in Section 382 of the Code
and the regulations issued thereunder. Pursuant to Section 382, our ability to
use our NOLs originating prior to the offering, accounting for approximately
$26.6 million, is subject to certain restrictions, including an annual
limitation of approximately $5.4 million. Losses incurred subsequent to this
offering are available without annual limitation to offset future income.

     The Company determines a valuation allowance based on an analysis of
amounts recoverable in the statutory carryback period and available tax planning
strategies. In assessing the valuation allowance established at December 31,
2001 and 2000, estimates were made as to the potential financial impact on the
Company of recent NOLs and our financial condition.

     Additionally, the Company reduced its valuation allowance by $5.9 million
during 2000 through a reduction of goodwill related to the acquisition of
Continental General. Management reviewed the Company's projections for taxable
income of Continental General to be generated in future periods and concluded a
greater amount of the deferred tax asset will be realized.

                                        62
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     In accordance with federal tax law, a portion of insurance companies' net
income, prior to 1984, is not subject to federal income taxes (within certain
limitations) until it is distributed to policyholders, at which time it is taxed
at regular corporate rates. For federal income tax purposes this untaxed income
is accumulated in a memorandum account designated "policyholders' surplus." At
December 31, 2001, the accumulated untaxed policyholders' surplus for the
Company, all of which relates to Central Reserve, is $2.9 million.

I.  LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE

     The following table reflects the activity in the liability for other policy
claims and benefits payable, including the claims adjustment expenses, net of
reinsurance recoverables, as follows:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
Gross balance at beginning of year...................  $176,236   $149,538   $ 74,395
Reserves on blocks of business acquired..............        --     11,176     39,173
                                                       --------   --------   --------
Adjusted gross beginning balance.....................   176,236    160,714    113,568
Less: Reserves ceded.................................    67,227     85,347     54,340
                                                       --------   --------   --------
Adjusted net beginning balance.......................   109,009     75,367     59,228
                                                       --------   --------   --------
Paid claims and claims adjustments expenses, net of
  reinsurance, for
  Current year.......................................   330,686    263,587    176,387
  Prior years........................................   120,347     70,299     57,875
                                                       --------   --------   --------
       Total paid....................................   451,033    333,886    234,262
                                                       --------   --------   --------
Incurred claims and claims adjustment expenses, net
  of reinsurance, for
  Current year.......................................   474,994    362,495    226,202
  Prior years........................................    12,414      5,437     (1,487)
                                                       --------   --------   --------
       Total incurred................................   487,408    367,932    224,715
                                                       --------   --------   --------
Net reserve balance at end of year...................   145,384    109,413     49,681
Plus: Reserves ceded at end of year..................    58,078     67,227     85,347
                                                       --------   --------   --------
Balance before reinsurance recoveries on paid
  claims.............................................   203,462    176,640    135,028
Plus: Increase (decrease) in reinsurance recoveries
  on paid claims.....................................    (5,166)      (404)    14,510
                                                       --------   --------   --------
Gross balance at end of year.........................  $198,296   $176,236   $149,538
                                                       ========   ========   ========
</Table>

     The foregoing indicates that a $12.4 million deficiency in the 2000
reserves emerged in 2001 as a result of higher than expected benefit utilization
in the medical segment related to increased costs of services, greater
utilization of medical services and greatly increased expenditures on
prescription drugs. In 2000, a $5.4 million deficiency in the 1999 reserves
emerged as a result of higher utilization in all segments, and in 1999, a $1.5
million redundancy in the 1998 reserves emerged.

                                        63
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

J.  REINSURANCE ARRANGEMENTS

  Central Reserve Life Insurance Company

     In December 2000, Central Reserve entered into a reinsurance transaction
with Lincoln National Reassurance Company, or Lincoln, for a ceding allowance of
$4,000,000. The policies reinsured, on a combined coinsurance and modified
coinsurance basis, were 80% of all group term life insurance and 35% of all
individual deferred annuities in force on and after December 31, 2000. The
ceding allowance is being accounted for as a deferred reinsurance gain in the
accompanying consolidated financial statements and will be amortized into income
over the duration of the underlying policies. Due to the structure of this
transaction, no assets will be transferred relating to the ceding allowance or
policy liabilities assumed by Lincoln.

     In December 1999, Central Reserve entered into a reinsurance transaction
with Hannover for certain health insurance policies issued during the period
from July 1, 1998 through June 30, 1999. As part of the coinsurance funds
withheld transaction, Hannover will pay Central Reserve on a quarterly basis, an
experience refund, the amount of which shall be based upon the earnings derived
from the business reinsured. Concurrent with this transaction, Hannover will
reinsure to Continental General on a stop loss basis 100% of any losses incurred
for the business reinsured in excess of a pre-determined aggregate annualized
loss ratio of 76.0% in 2000, 78.0% in 2001 and 80.0% thereafter. In exchange for
coverage under the stop loss reinsurance, Hannover pays Continental General a
stop loss premium on the business reinsured. The effects of the transaction,
except the net risk charge to Hannover, are eliminated in consolidation.

     In December 1997, Central Reserve entered into a retroactive reinsurance
treaty (the "1997 Treaty") with Hannover. The quota share treaty was effective
January 1, 1997, and covered certain group accident and health policies in force
and written during 1997. Under the provisions of the 1997 Treaty, Central
Reserve cedes 50% of the premiums of the eligible policies, and in return
receives reimbursement for 50% of the claims paid, plus a commission and expense
allowance. In connection with the 1997 Treaty, Central Reserve transferred $24.5
million of reserves to Hannover, and received an initial ceding allowance of
$10.0 million, resulting in a net cash transfer of $14.5 million to Hannover.
The initial ceding allowance was reported as a deferred reinsurance gain, and is
being amortized into income over the duration of the underlying block of
business.

  Continental General Life Insurance Company

     In December 2001, Continental General entered into a reinsurance
transaction with London Life International Reinsurance Corporation, or London,
for a 75% quota share of certain health policies issued after February 1, 1999.
Under the provisions of the treaty, effective January 1, 2001, Continental
General cedes 75% of the premiums of the eligible policies, and in return
receives reimbursement for 75% of the claims paid, plus a commission and expense
allowance. If the combined loss ratio (defined as benefits plus expense
allowances divided by premium) is less than 100%, an experience refund will be
paid from London to Continental General. The expense and profit charge is 85
basis points of reinsurance premium for calendar year 2001. The Company has
determined that this contract does not transfer risk in accordance with
generally accepted accounting principles and has reflected this agreement as a
deposit.

     In February 1999, Continental General entered into a reinsurance agreement
with Hannover, under which Hannover reinsured 50% of all insurance business in
force at Continental General for a ceding allowance of $13.0 million. The ceding
allowance is being accounted for as a deferred reinsurance gain in the
accompanying consolidated financial statements and will be amortized into income
over the duration of the underlying block of business. Various assets, primarily
comprised of fixed income securities with a market value of $188.4 million, were
transferred from Continental General to Hannover for the policy liabilities
assumed by Hannover.

                                        64
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

  Provident American Life & Health Insurance Company

     Prior to the acquisition of Provident American Life, all of the insurance
business of Provident American Life in force at December 31, 1998 was ceded to
Provident Indemnity. Hannover reinsured all the individual and small group
health insurance in force at December 31, 1998, of Provident Indemnity for a
ceding allowance of approximately $10.0 million. On January 1, 1999, Hannover
ceded 10% of this insurance in force to Central Reserve and Central Reserve paid
a $1.0 million ceding commission.

     Effective January 1, 1999, Provident American Life entered into a
reinsurance agreement with Provident Indemnity, whereby Provident American Life
reinsured 100% of Provident Indemnity's business written after December 31,
1998. In a separate reinsurance agreement, Provident American Life ceded to
Hannover 50% of its direct business written after December 31, 1998 and 50% of
the business reinsured from Provident Indemnity.

  United Benefit Life Insurance Company

     Effective August 1, 1998, Central Reserve entered into a reinsurance treaty
with United Benefit Life, a life and accident and health insurer in Texas. Under
the terms of the treaty, Central Reserve agreed to assume 100% of United Benefit
Life's block of business, until such time as profits earned by Central Reserve
on the assumed block reach a contractual threshold, which approximates $20.0
million of pre-tax income. Central Reserve paid to United Benefit Life a $20.0
million ceding allowance in connection with this transaction. In addition,
Central Reserve entered into an agency arrangement with respect to the marketing
of United Benefit Life policies with Insurance Advisors of America, Inc., or
IAA, a subsidiary of United Benefit Managed Care Corporation and an affiliate of
United Benefit Life, in exchange for a $7.0 million note receivable. Central
Reserve recorded a full valuation allowance against such note receivable at
December 31, 1998.

