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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                               ------------------


                                  FORM 10-K/A


                                  AMENDMENT #1


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000                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 to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                YES [X]  NO [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant 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 $27,471,655 computed based on the closing price of the common
stock on March 1, 2001. (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, 2001 was 17,322,679.
--------------------------------------------------------------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE:

 Portions of the Registrant's Definitive Proxy Statement for the Annual Meeting
                           of Stockholders to be held
  June 12, 2001 are incorporated by reference into Part III of this Form 10-K.
--------------------------------------------------------------------------------
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                                EXPLANATORY NOTE

On April 27, 2001, Ceres Group, Inc., a Delaware corporation, filed with the
Securities and Exchange Commission a Registration Statement on Form S-1 relating
to an underwritten public offering of 5,000,000 shares of common stock. The
purpose of this Form 10-K/A is to amend our Form 10-K for the fiscal year ended
December 31, 2000 to conform to the information included in the following
portions of the Form S-1: the "Business" section, including the "Properties" and
"Legal Proceedings" subsections, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Forward-Looking Statements,"
the description of dividend payments in "Price Range of Common Stock and
Dividend Policy," the footnotes to "Selected Financial Data," the notes to our
financial statements, and the exhibit index. The amended information does not
effect our net income, total assets, total liabilities or total equity. No part
of our Form 10-K for the fiscal year ended December 31, 2000 previously filed
with the SEC other than Items 1, 2, 3, 5, 6, 7, 8 and 14 are effected by this
amendment.
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                               CERES GROUP, INC.
                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2000


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PART I
Item 1        Business....................................................    1
Item 2        Properties..................................................   19
Item 3        Legal Proceedings...........................................   19
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.....................................   22
Item 7        Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................   24
Item 7A       Quantitative and Qualitative Disclosures about Market
              Risk........................................................   38
Item 8        Financial Statements and Supplemental Data..................   39
              Schedule II -- Condensed Financial Information of
              Registrant..................................................   74
              Schedule III -- Supplemental Insurance Information..........   77
              Schedule IV -- Reinsurance..................................   78
Item 9        Changes in and Disagreement with Accountants on Accounting
              and Financial Disclosure....................................   79

PART III
Item 10       Directors and Executive Officers of the Registrant..........   79
Item 11       Executive Compensation......................................   79
Item 12       Security Ownership of Certain Beneficial Owners and
              Management..................................................   79
Item 13       Certain Relationships and Related Transactions..............   79

PART IV
Item 14       Exhibits, Financial Statements, Financial Statement
              Schedules, and Reports on Form 8-K..........................   79
Signatures................................................................   85
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                                     PART I

ITEM 1.   BUSINESS

OVERVIEW


     Ceres provides a wide array of health and life insurance products to over
700,000 insureds. Our core businesses are major medical health insurance for
individuals, associations and small businesses, and senior health, life and
annuity products for Americans age 55 and over. 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.com, our new web-based service.


     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 product re-pricing, eliminating unprofitable
products, improving underwriting and reducing administrative expenses. Beginning
with the restructuring, we have added experienced management personnel to our
financial, actuarial, underwriting, claims, marketing and operations areas. We
also initiated a growth strategy that includes 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.



     We believe that our improved operating results and increased capabilities
demonstrate the success of our restructuring and growth strategy. Since 1998,
our distribution channels increased from one to ten, our agent force expanded
from 16,000 agents to approximately 48,000 and our product offerings increased
from five products in 1998 to over 40 products offered in our major medical and
senior markets today. Our net income was $16.5 million and our net premiums were
$511.5 million for the year ended December 31, 2000. Assets at December 31, 2000
were $880.5 million. Earnings per share on our common stock have increased from
a net loss of $5.01 per diluted share for the year ended December 31, 1997 to
net income of $1.00 per diluted share for the year ended December 31, 2000.


OUR CORE BUSINESSES


     MAJOR MEDICAL INSURANCE.  Historically, major medical insurance has been
our core business, including 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 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 the opportunity to seek care from doctors and
facilities within networks to deliver healthcare at favorable rates compared to
HMOs and traditional indemnity plans. PPO members generally are charged periodic
prepaid

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premiums, co-payments and deductibles. Traditional indemnity insurance usually
allows insureds substantial freedom of choice in selecting healthcare providers
but without the financial incentives or cost-control measures typical of managed
care plans.

     SENIOR HEALTH, LIFE AND ANNUITY PRODUCTS.  Although a greater percentage of
our current revenue is in our major medical insurance segment, we increasingly
focus on the senior segment because we believe this market has the potential for
greater revenue growth and profit margins than our medical segment. Our senior
health products, as well as life insurance and annuity products, are designed
with higher profit margins and premium payments to produce a longer-term cash
flow. In 2000, a growing percentage of our total new sales came from the senior
market. In 2000, new sales of our senior health, life and annuity products rose
230% to $92.8 million of annualized new premiums from $28.1 million in 1999.


     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. 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. With the July 2000 acquisition of
Pyramid Life, we significantly increased our senior business. We also intend to
transition our major medical insureds into our senior products as they age.


BUSINESS STRATEGY

     We continue to concentrate on many of the initiatives begun during the
restructuring program to enhance our profitability, including:

     MEDICAL COST MANAGEMENT.  Our approach is to manage the cost of healthcare.
With historically high medical inflation and utilization rates, we focus on
reducing medical costs for our insureds by actively managing these costs.
National health expenditures have grown from $41.0 billion, or $202 per capita,
in 1965 to $1.1 trillion, or $4,094 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 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:

     - ongoing activities to secure more favorable preferred provider network
       contracts and discounts;

     - use of a "Centers of Excellence" network providing our insureds access to
       transplant and other necessary high-risk procedures at approximately 53
       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 generic
       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;


     - 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
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     - 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 our 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.

     In 2000, we also developed new medical provider network discount programs
to help our insureds maximize their insurance benefits. By the middle of the
first quarter 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.

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

     IMPROVING OUR UNDERWRITING PROCESS.  We have improved our underwriting
process through more consistent and rigorous risk evaluation and controls. To
anticipate and respond to regulatory changes and actual market and profitability
experience, we closely monitor and manage premium rate adjustments, product
redesign, curtailment of unprofitable product offerings and adjustments in
co-insurance and deductible provisions.

     We have also 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. We have also made general enhancements to our underwriting
guidelines to better reflect current medical practices and treatment patterns.
These changes are made through review of claim charges and are based on research
completed by our medical director and medical cost management staff.

     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. In
2000, our total major medical segment premium revenues included 68.2% for
individual and association products and 31.8% for small group products, compared
to 61.5% and 38.5%, respectively, in 1999.


     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 are implemented for all major
medical business processed at our insurance subsidiaries, and
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include standardization of organizational design, business rules, risk selection
and processing requirements. An example of our best practices is our "Jet Issue"
process. Through Jet Issue, eligible individual or association applicants are
underwritten and processed within three business days. This service is completed
without sacrificing quality or risk selection and has been well received by our
insureds and agents.


     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 2001 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. In 2001, we plan to allow our insureds to access policy, payment
and claims information online at any time via COAST.



     We review expense variances to budgets 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 Ohio insureds, and the claims
processing and other administrative services for the Chambers 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 our growth strategy;

     - efficiency and economies of scale; and

     - system consolidation and integration.

     In 2000, our selling, general and administrative expenses as a percentage
of consolidated revenue decreased to 32.2%, compared to 37.1% in 1999.


     EXPANDING DISTRIBUTION CHANNELS.  We have ten distribution channels with
approximately 48,000 independent and exclusive agents. We believe that multiple
distribution channels provide the greatest coverage for our products. We are
continuing to expand our marketing reach by:


     - recruiting new agents for our existing distribution systems;

     - acquiring new agent distribution channels;

     - establishing marketing alliances with other insurance companies that
       provide non-competing products; and

     - pursuing endorsements of our products by affinity groups, including
       national associations and employer groups, and creating new distribution
       systems.

     When we acquire companies or blocks of insurance business, we seek to
retain the existing agency force. This strategy is intended to increase our new
sales going forward and improve our ability to retain the business we have
acquired. We communicate with these agents to illustrate the benefits and
rewards of our products and programs. We also emphasize our cross-selling
opportunities and encourage agents to be licensed by our other insurance
subsidiaries to expand the portfolio of products they can offer to clients.

     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
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insurance company. We believe our QQLink.com e-commerce vehicle, which includes
an agent interface to explain the complexity of many health and life products,
should be favorably positioned for this emerging trend.


     Our ten distribution channels are categorized into four main groups:
independent brokerage agents, exclusive agents, marketing alliances and affinity
marketing partners, and e-commerce agents. Our distribution channels are
discussed in greater detail in "Marketing and Sales."


     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 2000, our fee and other income
increased 81% to $31.5 million from $17.4 million in 1999. Fee and other income
from our non-regulated subsidiaries accounted for $10.4 million in 2000. 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 is expected to generate revenue from fees and sales
commissions. Fee income for QQLink is expected to include:



     - 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.


     STRATEGIC ACQUISITIONS.  Although our major focus is on managing and
enhancing the profitability of our existing business and generating increased
sales from our current distribution systems, we remain open to acquisition
opportunities that fit into our core businesses and provide increased
management, operations, marketing and administrative efficiencies. Besides
acquiring companies, we also may from time to time pursue strategic purchases of
blocks of business and administrative management contracts on a fee basis for
blocks of health insurance business similar to our own. We implemented product
changes, premium rate adjustments, claims management techniques, and
administrative efficiency improvements with the five companies and several
blocks of business we acquired in the past two years. By consolidating our
acquisitions and administrative management into our existing operations, we
believe we can enhance profits through improved efficiency and expense ratios.



     Acquisitions involve numerous challenges, some of which we have experienced
with our prior acquisitions. The acquisitions of United Benefit Life and
Provident American Life have not met our initial expectations due to higher than
anticipated claims and losses from unanticipated litigation. However, we limited
these losses by reinsuring portions of the acquired businesses to Hannover under
various reinsurance agreements. In addition, in July 2000, we discontinued new
sales activities for both United Benefit Life and Provident American Life,
except for Internet sales of Provident American Life. We are reviewing a number
of actions that could mitigate future losses.



     We believe we have refined our acquisition review process through the
knowledge we have gained from our past acquisitions, including the difficulties
we have encountered. We have formed an acquisition team whose members have
expertise in specific disciplines, including actuarial, administration, legal,
finance, medical cost management and operations. This team reviews each
acquisition opportunity and focuses on product offerings, premium rate actions,
claims management, underwriting standards, existing litigation,


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regulatory compliance, reserve adequacy and distribution systems. This process
is intended to maximize the positive impact of future acquisitions and minimize
our exposure to potential adverse consequences.


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 them with our competitors' products and changing insured needs. In 2000,
we developed and refined our entire line of senior market products. We also
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 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 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 that 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.

     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.  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.


     SENIOR HEALTH INSURANCE PRODUCTS.  Our senior market products include a
wide range of comprehensive and supplemental medical benefit products. In 2000,
we began releasing our new "Senior Power Portfolio," featuring 12 new 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.

     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, additional
commission income for our agents, and are designed with higher profit margins
for us. We

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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.

     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.

     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 2000, we recruited approximately 15,500
new agents. At the same time, 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,
marketing alliances, e-commerce and affinity groups. 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 ten distribution channels on organization of the agents and
specific markets or products:


      1. INDIVIDUAL AND GROUP 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 individual medical plans, small business
         medical plans, medical savings account plans, basic medical coverage,
         short-term major medical, dental and supplemental products.


      2. INDIVIDUAL MEDICAL EXCLUSIVE AGENTS. Our newly-developed exclusive
         agent distribution channel for this market is called HealthMark Sales,
         LLC, a Ceres subsidiary. This operation concentrates on individual
         catastrophic health insurance and supplemental health insurance sales
         of specially

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         designed products primarily in rural markets. At December 31, 2000,
         HealthMark had 353 dedicated agents.


      3. SENIOR HEALTH AND LIFE BROKERAGE. Agents in this distribution channel
         target the 58 million Americans age 55 and over with a comprehensive
         product line, including Medicare supplement, long-term care, home
         healthcare, convalescent and acute recovery care, and senior life and
         annuities.



      4. SENIOR HEALTH AND LIFE PRIMARY AGENTS. With our acquisition of Pyramid
         Life, we gained a distribution system made up of approximately 500
         agents who sell primarily for Pyramid Life, in addition to Pyramid
         Life's approximately 1,600 independent agents. This distribution
         channel targets the 58 million Americans age 55 and over, with a
         product line similar to the senior health and life brokerage channel.


      5. CHAMBERS DIVISION. Agents market individual and small employer medical
         plans, directly and through endorsements of over 3,500 local Chambers
         of Commerce.


      6. WORKSITE MARKETING. The agents who work in this distribution channel
         are generally also part of our individual and group medical brokerage
         or individual medical exclusive agent systems. This distribution
         channel offers small businesses a variety of supplemental employee
         benefit plans, including critical illness coverage, cancer coverage,
         accidental injury, accidental death, supplemental life insurance, and
         dental coverage. These agents also offer small business owners the
         opportunity to enroll in a government-sponsored, tax-savings program
         that can increase funds available to purchase these supplemental plans.
         The program provides tax savings for employers and their employees
         through the purchase of health insurance on a pre-tax basis. The more
         insurance purchased by employees on this pre-tax basis, the more tax
         benefits for the employer, as the total net payroll amount is reduced.



      7. E-COMMERCE -- QQLINK. In addition to the traditional agent distribution
         channels, in the fall of 2000, we began enrolling agents to participate
         in our e-commerce initiative, QQLink. QQLink is 94% owned by Ceres with
         most of the remaining 6% primarily owned by 15 of our agents.


         This unique B2B-B2C agent-linked e-commerce exchange is dedicated to
         empowering participating agents with Internet technology by combining 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.

         Our initial rollout focuses on recruiting agents who are currently
         licensed with a Ceres insurance subsidiary. As of March 1, 2001, QQLink
         had over 1,500 agents enrolled. In the future, QQLink will also recruit
         agents who are unaffiliated with Ceres companies.


         In 2001, we are expanding the services available to participating
         insurance agents to include a portal page featuring direct connections
         to many other websites of interest and a partnership with WebCE.com to
         provide online access to continuing education credits. QQLink also
         plans to add Internet Service Provider (ISP) service for connection to
         the Internet as a part of the package agents receive for their monthly
         hosting fee.


         The first products available through QQLink were products written for
         QQLink by Ceres insurance subsidiaries. The QQLink website became
         operational for consumer use in November 2000. In 2001, we expect to
         add non-competing products from other insurance companies and financial
         service companies. In the first half of 2001, QQLink expects to add
         annuity and term life insurance products of two A-rated unaffiliated
         insurance companies to its online offerings. We are also pursuing
         marketing alliances with additional insurance, financial service and
         other vendors of products and services, in order to position QQLink as
         a distributor of many products from a growing number of companies.

                                        8
<PAGE>   12

      8. E-COMMERCE -- DIGITAL INSURANCE. Ceres' first direct online sales of
         selected products began in 1999 through Digital Insurance, formerly
         HealthAxis.com. This initiative does not involve any agent
         participation.

      9. INTER-COMPANY MARKETING. We pursue alliances to market our health and
         life insurance products through the distribution systems of carriers
         who handle non-competing products. Continental General currently has
         marketing agreements with approximately 20 unaffiliated insurance
         companies.

     10. AFFINITY GROUP MARKETING. We actively pursue endorsement of our
         products by affinity groups throughout the nation, such as national
         associations, employer groups and other organizations. Marketing
         through affinity groups can reduce sales expenses, increase name
         recognition and streamline service operations.

     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 materials for our
       agents; and

     - consistent agent communication and quality sales materials.

     In addition, we are working with a vendor to develop an Internet-based
real-time quoting system. The planned software applications will empower our
agency sales force with ease-of-access to product quoting, selection and
proposal generation capabilities. Some expected benefits of the program include:

     - more consistent premium rate quotes and benefit cost comparisons for
       potential customers;

     - faster, more timely response; and

     - more accurate quoting and comparison information.

In addition, this new software will be used to enhance the capabilities of
QQLink.