     Reserve liabilities assumed by Central Reserve under the United Benefit
Life agreement on August 1, 1998 exceeded the cash transferred to Central
Reserve by United Benefit Life as reimbursement for this assumption by $3.0
million, which was reflected in a note receivable. Subsequent to August 1, 1998,
the balance of the note receivable was increased as a result of adverse
developments in the assumed policy liabilities, net of amounts ceded to
Hannover, and net of an allowance for uncollectability. The note receivable was
secured by the outstanding common stock and assets of United Benefit Life. The
assets included real estate, bonds and reinsurance receivables from an unrelated
party, and commissions due IAA.

     In connection with the United Benefit Life reinsurance treaty, Central
Reserve ceded 80% of the business in force on August 1, 1998 to Hannover,
thereby retaining a net risk of 20%. Additionally, Central Reserve ceded 50% of
the policies written by United Benefit Life subsequent to August 1, 1998 and
reinsured by Central Reserve to Hannover. This treaty provided Central Reserve
an initial ceding allowance of $20.0 million, which is being accounted for as a
deferred reinsurance gain in the accompanying consolidated financial statements,
and will be amortized into income over the duration of the underlying block of
business.

     On March 18, 1999, Central Reserve announced the execution of an agreement
with United Benefit Managed Care Corporation, to purchase all of the outstanding
shares of its subsidiary, United Benefit Life. On June 14, 1999, Central Reserve
terminated this agreement due to a reserve shortfall at United Benefit Life in
excess of amounts projected. Pursuant to the "true up" provision in the
agreements between United Benefit Life, IAA and Central Reserve, the reserve
shortfall on the business assumed from United Benefit Life by Central Reserve at
December 31, 1999, was approximately $19.4 million. On July 21, 1999, following
receipt of approval from the Department of Insurance of the State of Indiana,
Central Reserve foreclosed on the stock of United Benefit Life and the renewal
commissions due IAA in partial payment of the $19.4 million reserve shortfall
accounted for under purchase accounting rules.

                                        65
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     As of December 31, 1999, Central Reserve had recovered approximately $17.8
million of the $19.4 million reserve shortfall through real and personal
property of United Benefit Life totaling $4.6 million, commissions due IAA of
$5.3 million, and $7.9 million from the Hannover reinsurance agreement. As a
result, the remaining reserve shortfall was $1.6 million. An expense of $0.7
million was recorded in 1998, and the balance of $0.9 million was recorded in
1999.

     In the ordinary course of business, the Company maintains other reinsurance
arrangements with other insurers. These arrangements are designed to limit the
maximum amount of exposure that the Company retains on a given policy. For
ordinary and group life claims, Continental's maximum retention is $125,000,
Pyramid Life's maximum retention is $100,000, and Central Reserve's maximum
retention is $50,000 with no retention maintained over age 70. For accident and
health claims, maximum retention on individual claims is $500,000.

     The following table summarizes the net impact of reinsurance arrangements
on premiums and benefits, claims, losses and settlement expenses, and selling,
general and administrative expenses:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      2001        2000        1999
                                                    ---------   ---------   ---------
                                                         (DOLLARS IN THOUSANDS)
<S>                                                 <C>         <C>         <C>
Premiums
  Direct..........................................  $ 821,257   $ 752,281   $ 551,553
  Assumed.........................................      7,432      16,817      81,493
  Ceded...........................................   (193,650)   (257,556)   (305,300)
                                                    ---------   ---------   ---------
  Net premiums....................................  $ 635,039   $ 511,542   $ 327,746
                                                    =========   =========   =========
Benefits, claims, losses, and settlement
  expenses........................................  $ 658,637   $ 596,086   $ 485,717
Reinsurance recoverable...........................   (158,162)   (206,275)   (252,614)
                                                    ---------   ---------   ---------
                                                    $ 500,475   $ 389,811   $ 233,103
                                                    =========   =========   =========
Selling, general, and administrative expenses
  Commissions.....................................  $ 130,646   $ 127,692   $  85,104
  Salaries and benefits...........................     47,888      38,409      25,678
  Taxes, licenses, and fees.......................     22,169      18,439      13,024
  Other operating expenses........................     38,817      40,580      46,579
  Administrative and IS services..................     24,589      21,486      14,513
  Reinsurance expenses............................      1,728       1,973      44,096
  Reinsurance allowances..........................    (41,896)    (62,190)    (91,062)
                                                    ---------   ---------   ---------
                                                    $ 223,941   $ 186,389   $ 137,932
                                                    =========   =========   =========
</Table>

     The insurance companies remain obligated for amounts ceded in the event
that the reinsurers do not meet their obligations. Initial ceding allowances
received from reinsurers are accounted for as deferred reinsurance gain and are
amortized into income over the estimated remaining life of the underlying
policies reinsured, except for interest sensitive products that are amortized
over the expected profit stream of the in force business. Amortization of
deferred reinsurance gain for the years ended December 31, 2001, 2000 and 1999
was $5.0 million, $6.1 million, and $5.5 million, respectively. The above table
does not include the amortization of initial ceding allowances received from
reinsurers.

                                        66
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

K.  COMMITMENTS AND CONTINGENCIES

     The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, the effects, if any, of such litigation
are not expected to be material to the Company's consolidated financial
condition.

L.  DEBT

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Mortgage note payable.......................................   $    --      $ 8,018
                                                               =======      =======
Bank credit facility........................................   $28,500      $34,000
Revolver....................................................     2,500       15,000
                                                               -------      -------
                                                               $31,000      $49,000
                                                               =======      =======
</Table>

     On May 25, 2001, we entered into an agreement with Royalton Investors, LLC
and Big T Investments, LLC to sell our Cleveland headquarters. The transaction
was effective July 31, 2001. The building was sold to Royalton Investors, LLC
and Big T Investments, LLC for $16.0 million and concurrently we leased it back
for a term of 15 years with four optional five-year extensions. Monthly rent
payments began in August 2001 and annually total $1.7 million through July 2003,
$1.8 million through July 2006, $2.0 million through July 2011, and $2.1 million
through July 2016. The net proceeds were used to:

     - prepay in full the outstanding $7.9 million mortgage note on the building
       on August 3, 2001;

     - permanently reduce our revolving line of credit by $2.5 million on August
       6, 2001; and

     - contribute $5.0 million to the capital of Central Reserve.

     To provide funds for the acquisition of Continental General, on February
17, 1999, we entered into a credit agreement among Ceres', various lending
institutions, and JPMorgan Chase (formerly the Chase Manhattan Bank) as
Administrative Agent. Under the agreement, Ceres borrowed $40.0 million under a
tranche A term loan and secured a $10.0 million revolver.

     Interest on the outstanding balance of the term loan and revolver are
determined based on our selection each quarter of either a Base Rate Loan or a
Eurodollar Loan. Under the Base Rate Loan, the interest rate will be 2.5% per
annum plus the higher of (a) the rate which is 0.50% of 1.0% in excess of a
federal funds rate or (b) Chase's prime rate as in effect from time to time.
Under the Eurodollar Loan, the interest rate will be 3.5% per annum plus a
Eurodollar rate, which is the arithmetic average of the offered quotation to
first-class banks in the interbank Eurodollar market by Chase, adjusted for
certain reserve requirements.

     The credit agreement was amended on July 25, 2000 to increase the revolver
from $10.0 million to $15.0 million in connection with the acquisition of
Pyramid Life. Any amount outstanding on the revolver had to be repaid on
February 17, 2002. The revolver bore interest at the same rate choices as the
$40.0 million tranche A term loan. At December 31, 2001, the interest rate on
the revolver was 5.7% on the outstanding balance of $2.5 million. On February
17, 2002, the balance of the revolver was repaid from proceeds of our December
2001 public offering.

     On March 30, 2001, our credit agreement again was amended to enter into a
new $10.0 million term loan with CIT Equipment Financing, Inc. The proceeds of
this term loan, the tranche B term loan, were used to permanently pay down $10.0
million of our then fully-drawn $15.0 million revolver under the credit
agreement. The terms of the amendment provide for CIT Group to participate
equally with the syndicate of
                                        67
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

banks and Chase under the credit agreement. At December 31, 2001, the interest
rate on our tranche A term loan balance of $18.5 million was 6.0% per annum and
our $10.0 million CIT tranche B term loan was 6.5% per annum. The first
principal payment on the CIT tranche B term loan of $0.3 million will be due on
June 17, 2002. Quarterly principal payments will be due thereafter as follows:
$0.3 million through March 17, 2004; $0.6 million thereafter through March 17,
2005; and $1.2 million thereafter through March 17, 2006.

     On December 27, 2001, our credit agreement was again amended in connection
with the stock offering. The credit agreement, as amended, contains financial
and other covenants that among other things:

     - prohibit the payment of cash dividends on our shares of common stock;

     - restrict the creation of liens and sales of assets; and

     - require that we, at a minimum, maintain:

          - a leverage ratio (consolidated debt to consolidated total capital)
            of 0.35 to 1.00 through December 31, 2001, and 0.30 to 1.00
            thereafter;

          - an interest coverage ratio (consolidated earnings before interest,
            income taxes, depreciation, and amortization to consolidated
            interest expense) of 3.00 to 1.00;

          - a risk-based capital (RBC) ratio for any of our regulated insurance
            company subsidiaries of not less than 125.0% of the RBC Company
            Action Level;

          - consolidated net worth of $110.0 million through December 31, 2001,
            and beginning in 2002, consolidated net worth, excluding goodwill,
            of no less than the sum of (i) $85.0 million plus (ii) 80% of the
            net proceeds from the equity offering excluding the $5.0 million
            repurchase of our convertible voting preferred stock plus (iii) 50%
            of our aggregate consolidated net income calculated quarterly; and

          - a fixed charge coverage ratio of not less than 1.05 to 1.00 through
            June 30, 2003, and 1.10 to 1.00 thereafter.

In addition, the amended agreement required us to:

     - repay a portion of our tranche A term loan with $10.0 million of the
       proceeds from the December 2001 equity offering;

     - repay the term loans with 25% of the net cash proceeds from any future
       sale or issuance of our equity, excluding warrants and compensation
       awards or plans;

     - set aside $2.5 million of the proceeds from the equity offering for the
       permanent repayment of the balance of our revolver due February 17, 2002;
       and

     - increase the interest rate of the tranche B term loan by 0.5% per annum.

Finally, the credit agreement, as amended:

     - restructured our scheduled tranche A term loan debt payments as follows:
       quarterly principal payments of $0.5 million through May 17, 2002, $0.8
       million through November 17, 2002, $0.9 million through November 17,
       2004, and a payment of $8.5 million on February 17, 2005;

     - allowed repurchase of all of our convertible voting preferred stock with
       $5.0 million of the proceeds from the equity offering; and

     - allowed capital contributions to our insurance subsidiaries with proceeds
       from the equity offering after the repayments to the banks and repurchase
       of our convertible voting preferred stock.

                                        68
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     At December 31, 2001, the balance of our fully drawn revolver was $2.5
million. The pay-off and final maturity of this revolver was February 17, 2002.

     In addition, the common stock of Central Reserve, Continental General, and
most of our non-regulated subsidiaries are pledged as security for the credit
agreement. At December 31, 2001, we were in compliance with our credit
agreement, as amended.

     We believe that cash flow from operating activities will be sufficient to
meet the currently anticipated operating and capital expenditure requirements of
our subsidiaries over the next 12 months. Due to the equity offering and the
amendment to our credit agreement, we believe that funds should be sufficient to
meet all our debt obligations over the next 12 months. Funds to meet our debt
obligations are generated from fee income from our non-regulated subsidiaries
and from dividends of our insurance subsidiaries, if available. Our ability to
make scheduled payments of the principal and interest on our indebtedness
depends on our future performance and the future performance of our
non-regulated subsidiaries, which are subject to economic, financial,
competitive and other factors beyond our control. Dividends from the regulated
insurance subsidiaries are subject to, and limited by, state insurance
regulations. As of December 31, 2001, none of the direct insurance subsidiaries
(Central Reserve Life and Continental General) could pay a dividend to Ceres
Group, the parent company, without prior approval of their respective state
regulators as a result of their respective statutory levels of unassigned
surplus.

M.  SPECIAL CHARGES

     The Company reported special charges of $7.1 million in the first quarter
of 2001 related to:

     - the elimination of $5.9 million deferred acquisition cost (DAC) asset on
       all products of United Benefit Life and Provident American Life; and

     - $1.2 million loss on United Benefit Life.

     The Company has experienced excessive losses at United Benefit Life and
Provident American Life due to high benefit utilization and higher than
anticipated claims costs. These blocks had a $17.9 million pre-tax loss in 2001
compared to a $7.6 million pre-tax loss in 2000, including special charges and
legal expenses.

     In July 2001, we implemented a program to mitigate future losses of United
Benefit Life and Provident American Life by notifying policyholders that their
policies would be terminated or replaced with a different Provident American
Life product. The business should be substantially wound down by the early part
of 2002.

N.  STOCK-BASED COMPENSATION

     In 1999, 373 employees each received 1,000 common stock options under the
1998 Employee Stock Option Plan. A second grant was made for new employees hired
from January 1, 1999 through September 30, 1999, and still employed as of
December 31, 1999. Under this second grant in 2000, 75 employees received 1,000
common stock options. Each grant vests after three years and expires ten years
from the date of the grant, with accelerated vesting upon an event of a change
in control. The Company terminated this plan in December 2000. At December 31,
2001, there were options outstanding under the plan to purchase 325,000 shares.

     In 1998, pursuant to the 1998 Key Employee Share Incentive Plan, the
Company granted common stock options to certain key employees. In 2000 and 1999,
the Company granted additional common stock options to certain employees under
the 1998 Key Employee Share Incentive Plan. Such grants generally vest over
three years, and expire ten years from the date of the grant. In the event of a
change in control, all options granted immediately vest and become exercisable
in full. There are 2,000,000 shares of our common stock reserved for

                                        69
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

issuance under this plan, pending stockholder approval. At December 31, 2001,
there were options outstanding under the plan to purchase 1,659,926 shares.

     In 1998 and 1999, pursuant to various individual employment agreements, the
Company granted non-qualified options to purchase 815,000 shares of our common
stock to certain key employees. Such grants generally vest over three years. At
December 31, 2001 there were options outstanding under the plan to purchase
815,000 shares.

     Also, pursuant to employment contracts, the Company provided an award of
shares of common stock to Peter Nauert. The number of shares awarded is
contingent upon the weighted average fair value of the common shares over
specified periods, but is based on a stock award equal to $1.0 million per year
through July 1, 2001 and $0.5 million per year through July 1, 2003. Management
currently estimates that 269,881 shares (including 28,403 shares issued in 2001,
139,852 shares issued in 2002 and 101,626 shares issued in 2003) will be issued
pursuant to the employment contract, based upon the fair value of the Company's
shares at December 31, 2001.

     A summary of the Company's stock option activity is presented below:

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                                  2001                         2000
                                       --------------------------   --------------------------
                                                      WEIGHTED                     WEIGHTED
                                                      AVERAGE                      AVERAGE
                                        OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE
                                       ---------   --------------   ---------   --------------
<S>                                    <C>         <C>              <C>         <C>
Outstanding at beginning of year.....  2,052,184       $7.51        1,606,000       $7.81
Options granted, with exercise
  Prices:
  Greater than fair value at grant
     date............................    633,333        6.73               --          --
  Equal to fair value at grant
     date............................    275,000        5.19          644,977        6.68
Forfeited............................   (160,591)       6.76         (198,793)       7.22
                                       ---------                    ---------
Outstanding at end of year...........  2,799,926        7.15        2,052,184        7.51
                                       =========                    =========
Exercisable at end of year...........  1,049,947        7.64          470,000        7.88
                                       =========                    =========
</Table>

     Exercise prices for options outstanding at December 31, 2001 ranged from
$5.12 to $10.50, of which 51% were between $5.12 and $6.99, 14% between $7.00
and $7.99, 27% between $8.00 and $8.99, and 8% between $9.00 and $10.50. While
some options have no expiration date, management estimates the remaining average
contractual life of options awarded is 5 years.

     At December 31, 2001, there were 1,049,947 options exercisable ranging from
$5.50 to $10.50. Approximately 47% were between $5.50 and $6.99, 17% between
$7.00 and $7.99, 14% between $8.00 and $8.99, and 22% between $9.00 and $10.50.

     The Company also had outstanding at December 31, 2001 3,657,743 warrants at
$5.41, expiring in 2005, 770,000 warrants at $6.00, expiring in 2002, and
130,000 warrants at $6.00, expiring in 2003.

     Our 2000 Employee Stock Purchase Plan was adopted by our stockholders on
June 27, 2000. Under the plan, employees may purchase shares of our common stock
at a discount from fair value. All of our full time employees, including
officers, are eligible to participate in the employee stock purchase plan,
subject to limited exceptions. Eligible employees participate voluntarily, and
may withdraw from an offering at any time before the stock is purchased.
Participation terminates automatically upon termination of employment other than
for death, disability or retirement. Six-month offerings are made available
beginning May 1 and November 1 of each year. The purchase price per share in an
offering will not be less than 85% of the lesser of the stock's fair

                                        70
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions. As of December 31, 2001 and 2000,
62,761 and 18,807 shares, respectively, had been issued under the employee plan.

     We also have a 2000 Agent Stock Purchase Plan similar to the employee plan
under which certain of our agents may purchase shares of our common stock at the
same discount from fair value. The agent stock purchase plan does not qualify as
an employee stock purchase plan within the meaning of Section 423 of the Code.
As of December 31, 2001 and 2000, 76,621 and 10,603 shares, respectively, had
been issued under the agent plan. There are 1,000,000 shares of common stock
reserved for issuance in the aggregate under both plans. Both of the plans will
terminate when all of the shares reserved for issuance under the plans have been
purchased unless sooner terminated by the Board of Directors.