CUSTOMER BASE


     We had over 460,000 certificates and individual policies in force as of
December 31, 2000, representing more than 700,000 insureds, including
approximately 220,000 major medical group certificates and individual policies.
One association, Eagle Association, had approximately 50,000 certificate
holders, or 10.9% of all our certificates and individual policies in force as of
December 31, 2000. Each group certificate represents an


                                        9
<PAGE>   13

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, 2000 and 1999:


<TABLE>
<CAPTION>
                                              DECEMBER 31, 2000       DECEMBER 31, 1999
                                             --------------------    --------------------
                                             INDEMNITY      PPO      INDEMNITY      PPO
                                             ---------    -------    ---------    -------
<S>                                          <C>          <C>        <C>          <C>
Major medical..............................    45,539     174,982      46,180     162,301
Senior and supplemental products...........   173,137          --     102,138          --
                                              -------     -------     -------     -------
     Total health..........................   218,676     174,982     148,318     162,301
Life and annuity products..................    68,703          --      47,277          --
                                              -------     -------     -------     -------
     Total.................................   287,379     174,982     195,595     162,301
                                              =======     =======     =======     =======
</TABLE>



     The geographic distribution of direct and assumed premiums, before
reinsurance ceded, and annuity considerations on a statutory basis of all of our
subsidiaries in 2000, with the exception of five months for Pyramid Life, and by
all of our subsidiaries in 1999, with the exception of Pyramid Life and 11
months for Continental General, 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, 2000                                  DECEMBER 31, 1999
                 (IN THOUSANDS)                                     (IN THOUSANDS)
------------------------------------------------   ------------------------------------------------
                                        PERCENT                                            PERCENT
STATE                        AMOUNT     OF TOTAL   STATE                        AMOUNT     OF TOTAL
-----                       --------    --------   -----                       --------    --------
<S>                         <C>         <C>        <C>                         <C>         <C>
Ohio......................  $104,179      13.0%    Ohio......................  $ 94,193      14.2%
Florida...................    77,490       9.7     Florida...................    75,892      11.4
Texas.....................    67,306       8.4     Indiana...................    46,176       6.9
Indiana...................    54,555       6.8     Georgia...................    41,081       6.2
Georgia...................    35,576       4.5     North Carolina............    37,281       5.6
North Carolina............    34,988       4.4     Texas.....................    31,882       4.8
Tennessee.................    29,896       3.7     Kansas....................    25,121       3.8
Missouri..................    28,424       3.6     South Carolina............    24,967       3.8
South Carolina............    28,356       3.5     Tennessee.................    24,567       3.7
Kansas....................    27,711       3.2     Missouri..................    22,450       3.4
Other.....................   310,082      39.2     Other.....................   241,516      36.2
                            --------     -----                                 --------     -----
          Total...........  $798,563     100.0%    Total.....................  $665,126     100.0%
                            ========     =====                                 ========     =====
</TABLE>


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. 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.

     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
                                        10
<PAGE>   14

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.

     When we acquire a company, we review the new business rates and renewal
rates charged by the acquired company. 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 for our existing businesses and new
acquisitions with respect to both new business and renewals. In an acquisition,
we first examine the acquired company's new business rates and the current
market rates to analyze whether these rates sufficiently cover benefits,
expenses and commissions. For renewal business, we analyze the acquired
company's 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 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, and claims processing for Provident American Life and
United Benefit Life insureds to HealthPlan Services Corporation.


     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 our medical cost management personnel to review the claim, including the
specific health problem of the insured and the nature and extent of health care
services being provided. Our 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.

     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, work actively to meet our goals of:

     - processing claims within ten days of receipt;

     - minimizing claims inventory through consistent turnaround time and
       control of backlogs;

     - processing claims with an accuracy rate of not less than 99%; and

     - answering customer service calls in less than two minutes and with an
       abandon, or hang-up, rate less than 5%.

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.


     We outsource all information and telephone systems at our Cleveland
headquarters, as well as claims processing for our Central Reserve Ohio
insureds, to Antares Management Solutions, pursuant to an administrative
services agreement. 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, are outsourced to HealthPlan
Services. We receive regular reports from our third party vendors that enable us
to closely monitor our business on those systems.


                                        11
<PAGE>   15

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, 2000, approximately 97.5% of our invested assets were fixed
maturity securities, including mortgage-backed securities. At December 31, 2000,
98.1% of our fixed maturity securities were of investment grade quality with
81.4% in National Association of Insurance Commissioners (NAIC) I (typically A
or better) rated securities and 16.7% in NAIC II (typically BBB) rated
securities. We do not invest in derivatives, such as futures, forwards, swaps,
option contracts or other financial instruments with similar characteristics.



     At December 31, 2000, our investments in mortgage-backed securities totaled
$72.4 million, or 17.2% of total investments. The majority of our
mortgage-backed securities are issued by agencies of the U.S. Government, which
minimizes the credit risk for us. Among the agency mortgage-backed securities,
approximately two-fifths are in 30-year pass-through securities, while the rest
are planned amortization class collateralized mortgage obligations. These
planned amortization class collateralized mortgage obligations provide average
life protection in a fluctuating interest rate environment. The non-agency
mortgage-backed securities, consisting of both commercial and jumbo residential
mortgages, include features such as prepayment lockout and yield maintenance
provisions to reduce call risk.



     The amortized cost and estimated fair value of securities
available-for-sale 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
Fixed Maturities
  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-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
                                                    --------     ------    --------     --------
          Total...................................  $426,149     $5,635    $(11,502)    $420,282
                                                    ========     ======    ========     ========
</TABLE>

RESERVES

     In accordance with insurance regulations and generally accepted accounting
principles, we have established, and carry, actuarially determined reserves that
are calculated to satisfy our insurance policy and annuity contract obligations.
Reserves, together with premiums to be received on outstanding policies and
contracts and interest thereon at certain assumed rates, are calculated to be
sufficient to satisfy policy and contract obligations. The actuarial factors
used in determining such reserves are based on statutorily prescribed mortality
tables and interest rates. Reserves are also maintained for unearned premiums,
for

                                        12
<PAGE>   16

premium deposits, for claims that have been reported and are in the process of
being paid or contested and for management's estimate for claims that have been
incurred but have not yet been reported.

     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 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 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.


     When we acquire blocks of insurance policies or insurers owning blocks of
policies, our assessment of the adequacy of the transferred policy liabilities
is subject to risks and uncertainties. With acquired and existing businesses, we
may from time to time need to increase our claims reserves significantly in
excess of those estimated. 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, see Note K, Reinsurance Arrangements, to our
consolidated financial statements.


                                        13
<PAGE>   17


     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 has entered into reinsurance agreements with
several of our subsidiaries, including Central Reserve Life, United Benefit
Life, Continental General, and Provident American Life. Our reinsurance
agreements with Hannover are not cancellable or terminable by Hannover. In
addition, these agreements 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 Internet sales of Provident American Life. Hannover is reinsuring
the business under the reinsurance agreements until those policies lapse or are
terminated by us.


     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 2000 to unaffiliated
reinsurers amounted to $257.6 million, of which Hannover represented
approximately 98%. Our gross reinsurance receivables from unaffiliated
reinsurers amounted to $238.2 million as of December 31, 2000, of which
approximately 96% was attributable to Hannover.



     Hannover is a subsidiary of Hannover Rueckversicherung, a German
corporation which had assets of $19.5 billion and total stockholders' equity of
$1.2 billion at December 31, 1999. Moody's has assigned Hannover
Rueckversicherung a financial strength rating of Aa3 (excellent). At December
31, 2000, Hannover maintained an "A" (excellent) rating from A.M. Best Company,
Inc. Other rating agencies have maintained similar ratings of Hannover. At
December 31, 2000, Standard & Poor's has assigned Hannover a financial strength
rating of Api (rated 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.



     No new sales or business of any of our subsidiaries is currently reinsured,
except for Internet sales for Provident American Life, stop-loss coverage in
which we limit the maximum amount of exposure we retain on a given policy, and a
reinsurance agreement relating to Central Reserve's group term life insurance
and individual deferred annuities. 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 Universal American Financial Corp., 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., Conseco, Inc. and Banker's Life and
Casualty. 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 our products are marketed through independent agents, most of

                                        14
<PAGE>   18

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. Central Reserve's rating is a B+ (very good)
rating, reflecting strengthened capital, positive operating initiatives and a
focused, market-driven business strategy. Continental General's rating is A-
(excellent). Pyramid Life's rating is A- (excellent). Best affirmed the A-
ratings on Continental General and Pyramid Life with "negative outlook," meaning
that maintaining these ratings in the short-term is contingent upon successfully
completing an equity offering. However, Best acknowledged the improvements made
by Ceres to improve our capitalization and earnings trend. Provident American
Life's and United Benefit Life's ratings for 1999 are 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 they both
retain only a small portion of their gross premiums. In 2000, Fitch upgraded the
claims paying ability of Continental General to A- and kept Central Reserve at
BBB+.

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 make changes occasionally 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, 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.

     Prior to our foreclosure on its stock in July 1999, United Benefit Life was
under supervision by the State of Texas and State of Indiana Departments of
Insurance. Both states have now released United Benefit Life from their
supervision. New sales activities for United Benefit Life were discontinued in
July 2000.

     At December 31, 1996, Central Reserve's statutory capital levels fell to an
amount that subjected it to mandatory examination by the State of Ohio
Department of Insurance. This condition was abated by the change of control and
capital infusion in July 1998.

     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
                                        15
<PAGE>   19

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 states is common.


     In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance that replaces the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting as of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting practices had been silent and changes current statutory accounting
practices in some areas. The Codification will result in changes to the
accounting practices that we use to prepare our statutory-basis financial
statements. We believe the impact of these changes to our statutory-basis
capital and surplus as of January 1, 2001 will not be significant.


     The NAIC has also adopted 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. We calculated the risk-based capital for our insurance subsidiaries as
of December 31, 2000, using the applicable RBC formula. Based on these
calculations, our risk-based capital levels for each of our subsidiaries
substantially exceed 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. In 2001, 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 deficit in unassigned
surplus at December 31, 2000. As of December 31, 2000, Continental General could
pay approximately $1.4 million in dividends in 2001, without the prior approval
of the Nebraska Insurance Commissioner. By agreement with the Kansas Department
of Insurance, Pyramid Life can pay dividends only from net underwriting profits
of Pyramid Life, and, therefore, as of December 31, 2000, Pyramid Life could pay
approximately $2.9 million in dividends in 2001, without the prior approval of
the Kansas Insurance Commissioner.


     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, 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 may 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.


     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.

                                        16
<PAGE>   20

     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 health care 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 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 researcher 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

                                        17
<PAGE>   21

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 March 1, 2001, our largest network accounted for 33.4% of our
plan business. 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 other 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
administrative 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. The pending federal legislation, known as the
Bipartisan Patient Protection Act of 2001:

     - 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.

                                        18
<PAGE>   22

EMPLOYEES


     We had approximately 1,100 employees at December 31, 2000. We consider our
employee relations to be good. Our approximately 48,000 agents are independent
contractors and not employees.


ITEM 2.   PROPERTIES


     We own our headquarters building in Cleveland, Ohio, consisting of 121,625
square feet. At December 31, 2000, the outstanding principal balance of the
mortgage note on the building was approximately $8.0 million. Since April 11,
2000, we have leased a 19,484 square foot facility in Cleveland, Ohio that
houses our new business and 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, which
consists of approximately 45,000 square feet. Since August 1, 2000, we have also
leased a 1,977 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 defendants in a lawsuit filed on August 14, 2000, Insurance Advisors
of America, Inc., Transcend Group, Inc., and Jimmy K. Walker vs. Ceres Group,
Inc., Ceres Financial Services, Inc., Peter W. Nauert, Central Reserve Life
Insurance Company, Hannover Life Reassurance Company of America (f/k/a
Reassurance Company of Hannover), Provident American Life and Health Insurance
Company and Health Plan Services, Inc., United Benefit Life Insurance Company
and Billy B. Hill, Jr., case no. 17-184-65-00, in State District Court of
Tarrant County, Texas. The lawsuit involves a number of agreements between
Insurance Advisors of America and its affiliates, Transcend Group and Mr.
Walker, Ceres, Ceres Financial and United Benefit Life in which, among other
things, we reinsured United Benefit Life's policies, Insurance Advisors entered
into a non-compete agreement which prohibited them from selling insurance
products not provided by us, and Insurance Advisors signed a $10.0 million
promissory note payable to us. Pursuant to these agreements and to satisfy, in
part, a $19.4 million reserve shortfall, we acquired through foreclosure the
stock of United Benefit Life on July 21, 1999. Plaintiffs assert claims for,
among other things, fraud, breach of contract and negligence relating to unfair
competition. Plaintiffs allege that we engaged in a scheme to eliminate
plaintiffs from the competitive market, retain Insurance Advisors' renewal
commissions and "steal" their subagents by, among other things, "locking"
plaintiffs into exclusive agreements and non-compete agreements and "improperly"
increasing premiums and reducing commissions. Plaintiffs further assert, among
other things, that our actions and inactions "unilaterally and unfairly"
effectively eliminated plaintiffs' ability to conduct business and made it
"impossible" for agents and their managers to remain with Insurance Advisors and
"make a living." Actual damages sought by plaintiffs in the original complaint
filed on August 14 are in excess of $50.0 million. Hannover has now been
dismissed from this action. Additionally, plaintiffs voluntarily dismissed our
general counsel, Billy B. Hill, Jr., from the lawsuit.



     On March 5, 2001, plaintiffs amended their complaint to again include Billy
Hill; to add additional defendants, including Rhonda Immoos (a paralegal at
Ceres), Pyramid Life and Continental General; to add additional allegations of
civil conspiracy, tortious interference with business and existing and future
contractual relationships toward Nauert, Hill and Immoos; and to demand a jury
trial. Plaintiffs now seek monetary damages in excess of $100.0 million,
including damages for lost profits, unpaid commissions and unpaid administrative
fees. In addition, plaintiffs now seek punitive damages in excess of $100.0
million.


     On September 5, 2000, we filed a claim, Ceres Group, Inc., Central Reserve
Life Insurance Company, Provident American Life and Health Insurance Company,
and United Benefit Life Insurance Company vs. Insurance Advisors of America,
Inc., Robert H. Merrill, Private Business Management, Inc., Transcend Group,
Inc. and Jimmy K. Walker, in the Court of Common Pleas of Cuyahoga County, Ohio,
relating to the foreclosure on the United Benefit Life stock and Insurance
Advisors' failure to make payments under the promissory note. On September 15,
2000, the Court of Common Pleas entered a temporary restraining order in our
favor, prohibiting defendants from making any false statements regarding us and
prohibiting them from inducing our insureds to lapse coverage. This order was
superceded by an agreed order dated October 2, 2000,

                                        19
<PAGE>   23

which made permanent the temporary order and required defendants to send a
mailing to the agents of Insurance Advisors advising them of the same.

     On October 25, 2000, we filed a counterclaim in Tarrant County, Texas,
asserting that the plaintiffs failed to make payments under the various lending
agreements entered into by Insurance Advisors, breach of fiduciary duties,
misrepresentation of financial condition, breach of contract and certain other
claims. Contractual and tort damages sought are in excess of $25.0 million.

     On January 23, 2001, we sought leave of the court to file a supplemental
complaint and to deposit certain funds with the court pending the final outcome
of the litigation. On February 22, 2001, the Court of Common Pleas of Cuyahoga
County granted the defendants' Motion to Dismiss on Jurisdictional Priority
Grounds. We plan to appeal the court's decision to dismiss the case.


     We have denied liability to plaintiffs in the Texas action and we intend to
vigorously contest plaintiffs' claims in that action, as well as pursue the
claims we have against Insurance Advisors, Jimmy Walker and their affiliates
both in the litigation we initiated in Ohio and in our counterclaim in the Texas
action. Management believes the allegations in the Texas action to be groundless
and does not believe that the outcome of this matter will have a material
adverse impact on us. However, because litigation and jury trials are inherently
unpredictable and the amounts sought by plaintiffs are large, there can be no
assurance that the litigation will not have a material adverse effect on our
business, financial condition or results of operations.



     In addition to the above litigation, we have recently been sued for
compensatory damages and, in some cases, unspecified punitive damages in a
number of actions pertaining to the insureds of United Benefit Life arising from
claims payment issues. While we do not believe that United Benefit Life has
harmed any of the plaintiffs in these lawsuits and we believe our reserves are
adequate, we cannot predict the outcome of the lawsuits, including the award of
punitive damages and, therefore, we cannot predict the financial impact on us.
We intend to vigorously contest these actions.


     Other than the above matters, neither Ceres nor any of our subsidiaries is
party to, or the subject of, any material pending legal proceeding.

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

     None.

                                        20
<PAGE>   24

                                    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 22, 2001, our common stock closed at $5.94 per share.

<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    -----
<S>                                                           <C>       <C>
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
1998
     First Quarter..........................................  $ 7.75    $4.88
     Second Quarter.........................................    7.75     6.50
     Third Quarter..........................................    8.88     6.00
     Fourth Quarter.........................................   10.50     6.75
</TABLE>

     (b) As of March 22, 2001, we had 1,967 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.


     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, 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 deficit in unassigned
surplus at December 31, 2000. As of December 31, 2000, Continental General could
pay approximately $1.4 million in dividends in 2001, without the prior approval
of the Nebraska Insurance Commissioner. By agreement with the Kansas Department
of Insurance, Pyramid Life can pay dividends only from net underwriting profits
of Pyramid Life, and, therefore as of December 31, 2000, Pyramid Life could pay
approximately $2.9 million in dividends in 2001, without the prior approval of
the Kansas Insurance Commissioner.


     (d) On October 2, 2000, we issued 36,909 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.

     Also on October 2, 2000, we issued 4,101 shares of our common stock to
Billy B. Hill, Jr., our General Counsel, pursuant to his retainer agreement.
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.