     The Company recognized stock compensation expense of $0.9 million, $1.1
million, and $0.8 million in 2001, 2000 and 1999, respectively. As required by
FASB Statement 123, Accounting for Stock-Based Compensation, the Company has
estimated the pro forma impact on net income and earnings per share of
stock-based compensation under the fair value method, using the Black-Scholes
option valuation model.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     Significant underlying assumptions made are summarized as follows:

<Table>
<Caption>
                                                             2001      2000      1999
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
Risk-free rate of return..................................     4.33%     4.98%     6.34%
Dividend yield............................................        0%        0%        0%
Volatility factor.........................................    0.275     0.226     0.287
Expected life of award....................................  5 years   5 years   5 years
</Table>

     Based on the methodology and assumptions delineated above, the weighted
average fair value of options was $1.17, $1.26 and $2.10 per share for 2001,
2000 and 1999, respectively. The pro forma impact would be to decrease net
income by $0.8 million, $0.6 million and $0.9 million and decrease net income
per share by $0.05, $0.04 and $0.07 for basic and $0.05, $0.04 and $0.06 for
fully diluted for the years ended December 31, 2001, 2000 and 1999,
respectively.

O.  PREFERRED SHARES

     The Company has authorized 1,900,000 Non-Voting Preferred Shares, $.001 par
value. The Company has never issued any Non-Voting Preferred Shares; however,
the Board of Directors is authorized at any time to provide for the issuance of,
such shares in one or more series, and to determine the designations,
preferences, limitations and other rights of the shares issued, including but
not limited to the dividend rate, liquidation preference, redemption rights and
price, sinking fund requirements, conversion rights and restrictions on the
issuance of such shares. Holders of non-voting preferred shares shall have no
voting rights except as required by law.

     The Company has authorized 100,000 Convertible Voting Preferred Shares,
$.001 par value, of which none are outstanding at December 31, 2001. On December
27, 2001, the Company repurchased our

                                        71
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

convertible voting preferred stock for $5.0 million from the proceeds of the
public offering. The carrying value of the convertible voting preferred stock
was $8.2 million and the related dividends distributable was $0.4 million. The
resulting gain from repurchase of the convertible voting preferred stock was
$3.6 million. The gain was recorded in retained earnings and was reflected as a
component of net income attributable to common stockholders. For more
information regarding our convertible voting preferred stock, see Note B, Equity
Transactions and Note C, Business Combinations.

P.  STATUTORY FINANCIAL INFORMATION

     State insurance laws and regulations prescribe accounting practices for
determining statutory net income and equity for insurance companies. In
addition, state regulators may permit statutory accounting practices that differ
from prescribed practices. The use of such permitted practices by Ceres and its
insurance subsidiaries did not have a material effect on their statutory equity
at December 31, 2001 and 2000.

     Statutory accounting practices prescribed or permitted by regulatory
authorities for Ceres' insurance subsidiaries differ from generally accepted
accounting principles. Shareholders' equity and net income, unaudited, as
determined in accordance with statutory accounting practices, for Ceres and its
subsidiaries are summarized as follows:

<Table>
<Caption>
                                                                     STATUTORY CAPITAL AND
                                       STATUTORY NET GAIN (LOSS)            SURPLUS
                                        YEAR ENDED DECEMBER 31,          DECEMBER 31,
                                      ----------------------------   ---------------------
                                        2001      2000      1999       2001        2000
                                      --------   -------   -------   ---------   ---------
                                                           UNAUDITED
                                                     (DOLLARS IN THOUSANDS)
<S>                                   <C>        <C>       <C>       <C>         <C>
Central Reserve(1)..................  $(10,492)  $(1,046)  $(1,994)   $27,399     $26,164
Provident American Life(1)..........    (5,085)     (419)     (983)     3,947       6,551
Continental General(2)..............    (6,411)   (2,831)   13,591     48,072      42,478
United Benefit Life(1)..............    (2,392)   (1,564)      421      3,004       4,182
Pyramid Life(2).....................     1,008     2,874        --     22,320      20,814
                                      --------   -------   -------
  Total.............................  $(23,372)  $(2,986)  $11,035
                                      ========   =======   =======
</Table>

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

(1) Statutory capital and surplus for Central Reserve includes Provident
    American Life and United Benefit Life.

(2) Statutory capital and surplus for Continental General includes Pyramid Life.

     Generally, the capital and surplus of Ceres' insurance subsidiaries
available for transfer to the parent company are limited to the amounts that the
insurance subsidiaries' capital and surplus, as determined in accordance with
statutory accounting practices, exceed minimum statutory capital requirements;
however, payments of the amounts as dividends may be subject to approval by
regulatory authorities. In 2002, Central Reserve, United Benefit Life and
Provident American Life cannot pay any dividends without the prior approval of
the Ohio Insurance Commissioner as a result of their respective statutory levels
of unassigned surplus at December 31, 2001. As of December 31, 2001, Continental
General cannot pay any dividends in 2002, without the prior approval of the
Nebraska Insurance Commissioner. By agreement with the Kansas Department of
Insurance, Pyramid Life can pay dividends to its parent Continental General
Insurance only from net underwriting profits of Pyramid Life, and, therefore, as
of December 31, 2001, Pyramid Life could pay approximately $1.0 million in
dividends in 2002, without the prior approval of the Kansas Insurance
Commissioner.

                                        72
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     The National Association of Insurance Commissioners revised the Accounting
Practices and Procedures Manual in a process referred to as Codification. The
revised manual was effective January 1, 2001. The domiciliary states of Ceres
and its insurance subsidiaries have adopted the provisions of the revised
manual. The revised manual has changed, to some extent, prescribed statutory
accounting practices and has resulted in changes to the accounting practices
that Ceres and its subsidiaries use to prepare their statutory-basis financial
statements. The impact of these changes to statutory-basis capital and surplus
of Ceres insurance subsidiaries was not significant.

Q.  COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) is as follows:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                          2001      2000       1999
                                                        --------   -------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>       <C>
Net income............................................  $  2,332   $16,450   $ 11,704
Other comprehensive income (loss), net of tax:
  Unrealized gain (loss) on securities, net of tax of
     $37, $0 and $0, respectively(1)..................     7,280    11,806    (19,650)
  Other...............................................      (455)      210        362
                                                        --------   -------   --------
     Comprehensive income (loss)......................  $  9,157   $28,466   $ (7,584)
                                                        ========   =======   ========
</Table>

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

(1) Net of reclassification adjustments for net gains (losses) included in net
    income.

R.  COMPUTATION OF NET INCOME PER COMMON SHARE

     Basic and diluted earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share. Basic earnings per common share is computed by
dividing net income (loss) attributable to common stockholders by the weighted
average number of shares outstanding during the period. Diluted earnings per
common share is computed by dividing net income (loss) by the weighted average
number of shares outstanding during the period including the effect of the
assumed exercise of dilutive stock options under the treasury stock method. In
2001, the diluted earnings per share calculation was adjusted for a one time net
gain on repurchase of the convertible voting preferred stock. All stock options
are antidilutive for the year ended December 31, 2001 and therefore are excluded
from the calculation of diluted earnings per share. Basic and diluted weighted
average shares of common stock are as follows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                   ------------------------------------
                                                      2001         2000         1999
                                                   ----------   ----------   ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>          <C>
Weighted average shares:
  BASIC..........................................  17,751,919   15,260,160   13,328,339
  Convertible voting preferred stock.............          --      535,851           --
  Stock awards and incremental shares from
     assumed exercise of stock options...........      38,226      629,344    1,905,560
                                                   ----------   ----------   ----------
  DILUTED........................................  17,790,145   16,425,355   15,233,899
                                                   ==========   ==========   ==========
</Table>

                                        73
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

S.  EMPLOYEE BENEFIT PLAN

     The Company sponsors the Ceres Group, Inc. 401(k) Plan, a defined
contribution 401(k) savings plan, or the Plan. Effective January 1, 2001, the
Plan was amended to increase the employer match (Company Match Contribution) to
50% of the first 6% of each participant's salary deferrals.

     Based on provisions of the Plan, participants can elect to make pre-tax
contributions from 1% to 15% of their compensation and can elect to make
after-tax contributions up to 15% of their compensation. In addition to the
Company Match Contribution, Ceres will match 100% of each participant's
contributions (Stock Match Contribution) to the Ceres Group, Inc. Stock Fund, up
to a maximum of $1,000 per year.

     In addition, Ceres may contribute a Profit Sharing Contribution to the
Plan, as determined by the Board of Directors. All eligible, active employees
who have worked over 1,000 hours during the plan year and who are employed on
the last day of the plan year share in this contribution. Participants who leave
employment during the plan year due to retirement, death or disability will also
share in the contribution. There were no Profit Sharing Contributions made for
the 2001, 2000 and 1999 plan years, respectively.

     A participant's interest in the Company Match Contribution, Stock Match
Contribution and Profit Sharing Contribution allocated to the participant's
account becomes vested over a five-year graded vesting schedule with 100%
vesting over five years. Total matching contributions by the Company were
approximately $768,000 for 2001, $376,000 for 2000, and $133,000 for 1999.

T.  OPERATING SEGMENTS

     In conjunction with the Company's continued growth and refinement of its
organization structure, the Company expanded its operating segments to the
following three distinct operating segments based upon product types: medical,
senior and other, and corporate and other. Products included in the medical
segment include comprehensive major medical plans. Significant products in the
senior and other segment include Medicare supplement, long-term care, dental,
life insurance, and annuities.

     The corporate and other segment encompasses all other activities of the
Company, including interest income, interest expense, or corporate expenses of
the parent company. Revenues from each segment are primarily generated from
premiums charged to external policyholders and interest earned on cash and
investments and are summarized in the following tables:

                                        74
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>

MEDICAL
  Revenues
     Net premiums....................................  $408,215   $375,804   $251,876
     Investment income, realized gains...............    11,984      9,101      6,985
     Other income....................................    37,772     36,103     21,307
                                                       --------   --------   --------
                                                        457,971    421,008    280,168
                                                       --------   --------   --------
  Expenses
     Benefits and claims.............................   333,740    288,260    176,531
     Other operating expenses........................   130,306    122,483     96,357
     Special charges.................................     7,097         --         --
                                                       --------   --------   --------
                                                        471,143    410,743    272,888
                                                       --------   --------   --------
  Segment profit (loss) before federal income taxes,
     minority interest and preferred stock
     transactions....................................  $(13,172)  $ 10,265   $  7,280
                                                       ========   ========   ========
SENIOR AND OTHER
  Revenues
     Net premiums....................................  $226,824   $135,738   $ 75,870
     Investment income, realized gains...............    24,345     16,615     14,233
     Other income....................................     3,341      2,686      1,364
                                                       --------   --------   --------
                                                        254,510    155,039     91,467
                                                       --------   --------   --------
  Expenses
     Benefits and claims.............................   166,735    101,551     56,572
     Other operating expenses........................    61,871     32,265     18,510
                                                       --------   --------   --------
                                                        228,606    133,816     75,082
                                                       --------   --------   --------
  Segment profit before federal income taxes,
     minority interest and preferred stock
     transactions....................................  $ 25,904   $ 21,223   $ 16,385
                                                       ========   ========   ========
CORPORATE AND OTHER
  Revenues
     Investment income, realized gains...............  $    623   $  1,057   $    251
     Other income....................................        --         22        207
                                                       --------   --------   --------
                                                            623      1,079        458
                                                       --------   --------   --------
  Expenses
     Interest and financing expenses.................     4,679      5,566      4,090
     Other operating expenses........................     3,696      2,197      2,027
                                                       --------   --------   --------
                                                          8,375      7,763      6,117
                                                       --------   --------   --------
  Segment loss before federal income taxes, minority
     interest and preferred stock transactions.......  $ (7,752)  $ (6,684)  $ (5,659)
                                                       ========   ========   ========
INCOME BEFORE FEDERAL INCOME TAXES, MINORITY INTEREST
  AND PREFERRED STOCK TRANSACTIONS...................  $  4,980   $ 24,804   $ 18,006
                                                       ========   ========   ========
</Table>

     The Company does not separately allocate investments or other identifiable
assets by industry segment, nor are income tax (benefits) expenses allocated by
industry segment. The Company also expanded the detail of its disclosures for
2001, 2000 and 1999, which included certain reclassifications.

                                        75
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

U.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     Fair values of financial instruments are based upon quoted market prices,
where available, or on values obtained from independent pricing services. In
cases where quoted market prices are not available, fair value is based on
estimates using the present value of future cash flows or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, differences between estimated and actual outcomes or changes in the
underlying assumptions could cause these values to vary materially.
Consequently, calculated fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized by
the immediate settlement of the instruments.

     The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.

     The following methods and assumptions were used by the Company in
estimating its fair value disclosures:

     INVESTMENT SECURITIES -- Fair value for fixed maturity securities is based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair value is estimated using values obtained from independent
pricing services.

     CASH, CASH EQUIVALENTS, PREMIUMS RECEIVABLE, REINSURANCE RECEIVABLE,
SURPLUS NOTES, MORTGAGE LOANS AND POLICY NOTES -- The carrying amounts reported
in the consolidated balance sheets for these instruments approximate their fair
value.

     ANNUITY CONTRACTS -- The fair value for the annuity reserves included in
the liability for future policy benefit, losses, and claims is the amount
payable on demand.

     OTHER POLICYHOLDERS' FUNDS -- The carrying amount reported in the
consolidated balance sheets for these instruments approximate their fair value.

     MORTGAGE NOTE PAYABLE, DEBT AND REINSURANCE PAYABLE -- The carrying amounts
reported in the consolidated balance sheets for the mortgage note payable and
long-term debt approximates their fair value.

                                        76
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

     Carrying amounts and estimated fair values of financial instruments at
December 31, 2001 and 2000, are summarized as follows:

<Table>
<Caption>
                                                                     DECEMBER 31,
                                                     ---------------------------------------------
                                                             2001                    2000
                                                     ---------------------   ---------------------
                                                     CARRYING   ESTIMATED    CARRYING   ESTIMATED
                                                      AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                                     --------   ----------   --------   ----------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                  <C>        <C>          <C>        <C>
ASSETS
Investments
  Fixed maturities available for sale..............  $471,485    $471,485    $415,287    $415,287
  Surplus notes....................................     5,211       5,211       4,995       4,995
  Policy notes.....................................     5,869       5,869       5,740       5,740
  Mortgage loans...................................        57          57          89          89
Cash and cash equivalents..........................    74,573      74,573      59,512      59,512
Premiums receivable................................     5,230       5,230       5,852       5,852
Reinsurance receivable.............................   223,330     223,330     238,185     238,185

LIABILITIES
Annuity reserves...................................   182,526     177,381     194,369     186,786
Other policyholders' funds.........................    28,659      28,659      24,246      24,246
Mortgage note payable..............................        --          --       8,018       8,018
Debt...............................................    31,000      31,000      49,000      49,000
</Table>

V.  CONCENTRATIONS OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of fixed maturity investments,
cash, cash equivalents, and reinsurance receivable.

     The Company maintains cash and short-term investments with various
financial institutions, and performs periodic evaluations of the relative credit
standings of those financial institutions.

     Substantially all of the Company's reinsurance recoverable is due from a
single reinsurer, Hannover. At December 31, 2001, Hannover maintained an "A"
rating from the A.M. Best Company. The Company performs periodic evaluations of
this reinsurer's credit standing.

                                        77
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

W.  QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)

     The following is a summary of quarterly results of operations for the years
ended December 31, 2001 and 2000:

<Table>
<Caption>
                                                       FIRST        SECOND       THIRD        FOURTH
                                                     ----------   ----------   ----------   ----------
                                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                  <C>          <C>          <C>          <C>
2001
  Revenues.........................................   $171,185     $175,667     $184,826     $181,426
  Benefits and claims..............................    129,196      123,062      122,331      125,886
  Selling, general and administrative and other
     expenses......................................     44,684       51,279       53,772       50,817
  Special charges..................................      7,097           --           --           --
  Net income (loss)................................     (7,097)         711        5,558        3,160
  Gain on repurchase of the convertible voting
     preferred stock, net of dividends.............       (185)        (187)        (207)       3,406
  Net income (loss) attributable to common
     stockholders..................................     (7,282)         524        5,351        6,566
  Net income (loss) per share attributable to
     common stockholders
  Basic............................................      (0.42)        0.03         0.30         0.35
  Diluted..........................................      (0.42)        0.03         0.29         0.35

2000
  Revenues.........................................   $118,709     $135,043     $158,021     $165,353
  Benefits and claims..............................     81,558       90,023      104,018      114,212
  Selling, general and administrative and other
     expenses......................................     31,350       37,965       47,893       45,303
  Net income.......................................      3,771        4,585        3,972        4,122
  Net income attributable to common stockholders...      3,771        4,585        3,834        3,933
  Net income per share attributable to common
     stockholders
  Basic............................................       0.28         0.33         0.23         0.23
  Diluted..........................................       0.26         0.32         0.21         0.22
</Table>

                                        78
<PAGE>

SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
Investment in subsidiaries(1)...............................  $193,901   $157,088
Cash and cash equivalents...................................    14,021      4,832
Property and equipment, net.................................       381      9,035
Other assets................................................     4,725      3,113
                                                              --------   --------
          Total assets......................................  $213,028   $174,068
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Debt......................................................  $ 31,000   $ 57,018
  Other liabilities(2)......................................    25,453     13,767
                                                              --------   --------
          Total liabilities.................................    56,453     70,785
                                                              --------   --------
Stockholders' equity
  Non-voting preferred stock................................        --         --
  Convertible voting preferred stock........................        --      7,500
  Common stock..............................................        34         17
  Additional paid-in capital................................   132,061     82,943
  Dividends distributable, convertible voting preferred
     stock..................................................        --        327
  Retained earnings.........................................    23,831     18,672
  Accumulated other comprehensive income (loss).............       649     (6,176)
                                                              --------   --------
          Total stockholders' equity........................   156,575    103,283
                                                              --------   --------
          Total liabilities and stockholders' equity........  $213,028   $174,068
                                                              ========   ========
</Table>

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

(1) Eliminated in consolidation.