                                        21
<PAGE>   25

ITEM 6.   SELECTED FINANCIAL DATA


     The selected consolidated financial data presented below as of and for each
of the five years ended December 31, 2000, 1999, 1998, 1997 and 1996 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. 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>
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
FOR THE YEAR:
Premiums (net of reinsurance).......  $511,542    $327,746    $154,188    $249,707    $258,175
Net investment income...............    26,871      21,362       7,454       6,528       6,701
Net realized (losses) gains.........       (98)        107         211         146           9
Fee and other income................    31,540      17,410       7,694       9,152          --
Amortization of deferred reinsurance
  gain..............................     6,093       5,468         600          --          --
                                      --------    --------    --------    --------    --------
     Total revenues.................  $575,948    $372,093    $170,147    $265,533    $264,885
                                      ========    ========    ========    ========    ========
Income (loss) before federal income
  taxes, minority interest and
  preferred stock dividends.........  $ 24,804    $ 18,006    $ (2,769)   $(21,089)   $(12,134)
Federal income tax expense
  (benefit).........................     8,380       6,302       1,067        (133)     (2,846)
                                      --------    --------    --------    --------    --------
Income (loss) after tax, before
  minority interest and preferred
  stock dividends...................    16,424      11,704      (3,836)    (20,956)     (9,288)
Minority interest...................       (26)         --          --          --          --
                                      --------    --------    --------    --------    --------
Net income (loss)...................    16,450      11,704      (3,836)    (20,956)     (9,288)
Convertible voting preferred stock
  dividends.........................       327          --          --          --          --
                                      --------    --------    --------    --------    --------
     Net income (loss) attributable
       to common stockholders.......  $ 16,123    $ 11,704    $ (3,836)   $(20,956)   $ (9,288)
                                      ========    ========    ========    ========    ========
Basic earnings (loss) per
  share(1)..........................  $   1.06    $   0.88    $  (0.49)   $  (5.01)   $  (2.29)
Diluted earnings (loss) per
  share(1)..........................      1.00        0.77       (0.49)(2)   (5.01)(2)   (2.29)(2)
Cash dividends per share............        --          --          --          --        0.52
</TABLE>

                                        22
<PAGE>   26


<TABLE>
<CAPTION>
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                   <C>         <C>         <C>         <C>         <C>
AT YEAR-END:
Investments.........................  $426,111    $309,952    $ 89,826    $ 79,957    $ 79,613
Reinsurance receivable..............   238,185     263,289      41,417      26,216         312
Total assets........................   880,529     717,868     180,233     135,804     119,389
Debt................................    57,018      48,157       8,284       8,399       8,504
Note payable........................        --          --          --      20,000          --
Future policy benefits and claims
  payable...........................   627,156     538,732      97,113      81,090      76,651
Retained earnings (accumulated
  deficit)..........................    18,672       2,549      (9,155)     (5,319)     15,637
Stockholders' equity................   103,283      44,661      35,836(4)    1,512      21,468
Equity per share:
  After accumulated other
     comprehensive income
     (loss)(3)......................      5.98        3.26        3.12(4)     0.36        5.18
  Before accumulated other
     comprehensive income
     (loss)(3)......................      6.33        4.59        3.02(4)     0.21        5.24
</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 solely to the net
   unrealized gain (loss) on available-for-sale securities.



(4) In July 1998, we issued and sold in a private placement 7,300,000 shares of
    our 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.


                                        23
<PAGE>   27

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" below.

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 retroactive 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 dividend, 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,
       which has now been fully recovered;

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

                                        24
<PAGE>   28


     - 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; and



     - 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 dividend, $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.



     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 year ended December 31, 2000 includes the
operations of Pyramid Life subsequent to its acquisition on July 26, 2000.



     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 to insured's expense.

     We also maintain reserves for policies that are not currently in claim
based upon actuarial expectations that a policy may go on 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 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. 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%. Interest

                                        25
<PAGE>   29


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 4.75% 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 unamortized 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% for
Continental General and 7% 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% for Continental General and 7% 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.


RECENT EVENTS



     On March 30, 2001, our credit agreement with Chase was amended to enter
into a new $10.0 million term loan with CIT Equipment Financing, Inc. The
proceeds of this term loan were used to permanently pay down $10.0 million of
our fully-drawn $15.0 million line of credit 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. The $10.0 million CIT
term loan bears interest at the same rate choices, Eurodollar or Base rate, as
our $40.0 million term loan. On April 20, 2001, the interest rate on our $40.0
million term loan was 8.91% and the interest rate on our $10.0 million CIT term
loan was 8.57%, both of which were based on Eurodollar rates. The first
principal payment on the CIT 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. For


                                        26
<PAGE>   30


more information on our credit agreement, including the line of credit and the
$40.0 million term loan, see "Liquidity and Capital Resources."



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.

  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       65.2%      $251,876       67.7%      $123,928    49.2%
  Senior and other.................   135,738       23.6%        75,870       20.4%        59,868    78.9%
                                     --------      -----       --------      -----       --------
     Total.........................   511,542       88.8%       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 (losses) gains........       (98)        --            107         --           (205)    N/M
Fee and other income...............    31,540        5.5%        17,410        4.7%        14,130    81.2%
Amortization of deferred
  reinsurance gain.................     6,093        1.0%         5,468        1.5%           625    11.4%
                                     --------      -----       --------      -----       --------
Consolidated Revenues..............   575,948      100.0%       372,093      100.0%       203,855    54.8%
                                     --------      -----       --------      -----       --------
Benefits, claims, losses and
  settlement expenses
  Medical..........................   288,260       50.1%       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       67.7%       233,103       62.7%       156,708    67.2%
Selling, general and administrative
  expenses.........................   185,211       32.1%       137,932       37.1%        47,279    34.3%
Net amortization and change in
  deferral of 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%
                                     ========      =====       ========      =====       ========
</TABLE>


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

N/M = not meaningful



                                        27

<PAGE>   31


  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 $31.5 million for 2000 compared to $17.4
million for 1999, an increase of 81.2%, 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,
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 $47.3 million to
$185.2 million in 2000 compared to $137.9 million in 1999, an increase of 34.3%.
The increase in selling, general and administrative expenses resulted from a
$42.6 million increase in commissions and a $12.6 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.
Pyramid Life accounted for $10.0 million of the $47.3 million increase. As a
percentage of consolidated revenues, selling, general and administrative
expenses decreased to 32.2% in 2000 compared to 37.1% in 1999.
                                        28
<PAGE>   32

     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%.


     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 are taking 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.


  1999 COMPARED TO 1998


<TABLE>
<CAPTION>
                                                                                             INCREASE
                                                                                         (DECREASE) FROM
                                                    % OF                      % OF        PREVIOUS YEAR
                                                CONSOLIDATED              CONSOLIDATED   ----------------
                                       1999       REVENUES       1998       REVENUES     DOLLARS      %
                                     --------   ------------   --------   ------------   --------   -----
                                                            (DOLLARS IN THOUSANDS)
<S>                                  <C>        <C>            <C>        <C>            <C>        <C>
Premiums, net
  Medical..........................  $251,876       67.7%      $143,064       84.1%      $108,812    76.1%
  Senior and other.................    75,870       20.4%        11,124        6.5%        64,746   582.0%
                                     --------      -----       --------      -----       --------
     Total.........................   327,746       88.1%       154,188       90.6%       173,558   112.6%
Net investment income..............    21,362        5.7%         7,454        4.4%        13,908   186.6%
Net realized gains.................       107         --            211        0.1%          (104)  (49.3)%
Fee and other income...............    17,410        4.7%         7,694        4.5%         9,716   126.3%
Amortization of deferred
  reinsurance gain.................     5,468        1.5%           600        0.4%         4,868   811.3%
                                     --------      -----       --------      -----       --------
Consolidated revenues..............   372,093      100.0%       170,147      100.0%       201,946   118.7%
                                     --------      -----       --------      -----       --------
Benefits, claims, losses and
  settlement expenses
  Medical..........................   176,531       47.5%       108,439       63.7%        68,092    62.8%
  Senior and other.................    56,572       15.2%         7,620        4.5%        48,952   642.4%
                                     --------      -----       --------      -----       --------
     Total.........................   233,103       62.7%       116,059       68.2%       117,044   100.8%
Selling, general and administrative
  expenses.........................   137,932       37.1%        54,368       32.0%        83,564   153.7%
Net amortization and change in
  deferral of acquisition costs and
  value of business acquired.......   (21,892)      (5.9)%          647        0.4%       (22,539)    N/M
Amortization of goodwill...........       854        0.2%            --         --            854     N/M
Interest expense and financing
  costs............................     4,090        1.1%         1,842        1.1%         2,248   122.0%
</TABLE>


                                        29
<PAGE>   33


<TABLE>
<CAPTION>
                                                                                             INCREASE
                                                                                         (DECREASE) FROM
                                                    % OF                      % OF        PREVIOUS YEAR
                                                CONSOLIDATED              CONSOLIDATED   ----------------
                                       1999       REVENUES       1998       REVENUES     DOLLARS      %
                                     --------   ------------   --------   ------------   --------   -----
                                                            (DOLLARS IN THOUSANDS)
<S>                                  <C>        <C>            <C>        <C>            <C>        <C>
Federal income tax expense.........     6,302        1.7%         1,067        0.6%         5,235   490.6%
                                     --------      -----       --------      -----       --------
Net income (loss)..................  $ 11,704        3.1%      $ (3,836)      (2.3)%     $ 15,540     N/M
                                     ========      =====       ========      =====       ========
</TABLE>


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

N/M = not meaningful


  NET PREMIUMS

     For the year ended December 31, 1999, total net premiums were $327.7
million, an increase of 112.6%, from $154.2 million for 1998.


     Medical premiums for 1999 were $251.9 million compared to $143.1 million
for 1998, an increase of 76.1%. The increase in medical premiums was the result
of $49.4 million attributable to Provident American Life and Continental
General, $25.8 million reinsurance assumed, and $33.6 million from rate
increases and new business, net of lapses, at Central Reserve.


     Senior and other premiums were $75.9 million for 1999 compared to $11.1
million for 1998, an increase of 582.0%. The increase in senior and other
premiums was primarily the result of $63.3 million attributable to Continental
General and Provident American Life.

  OTHER REVENUES


     Net investment income increased to $21.4 million for 1999 from $7.5 million
for 1998, an increase of 186.6%. Continental General accounted for $14.4 million
of the increase. Central Reserve's net investment income decreased approximately
$1.8 million during the year from 1998. The decrease was directly related to the
decrease in invested assets from $89.8 million at December 31, 1998 to $67.2
million at December 31, 1999. The decrease in invested assets was primarily a
result of acquiring Provident American and payment of claims under the United
Benefit Life reinsurance agreement.


     Fee and other income increased to $17.4 million for 1999 compared to $7.7
million for 1998, an increase of 126.3%. This increase was primarily attributed
to $4.0 million in administrative fees for business reinsured through Provident
American Life and United Benefit Life. The balance represents association fees
and a partial recovery of $1.6 million from a fraud committed by a former
employee in connection with claims administration at United Benefit Life prior
to our 1998 reinsurance agreement.

     The amortization of deferred reinsurance gain of $5.5 million for 1999
represented the recognition of the ceding commission allowances received on our
reinsurance agreements. The unamortized amount of $20.9 million at December 31,
1999 was accounted for as a deferred reinsurance gain on the consolidated
balance sheet.

  BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES

     Total benefits, claims and settlement expenses increased to $233.1 million
for 1999 compared to $116.1 million for 1998, an increase of 100.8%. Provident
American Life and Continental General accounted for $78.7 million of the total
increase of $117.0 million. The remaining $38.3 million was primarily
attributable to Central Reserve's portion of the increase in benefits at United
Benefit Life, reflecting 12 months of operational activity in 1999 compared to
five months in 1998. Medical benefits, claims, losses and settlement expenses
were $176.5 million for 1999 compared to $108.4 million for 1998, an increase of
62.8%. The medical loss ratio was 70.1% for the year ended December 31, 1999
compared to 75.8% for 1998. Cost reduction and benefit program modifications
implemented beginning in 1998, such as rate increases, improved underwriting,
enhanced claim procedures, and medical cost management techniques, in addition
to reduced loss ratios on increased new sales, led to the reduction in the
medical loss ratio. Senior and other benefits, claims, losses and

                                        30
<PAGE>   34

settlement expenses were $56.6 million for 1999 compared to $7.6 million for
1998, an increase of 642.4%. The senior loss ratio was 74.6% for 1999 compared
to 68.5% for 1998. The increase was primarily attributable to the inclusion of
Continental General's Medicare supplement business and interest sensitive life
and annuity benefits and reserves, which traditionally support a higher benefit
ratio, in addition to adverse claims of Continental General's long-term care
business.

  OTHER EXPENSES AND NET INCOME


     Selling, general and administrative expenses increased to $137.9 million
compared to $54.4 million in 1998, an increase of 153.7%. Of this amount, agent
commissions in 1999 were $85.1 million compared to $36.9 million in 1998.
Included in the 1999 commissions was $44.3 million for Provident American Life
and Continental General. The remaining increase represented the increase in
commissions for Central Reserve due to higher commissions that were paid on the
increase in new business sold in 1999. Other expenses, consisting of employee
salaries and benefits, taxes, licenses and fees, and administrative expenses,
increased to $99.8 million for 1999 compared to $44.6 million in 1998.
Continental General accounted for $32.8 million of the $55.2 million increase.
We also incurred costs of $9.7 million for the operations of Provident American
Life in 1999. Central Reserve accounted for approximately $7.6 million of the
increase consisting of $6.0 million for increased costs of administration,
information systems services, and medical cost management and $1.6 million for
personnel and premium tax costs related to the increase in sales. The balance of
$5.1 million represents the increased expenses in 1999 over 1998, including $3.4
million for employee contracts, severance and other expenses, $1.3 million for
bonuses and professional fees, and a one time charge of $0.4 million for
professional services in connection with the postponement of a secondary public
offering of our common stock.


     As a percentage of revenues, selling, general and administrative expenses
increased to 37.1% in 1999 compared to 31.9% in 1998, primarily as a result of
higher commission payments as a result of increased new business, hiring
additional employees, consulting support, acquisitions, product development to
help support our increased growth, and actions necessary to complete Year 2000
compliance conversions.

     The net amortization and change in deferral of acquisition costs and value
of business acquired resulted in a net deferral of $21.9 million for 1999
compared to a net amortization of $0.6 million for 1998. Continental General and
Provident American Life accounted for $13.5 million of the deferral. The
deferral of first year excess expenses associated with the significant increase
in sales of new products written by Central Reserve and United Benefit Life
accounted for the remaining balance.

     Interest expense and financing costs increased to $4.1 million in 1999
compared to $1.8 million in 1998 as a result of the interest expense on the
$40.0 million loan under our credit facility, which began to accrue on February
17, 1999, the closing date of the purchase of Continental General.

     Net income for the year ended December 31, 1999 was $11.7 million, or $0.88
basic earnings per share and $0.77 diluted earnings per share, compared to a net
loss of $3.8 million, or $0.49 loss per share on both a basic and diluted basis,
for 1998. Our net income for 1999 was adversely affected by a net loss of $4.7
million at United Benefit Life due to high benefit and claims loss ratios and
other related expenses.

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 of $426.1 million, or 48.4% of the total assets, were in investments
at December 31, 2000. Fixed maturities, our primary investment, were $415.3
million, or 97.5% of total investments, at December 31, 2000. Other investments
consist of surplus notes, policy loans and mortgage loans. We have classified
all of our fixed

                                        31
<PAGE>   35

maturities as "available-for-sale" and accordingly have reported them at
estimated fair value at December 31, 2000.

     We hold few high-yield type securities, with 98.5% of our bonds being
investment grade quality. In addition to the fixed maturities, we also had $59.5
million in cash and cash equivalents, and a $15.0 million line of credit, which
was fully drawn, at December 31, 2000.

     The total reinsurance receivable was $238.2 million at December 31, 2000.
Of this amount, $218.3 million represents reserves held by our reinsurers under
our various reinsurance treaties in place. Hannover holds most of these
reserves.

     Assets increased 22.7% to $880.5 million at December 31, 2000 from $717.9
million at December 31, 1999. The increase was primarily due to the acquisition
of Pyramid Life, which had assets of $136.2 million at December 31, 2000.

     The total policy liabilities and accruals (reserves) were 80.7% of the
total liabilities at December 31, 2000, compared to 80.0% at December 31, 1999.

     To provide funds for the acquisition of Continental General in February
1999, we incurred debt of $40.0 million under a credit agreement. Under the
terms of the credit agreement, dated as of February 17, 1999, among Ceres,
various lending institutions and The Chase Manhattan Bank, as Administrative
Agent, quarterly principal payments of $1.5 million through February 17, 2002
and $2.25 million thereafter are due through February 2005.

     Interest on the outstanding balance will be 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% in excess of a federal funds rate
and (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 an 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.
At December 31, 2000, the interest rate was 10.3%.

     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 must be repaid on February
17, 2002. The revolver bears interest at the same rate choices as the $40.0
million loan. At December 31, 2000, the interest rate was 10.2% on the
outstanding balance of $15.0 million.


     On March 30, 2001, our credit agreement was amended to enter into a new
$10.0 million term loan with CIT Equipment Financing, Inc. The proceeds of this
term loan were used to permanently pay down $10.0 million of our fully-drawn
$15.0 million line of credit 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. The $10.0 million CIT term loan
bears interest at the same rate choices, Eurodollar or Base rate, as our $40.0
million term loan. On April 20, 2001, the interest rate on our $40.0 million
term loan was 8.91% and the interest rate on our $10.0 million CIT term loan was
8.57%, both of which were based on Eurodollar rates. The first principal payment
on the CIT 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.


     The credit agreement, as amended, contains financial and other covenants
that, among other matters:

     - 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
          0.40 to 1.00 through December 31, 2000, 0.35 to 1.00 thereafter
          through December 31, 2001, and 0.30 to 1.00 thereafter;

                                        32
<PAGE>   36

        - an interest coverage ratio (consolidated earnings before interest,
          income taxes, depreciation, and amortization to consolidated interest
          expense) of 2.50 to 1.00 through December 31, 2000, and 3.00 to 1.00
          thereafter;


        - 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 $80.0 million through December 31, 2000,
          $110.0 million thereafter through December 31, 2001, $160.0 million
          thereafter through December 31, 2002, and $200.0 million thereafter;
          and

        - a fixed charge coverage ratio (borrower cash flow to the sum of
          consolidated interest expense and scheduled repayments) of not less
          than 1.05 to 1.00 for the period of June 30, 2000 through June 30,
          2001, 1.10 to 1.00 thereafter through June 30, 2002, 1.20 to 1.00
          thereafter through June 30, 2003, and 1.30 to 1.00 thereafter.

     In addition, we pledged the common stock of Continental General, Central
Reserve, Provident American Life, Pyramid Life and other subsidiaries as
security for the credit agreement. At December 31, 2000, we were in compliance
with the covenants contained in our credit agreement, as amended.


     The mortgage note on our Cleveland headquarters bears interest at 9.5% per
annum. Principal payments are due monthly with the final payment of $7.7 million
due on January 1, 2003. As of April 20, 2001, future annual principal payments
due for the mortgage note and all long-term debt are $5.7 million for 2001,
$14.4 million for 2002, $18.0 million for 2003, $11.2 million for 2004, $6.5
million for 2005 and $1.2 million in 2006. As of April 20, 2001, future annual
interest payments, assuming the current interest rate of 8.91% on the $40.0
million term loan under our credit agreement, due for the mortgage note and all
long-term debt are $4.9 million for 2001, $3.8 million for 2002, $2.9 million
for 2003, $1.9 million for 2004, $1.1 million for 2005 and $0.7 million for
2006.



     We believe that cash flow from operating activities will be sufficient to
meet our currently anticipated operating and capital expenditure requirements
over the next 12 months. In addition, we believe that funds from our
non-regulated subsidiaries will be sufficient to meet our debt obligations over
the next 12 months. In 2000, $6.3 million from our non-regulated subsidiaries
was transferred to the holding company through inter-company advances. In the
future, we intend to rely primarily on dividends from our non-regulated
subsidiaries to meet our outstanding debt obligations. These dividends will be
reflected in the "parent only" schedules as part of our financial statements.
Dividends from our non-regulated, non-insurance subsidiaries may be derived from
their retained earnings, which are generated by fees paid by unaffiliated and
affiliated companies under various agreements of these subsidiaries. Our ability
to make scheduled payments of the principal of and interest on our indebtedness
depends on our future performance and the future performance of these non-
regulated subsidiaries. Dividends from our regulated insurance subsidiaries are
subject to, and limited by, state insurance regulations. For more information on
dividends payable in 2001 by our regulated insurance subsidiaries, see "Price
Range of Common Stock and Dividend Policy." If additional funds become
necessary, additional financing may not be available on terms favorable to us or
at all. If adequate funds are not available on acceptable terms, we may not be
able to continue to fund our growth or make any additional acquisitions. Our
inability to raise capital could adversely affect our business.


NET OPERATING LOSS CARRYFORWARD

     At December 31, 2000, we had a tax net operating loss, or NOL, carryforward
of approximately $15.7 million for federal income tax purposes, which expires
through 2013. We may not be able to utilize any or all of the NOL. 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.

     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, 2000 and 1999, 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
                                        33
<PAGE>   37

to realize the $3.8 million net deferred tax asset, recorded as of December 31,
2000, prior to the expiration of any NOLs.

     Additionally, we reduced the valuation allowance by $5.9 million during
2000 through an adjustment to goodwill related to the acquisition of Continental
General. The reduction was attributable to Continental General, as management
believes a sufficient amount of taxable income will be generated in future years
to realize a greater amount of the deferred tax assets than previously
anticipated.

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,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
MEDICAL
  Revenues
     Net premiums..........................................  $375,804    $251,876    $143,064
     Investment income, realized gains (losses)............     9,101       6,985       5,682
     Other income..........................................    34,925      21,307       8,294
                                                             --------    --------    --------
                                                              419,830     280,168     157,040
                                                             --------    --------    --------
  Expenses
     Benefits and claims...................................   288,260     176,531     108,439
     Other operating expenses..............................   121,345      96,357      49,143
                                                             --------    --------    --------
                                                              409,605     272,888     157,582
                                                             --------    --------    --------
  Segment profit (loss) before federal income taxes,
     minority interest and preferred stock dividends.......  $ 10,225    $  7,280    $   (542)
                                                             ========    ========    ========
SENIOR AND OTHER
  Revenues
     Net premiums..........................................  $135,738    $ 75,870    $ 11,124
     Investment income, realized gains (losses)............    16,615      14,233       1,498
     Other income..........................................     2,686       1,364          --
                                                             --------    --------    --------
                                                              155,039      91,467      12,622
                                                             --------    --------    --------
  Expenses
     Benefits and claims...................................   101,551      56,572       7,620
     Other operating expenses..............................    32,225      18,510       3,986
                                                             --------    --------    --------
                                                              133,776      75,082      11,606
                                                             --------    --------    --------
  Segment profit before federal income taxes, minority
     interest and preferred stock dividends................  $ 21,263    $ 16,385    $  1,016
                                                             ========    ========    ========
CORPORATE AND OTHER
  Revenues
     Investment income, realized gains (losses)............  $  1,057    $    251    $    485
     Other income..........................................        22         207          --
                                                             --------    --------    --------
                                                                1,079         458         485
                                                             --------    --------    --------
</TABLE>


                                        34
<PAGE>   38

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
  Expenses
     Interest and financing expenses.......................     5,566       4,090       1,842
     Other operating expenses..............................     2,197       2,027       1,886
                                                             --------    --------    --------
                                                                7,763       6,117       3,728
                                                             --------    --------    --------
  Segment loss before federal income taxes, minority
     interest and preferred stock dividends................  $ (6,684)   $ (5,659)   $ (3,243)
                                                             ========    ========    ========
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES, MINORITY
  INTEREST AND PREFERRED STOCK DIVIDENDS...................  $ 24,804    $ 18,006    $ (2,769)
                                                             ========    ========    ========
</TABLE>

MARKET RISK AND MANAGEMENT POLICIES

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

     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.

     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.

     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 its assets with the expected payouts of its liabilities. To
the extent that liabilities come due more quickly than assets mature, an insurer
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
$16.9 million after-tax at December 31, 2000. This amount represents
approximately 16.4% of our stockholders' equity.

     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 in 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 during the winter months and the use of deductibles.

                                        35
<PAGE>   39

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. The Health Insurance Association of America
reported, in an Issue Brief dated March 2000, that prescription drug costs are
increasing more than 16% a year. 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, 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 both historical and forward-looking statements.
Forward-looking statements are statements other than historical information or
statements of current condition. The forward-looking statements relate to our
plans and objectives for future operations. In addition to statements, which are
forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," " optimistic," "will"
and other similar expressions identify forward-looking statements. In light of
risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements should not be regarded as a representation by Ceres
or any other person that our objectives or plans will be achieved.

     Many 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
       HIPAA and increased privacy regulation, and changes in laws and
       regulations in key states in which we operate;

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

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

     - the risk of material adverse outcomes in litigation;

     - a new and untested business plan;

     - dependence on senior management and key personnel;

     - the failure to successfully manage our growth and integrate future
       acquisitions, including the failure to achieve cost savings;

     - our financial and claims paying ratings;

     - 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 adequacy of funds received from our non-regulated subsidiaries to
       meet Ceres' debt obligations;


                                        36
<PAGE>   40


     - payments to state assessment funds;



     - business conditions and competition in the healthcare industry;



     - 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;

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

     - 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 foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements
that are included in this report, including the risks detailed under "Market
Risk and Management Policies." We undertake no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In September 2000, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
which replaces FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This standard revises the
methods for accounting for securitizations and other transfers of financial
assets and collateral as outlined in FASB Statement No. 125, and requires
certain additional disclosures. For transfers and servicing of financial assets
and extinguishments of liabilities, this standard will be effective for our June
30, 2001 financial statements. However, for disclosures regarding
securitizations and collateral, as well as the accounting for recognition and
reclassification of collateral, this standard is effective for our December 31,
2000 financial statements. The adoption of this standard did not have a material
effect on our financial position or results of operations as of December 31,
2000. In addition, the provisions, that will be effective June 30, 2001, are not
expected to have a material effect on our financial position or results of
operations.


     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities as amended
by FASB Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, that is
required to be adopted for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We adopted the new statement effective January 1, 2001. If
in the future we have derivative instruments, Statement No. 133 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 Statement No. 133 did not
have a significant effect on our financial position or results of operations.


     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of the
Accounting Principles Board Opinion No. 25, which clarifies the application of
APB Opinion No. 25 for some issues including:

     - the definition of an employee for purposes of applying APB Opinion No.
       25;

     - the criteria for determining whether a plan qualifies as a
       noncompensatory plan;

                                        37
<PAGE>   41

     - the accounting consequences of various modifications to the terms of a
       previously fixed stock option or award; and

     - the accounting for an exchange of stock compensation awards in a business
       combination.

Interpretation No. 44 became effective July 1, 2000, but some of the conclusions
were retroactive. The adoption of this guidance on July 1, 2000 did not have a
material impact on our results of operations or financial position.

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.

                                        38
<PAGE>   42

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..............................    40

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................    41
Consolidated Statements of Operations for the years ended
  December 31, 2000, 1999 and 1998..........................    42
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 2000, 1999 and 1998..............    43
Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 1999 and 1998..........................    44
Notes to Consolidated Financial Statements for the years
  ended December 31, 2000, 1999 and 1998....................    45

FINANCIAL STATEMENT SCHEDULES
Schedule II -- Condensed Financial Information of
  Registrant -- Ceres Group, Inc. (Parent Only).............    74
Schedule III -- Supplemental Insurance Information..........    77
Schedule IV -- Reinsurance..................................    78
</TABLE>


                                        39
<PAGE>   43

                         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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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 8, 2001

                                        40
<PAGE>   44

                       CERES GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


                           DECEMBER 31, 2000 AND 1999

                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Investments
  Fixed maturities available-for-sale, at fair value--Note
     D......................................................  $415,287    $300,986
  Surplus notes.............................................     4,995       5,043
  Policy and mortgage loans.................................     5,829       3,923
                                                              --------    --------
          Total investments.................................   426,111     309,952
Cash and cash equivalents (of which $9,397 and $4,763 is
  restricted, respectively)--Note D.........................    59,512      42,921
Accrued investment income...................................     7,496       5,234
Premiums receivable.........................................     5,852       4,905
Reinsurance receivable--Note K..............................   238,185     263,289
Property held for sale--Note E..............................        --       2,177
Property and equipment, net--Note F.........................    17,531      15,091
Deferred federal income taxes--Note I.......................     3,797       1,792
Deferred acquisition costs--Note G..........................    55,989      26,650
Value of business acquired--Note H..........................    32,254      16,731
Goodwill....................................................    25,425      21,696
Other assets................................................     8,377       7,430
                                                              --------    --------
          Total assets......................................  $880,529    $717,868
                                                              ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accrual
  Future policy benefits, losses and claims.................  $408,169    $357,149
  Unearned premiums.........................................    42,751      32,045
  Other policy claims and benefits payable--Note J..........   176,236     149,538
                                                              --------    --------
                                                               627,156     538,732
Deferred reinsurance gain--Note K...........................    18,839      20,932
Other policyholders' funds..................................    24,246      22,365
Federal income taxes payable--Note I........................     1,464       1,449
Mortgage note payable--Note M...............................     8,018       8,157
Debt--Note M................................................    49,000      40,000
Other liabilities...........................................    48,523      41,572
                                                              --------    --------
          Total liabilities.................................   777,246     673,207
Stockholders' equity
  Non-voting preferred stock, $.001 par value, 1,900,000 and
     2,000,000 shares authorized, respectively, none
     issued--Note O.........................................        --          --
  Convertible voting preferred stock, $.001 par value, at
     stated value, 100,000 and 0 shares authorized, 75,000
     and 0 shares issued and outstanding, respectively......     7,500          --
  Common stock, $.001 par value, 50,000,000 and 30,000,000
     shares authorized, 17,278,704 and 13,706,726 shares
     issued and outstanding respectively....................        17          14
  Additional paid-in capital................................    82,943      60,290
  Dividends distributable, convertible voting preferred
     stock--Note B..........................................       327          --
  Retained earnings.........................................    18,672       2,549
  Accumulated other comprehensive loss......................    (6,176)    (18,192)
                                                              --------    --------
          Total stockholders' equity........................   103,283      44,661
                                                              --------    --------
          Total liabilities and stockholders' equity........  $880,529    $717,868
                                                              ========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        41
<PAGE>   45

                       CERES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

<TABLE>
<CAPTION>
                                                              2000        1999        1998
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>
REVENUES
Premiums, net--Note K
  Medical.................................................  $375,804    $251,876    $143,064
  Senior and other........................................   135,738      75,870      11,124
                                                            --------    --------    --------
          Total premiums, net.............................   511,542     327,746     154,188
Net investment income--Note D.............................    26,871      21,362       7,454
Net realized (losses) gains...............................       (98)        107         211
Fee and other income......................................    31,540      17,410       7,694
Amortization of deferred reinsurance gain--Note K.........     6,093       5,468         600
                                                            --------    --------    --------
                                                             575,948     372,093     170,147
                                                            --------    --------    --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses--Note K
  Medical.................................................   288,260     176,531     108,439
  Senior and other........................................   101,551      56,572       7,620
                                                            --------    --------    --------
          Total benefits, claims, losses and settlement
            expenses......................................   389,811     233,103     116,059
Selling, general and administrative expenses--Note K......   185,211     137,932      54,368
Net (deferral) amortization and change in acquisition
  costs and value of business acquired--Notes G and H.....   (30,513)    (21,892)        647
Amortization of goodwill..................................     1,069         854          --
Interest expense and financing costs......................     5,566       4,090       1,842
                                                            --------    --------    --------
                                                             551,144     354,087     172,916
                                                            --------    --------    --------
Income (loss) before federal income taxes, minority
  interest, and preferred stock dividends.................    24,804      18,006      (2,769)
Federal income tax expense--Note I........................     8,380       6,302       1,067
                                                            --------    --------    --------
Income (loss) after tax, before minority interest and
  preferred stock dividends...............................    16,424      11,704      (3,836)
Minority interest.........................................       (26)         --          --
                                                            --------    --------    --------
NET INCOME (LOSS).........................................    16,450      11,704      (3,836)
Convertible voting preferred stock dividends..............       327          --          --
                                                            --------    --------    --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS.....  $ 16,123    $ 11,704    $ (3,836)
                                                            ========    ========    ========
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
  STOCKHOLDERS
  Basic...................................................  $   1.06    $   0.88    $  (0.49)
  Diluted.................................................      1.00        0.77       (0.49)
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        42
<PAGE>   46

                       CERES GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                           2000          1999          1998
                                                        ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>
CONVERTIBLE VOTING PREFERRED STOCK
Balance at beginning of year..........................  $       --    $       --    $       --
Issuance of stock.....................................       7,500            --            --
                                                        ----------    ----------    ----------
          Balance at end of year......................  $    7,500    $       --    $       --
                                                        ==========    ==========    ==========
COMMON STOCK
Balance at beginning of year..........................  $       14    $       12    $    2,098
Issuance of common stock..............................           3             2         3,650
Change to $.001 par value.............................          --            --        (5,736)
                                                        ----------    ----------    ----------
          Balance at end of year......................  $       17    $       14    $       12
                                                        ==========    ==========    ==========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year..........................  $   60,290    $   43,883    $    4,122
Issuance of stock:
  Private placement...................................      21,093        14,998        34,025
  Employee benefit plans..............................       1,560         1,409            --
Change to $.001 par value.............................          --            --         5,736
                                                        ----------    ----------    ----------
          Balance at end of year......................  $   82,943    $   60,290    $   43,883
                                                        ==========    ==========    ==========
DIVIDENDS DISTRIBUTABLE, CONVERTIBLE VOTING PREFERRED
  STOCK
Balance at beginning of year..........................  $       --    $       --    $       --
Dividends distributable...............................         327            --            --
                                                        ----------    ----------    ----------
          Balance at end of year......................  $      327    $       --    $       --
                                                        ==========    ==========    ==========
RETAINED EARNINGS
Balance at beginning of year..........................  $    2,549    $   (9,155)   $   (5,319)
Net income (loss).....................................      16,450        11,704        (3,836)
Dividends distributable, convertible voting preferred
  stock...............................................        (327)           --            --
                                                        ----------    ----------    ----------
          Balance at end of year......................  $   18,672    $    2,549    $   (9,155)
                                                        ==========    ==========    ==========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year..........................  $  (18,192)   $    1,096    $      611
Unrealized gain (loss) on securities, net of tax of
  $0, $0 and $565, respectively.......................      11,806       (19,650)          485
Other.................................................         210           362            --
                                                        ----------    ----------    ----------
          Balance at end of year......................  $   (6,176)   $  (18,192)   $    1,096
                                                        ==========    ==========    ==========
TOTAL STOCKHOLDERS' EQUITY............................  $  103,283    $   44,661    $   35,836
                                                        ==========    ==========    ==========
NUMBER OF SHARES OF CONVERTIBLE VOTING PREFERRED STOCK
Balance at beginning of year..........................          --            --            --
Issuance of shares....................................      75,000            --            --
                                                        ----------    ----------    ----------
          Balance at end of year......................      75,000            --            --
                                                        ==========    ==========    ==========
NUMBER OF SHARES OF COMMON STOCK
Balance at beginning of year..........................  13,706,726    11,495,172     4,195,172
Issuance of shares:
  Private placement...................................   3,333,334     2,000,000     7,300,000
  Employee benefit plans..............................     238,644       211,554            --
                                                        ----------    ----------    ----------
          Balance at end of year......................  17,278,704    13,706,726    11,495,172
                                                        ==========    ==========    ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        43
<PAGE>   47