(2) Includes $8.0 million and $6.3 million in advances from non-regulated
    subsidiaries in 2001 and 2000, respectively.

                 See accompanying independent auditors' report.
                                        79
<PAGE>

SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                            STATEMENT OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                               2001      2000      1999
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
REVENUES
Dividend income(1)..........................................  $11,200   $    --   $    --
Rental income(2)............................................    1,406     1,170     1,410
Net realized gains..........................................      180        --        --
Net investment income.......................................       26        97        72
                                                              -------   -------   -------
                                                               12,812     1,267     1,482

EXPENSES
Selling, general and administrative expenses................    8,097     4,015    10,103
                                                              -------   -------   -------
Income (loss) before income tax benefit and equity in
  undistributed income (loss) of subsidiaries...............    4,715    (2,748)   (8,621)
Income tax benefit..........................................   (2,270)     (962)   (3,017)
                                                              -------   -------   -------
Income (loss) before equity in undistributed income (loss)
  of subsidiaries...........................................    6,985    (1,786)   (5,604)
Equity in undistributed (loss) income of subsidiaries(3)....   (4,653)   18,236    17,308
                                                              -------   -------   -------
Net income..................................................    2,332    16,450    11,704
Gain on repurchase of preferred stock, net of dividends.....    2,827      (327)       --
                                                              -------   -------   -------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS..............  $ 5,159   $16,123   $11,704
                                                              =======   =======   =======
</Table>

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

(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.

                 See accompanying independent auditors' report.
                                        80
<PAGE>

SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                            STATEMENT OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                2001       2000       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income..................................................  $  2,332   $ 16,450   $ 11,704
Adjustments to reconcile net income (loss) to cash provided
  by operating activities:
  Equity in undistributed loss (income) of subsidiaries
    (1).....................................................     4,653    (18,236)   (17,308)
  Depreciation..............................................       352        470        380
  Net realized gains........................................      (180)        --         --
  Decrease (increase) in other assets.......................    (1,612)     1,303     (3,682)
  Increase (decrease) in other liabilities..................     2,933     (1,915)     7,137
  Increase in net advances from non-regulated subsidiaries
    (1).....................................................     1,685      6,336         --
                                                              --------   --------   --------
Net cash provided by (used in) operating activities.........    10,163      4,408     (1,769)
                                                              --------   --------   --------
INVESTING ACTIVITIES
  Capital contributions to regulated subsidiaries (1).......   (34,500)    (3,500)        --
  Capital contribution to Continental General for the
    acquisition of Pyramid Life Insurance Company (1).......        --    (33,272)        --
  Increase in investment in subsidiaries (1)................      (141)    (2,877)    (4,035)
  Acquisition of Continental General Corporation, net of
    $2,212 cash acquired (1)................................        --         --    (59,788)
  Proceeds from sale of Cleveland headquarters..............    15,586         --         --
  Purchase of property and equipment........................       (36)      (618)      (191)
                                                              --------   --------   --------
Net cash used in investing activities.......................   (19,091)   (40,267)   (64,014)
                                                              --------   --------   --------
FINANCING ACTIVITIES
  Increase in debt borrowings...............................    10,000     15,000     40,000
  Principal payments on debt................................   (28,000)    (6,000)        --
  Principal payments on mortgage note payable...............    (8,018)      (139)      (127)
  Proceeds from public equity offering......................    46,511         --         --
  Proceeds from private placement of common stock, net of
    acquisition costs.......................................        --     21,096     15,000
  Proceeds from issuance of common stock related to employee
    benefit plans...........................................     2,624      1,560      1,409
  Repurchase of convertible voting preferred stock..........    (5,000)        --         --
  Proceeds from private placement of preferred stock........        --      7,500         --
                                                              --------   --------   --------
Net cash provided by financing activities...................    18,117     39,017     56,282
                                                              --------   --------   --------
NET INCREASE (DECREASE) IN CASH.............................     9,189      3,158     (9,501)
Cash and cash equivalents at beginning of year..............     4,832      1,674     11,175
                                                              --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $ 14,021   $  4,832   $  1,674
                                                              ========   ========   ========
</Table>

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

(1) Eliminated in consolidation.

                 See accompanying independent auditors' report.
                                        81
<PAGE>

                                                                    SCHEDULE III

                       CERES GROUP, INC. AND SUBSIDIARIES
                       SUPPLEMENTAL INSURANCE INFORMATION
                             (DOLLARS IN THOUSANDS)
<Table>
<Caption>

                                                                                                                     BENEFITS,
                                                   FUTURE POLICY              OTHER POLICY                           CLAIMS,
                                     DEFERRED      BENEFITS,                  CLAIMS AND                NET          LOSSES AND
                                     ACQUISITION   LOSSES AND      UNEARNED   BENEFITS       PREMIUM    INVESTMENT   SETTLEMENT
                                     COSTS         CLAIMS          PREMIUMS   PAYABLE        REVENUE    INCOME       EXPENSES
<S>                                  <C>           <C>             <C>        <C>            <C>        <C>          <C>
--------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
  Medical..........................    $39,202       $ 12,120      $11,284      $145,951     $408,215    $ 9,877      $333,740
  Senior and other.................     38,175        396,798       36,055        52,345      226,824     21,679       166,735
  Corporate and other..............         --             --           --            --           --        443            --
                                       -------       --------      -------      --------     --------    -------      --------
         Total.....................    $77,377       $408,918      $47,339      $198,296     $635,039    $31,999      $500,475
                                       =======       ========      =======      ========     ========    =======      ========
Year ended December 31, 2000
  Medical..........................    $33,187       $ 10,113      $ 9,493      $132,453     $375,804    $ 9,250      $288,260
  Senior and other.................     22,802        398,777       33,258        43,783      135,738     16,570       101,551
  Corporate and other..............         --             --           --            --           --      1,051            --
                                       -------       --------      -------      --------     --------    -------      --------
         Total.....................    $55,989       $408,890      $42,751      $176,236     $511,542    $26,871      $389,811
                                       =======       ========      =======      ========     ========    =======      ========
Year ended December 31, 1999
  Medical..........................    $18,758       $  6,839      $ 8,613      $120,081     $251,876    $ 7,027      $176,531
  Senior and other.................      7,892        350,310       23,432        29,457       75,870     14,084        56,572
  Corporate and other..............         --             --           --            --           --        251            --
                                       -------       --------      -------      --------     --------    -------      --------
         Total.....................    $26,650       $357,149      $32,045      $149,538     $327,746    $21,362      $233,103
                                       =======       ========      =======      ========     ========    =======      ========

<Caption>
                                     NET (DEFERRAL)
                                     AMORTIZATION
                                     AND CHANGE IN
                                     ACQUISITION
                                     COSTS AND VALUE    OTHER
                                     OF BUSINESS        OPERATING
                                     ACQUIRED           EXPENSES
<S>                                  <C>                <C>
---------------------------------------------------------------------------
Year ended December 31, 2001
  Medical..........................      $(11,687)      $149,090
  Senior and other.................       (17,485)        79,356
  Corporate and other..............            --          8,375
                                         --------       --------
         Total.....................      $(29,172)      $236,821
                                         ========       ========
Year ended December 31, 2000
  Medical..........................      $(14,295)      $136,778
  Senior and other.................       (16,218)        48,483
  Corporate and other..............            --          7,763
                                         --------       --------
         Total.....................      $(30,513)      $193,024
                                         ========       ========
Year ended December 31, 1999
  Medical..........................      $(13,210)      $109,567
  Senior and other.................        (8,682)        27,192
  Corporate and other..............            --          6,117
                                         --------       --------
         Total.....................      $(21,892)      $142,876
                                         ========       ========
</Table>

                 See accompanying independent auditors' report.