                       CERES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                                2000        1999         1998
                                                              --------    ---------    --------
<S>                                                           <C>         <C>          <C>
OPERATING ACTIVITIES
  Net income (loss).........................................  $ 16,450    $  11,704    $ (3,836)
  Adjustments to reconcile net income (loss) to cash
    provided by operating activities:
      Depreciation and amortization.........................     2,418        2,395         513
      Net realized losses (gains)...........................        98         (107)       (211)
      Deferred federal income tax expense (benefit).........     1,573        5,587        (382)
      Changes in assets and liabilities:
         Premiums receivable................................      (724)          85        (105)
         Reinsurance receivable.............................    28,350     (221,744)    (15,201)
         Value of business acquired.........................    (2,841)        (902)         --
         Goodwill...........................................     6,495         (423)         --
         Federal income taxes payable/recoverable...........        15       (6,256)        720
         Accrued investment income..........................      (350)         250        (219)
         Other assets.......................................       627       (1,376)     (1,191)
         Future policy benefits, claims and funds payable...    11,998      248,382      21,939
         Unearned premium...................................     9,530       17,525          --
         Other liabilities..................................     4,861        8,454       8,708
         Deferred acquisition costs.........................   (27,672)     (22,283)      3,484
         Deferred reinsurance gain..........................    (2,093)      (5,468)     (3,400)
                                                              --------    ---------    --------
Net cash provided by operating activities...................    48,735       35,823      10,819
                                                              --------    ---------    --------
INVESTING ACTIVITIES
  Net (purchases) disposals of furniture and equipment......    (1,909)        (739)        302
  Purchase of fixed maturities available-for-sale...........   (66,337)     (30,323)    (33,100)
  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.....       366          (20)         (2)
  Proceeds from sales of fixed maturities
    available-for-sale......................................    11,569       29,811       7,926
  Proceeds from calls and maturities of fixed maturities
    available-for-sale......................................    31,258       12,991      13,318
  Proceeds from sales, calls and maturities of fixed
    maturities held-to-maturity.............................        --        3,923       3,023
  Proceeds from sale of property held for sale..............     2,115           --          --
                                                              --------    ---------    --------
Net cash used in investing activities.......................   (60,277)     (49,187)     (8,533)
                                                              --------    ---------    --------
FINANCING ACTIVITIES
  Increase in annuity account balances......................    23,223       18,446         482
  Decrease in annuity account balances......................   (34,107)     (37,819)     (5,118)
  Increase in note receivable...............................        --           --      (7,368)
  Principal payments on mortgage note payable...............      (139)        (127)       (115)
  Repayment of notes payable................................        --           --     (20,000)
  Increase in debt borrowings...............................    15,000       40,000          --
  Principal payments on debt................................    (6,000)          --          --
  Proceeds from issuance of common stock related to employee
    benefit plans...........................................     1,560        1,409          --
  Proceeds from private placement of common stock, net of
    acquisition costs.......................................    21,096       15,000      37,675
  Proceeds from private placement of preferred stock........     7,500           --          --
                                                              --------    ---------    --------
Net cash provided by financing activities...................    28,133       36,909       5,556
                                                              --------    ---------    --------
NET INCREASE IN CASH........................................    16,591       23,545       7,842
Cash and cash equivalents at beginning of year..............    42,921       19,376      11,534
                                                              --------    ---------    --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $ 59,512    $  42,921    $ 19,376
                                                              ========    =========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the year for interest....................  $  6,051    $   2,940    $  1,662
  Cash paid during the year for income taxes................     1,100        2,078         650
</TABLE>

 These accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        44
<PAGE>   48

                       CERES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2000, 1999 AND 1998

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

A. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF BUSINESS

     Ceres Group, Inc. and its subsidiaries, known as Central Reserve Life
Corporation prior to December 8, 1998, operated in 1998 and prior periods
primarily through its wholly owned subsidiary, Central Reserve Life Insurance
Company. As of December 31, 1999, 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 and United Benefit Life Insurance Company under a reinsurance
arrangement effective August 1, 1998 and acquired on July 21, 1999 (through
foreclosure). As of December 31, 2000, the Company's consolidated statements
also include the accounts of Pyramid Life Insurance Company acquired on July 26,
2000. These acquisitions are discussed further in Note C, Business Combinations
and Note K, Reinsurance Arrangements.


     The Company provides through its wholly-owned subsidiaries a wide array of
health and life insurance products to over 700,000 insureds. While the Company
through its subsidiaries is licensed in 49 states, the District of Columbia and
the U.S. Virgin Islands, approximately 67% of premium volume is generated from
twelve states: Ohio, Florida, Texas, Indiana, Georgia, North Carolina,
Tennessee, Missouri, South Carolina, Kansas, Nebraska and Illinois.


SIGNIFICANT ACCOUNTING POLICIES

     The accompanying consolidated financial statements include the accounts of
Ceres and its wholly-owned subsidiaries. The consolidated statement of
operations 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 operations 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 discussion.

     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 are reported at fair value, with unrealized
holding gains and losses reported in accumulated other comprehensive


                                        45
<PAGE>   49
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

income (losses), net of deferred federal income taxes. All investments as of
December 31, 2000 are designated as available-for-sale.

     Investments in surplus notes, policy loans, and mortgage loans are reported
at cost which approximates fair value.

     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.

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

  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, 2000.

  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 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, 2000, credited rates
ranged from 5.5% to 7.0%. Guaranteed base minimum rates for deferred annuities
range from 3.0% to 5.75% depending on the duration of the contract. Current
rates credited range from 5.0% to 8.6%.

                                        46
<PAGE>   50
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

  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.

  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.

  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 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 2000, 1999 and 1998 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.

                                        47
<PAGE>   51
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

  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.

  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.

  Related Party Transactions


     We outsource all information and telephone systems at our Cleveland
headquarters, as well as claims processing for our Central Reserve Ohio
insureds, to Antares Management Solutions, pursuant to an administrative
services agreement. Antares is a division of Medical Mutual Services, which is a
subsidiary of Medical Mutual of Ohio, a 3.8% 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 $21.4 million in 2000, $18.8
million in 1999 and $6.6 million in 1998.


  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.

  New Accounting Pronouncements

     In September 2000, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
which replaces FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This standard revises the
methods for accounting for

                                        48
<PAGE>   52
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

securitizations and other transfers of financial assets and collateral as
outlined in FASB Statement No. 125, and requires certain additional disclosures.
For transfers and servicing of financial assets and extinguishments of
liabilities, this standard will be effective for the Company's June 30, 2001
financial statements. However, for disclosures regarding securitizations and
collateral, as well as the accounting for recognition and reclassification of
collateral, this standard is effective for our December 31, 2000 financial
statements. The adoption of this standard did not have a material effect on our
financial position or results of operations as of December 31, 2000. In
addition, the provisions, that will be effective June 30, 2001, are not expected
to have a material effect on our financial position or results of operations.


     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities as amended
by FASB Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, that is
required to be adopted for all fiscal quarters of all fiscal years beginning
after June 15, 2000. 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 FASB Statement No. 133 did not have a
significant effect on our results of operations or financial position.


     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of the
Accounting Principles Board Opinion No. 25, which clarifies the application of
APB Opinion No. 25 for some issues including:

     - the definition of an employee for purposes of applying APB Opinion No.
       25;

     - the criteria for determining whether a plan qualifies as a
       noncompensatory plan;

     - the accounting consequences of various modifications to the terms of a
       previously fixed stock option or award; and

     - the accounting for an exchange of stock compensation awards in a business
       combination.

Interpretation No. 44 became effective July 1, 2000, but some of the conclusions
are retroactive. The adoption of this guidance on July 1, 2000 did not have a
material impact on our results of operations or financial position.

B. EQUITY TRANSACTIONS

     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, 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.

                                        49
<PAGE>   53
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     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 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 on 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 our
       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 our
       convertible voting preferred stock, which shares (1) are entitled to vote
       on all matters presented to our stockholders as if conversion has
       occurred, (2) are convertible into our 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

                                        50
<PAGE>   54
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

       dividends on shares of our common stock unless all previous dividends on
       the convertible voting preferred stock have been paid, and (5) as of
       December 31, 2000, we have accrued $0.3 million in dividends or $4.36 per
       convertible voting preferred share;

     - $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. Allocations are subject to valuations as of the date
of the acquisition based on appraisals and other studies which are not yet fully
completed. Accordingly, the final allocations may be different from the amounts
reflected herein. Although the final allocations may differ, the unaudited pro
forma financial statements reflect management's best estimates based on
currently available information as of the date of this filing.

     The following unaudited pro forma information presents the consolidated
results of operations of the Company assuming the acquisition of Pyramid Life
was completed on January 1, 2000 and 1999:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                 2000          1999
                                                              ----------    ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Revenues....................................................   $617,946      $440,672
Income before federal income taxes..........................     29,113        26,104
Federal income tax expense..................................      9,977         9,293
Net income..................................................     19,136        16,811
Net income attributable to common stockholders..............     18,386        16,061
Net income per share attributable to common stockholders
  Basic.....................................................       1.07          0.96
  Diluted...................................................       1.00          0.84
</TABLE>

     The pro forma results of operations are not indicative of the actual
results of operations that would have occurred had the acquisitions been made on
the dates indicated, or the results that may be obtained in the future.

  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.

                                        51
<PAGE>   55
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     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. In addition, effective February 17, 1999, the Company entered
into a series of stock subscription agreements with a group of investors,
principally Peter Nauert and Insurance Partners whereby the Company issued
2,000,000 common shares at $7.50 per share for $15.0 million.

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

                                        52
<PAGE>   56
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     D. CASH AND INVESTMENTS

     The amortized cost and estimated fair market value of securities
available-for-sale 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
Fixed Maturities
  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-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
                                            --------     ------    --------     --------
          Total...........................  $426,149     $5,635    $(11,502)    $420,282
                                            ========     ======    ========     ========
</TABLE>

     The amortized cost and estimated fair value of securities
available-for-sale as of December 31, 1999 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
Fixed Maturities
  U.S. Treasury securities.................  $ 16,140     $ 41     $   (282)    $ 15,899
  U.S. Agencies............................     6,670       --         (160)       6,510
  State and political subdivisions.........     4,225       --         (145)       4,080
  Corporate bonds..........................   232,229      692      (17,353)     215,568
  Mortgage-backed securities...............    60,355      138       (1,564)      58,929
                                             --------     ----     --------     --------
          Total available-for-sale.........   319,619      871      (19,504)     300,986
Surplus notes..............................     4,964       79           --        5,043
                                             --------     ----     --------     --------
          Total............................  $324,583     $950     $(19,504)    $306,029
                                             ========     ====     ========     ========
</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, 2000. At December 31, 1999, the Company
held a bond of Petroliam Nasional Berhad with an estimated fair value of $4.8
million that exceeded 10% of stockholders' equity.

     In June 1999, the Company sold approximately $4.0 million of securities
from its held-to-maturity portfolio to meet a significant and unanticipated
increase in claim payments. The securities sold represented 44% of the
held-to-maturity portfolio and generated a realized gain of $2,000. Due to that
sale and the acquisition of Continental General, management changed its intent
to hold the remaining held-to-maturity portfolio, of approximately $5.0 million,
and transferred the balance to available-for-sale and recorded an unrealized
loss of $9,000 in 1999.

                                        53
<PAGE>   57
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     The amortized cost and estimated fair value of fixed maturities and surplus
notes at December 31, 2000 by contractual maturity were as follows:

<TABLE>
<CAPTION>
                                                              AMORTIZED    ESTIMATED
                                                                COST       FAIR VALUE
                                                              ---------    ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
AVAILABLE-FOR-SALE
  Due in one year or less...................................  $ 21,511      $ 21,543
  Due after one year through five years.....................   131,783       130,820
  Due after five years through ten years....................   129,865       127,291
  Due after ten years.......................................    70,908        68,232
                                                              --------      --------
                                                               354,067       347,886
  Mortgage-backed securities................................    72,082        72,396
                                                              --------      --------
  Total available-for-sale..................................  $426,149      $420,282
                                                              ========      ========
</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,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                      <C>        <C>        <C>
Proceeds...............................................  $11,569    $29,811    $7,926
Gross realized gains...................................      161         27       165
Gross realized losses..................................       80         74        29
</TABLE>

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

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                      <C>        <C>        <C>
Fixed maturities.......................................  $23,390    $19,359    $5,433
Policy loans...........................................      356        244         5
Cash equivalents.......................................    3,378      1,637     1,182
Other..................................................      831      1,345     1,033
                                                         -------    -------    ------
Investment income......................................   27,955     22,585     7,653
Investment expenses....................................   (1,084)    (1,223)     (199)
                                                         -------    -------    ------
Net investment income..................................  $26,871    $21,362    $7,454
                                                         =======    =======    ======
</TABLE>

     At December 31, 2000 and 1999, the Company's insurance subsidiaries had
certificates of deposit and fixed maturity securities with a carrying value of
$32.6 million and $21.6 million, respectively, on deposit with various state
insurance departments to satisfy regulatory requirements.

     At December 31, 2000 and 1999, $9.4 million and $4.8 million, respectively,
of cash was held for self-funded accident and health accounts, which is
restricted to use. Ceres Group is entitled to investment income from these
funds. A corresponding liability is included in the accompanying consolidated
financial statements.

                                        54
<PAGE>   58
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     At December 31, 2000, the Company held no unrated bonds, but held two
less-than-investment grade bonds that were downgraded as a result of litigation
against the bond issuers. The ultimate disposition of these investments is not
expected to have a material effect on our results of operations and financial
position. At December 31, 1999, the Company held no unrated or
less-than-investment grade bonds. 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 HELD FOR SALE

     During the fourth quarter of 1999, management committed to a plan to
consolidate the operations of United Benefit Life into the Company's other
administrative facilities and to sell United Benefit Life's home office
property. At December 31, 1999, the Company recorded the property at its
estimated fair value less the estimated incremental direct costs to transact a
sale. On March 31, 2000, the property was sold for $3.7 million. A loss of $0.1
million was recognized on the sale of the property in the first quarter 2000. In
the second quarter, the Company sold the remaining vacant land parcel located
next to United Benefit Life's home office for $177,000 resulting in a gain on
sale of $12,000.

F. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Home office building........................................   $16,153      $15,251
Land........................................................     2,871        2,100
Furniture and fixtures......................................     2,499        2,255
EDP equipment...............................................     3,705        3,128
Other property and equipment................................     3,229        1,769
                                                               -------      -------
                                                                28,457       24,503
Less: Accumulated depreciation..............................    10,926        9,412
                                                               -------      -------
          Total.............................................   $17,531      $15,091
                                                               =======      =======
</TABLE>

     Other property and equipment consists principally of software, leasehold
improvements and office equipment. Depreciation expense for the years ended
December 31, 2000, 1999 and 1998 was $1.5 million, $1.1 million, and $0.9
million, respectively.

G. DEFERRED ACQUISITION COSTS

     Certain costs of writing 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.

                                        55
<PAGE>   59
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     Unamortized deferred policy acquisition costs are summarized as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                      <C>        <C>        <C>
Balance at beginning of year...........................  $26,650    $ 3,810    $  326
Current year's costs deferred..........................   46,171     27,379     4,131
                                                         -------    -------    ------
                                                          72,821     31,189     4,457
Less: Amortization for the year........................   16,832      4,539       647
                                                         -------    -------    ------
Balance at end of the year.............................  $55,989    $26,650    $3,810
                                                         =======    =======    ======
</TABLE>

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

H. 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%. 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 4.75% 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% and 7%
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% for Continental General Corporation and 7% 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,
                                                           --------------------------
                                                            2000       1999      1998
                                                           -------    -------    ----
                                                             (DOLLARS IN THOUSANDS)
<S>                                                        <C>        <C>        <C>
Balance at beginning of year.............................  $16,731    $    --     $--
Additions from acquisitions..............................   12,683     14,182     --
Amortization.............................................   (2,263)    (1,901)    --
Additional expense reserve...............................    5,103      4,450     --
                                                           -------    -------     --
Balance at end of the year...............................  $32,254    $16,731     $--
                                                           =======    =======     ==
</TABLE>

                                        56
<PAGE>   60
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     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 (DEFERRAL)
                                           -----------------------
<S>                                        <C>
2001.....................................          $(1,604)
2002.....................................              549
2003.....................................            1,885
2004.....................................            2,715
2005.....................................            3,228
</TABLE>

I. 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 a separate return through fiscal years 2003 and 2004,
respectively.