                                        82
<PAGE>

SCHEDULE IV

                       CERES GROUP, INC. AND SUBSIDIARIES
                                  REINSURANCE
                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                                                         PERCENTAGE
                                                                                             OF
                                                   CEDED TO     ASSUMED                    AMOUNT
                                       GROSS        OTHER      FROM OTHER      NET       ASSUMED TO
                                       AMOUNT     COMPANIES    COMPANIES      AMOUNT        NET
                                     ----------   ----------   ----------   ----------   ----------
<S>                                  <C>          <C>          <C>          <C>          <C>
YEAR ENDED DECEMBER 31, 2001
Life insurance in force............  $4,422,807   $2,138,147    $ 40,670    $2,325,330       1.7%
                                     ==========   ==========    ========    ==========
Premiums
  Life insurance...................  $   25,074   $   11,108    $  1,183    $   15,149       7.8%
  Accident and health insurance....     796,183      182,542       6,249       619,890       1.0%
                                     ----------   ----------    --------    ----------
                                     $  821,257   $  193,650    $  7,432    $  635,039       1.2%
                                     ==========   ==========    ========    ==========
YEAR ENDED DECEMBER 31, 2000
Life insurance in force............  $4,566,816   $2,247,235    $ 80,178    $2,399,759       3.3%
                                     ==========   ==========    ========    ==========
Premiums
  Life insurance...................  $   25,765   $    6,207    $  1,671    $   21,229       7.9%
  Accident and health insurance....     726,516      251,349      15,146       490,313       3.1%
                                     ----------   ----------    --------    ----------
                                     $  752,281   $  257,556    $ 16,817    $  511,542       3.3%
                                     ==========   ==========    ========    ==========
YEAR ENDED DECEMBER 31, 1999
Life insurance in force............  $3,863,690   $1,165,579    $129,428    $2,827,539       4.6%
                                     ==========   ==========    ========    ==========
Premiums
  Life insurance...................  $   17,735   $    5,757    $  1,958    $   13,936      14.0%
  Accident and health insurance....     533,818      299,543      79,535       313,810      25.3%
                                     ----------   ----------    --------    ----------
                                     $  551,553   $  305,300    $ 81,493    $  327,746      24.9%
                                     ==========   ==========    ========    ==========
</Table>

                 See accompanying independent auditors' report.
                                        83
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by Item 10 is incorporated by reference to our
Proxy Statement in connection with our annual meeting of stockholders to be held
on May 15, 2002. We expect to file the Proxy Statement by April 1, 2002.

ITEM 11.   EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated by reference to our
Proxy Statement in connection with our annual meeting of stockholders to be held
on May 15, 2002.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated by reference to our
Proxy Statement in connection with our annual meeting of stockholders to be held
on May 15, 2002.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated by reference to our
Proxy Statement in connection with our annual meeting of stockholders to be held
on May 15, 2002.

                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
           REPORTS ON FORM 8-K

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

     1. Financial Statements.

        Ceres Group, Inc. and Subsidiaries: Audit Report.

        Consolidated Balance Sheets -- December 31, 2001 and 2000.

        Consolidated Statements of Operations -- Years ended December 31, 2001,
           2000 and 1999.

        Consolidated Statements of Stockholders' Equity -- Years ended December
           31, 2001, 2000 and 1999.

        Consolidated Statements of Cash Flows -- Years ended December 31, 2001,
           2000 and 1999.

        Notes to Consolidated Financial Statements.

     2. Financial Statement Schedules.

        Ceres Group, Inc.:

        II. Condensed Financial Information of Registrant -- Ceres Group, Inc.
            (parent only).

        III. Supplementary Insurance Information.

        IV. Reinsurance.

                                        84
<PAGE>

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

     (b) Reports on Form 8-K: None.

     (c) Exhibits.

<Table>
<Caption>
                                                   INCORPORATED BY
                                                    REFERENCE TO
                                                   REGISTRATION OR   FORM OR                EXHIBIT
                       EXHIBITS                      FILE NUMBER     REPORT       DATE      NUMBER
                       --------                    ---------------   -------   ----------   -------
<C>    <S>                                         <C>               <C>       <C>          <C>
 (2)   Plan of acquisition, reorganization,
        arrangement, liquidation, or succession.
       (1) Amended and Restated Stock Purchase           0-8483        10-K    Mar. 1998       2.2
           Agreement, dated March 30, 1998, by
           and among Strategic Partners,
           Insurance Partners, L.P., Insurance
           Partners Offshore (Bermuda), L.P.,
           and Central Reserve.
       (2) Merger Agreement and Plan of                  0-8483         8-K    Dec. 1998       2.1
           Reorganization dated December 8, 1998
           between Central Reserve Life
           Corporation and Ceres Group, Inc.
       (3) Stock Purchase Agreement dated as of          0-8483         8-K    Feb. 1999       2.2
           November 4, 1998 between The Western
           and Southern Life Insurance Company
           and Ceres Group, Inc.
       (4) Purchase Agreement dated October 7,           0-8483         8-K    Aug. 2000       2.1
           1999, by and between United Insurance
           Company of America and Ceres Group,
           Inc.
       (5) Amendment of Purchase Agreement by            0-8483         8-K    Aug. 2000       2.2
           and between United Insurance Company
           of America and Ceres Group, Inc.
           dated as of April 17, 2000.
       (6) Amendment No. 2 to Purchase Agreement         0-8483         8-K    Aug. 2000       2.3
           by and between United Insurance
           Company of America and Ceres Group,
           Inc. dated as of July 5, 2000.
 (3)   Articles of Incorporation and By-laws.
       (1) Certificate of Incorporation of Ceres         0-8483         8-K    Dec. 1998       3.1
           Group, Inc. as filed with Secretary
           of Delaware on October 22, 1998.
       (2) Certificate of Amendment of the               0-8483         8-K    Aug. 2000       3.1
           Certificate of Incorporation of Ceres
           Group, Inc. dated July 25, 2000.
       (3) Bylaws of Ceres Group, Inc.                   0-8483         8-K    Dec. 1998       3.2
 (4)   Instruments defining the rights of
       security holders, including indentures.
</Table>

                                        85
<PAGE>

<Table>
<Caption>
                                                   INCORPORATED BY
                                                    REFERENCE TO
                                                   REGISTRATION OR   FORM OR                EXHIBIT
                       EXHIBITS                      FILE NUMBER     REPORT       DATE      NUMBER
                       --------                    ---------------   -------   ----------   -------
<C>    <S>                                         <C>               <C>       <C>          <C>
       (1) Amended and Restated Voting Agreement         0-8483         8-K    Aug. 2000       4.2
           dated as of July 25, 2000 by and
           among Ceres Group, Inc. (as
           successor-in-interest to Central
           Reserve Life Corporation) and the
           security holders listed on the
           signature pages thereof.
       (2) Stockholders Agreement, dated as of           0-8483         8-K    Feb. 1999       4.2
           July 1, 1998 by and among Ceres
           Group, Inc. (as successor-in-interest
           to Central Reserve Life Corporation)
           and the security holders listed on
           the signature pages thereof.
       (3) Amended and Restated Registration             0-8483         8-K    Aug. 2000       4.1
           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.
       (5) Form of Stockholders Agreement                0-8483         S-1    Apr. 2001       4.5
           between QQLink.com, Inc., Ceres
           Group, Inc. and the persons and
           entities listed on the signature
           pages thereto.
       (6) Amendment No. 1 to Amended and                     *                                4.6
           Restated Voting Agreement, dated
           November 30, 2001, by and among Ceres
           Group, Inc. and the persons and
           entities set forth on the signature
           page attached thereto.
(10)   Material Contracts
       (6) Warrant to purchase Common Shares,            0-8483         8-K    Dec. 1997      10.4
           dated December 16, 1997 by Central
           Reserve Life Corporation in favor of
           Peter W. Nauert.
       (7) Warrant to purchase Common Shares,            0-8483         8-K    Dec. 1997      10.5
           dated December 16, 1997, by Central
           Reserve Life Corporation in favor of
           the Turkey Vulture Fund XIII, Ltd.
       (8) Reinsurance Agreement between Central         0-8483        10-K    Mar. 1998     10.10
           Reserve Life Insurance Company and
           Reassurance Company of Hannover.
       (9) Administrative Services Agreement,            0-8483      10-K/A    Mar. 1998     10.12
           dated March 25, 1998 by and between
           Mutual Management Company, Inc. and
           Central Reserve Life Insurance
           Company.
       (10) Amendment No. 1 to Warrant to                0-8483        10-K    Mar. 1998     10.13
            purchase Common Shares, dated March
            30, 1998 by Central Reserve Life
            Corporation in favor of Peter W.
            Nauert.
</Table>