     Federal income tax expense (benefit) is composed of the following:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            2000      1999      1998
                                                           ------    ------    ------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                        <C>       <C>       <C>
Current..................................................  $1,022    $  715    $1,449
Deferred.................................................   7,358     5,587      (382)
                                                           ------    ------    ------
          Total..........................................  $8,380    $6,302    $1,067
                                                           ======    ======    ======
</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,
                                                           --------------------------
                                                            2000      1999      1998
                                                           ------    ------    ------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                        <C>       <C>       <C>
Expected tax expense (benefit) at 35%....................  $8,681    $6,302    $ (969)
Special life insurance deduction.........................      --        --      (367)
Tax exempt interest......................................      (4)     (135)      (12)
Valuation allowance for deferred tax assets..............      --      (158)    2,327
Tax rate differential....................................      --        --        28
Non deductible goodwill..................................     318        --        --
Alternative minimum tax..................................      --       332        --
Other....................................................    (615)      (39)       60
                                                           ------    ------    ------
                                                           $8,380    $6,302    $1,067
                                                           ======    ======    ======
</TABLE>

     The federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service through 1995. There are no issues
currently outstanding. The Company paid $0.8 million related to these audits.

                                        57
<PAGE>   61
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are presented below:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Deferred tax assets
  Ceding commission.........................................   $ 4,257      $    --
  Reinsurance transactions..................................     5,262       11,222
  Deferred acquisition costs................................        --        2,834
  Severance pay.............................................       266          417
  Alternative minimum tax...................................       624          332
  Reserves..................................................    12,094        4,812
  Net operating loss carryforward...........................     5,506        5,923
  Advance premium...........................................       636          673
  Other.....................................................     1,469          178
                                                               -------      -------
                                                                30,114       26,391
Less: Valuation allowance...................................     8,829       14,719
                                                               -------      -------
Deferred assets, net of valuation allowance.................    21,285       11,672
                                                               -------      -------
Deferred tax liabilities
  Value of business acquired................................    11,289        9,548
  Deferred acquisition costs................................     5,283           --
  Bond discount accretion...................................       359          186
  Other.....................................................       557          146
                                                               -------      -------
                                                                17,488        9,880
                                                               -------      -------
Net deferred tax assets.....................................   $ 3,797      $ 1,792
                                                               =======      =======
</TABLE>

     At December 31, 2000, the Company had a tax net operating loss
carryforward, or NOL, of approximately $15.7 million for federal income tax
purposes, which expires through 2013. 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 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,
2000 and 1999, estimates were made as to the potential financial impact on the
Company of recent NOLs. Management believes that the Company will generate
sufficient future taxable income to realize the $3.8 million net deferred tax
asset recorded as of December 31, 2000 prior to the expiration of any NOLs.

     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.

     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

                                        58
<PAGE>   62
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

in a memorandum account designated "policyholders' surplus." At December 31,
2000, the accumulated untaxed policyholders' surplus for the Company, all of
which relates to Central Reserve, is $2.9 million.

J. 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,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Gross balance at beginning of year.................  $149,538    $ 74,395    $ 56,187
Reserves on blocks of business acquired............    11,176      39,173      44,000
                                                     --------    --------    --------
Adjusted gross beginning balance...................   160,714     113,568     100,187
Less: Reserves ceded...............................    85,347      54,340      55,656
                                                     --------    --------    --------
Adjusted net beginning balance.....................    75,367      59,228      44,531
                                                     --------    --------    --------
Paid claims and claims adjustments expenses, net of
  reinsurance, for
  Current year.....................................   276,546     176,387      89,953
  Prior years......................................    72,952      57,875      29,999
                                                     --------    --------    --------
     Total paid....................................   349,498     234,262     119,952
                                                     --------    --------    --------
Incurred claims and claims adjustment expenses, net
  of reinsurance, for
  Current year.....................................   362,495     226,202     116,357
  Prior years......................................     5,437      (1,487)     (1,697)
                                                     --------    --------    --------
     Total incurred................................   367,932     224,715     114,660
                                                     --------    --------    --------
Net reserve balance at end of year.................    93,801      49,681      39,239
Plus: Reserves ceded at end of year................    67,227      85,347      35,156
                                                     --------    --------    --------
Balance before reinsurance recoveries on paid
  claims...........................................   161,028     135,028      74,395
Plus: Reinsurance recoveries on paid claims........    15,208      14,510          --
                                                     --------    --------    --------
Gross balance at end of year.......................  $176,236    $149,538    $ 74,395
                                                     ========    ========    ========
</TABLE>

     The foregoing indicates that a $5.4 million deficiency in the 1999 reserves
emerged in 2000 as a result of higher utilization in all segments, a $1.5
million redundancy in the 1998 reserves emerged in 1999, and a $1.7 million
redundancy in the 1997 reserves emerged in 1998.

K. 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.

                                        59
<PAGE>   63
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     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.

     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, in the
accompanying consolidated financial statements, and is amortized into income
over the duration of the underlying block of business.

  Continental General Life Insurance Company

     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.

  Provident American Life & Health Insurance Company

     Prior to our 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

                                        60
<PAGE>   64
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

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.

     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.

                                        61
<PAGE>   65
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     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,
                                                  -----------------------------------
                                                    2000         1999         1998
                                                  ---------    ---------    ---------
                                                        (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>          <C>
Premiums
  Direct........................................  $ 752,281    $ 551,553    $ 258,271
  Assumed.......................................     16,817       81,493       45,923
  Ceded.........................................   (257,556)    (305,300)    (150,006)
                                                  ---------    ---------    ---------
  Net premiums..................................  $ 511,542    $ 327,746    $ 154,188
                                                  =========    =========    =========
Benefits, claims, losses, and settlement
  expenses......................................  $ 596,086    $ 485,717    $ 220,677
Reinsurance recoverable.........................   (206,275)    (252,614)    (104,618)
                                                  ---------    ---------    ---------
                                                  $ 389,811    $ 233,103    $ 116,059
                                                  =========    =========    =========
Selling, general, and administrative expenses
  Commissions...................................  $ 127,692    $  85,104    $  36,853
  Salaries and benefits.........................     38,409       25,678       15,718
  Taxes, licenses, and fees.....................     18,439       13,024        6,448
  Other operating expenses......................     39,402       46,579       14,328
  Administrative and IS services................     21,486       14,513        8,122
  Reinsurance expenses..........................      3,299       44,096       13,774
  Reinsurance allowances........................    (63,516)     (91,062)     (40,875)
                                                  ---------    ---------    ---------
                                                  $ 185,211    $ 137,932    $  54,368
                                                  =========    =========    =========
</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, 2000, 1999 and 1998
was $6.1 million, $5.5 million and $0.6 million, respectively. The above table
does not include the initial ceding allowances received from Hannover.

L. COMMITMENTS AND CONTINGENCIES


     We are defendants in a lawsuit filed on August 14, 2000, Insurance Advisors
of America, Inc., Transcend Group, Inc., and Jimmy K. Walker vs. Ceres Group,
Inc., Ceres Financial Services, Inc., Peter W. Nauert, Central Reserve Life
Insurance Company, Hannover Life Reassurance Company of America (f/k/a
Reassurance Company of Hannover), Provident American Life and Health Insurance
Company and Health Plan Services, Inc., United Benefit Life Insurance Company
and Billy B. Hill, Jr., case no. 17-184-65-00, in State District Court of
Tarrant County, Texas. The lawsuit involves a number of agreements between
Insurance Advisors of America and its affiliates, Transcend Group and Mr.
Walker, Ceres, Ceres Financial and United Benefit Life in which, among other
things, we reinsured United Benefit Life's policies, Insurance Advisors entered
into a non-compete agreement which prohibited them from selling insurance
products not provided by us, and Insurance Advisors signed a $10.0 million
promissory note payable to us. Pursuant to these agreements and to satisfy, in
part, a $19.4 million reserve shortfall, we acquired through foreclosure the
stock of United Benefit Life on July 21, 1999. Plaintiffs assert claims for,
among other things, fraud, breach of


                                        62
<PAGE>   66
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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


contract and negligence relating to unfair competition. Plaintiffs allege that
we engaged in a scheme to eliminate plaintiffs from the competitive market,
retain Insurance Advisors' renewal commissions and "steal" their subagents by,
among other things, "locking" plaintiffs into exclusive agreements and
non-compete agreements and "improperly" increasing premiums and reducing
commissions. Plaintiffs further assert, among other things, that our actions and
inactions "unilaterally and unfairly" effectively eliminated plaintiffs' ability
to conduct business and made it "impossible" for agents and their managers to
remain with Insurance Advisors and "make a living." Actual damages sought by
plaintiffs in the original complaint filed on August 14 are in excess of $50.0
million. Hannover has now been dismissed from this action. Additionally,
plaintiffs voluntarily dismissed our general counsel, Billy B. Hill, Jr., from
the lawsuit.



     On March 5, 2001, plaintiffs amended their complaint to again include Billy
Hill; to add additional defendants, including Rhonda Immoos (a paralegal at
Ceres), Pyramid Life and Continental General; to add additional allegations of
civil conspiracy, tortious interference with business and existing and future
contractual relationships toward Nauert, Hill and Immoos; and to demand a jury
trial. Plaintiffs now seek monetary damages in excess of $100.0 million,
including damages for lost profits, unpaid commissions and unpaid administrative
fees. In addition, plaintiffs now seek punitive damages in excess of $100.0
million.


     On September 5, 2000, we filed a claim, Ceres Group, Inc., Central Reserve
Life Insurance Company, Provident American Life and Health Insurance Company,
and United Benefit Life Insurance Company vs. Insurance Advisors of America,
Inc., Robert H. Merrill, Private Business Management, Inc., Transcend Group,
Inc. and Jimmy K. Walker, in the Court of Common Pleas of Cuyahoga County, Ohio,
relating to the foreclosure on the United Benefit Life stock and Insurance
Advisors' failure to make payments under the promissory note. On September 15,
2000, the Court of Common Pleas entered a temporary restraining order in our
favor, prohibiting defendants from making any false statements regarding us and
prohibiting them from inducing our insureds to lapse coverage. This order was
superceded by an agreed order dated October 2, 2000, which made permanent the
temporary order and required defendants to send a mailing to the agents of
Insurance Advisors advising them of the same.

     On October 25, 2000, we filed a counterclaim in Tarrant County, Texas,
asserting that the plaintiffs failed to make payments under the various lending
agreements entered into by Insurance Advisors, breach of fiduciary duties,
misrepresentation of financial condition, breach of contract and certain other
claims. Contractual and tort damages sought are in excess of $25.0 million.


     On January 23, 2001, we sought leave of the court to file a supplemental
complaint and to deposit certain funds with the court pending the final outcome
of the litigation. On February 22, 2001, the Court of Common Pleas of Cuyahoga
County granted the defendants' Motion to Dismiss on Jurisdictional Priority
Grounds. We plan to appeal the court's decision to dismiss the case.



     We have denied liability to plaintiffs in the Texas action and we intend to
vigorously contest plaintiffs' claims in that action, as well as pursue the
claims we have against Insurance Advisors, Jimmy Walker and their affiliates
both in the litigation we initiated in Ohio and in our counterclaim in the Texas
action. Management believes the allegations in the Texas action to be groundless
and does not believe that the outcome of this matter will have a material
adverse impact on us. However, because litigation and jury trials are inherently
unpredictable and the amounts sought by plaintiffs are large, there can be no
assurance that the litigation will not have a material adverse effect on our
business, financial condition or results of operations.



     In addition to the above litigation, we have recently been sued for
compensatory damages and, in some cases, unspecified punitive damages in a
number of actions pertaining to the insureds of United Benefit Life arising from
claims payment issues. While we do not believe that United Benefit Life has
harmed any of the plaintiffs in these lawsuits and we believe our reserves are
adequate, we cannot predict the outcome of the


                                        63
<PAGE>   67
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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


lawsuits, including the award of punitive damages and, therefore, we cannot
predict the financial impact on us. We intend to vigorously contest these
actions.



     Other than the above matters, neither Ceres nor any of our subsidiaries,
including any of our property, is party to, or the subject of, any material
pending legal proceeding.



     The Company is also 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.


M. DEBT

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Mortgage note payable.......................................   $ 8,018      $ 8,157
                                                               =======      =======
Bank credit facility........................................   $34,000      $40,000
Revolver....................................................    15,000           --
                                                               -------      -------
                                                               $49,000      $40,000
                                                               =======      =======
</TABLE>

     The Company executed a mortgage note payable in December 1990 for $9.0
million bearing interest at 9.5% per annum for 10 years. The mortgage note is
collateralized by the home office building and by an assignment of the tenant
lease for the building. The Company is required to make monthly payments based
on a 30-year amortization schedule, of $75,700 for 10 years. In December 2000,
the note was extended at the same rate for a two year period. Principal payments
due in the next three years, assuming no prepayments are $0.2 million in 2001,
$0.1 million in 2002 and $7.7 million in 2003. The Company has a right to prepay
the loan with a 1.0% prepayment fee.

     To provide funds for the acquisition of Continental General in February
1999, we incurred debt of $40.0 million under a credit agreement. Under the
terms of the credit agreement, dated as of February 17, 1999, among Ceres,
various lending institutions and The Chase Manhattan Bank, as Administrative
Agent, the first principal payment of $3.0 million was due on February 17, 2000,
and quarterly principal payments are due thereafter as follows: $1.0 million
through February 17, 2001; $1.5 million through February 17, 2002; and $2.25
million thereafter through February 2005.

     Interest on the outstanding balance will be 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% in excess of a federal funds rate
and (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 an 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.
At December 31, 2000, the interest rate was 10.3%.

     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 must be repaid on February
17, 2002. The revolver bears interest at the same rate choices as the $40.0
million loan. At December 31, 2000, the interest rate was 10.2% on the
outstanding balance of $15.0 million.

     The credit agreement, as amended, contains financial and other covenants
that, among other matters:

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

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

                                        64
<PAGE>   68
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     - require that we, at a minimum, maintain:

          - a leverage ratio (consolidated debt to consolidated total capital)
            of 0.40 to 1.00 through December 31, 2000, 0.35 to 1.00 thereafter
            through December 31, 2001, and 0.30 to 1.00 thereafter;

          - an interest coverage ratio (consolidated earning before interest,
            income taxes, depreciation, and amortization to consolidated
            interest expense) of 2.50 to 1.00 through December 31, 2000, and
            3.00 to 1.00 thereafter;

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

          - consolidated net worth of $80.0 million through December 31, 2000,
            $110.0 million thereafter through December 31, 2001, $160.0 million
            thereafter through December 31, 2002, and $200.0 million thereafter;
            and

          - a fixed charge coverage ratio (borrower cash flow to the sum of
            consolidated interest expense and scheduled repayments) of not less
            than 1.05 to 1.00 for the period of June 30, 2000 through June 30,
            2001, 1.10 to 1.00 thereafter through June 30, 2002, 1.20 to 1.00
            thereafter through June 30, 2003, and 1.30 to 1.00 thereafter.

     In addition, we pledged the common stock of Continental General
Corporation, Central Reserve, Provident American Life, Pyramid Life and other
subsidiaries as security for the credit agreement. At December 31, 2000, we were
in compliance with the covenants contained in the credit agreement, as amended.
Future annual principal payments due for the mortgage note and all long-term
debt are $5.7 million for 2001, $23.4 million for 2002, $16.7 million for 2003,
$9.0 million for 2004 and $2.2 million for 2005.

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. The vesting accelerates in the event of a change in
control of the Company. There are 500,000 shares of our common stock reserved
for issuance under this plan. The Company terminated this plan in December 2000.

     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 issuance
under this plan, pending stockholder approval.

     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.

     Also, pursuant to an employment contract, the Company provided an award of
common shares 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.
Management currently estimates that 474,256 shares (including 141,442 shares
issued in 1999 and 144,488

                                        65
<PAGE>   69
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

shares issued in 2000) will be issued pursuant to the employment contract, based
upon the fair value of the Company's shares at December 31, 2000.

     In 1983, the Company adopted an Incentive Stock Option Plan, or the 1983
Plan. The 1983 Plan, which expired in May 1993, provided that key full-time
employees of the Company and its subsidiaries were eligible for participation.
The 65,845 options outstanding at December 31, 1997 expired in 1998 and no
options are outstanding under the plan.

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


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                    ----------------------------------------------------------
                                               2000                           1999
                                    ---------------------------    ---------------------------
                                                    WEIGHTED                       WEIGHTED
                                                    AVERAGE                        AVERAGE
                                     OPTIONS     EXERCISE PRICE     OPTIONS     EXERCISE PRICE
                                    ---------    --------------    ---------    --------------
<S>                                 <C>          <C>               <C>          <C>
Outstanding at beginning of
  year............................  1,606,000        $7.81         1,065,000        $7.70
Options granted, with exercise
  prices:
  Equal to fair value at grant
     date.........................    644,977         6.68           648,000         8.11
  Less than fair value at grant
     date.........................         --           --                --           --
Forfeited.........................   (198,793)        7.22          (107,000)        8.60
                                    ---------                      ---------
Outstanding at end of year........  2,052,184         7.51         1,606,000         7.81
                                    =========                      =========
Exercisable at end of year........    470,000         7.88           340,000         7.82
                                    =========                      =========
</TABLE>


     Exercise prices for options outstanding at December 31, 2000 ranged from
$5.50 to $10.50, of which 40% were between $5.50 and $6.99, 20% between $7.00
and $7.99, 29% between $8.00 and $8.99, and 11% 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, 2000, there were 470,000 options exercisable ranging from
$5.50 to $10.50. Approximately 10% were at $5.50, 30% were at $6.50, and 15%
were at each of the following: $7.50, $8.50, $9.50 and $10.50.

     The Company also had outstanding at December 31, 2000 3,657,743 warrants at
$5.41, expiring in 2005 and 900,000 warrants at $6.00, expiring in 2002.

     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. We make six-month offerings 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 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, 2000, 18,807 shares 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 purchase plan does not qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code. As
of December 31, 2000, 10,603 shares 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.

                                        66
<PAGE>   70
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     The Company recognized stock compensation expense of $1.1 million, $0.8
million and $0.6 million in 2000, 1999 and 1998, 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>
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Risk-free rate of return....................................     4.98%     6.34%     4.54%
Dividend yield..............................................        0%        0%        0%
Volatility factor...........................................    0.226     0.287     0.592
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 $1.26, $2.10 and $3.23 per share for 2000,
1999 and 1998, respectively. The pro forma impact would be to decrease net
income by $0.6 million, $0.9 million and $0.8 million and decrease net income
per share by $0.04, $0.07 and $0.10 for basic and $0.04, $0.06 and $0.10 for
fully diluted for the years ended December 31, 2000, 1999 and 1998,
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 75,000 are outstanding. For more information regarding
our Convertible Voting Preferred Stock, see Note C, Business Combination, The
Pyramid Life Insurance Company acquisition.

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, 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, as

                                        67
<PAGE>   71
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

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,
                                -------------------------------    ---------------------
                                  2000       1999        1998        2000        1999
                                --------    -------    --------    --------    ---------
                                                 (DOLLARS IN THOUSANDS)
<S>                             <C>         <C>        <C>         <C>         <C>
Central Reserve(a)............  $ (1,046)   $(1,994)   $(21,163)   $26,164     $ 23,109
Provident American Life(a)....      (419)      (983)         --      6,551        3,356
Continental General(b)........    (2,831)    13,591          --     42,478       33,535
United Benefit Life(a)........    (1,564)       421          --      4,182        3,854
Pyramid Life(b)...............     2,874         --          --     20,814           --
                                --------    -------    --------
          Total...............  $ (2,986)   $11,035    $(21,163)
                                ========    =======    ========
</TABLE>

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

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

(b) 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 2001, 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
deficit in unassigned surplus at December 31, 2000. As of December 31, 2000,
Continental General could pay approximately $1.4 million in dividends in 2001,
without the prior approval of the Nebraska Insurance Commissioner. By agreement
with the Kansas Department of Insurance, Pyramid Life can pay dividends only
from net underwriting profits of Pyramid Life, and, therefore, as of December
31, 2000, Pyramid Life could pay approximately $2.9 million in dividends in
2001, without the prior approval of the Kansas Insurance Commissioner.


     The National Association of Insurance Commissioners revised the Accounting
Practices and Procedures Manual in a process referred to as Codification. The
revised manual is 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 will result in changes to the accounting practices that Ceres and
its subsidiaries use to prepare their statutory-basis financial statements.
Management believes the impact of these changes to Ceres and its insurance
subsidiaries statutory-basis capital and surplus as of January 1, 2001 will not
be significant.

                                        68
<PAGE>   72
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

Q. COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) is as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         2000       1999       1998
                                                        -------    -------    -------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
Net income (loss).....................................  $16,450    $11,704    $(3,836)
Other comprehensive loss, net
  Unrealized gain (loss) on securities, net of tax of
     $0, $0, and $565, respectively...................   11,806    (19,650)       485
  Other...............................................      210        362         --
                                                        -------    -------    -------
     Comprehensive income (loss)......................  $28,466    $(7,584)   $(3,351)
                                                        =======    =======    =======
</TABLE>

R. COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE

     The following table sets forth the computations of basic and diluted net
income (loss) per common share:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                               ----------------------------------------
                                                  2000           1999           1998
                                               -----------    -----------    ----------
                                                        (DOLLARS IN THOUSANDS)
<S>                                            <C>            <C>            <C>
BASIC
  Average common stock outstanding...........   15,260,160     13,328,339     7,845,172
                                               ===========    ===========    ==========
  Net income (loss) attributable to common
     stockholders............................  $    16,123    $    11,704    $   (3,836)
                                               ===========    ===========    ==========
  Net income (loss) per share attributable to
     common stockholders.....................  $      1.06    $      0.88    $    (0.49)
                                               ===========    ===========    ==========
DILUTED
  Average common stock outstanding...........   15,260,160     13,328,339     7,845,172
  Convertible voting preferred stock.........      535,851             --            --
  Warrants/stock options -- treasury stock
     method..................................      629,344      1,905,560            --
                                               -----------    -----------    ----------
  Weighted average shares of common stock....   16,425,355     15,233,899     7,845,172
                                               ===========    ===========    ==========
  Net income (loss)..........................  $    16,450    $    11,704    $   (3,836)
                                               ===========    ===========    ==========
  Net income (loss) per share................  $      1.00    $      0.77    $    (0.49)
                                               ===========    ===========    ==========
</TABLE>

     Net income (loss) per common share has been computed in accordance with
FASB Statement No. 128, Earnings Per Share. In computing diluted earnings per
share, only potential common shares that are dilutive, those that reduce
earnings per share, are included. The exercise of options and warrants is not
assumed if the result would be antidilutive, such as when a loss from operations
is reported.

S. EMPLOYEE BENEFIT PLAN

     Effective January 1, 1998, the Company's noncontributory pension plan was
converted into a defined contribution 401(k) savings plan, or the Plan.
Employees become eligible to participate in the Plan after six months of
service. Based on the provisions of the Plan, participants may contribute up to
15% of their pre-tax annual compensation. The Plan provides for a 100% employer
matching contribution only for that portion of

                                        69
<PAGE>   73
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

participant contributions made to a fund, which holds principally the Company's
common shares, up to $1,000 annually.

     In 1999, Continental General employees were eligible to participate in the
Continental Retirement Savings Plan, or Continental Plan. Effective January 1,
2000, the Continental Plan was merged into the Plan. Following the acquisition
of Pyramid Life on July 26, 2000, employees of Pyramid Life also became eligible
to participate in the Plan.

     Total matching contributions by the Company were approximately $376,000 for
2000, $133,000 for 1999 and $52,000 for 1998. The employer matching
contributions vest over a five-year graded vesting schedule with 100% vesting
after five years. Effective January 1, 2001, the employer match for the Plan was
increased to 50% of the first 6% of salary deferrals.

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, and 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:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
MEDICAL
  Revenues
     Net premiums..................................  $375,804    $251,876    $143,064
     Investment income, realized gains (losses)....     9,101       6,985       5,682
     Other income..................................    34,925      21,307       8,294
                                                     --------    --------    --------
                                                      419,830     280,168     157,040
                                                     --------    --------    --------
  Expenses
     Benefits and claims...........................   288,260     176,531     108,439
     Other operating expenses......................   121,345      96,357      49,143
                                                     --------    --------    --------
                                                      409,605     272,888     157,582
                                                     --------    --------    --------
  Segment profit (loss) before federal income
     taxes, minority interest and preferred stock
     dividends.....................................  $ 10,225    $  7,280    $   (542)
                                                     ========    ========    ========
SENIOR AND OTHER
  Revenues
     Net premiums..................................  $135,738    $ 75,870    $ 11,124
     Investment income, realized gains (losses)....    16,615      14,233       1,498
     Other income..................................     2,686       1,364          --
                                                     --------    --------    --------
                                                      155,039      91,467      12,622
                                                     --------    --------    --------
</TABLE>

                                        70
<PAGE>   74
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
  Expenses
     Benefits and claims...........................   101,551      56,572       7,620
     Other operating expenses......................    32,225      18,510       3,986
                                                     --------    --------    --------
                                                      133,776      75,082      11,606
                                                     --------    --------    --------
  Segment profit before federal income taxes,
     minority interest and preferred stock
     dividends.....................................  $ 21,263    $ 16,385    $  1,016
                                                     ========    ========    ========
CORPORATE AND OTHER
  Revenues
     Investment income, realized gains (losses)....  $  1,057    $    251    $    485
     Other income..................................        22         207          --
                                                     --------    --------    --------
                                                        1,079         458         485
                                                     --------    --------    --------
  Expenses
     Interest and financing expenses...............     5,566       4,090       1,842
     Other operating expenses......................     2,197       2,027       1,886
                                                     --------    --------    --------
                                                        7,763       6,117       3,728
                                                     --------    --------    --------
  Segment loss before federal income taxes,
     minority interest and preferred stock
     dividends.....................................  $ (6,684)   $ (5,659)   $ (3,243)
                                                     ========    ========    ========
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES, MINORITY
  INTEREST AND PREFERRED STOCK DIVIDENDS...........  $ 24,804    $ 18,006    $ (2,769)
                                                     ========    ========    ========
</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
2000, 1999, and 1998, which included certain reclassifications.

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 present value 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, changes in
assumptions could cause these estimates to vary materially. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in 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.

                                        71
<PAGE>   75
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

     CASH, CASH EQUIVALENTS, PREMIUMS RECEIVABLE, REINSURANCE RECEIVABLE,
SURPLUS NOTES, MORTGAGE LOANS AND POLICY LOANS -- 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.

     Carrying amounts and estimated fair values of financial instruments at
December 31, 2000 and 1999, are summarized as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                  ------------------------------------------------
                                                           2000                      1999
                                                  ----------------------    ----------------------
                                                  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...........  $415,287     $415,287     $300,986     $300,986
  Surplus notes.................................     4,995        4,995        5,043        5,043
  Policy loans..................................     5,740        5,740        3,828        3,828
  Mortgage loans................................        89           89           95           95
Cash and cash equivalents.......................    59,512       59,512       42,921       42,921
Premiums receivable.............................     5,852        5,852        4,905        4,905
Reinsurance receivable..........................   238,185      238,185      263,289      263,289
LIABILITIES
Annuity reserves................................   194,369      186,786      218,074      209,586
Other policyholders' funds......................    24,246       24,246       22,365       22,365
Mortgage note payable...........................     8,018        8,018        8,157        8,157
Debt............................................    49,000       49,000       40,000       40,000
</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, 2000, Hannover maintained an "A"
rating from the A.M. Best Company. The Company performs periodic evaluations of
this reinsurer's credit standing.

                                        72
<PAGE>   76
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                        DECEMBER 31, 2000, 1999 AND 1998

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

W. QUARTERLY RESULTS OF OPERATIONS -- (UNAUDITED)

     The following is a summary of quarterly results of operations for the years
ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                    FIRST       SECOND        THIRD       FOURTH
                                                  ---------    ---------    ---------    ---------
                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>          <C>          <C>          <C>
2000
  Revenues......................................  $118,490     $134,789     $157,557     $165,112
  Benefits and claims...........................    81,558       90,023      104,018      114,212
  Selling, general and administrative and other
     expenses...................................    31,131       37,711       47,429       45,062
  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
1999
  Revenues......................................  $ 78,434     $ 93,555     $ 97,424     $102,680
  Benefits and claims...........................    50,210       60,387       60,108       62,398
  Selling, general and administrative and other
     expenses...................................    24,803       28,530       33,193       34,458
  Net income....................................     2,224        3,014        2,680        3,786(a)
  Net income per share..........................
     Basic......................................      0.17         0.23         0.20         0.28
     Diluted....................................      0.15         0.19         0.17         0.26
</TABLE>

---------------
(a) The increase in the fourth quarter net income is primarily a result of a
    decrease in claim reserves held for the health business of Continental
    General and a leveling of the increased reserves held for adverse deviations
    in the long-term care business of Continental General.

                                        73
<PAGE>   77

                                                                     SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                                 BALANCE SHEETS

                           DECEMBER 31, 2000 AND 1999

                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Investment in subsidiaries(1)...............................  $157,088    $ 87,187
Cash and cash equivalents...................................     4,832       1,674
Property and equipment, net.................................     9,035       8,887
Other assets................................................     3,113       4,416
                                                              --------    --------
          Total assets......................................  $174,068    $102,164
                                                              ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Debt......................................................  $ 57,018    $ 48,157
  Other liabilities(2)......................................    13,767       9,346
                                                              --------    --------
          Total liabilities.................................    70,785      57,503
                                                              --------    --------
Stockholders' equity
  Non-voting preferred stock................................        --          --
  Convertible voting preferred stock........................     7,500          --
  Common stock..............................................        17          14
  Additional paid-in capital................................    82,943      60,290
  Dividends distributable, convertible voting preferred
     stock..................................................       327          --
  Retained earnings.........................................    18,672       2,549
  Accumulated other comprehensive loss......................    (6,176)    (18,192)
                                                              --------    --------
          Total stockholders' equity........................   103,283      44,661
                                                              --------    --------
          Total liabilities and stockholders' equity........  $174,068    $102,164
                                                              ========    ========
</TABLE>


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

(1) Eliminated in consolidation.



(2)Includes $6.3 million and $0 in advances from non-regulated subsidiaries in
   2000 and 1999, respectively. Beginning in 2001, we intend to rely primarily
   on dividends from our non-regulated subsidiaries to meet our outstanding debt
   obligations. Dividends from our non-regulated, non-insurance subsidiaries may
   be derived from their retained earnings, which are generated by fees paid by
   unaffiliated and affiliated companies under various agreements of these
   subsidiaries.


                 See accompanying independent auditors' report.
                                        74
<PAGE>   78

                                                                     SCHEDULE II

                       CERES GROUP, INC. AND SUBSIDIARIES
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CERES GROUP, INC. (PARENT ONLY)
                            STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                               2000        1999       1998
                                                              -------    --------    -------
<S>                                                           <C>        <C>         <C>
REVENUES
Rental income(1)............................................  $ 1,170    $  1,410    $   930
Net investment income.......................................       97          72        293
                                                              -------    --------    -------
                                                                1,267       1,482      1,223
EXPENSES
Selling, general and administrative expenses................    4,015      10,103      3,712
                                                              -------    --------    -------
Loss before income tax benefit and equity in undistributed
  income (loss) of subsidiaries.............................   (2,748)     (8,621)    (2,489)
Income tax benefit..........................................     (962)     (3,017)      (871)
                                                              -------    --------    -------
Loss before equity in undistributed loss of subsidiaries....   (1,786)     (5,604)    (1,618)
Equity in undistributed income (loss) of subsidiaries(2)....   18,236      17,308     (2,218)
                                                              -------    --------    -------
Net income (loss)...........................................   16,450      11,704     (3,836)
Convertible voting preferred stock dividends................      327          --         --
                                                              -------    --------    -------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS.......  $16,123    $ 11,704    $(3,836)
                                                              =======    ========    =======
</TABLE>


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

(1) Eliminated in consolidation.



(2)Includes the parent company's equity in earnings of regulated and
   non-regulated subsidiaries. Beginning in 2001, we intend to rely primarily on
   dividends from our non-regulated subsidiaries to meet our outstanding debt
   obligations. Dividends from our non-regulated, non-insurance subsidiaries may
   be derived from their retained earnings, which are generated by fees paid by
   unaffiliated and affiliated companies under various agreements of these
   subsidiaries.


                 See accompanying independent auditors' report.
                                        75
<PAGE>   79

                                                                     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, 2000, 1999 AND 1998

                             (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                2000        1999        1998
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $ 16,450    $ 11,704    $ (3,836)
Adjustments to reconcile net income (loss) to cash provided
 by operating activities:
  Depreciation..............................................       470         380         449
  Decrease (increase) in other assets.......................     1,303      (3,682)       (107)
  Decrease in other liabilities.............................    (1,915)      7,137       3,208
  Increase in net advances from non-regulated
    subsidiaries(2).........................................     6,336          --          --
  Dividend income received from subsidiaries(1).............       220         450          --
                                                              --------    --------    --------
Net cash provided by (used in) operating activities.........    22,864      15,989        (286)
                                                              --------    --------    --------
INVESTING ACTIVITIES
  Surplus note receivable(1)................................        --          --      14,000
  Contribution to subsidiary surplus(1).....................    (3,500)         --     (21,200)
  Contribution to Continental General for the acquisition of
    Pyramid Life Insurance Company(1).......................   (33,272)         --          --
  Equity in undistributed (income) loss of
    subsidiaries(1).........................................   (18,236)    (17,308)      2,218
  Increase in investment in subsidiaries(1).................    (3,097)     (4,485)     (1,938)
  Acquisition of Continental General Corporation, net of
    $2,212 cash acquired....................................        --     (59,788)         --
  Purchase of property and equipment........................      (618)       (191)         --
                                                              --------    --------    --------
Net cash used in investing activities.......................   (58,723)    (81,772)     (6,920)
                                                              --------    --------    --------
FINANCING ACTIVITIES
  Repayment of notes payable................................        --          --     (20,000)
  Increase in debt borrowings...............................    15,000      40,000          --
  Principal payments on debt................................    (6,000)         --          --
  Principal payments on mortgage note payable...............      (139)       (127)       (115)
  Proceeds from private placement of common stock, net of
    acquisition costs.......................................    21,096      15,000      37,675
  Proceeds from issuance of common stock related to employee
    benefit plans...........................................     1,560       1,409          --
  Proceeds from private placement of preferred stock........     7,500          --          --
                                                              --------    --------    --------
Net cash provided by financing activities...................    39,017      56,282      17,560
                                                              --------    --------    --------
NET INCREASE (DECREASE) IN CASH.............................     3,158      (9,501)     10,354
Cash and cash equivalents at beginning of year..............     1,674      11,175         821
                                                              --------    --------    --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $  4,832    $  1,674    $ 11,175
                                                              ========    ========    ========
</TABLE>


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


(1) Eliminated in consolidation.