                                        86
<PAGE>

<Table>
<Caption>
                                                   INCORPORATED BY
                                                    REFERENCE TO
                                                   REGISTRATION OR   FORM OR                EXHIBIT
                       EXHIBITS                      FILE NUMBER     REPORT       DATE      NUMBER
                       --------                    ---------------   -------   ----------   -------
<C>    <S>                                         <C>               <C>       <C>          <C>
       (11) Amendment No. 1 to Warrant to                0-8483        10-K    Mar. 1998     10.14
            purchase Common Shares, dated March
            30, 1998 by Central Reserve in favor
            of the Turkey Vulture Fund XIII,
            Ltd.
       (12) Employment Agreement dated June 30,          0-8483        10-Q    Sept. 1998    10.17
            1998, by and between Peter W. Nauert
            and Central Reserve Life
            Corporation.
       (13) Employment Agreement dated October           0-8483        10-K    Mar. 1999     10.20
            1, 1998, by and between Charles E.
            Miller and Central Reserve Life
            Corporation.
       (14) Reinsurance Agreement dated February         0-8483        10-K    Mar. 1999     10.21
            1, 1999, between Continental General
            Life Insurance Company and
            Reassurance Company of Hannover.
       (15) Credit Agreement dated February 17,          0-8483         8-K    Feb. 1999     10.22
            1999, among Ceres Group, Inc., the
            lending institutions and The Chase
            Manhattan Bank, as Administrative
            Agent.
       (16) First Amendment to the Credit                0-8483         8-K    Aug. 2000      10.2
            Agreement, dated as of May 3, 1999,
            among Ceres Group, Inc., the lending
            institutions party to the Credit
            Agreement and The Chase Manhattan
            Bank, as Administrative Agent.
       (17) Second Amendment to Credit                   0-8483         8-K    Aug. 2000      10.3
            Agreement, dated as of July 25,
            2000, among Ceres Group, Inc., the
            lending institutions party to the
            Credit Agreement and The Chase
            Manhattan Bank, as Administrative
            Agent.
       (18) First Amendment to Employment                0-8483        10-K    Mar. 2000     10.23
            Agreement between Peter W. Nauert
            and Ceres Group, Inc. dated March
            18, 1999.
       (19) Second Amendment to Employment               0-8483        10-K    Mar. 2000     10.24
            Agreement between Peter W. Nauert
            and Ceres Group, Inc. dated June 15,
            1999.
       (20) Third Amendment to Employment                0-8483        10-K    Mar. 2000     10.25
            Agreement between Peter W. Nauert
            and Ceres Group, Inc. dated December
            19, 1999.
       (21) Third Amendment to Credit Agreement,         0-8483        10-Q    Nov. 2000      10.1
            dated as of September 22, 2000,
            among Ceres Group, Inc., the lending
            institutions party to the Credit
            Agreement and The Chase Manhattan
            Bank, as Administrative Agent.
</Table>

                                        87
<PAGE>

<Table>
<Caption>
                                                   INCORPORATED BY
                                                    REFERENCE TO
                                                   REGISTRATION OR   FORM OR                EXHIBIT
                       EXHIBITS                      FILE NUMBER     REPORT       DATE      NUMBER
                       --------                    ---------------   -------   ----------   -------
<C>    <S>                                         <C>               <C>       <C>          <C>
       (22) Employment Agreement, dated October          0-8483        10-K    Apr. 2001      10.3
            1, 1999, by and between Anthony J.
            Pino and Ceres Group, Inc.
       (23) Fourth Amendment to Credit                   0-8483        10-K    Apr. 2001      10.4
            Agreement, dated as of December 13,
            2000, among Ceres Group, Inc., the
            lending institutions party to the
            Credit Agreement and The Chase
            Manhattan Bank, as Administrative
            Agent.
       (24) Fifth Amendment to Credit Agreement,         0-8483        10-K    Apr. 2001      10.5
            dated as of February 16, 2001, among
            Ceres Group, Inc., the lending
            institutions party to the Credit
            Agreement and The Chase Manhattan
            Bank, as Administrative Agent.
       (25) Sixth Amendment to Credit Agreement,         0-8483         S-1    Apr. 2001     10.25
            dated as of March 30, 2001, among
            Ceres Group, Inc., the lending
            institutions party to the Credit
            Agreement and the Chase Manhattan
            Bank, as Administrative Agent.
       (26) Ceres Group, Inc. 1998 Key Employee          0-8483         S-1    Apr. 2001     10.26
            Share Incentive Plan.
       (27) Ceres Group, Inc. 1998 Employee              0-8483         S-1    Apr. 2001     10.27
            Stock Option Plan.
       (28) Ceres Group, Inc. 1999 Special               0-8483         S-1    Apr. 2001     10.28
            Agent's Stock Option Plan.
       (29) Ceres Group, Inc. 2000 Employee              0-8483         S-8    Apr. 2001       4.1
            Stock Purchase Plan.
       (30) Ceres Group, Inc. 2000 Agent Stock           0-8483         S-8    Apr. 2001       4.2
            Purchase Plan.
       (31) Employment Agreement dated April 10,         0-8483         S-1    Apr. 2001     10.30
            2001, by and between Bruce M. Henry
            and Ceres Group, Inc.
       (32) Amendment No. 1 to Employment                0-8483         S-1    Apr. 2001     10.31
            Agreement dated April 10, 2001, by
            and between Anthony J. Pino and
            Ceres Group, Inc.
       (33) Amendment No. 1 to Employment                0-8483         S-1    Apr. 2001     10.32
            Agreement dated April 10, 2001, by
            and between Charles E. Miller.
       (34) Employment Agreement, dated April         333-59784       S-1/A    Nov. 2001     10.29
       10, 2001, by and between Peter W. Nauert
            and Ceres Group, Inc.
</Table>

                                        88
<PAGE>

<Table>
<Caption>
                                                   INCORPORATED BY
                                                    REFERENCE TO
                                                   REGISTRATION OR   FORM OR                EXHIBIT
                       EXHIBITS                      FILE NUMBER     REPORT       DATE      NUMBER
                       --------                    ---------------   -------   ----------   -------
<C>    <S>                                         <C>               <C>       <C>          <C>
       (35) Seventh Amendment to Credit                  0-8483        10-Q    May 2001      10.35
            Agreement, dated as of May 17, 2001,
            among Ceres Group, Inc., the lending
            institutions party to the Credit
            Agreement referred to therein and
            The Chase Manhattan Bank, as
            Administrative Agent.
       (36) Lease Agreement, dated as of July            0-8483        10-Q    Aug. 2001     10.37
            31, 2001, between Royalton Investors,
            LLC and Big T Investments, LLC and
            Ceres Group, Inc.
       (37) Eighth Amendment to the Credit               0-8483         8-K    Jan. 2002     10.38
            Agreement, dated as of December 18,
            2001, among Ceres Group, Inc., the
            lending Institutions party to the
            Credit Agreement and JPMorgan Chase,
            as Administrative Agent.
(21)   Subsidiaries of the registrant.
       (1) Subsidiaries.                                      *                               21.1
(23)   Consents of expert and counsel.
       (1) Consent of Ernst & Young LLP.                      *                               23.1
</Table>

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

* Filed herewith.

                                        89
<PAGE>

                                   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.

<Table>
<S>                                         <C>
                                            CERES GROUP, INC.

Date: March 25, 2002                                          By: /s/ PETER W. NAUERT
                                               -----------------------------------------------------
                                                             Peter W. Nauert, Chairman
</Table>

     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.

<Table>
<Caption>
                  DATE                                        SIGNATURE AND CAPACITY
                  ----                                        ----------------------
<S>                                         <C>

March 25, 2002                                                By: /s/ PETER W. NAUERT
                                              -------------------------------------------------------
                                                       Peter W. Nauert, Chairman, President
                                                            and Chief Executive Officer
                                                           (principal executive officer)

March 25, 2002                                            By: /s/ CHARLES E. MILLER, JR.
                                              -------------------------------------------------------
                                                 Charles E. Miller, Jr., Executive Vice President,
                                                              Chief Financial Officer
                                                   (principal financial and accounting officer)

March 25, 2002                                                By: /s/ ANDREW A. BOEMI
                                              -------------------------------------------------------
                                                             Andrew A. Boemi, Director

March 25, 2002                                              By: /s/ MICHAEL A. CAVATAIO
                                              -------------------------------------------------------
                                                           Michael A. Cavataio, Director

March 25, 2002                                               By: /s/ BRADLEY E. COOPER
                                              -------------------------------------------------------
                                                            Bradley E. Cooper, Director

March 25, 2002                                               By: /s/ SUSAN S. FLEMING
                                              -------------------------------------------------------
                                                            Susan S. Fleming, Director

March 25, 2002                                                By: /s/ RODNEY L. HALE
                                              -------------------------------------------------------
                                                             Rodney L. Hale, Director

March 25, 2002                                                By: /s/ ROBERT J. LUNN
                                              -------------------------------------------------------
                                                             Robert J. Lunn, Director

March 25, 2002                                                By: /s/ WILLIAM J. RUH
                                              -------------------------------------------------------
                                                             William J. Ruh, Director

March 25, 2002                                                By: /s/ ROBERT A. SPASS
                                              -------------------------------------------------------
                                                             Robert A. Spass, Director
</Table>

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