(2)Beginning in 2001, we intend to rely primarily on dividends from our
   non-regulated subsidiaries to meet our outstanding debt obligations.
   Dividends from our non-regulated, non-insurance subsidiaries may be derived
   from their retained earnings, which are generated by fees paid by
   unaffiliated and affiliated companies under various agreements of these
   subsidiaries.


                 See accompanying independent auditors' report.
                                        76
<PAGE>   80

                                                                    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, 2000
  Medical...........................    $33,187       $ 10,113      $ 9,493      $132,453     $375,804    $ 9,250      $288,260
  Senior and other..................     22,802        398,056       33,258        43,783      135,738     16,570       101,551
  Corporate and other...............         --             --           --            --           --      1,051            --
                                        -------       --------      -------      --------     --------    -------      --------
         Total......................    $55,989       $408,169      $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
                                        =======       ========      =======      ========     ========    =======      ========
Year ended December 31, 1998
  Medical...........................    $ 3,400       $    395      $ 2,024      $ 73,872     $143,064    $ 5,647      $108,439
  Senior and other..................        278         20,299           --           523       11,124      1,322         7,620
  Corporate and other...............        132             --           --            --           --        485            --
                                        -------       --------      -------      --------     --------    -------      --------
         Total......................    $ 3,810       $ 20,694      $ 2,024      $ 74,395     $154,188    $ 7,454      $116,059
                                        =======       ========      =======      ========     ========    =======      ========

<CAPTION>
                                      NET (DEFERRAL)
                                      AMORTIZATION
                                      AND CHANGE
                                      IN ACQUISITION
                                      COSTS AND
                                      VALUE OF         OTHER
                                      BUSINESS         OPERATING
                                      ACQUIRED         EXPENSES
<S>                                   <C>              <C>
--------------------------------------------------------------------------
Year ended December 31, 2000
  Medical...........................     $(14,295)     $135,640
  Senior and other..................      (16,218)       48,443
  Corporate and other...............           --         7,763
                                         --------      --------
         Total......................     $(30,513)     $191,846
                                         ========      ========
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
                                         ========      ========
Year ended December 31, 1998
  Medical...........................     $    600      $ 48,543
  Senior and other..................           47         3,939
  Corporate and other...............           --         3,728
                                         --------      --------
         Total......................     $    647      $ 56,210
                                         ========      ========
</TABLE>

                 See accompanying independent auditor's report.

                                        77
<PAGE>   81

                                                                     SCHEDULE IV

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


<TABLE>
<CAPTION>
                                                               ASSUMED                  PERCENTAGE OF
                                                 CEDED TO       FROM                       AMOUNT
                                    GROSS         OTHER         OTHER         NET        ASSUMED TO
                                    AMOUNT      COMPANIES     COMPANIES      AMOUNT          NET
-----------------------------------------------------------------------------------------------------
<S>                               <C>           <C>           <C>          <C>          <C>
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       14.1%
  Accident and health
     insurance..................     533,818       299,543      79,535        313,810       25.3%
                                  ----------    ----------    --------     ----------
                                  $  551,553    $  305,300    $ 81,493     $  327,746       24.9%
                                  ==========    ==========    ========     ==========
YEAR ENDED DECEMBER 31, 1998
Life insurance in force.........  $1,239,853    $   88,477    $     --     $1,151,376         --
                                  ==========    ==========    ========     ==========
Premiums
  Life insurance................  $    6,817    $      201    $     --     $    6,616         --
  Accident and health
     insurance..................     251,454       149,805      45,923        147,572       31.1%
                                  ----------    ----------    --------     ----------
                                  $  258,271    $  150,006    $ 45,923     $  154,188       29.8%
                                  ==========    ==========    ========     ==========
</TABLE>


                 See accompanying independent auditor's report.
                                        78
<PAGE>   82

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 June 12, 2001. We expect to file the Proxy Statement by April 30, 2001.

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 June 12, 2001.

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 June 12, 2001.

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 June 12, 2001.

                                    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, 2000 and 1999.

        Consolidated Statements of Operations -- Years ended December 31, 2000,
        1999 and 1998.

        Consolidated Statements of Stockholders' Equity  -- Years ended December
           31, 2000, 1999 and 1998.

        Consolidated Statements of Cash Flows -- Years ended December 31, 2000,
        1999 and 1998.

        Notes to Consolidated Financial Statements.

     2. Financial Statement Schedules

        Ceres Group, Inc.:

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

        III. Supplemental Insurance Information.

        IV. Reinsurance.

                                        79
<PAGE>   83

     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 Reorganization         0-8483            8-K     Dec. 1998        2.1
          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, 1999, by        0-8483            8-K     Aug. 2000        2.1
          and between United Insurance Company of
          America and Ceres Group, Inc.
      (5) Amendment of Purchase Agreement by and              0-8483            8-K     Aug. 2000        2.2
          between United Insurance Company of America
          and Ceres Group, Inc. dated as of April 17,
          2000.
      (6) Amendment No. 2 to Purchase Agreement by and        0-8483            8-K     Aug. 2000        2.3
          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 Group,        0-8483            8-K     Dec. 1998        3.1
          Inc. as filed with Secretary of Delaware on
          October 22, 1998.
      (2) Certificate of Amendment of the Certificate         0-8483            8-K     Aug. 2000        3.1
          of Incorporation of Ceres Group, Inc. dated
          July 25, 2000.
      (3) Bylaws of Ceres Group, Inc.                         0-8483            8-K     Dec. 1998        3.2
</TABLE>

                                        80
<PAGE>   84


<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
 (4)  Instruments defining the rights of security
      holders, including indentures.
      (1) Amended and Restated Voting Agreement dated         0-8483            8-K     Aug. 2000        4.2
          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 July 1,         0-8483            8-K     Feb. 1999        4.2
          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 Rights            0-8483            8-K     Aug. 2000        4.1
          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.
      (4) United Registration Rights Agreement dated          0-8483            8-K     Aug. 2000        4.4
          as of July 26, 2000 between Ceres Group,
          Inc. and United Insurance Company of
          America.
      (5) Form of Stockholders Agreement between              0-8483            S-1     Apr. 2001        4.5
          QQLink.com, Inc., Ceres Group, Inc. and the
          persons and entities listed on the signature
          pages thereto.
(10)  Material Contracts
      (1) Agreement of Lease.                                 0-8483           10-K     Mar. 1992       10(c)
      (2) Mortgage Note.                                      0-8483           10-K     Mar. 1992       10(d)
      (3) Mortgage.                                           0-8483           10-K     Mar. 1992       10(e)
      (4) Lease Extension Agreement.                          0-8483           10-K     Apr. 2001       10.1
      (5) First Loan Modification Agreement.                  0-8483           10-K     Apr. 2001       10.2
      (6) Warrant to purchase Common Shares, dated            0-8483            8-K     Dec. 1997       10.4
          December 16, 1997 by Central Reserve Life
          Corporation in favor of Peter W. Nauert.
      (7) Warrant to purchase Common Shares, dated            0-8483            8-K     Dec. 1997       10.5
          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.
</TABLE>


                                        81
<PAGE>   85

<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
      (9) Administrative Services Agreement, dated            0-8483         10-K/A     Mar. 1998      10.12
          March 25, 1998 by and between Mutual
          Management Company, Inc. and Central Reserve
          Life Insurance Company.
      (10) Amendment No. 1 to Warrant to purchase             0-8483           10-K     Mar. 1998      10.13
           Common Shares, dated March 30, 1998 by
           Central Reserve Life Corporation in favor
           of Peter Nauert.
      (11) Amendment No. 1 to Warrant to purchase             0-8483           10-K     Mar. 1998      10.14
           Common Shares, dated March 30, 1998 by
           Central Reserve in favor of the Turkey
           Vulture Fund XIII, Ltd.
      (12) Employment Agreement dated June 30, 1998,          0-8483           10-Q     Sept. 1998     10.17
           by and between Peter Nauert and Central
           Reserve Life Corporation.
      (13) Employment Agreement dated October 1, 1998,        0-8483           10-K     Mar. 1999      10.20
           by and between Charles Miller and Central
           Reserve Life Corporation.
      (14) Reinsurance Agreement dated February 1,            0-8483           10-K     Mar. 1999      10.21
           1999, between Continental General Life
           Insurance Company and Reassurance Company
           of Hannover.
      (15) Credit Agreement dated February 17, 1999,          0-8483            8-K     Feb. 1999      10.22
           among Ceres Group, Inc., the lending
           institutions and The Chase Manhattan Bank,
           as Administrative Agent.
      (16) First Amendment to the Credit Agreement,           0-8483            8-K     Aug. 2000       10.2
           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 Agreement, dated        0-8483            8-K     Aug. 2000       10.3
           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.
</TABLE>

                                        82
<PAGE>   86


<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
      (18) First Amendment to Employment Agreement            0-8483           10-K     Mar. 2000      10.23
           between Peter W. Nauert and Ceres Group,
           Inc. dated March 18, 1999.
      (19) Second Amendment to Employment Agreement           0-8483           10-K     Mar. 2000      10.24
           between Peter W. Nauert and Ceres Group,
           Inc. dated June 15, 1999.
      (20) Third Amendment to Employment Agreement            0-8483           10-K     Mar. 2000      10.25
           between Peter W. Nauert and Ceres Group,
           Inc. dated December 19, 1999.
      (21) Third Amendment to Credit Agreement, dated         0-8483           10-Q     Nov. 2000       10.1
           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.
      (22) Employment Agreement, dated October 1,             0-8483           10-K     Apr. 2001       10.3
           1999, by and between Anthony J. Pino and
           Ceres Group, Inc.
      (23) Fourth Amendment to Credit Agreement, dated        0-8483           10-K     Apr. 2001       10.4
           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, dated         0-8483           10-K     Apr. 2001       10.5
           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, dated         0-8483            S-1     Apr. 2001      10.25
           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 Share          0-8483            S-1     Apr. 2001      10.26
           Incentive Plan
      (27) Ceres Group, Inc. 1998 Employee Stock Option       0-8483            S-1     Apr. 2001      10.27
           Plan
</TABLE>


                                        83
<PAGE>   87


<TABLE>
<CAPTION>
                                                          INCORPORATED BY
                                                           REFERENCE TO
                                                          REGISTRATION OR    FORM OR                  EXHIBIT
                          EXHIBITS                          FILE NUMBER      REPORT        DATE       NUMBER
                          --------                        ---------------    -------    ----------    -------
<C>   <S>                                                 <C>                <C>        <C>           <C>
      (28)Ceres Group, Inc. 1999 Special Agents' Stock        0-8483            S-1     Apr. 2001      10.28
          Option Plan
      (29)Ceres Group, Inc. 2000 Employee Stock               0-8483            S-8     Apr. 2000        4.1
          Purchase Plan
      (30)Ceres Group, Inc. 2000 Agent Stock Purchase         0-8483            S-8     Apr. 2000        4.2
          Plan
      (31)Employment Agreement dated April 10, 2001,          0-8483            S-1     Apr. 2001      10.29
          by and between Bruce M. Henry and Ceres
          Group, Inc.
      (32)Amendment No. 1 to Employment Agreement             0-8483            S-1     Apr. 2001      10.30
          dated April 10, 2001, by and between Anthony
          J. Pino and Ceres Group, Inc.
      (33)Amendment No. 1 to Employment Agreement             0-8483            S-1     Apr. 2001      10.31
          dated April 10, 2001, by and between Charles
          E. Miller
(21)  Subsidiaries of the registrant.
      (1) Subsidiaries.                                       0-8483           10-K     Mar. 2000         21
(23)  Consents of expert and counsel.
      (1) Consent of Ernst & Young LLP.                            *                                    23.1
</TABLE>


* Filed herewith.

                                        84
<PAGE>   88

                                   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: May 1, 2001                                            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>

May 1, 2001                                                   By: /s/ PETER W. NAUERT
                                              -------------------------------------------------------
                                                       Peter W. Nauert, Chairman, President
                                                            and Chief Executive Officer
                                                           (principal executive officer)

May 1, 2001                                               By: /s/ CHARLES E. MILLER, JR.
                                              -------------------------------------------------------
                                                 Charles E. Miller, Jr., Executive Vice President,
                                                              Chief Financial Officer
                                                   (principal financial and accounting officer)

May 1, 2001                                                   By: /s/ ANDREW A. BOEMI
                                              -------------------------------------------------------
                                                             Andrew A. Boemi, Director

May 1, 2001                                                 By: /s/ MICHAEL A. CAVATAIO
                                              -------------------------------------------------------
                                                           Michael A. Cavataio, Director

May 1, 2001                                                  By: /s/ BRADLEY E. COOPER
                                              -------------------------------------------------------
                                                            Bradley E. Cooper, Director

May 1, 2001                                                   By: /s/ RODNEY L. HALE
                                              -------------------------------------------------------
                                                             Rodney L. Hale, Director

May 1, 2001                                                   By: /s/ ROBERT J. LUNN
                                              -------------------------------------------------------
                                                             Robert J. Lunn, Director

May 1, 2001                                                   By: /s/ WILLIAM J. RUH
                                              -------------------------------------------------------
                                                             William J. Ruh, Director

May 1, 2001                                                   By: /s/ ROBERT A. SPASS
                                              -------------------------------------------------------
                                                             Robert A. Spass, Director
</TABLE>


                                        85
<PAGE>   89

                               INDEX TO 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                0-8483           10-K     Mar. 1998        2.2
          Purchase Agreement, dated March
          30, 1998, by and among Strategic
          Partners, Insurance Partners,
          L.P., Insurance Partners Offshore
          (Bermuda), L.P., and Central
          Reserve.
      (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         0-8483            8-K     Feb. 1999        2.2
          of November 4, 1998 between The
          Western and Southern Life
          Insurance Company and Ceres Group,
          Inc.
      (4) Purchase Agreement dated October          0-8483            8-K     Aug. 2000        2.1
          7, 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               0-8483            8-K     Aug. 2000        2.3
          Agreement 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           0-8483            8-K     Dec. 1998        3.1
      Ceres 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.
      (1) Amended and Restated Voting               0-8483            8-K     Aug. 2000        4.2
          Agreement 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.
</TABLE>

                                        86
<PAGE>   90


<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (2) Stockholders Agreement, dated as          0-8483            8-K     Feb. 1999        4.2
          of 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.
      (4) United Registration Rights                0-8483            8-K     Aug. 2000        4.4
          Agreement dated as of July 26,
          2000 between Ceres Group, Inc. and
          United Insurance Company of
          America.
      (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.
(10)  Material Contracts
      (1) Agreement of Lease.                       0-8483           10-K     Mar. 1992       10(c)
      (2) Mortgage Note.                            0-8483           10-K     Mar. 1992       10(d)
      (3) Mortgage.                                 0-8483           10-K     Mar. 1992       10(e)
      (4) Lease Extension Agreement.                0-8483           10-K     Apr. 2001       10.1
      (5) First Loan Modification Agreement.        0-8483           10-K     Apr. 2001       10.2
      (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             0-8483           10-K     Mar. 1998      10.10
          Central 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.
</TABLE>


                                        87
<PAGE>   91

<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (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 Nauert.
      (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          0-8483           10-Q     Sept. 1998     10.17
           30, 1998, by and between Peter
           Nauert and Central Reserve Life
           Corporation.
      (13) Employment Agreement dated               0-8483           10-K     Mar. 1999      10.20
           October 1, 1998, by and between
           Charles Miller and Central
           Reserve Life Corporation.
      (14) Reinsurance Agreement dated              0-8483           10-K     Mar. 1999      10.21
           February 1, 1999, between
           Continental General Life
           Insurance Company and Reassurance
           Company of Hannover.
      (15) Credit Agreement dated February          0-8483            8-K     Feb. 1999      10.22
           17, 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.
</TABLE>

                                        88
<PAGE>   92


<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (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                0-8483           10-Q     Nov. 2000       10.1
           Agreement, 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.
      (22) Employment Agreement, dated              0-8483           10-K     Apr. 2001       10.3
           October 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                0-8483           10-K     Apr. 2001       10.5
           Agreement, 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                0-8483            S-1     Apr. 2001      10.25
           Agreement, 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               0-8483            S-1     Apr. 2001      10.26
           Employee 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
           Agents' Stock Option Plan
      (29) Ceres Group, Inc. 2000 Employee          0-8483            S-8     Apr. 2000        4.1
           Stock Purchase Plan
</TABLE>


                                        89
<PAGE>   93


<TABLE>
<CAPTION>
                                                INCORPORATED BY
                                                 REFERENCE TO
                                                REGISTRATION OR    FORM OR                  EXHIBIT
                     EXHIBITS                     FILE NUMBER      REPORT        DATE       NUMBER
                     --------                   ---------------    -------    ----------    -------
<C>   <S>                                       <C>                <C>        <C>           <C>
      (30)Ceres Group, Inc. 2000 Agent Stock        0-8483            S-8     Apr. 2000        4.2
          Purchase Plan
      (31)Employment Agreement dated April          0-8483            S-1     Apr. 2001      10.29
          10, 2001, by and between Bruce M.
          Henry and Ceres Group, Inc.
      (32)Amendment No. 1 to Employment             0-8483            S-1     Apr. 2001      10.30
          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      10.31
          Agreement dated April 10, 2001, by
          and between Charles E. Miller
(21)  Subsidiaries of the registrant.
      (1) Subsidiaries.                             0-8483           10-K     Mar. 2000         21
(23)  Consents of expert and counsel.
      (1) Consent of Ernst & Young LLP.                                 *                     23.1
</TABLE>


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

                                        90