Document:

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                                                                   Exhibit 10.39

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT is effective as of the 9th day of July, 2002
by and between CERES GROUP, INC., a Delaware corporation, referred to in this
Agreement as "Employer," and THOMAS J. KILIAN, referred to in this Agreement as
"Employee."

                                    RECITALS:

         Employer is engaged in the insurance business and maintains its
corporate office in the City of Strongsville, Ohio; and

         Employer wishes to employ Employee, and Employee wishes to be employed
by Employer, on the terms and conditions set forth in this Agreement.

         For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:

         Employer hereby employs Employee and Employee hereby accepts such
employment upon the terms and conditions hereinafter set forth.

         1.       SERVICES. Employer shall employ Employee as its President and
                  Chief Executive Officer. Subject to the direction and
                  authorization of Employer's board of directors ("Board"),
                  Employee shall have such duties, responsibilities, and
                  authorities as are commensurate for presidents/chief executive
                  officers of public companies of similar size in the same
                  industry.

                  The Board will nominate and, pursuant to Section 2.3 of
                  Employer's bylaws, elect Employee to fill a vacancy on the
                  Board promptly following the resignation of Rodney L. Hale,
                  which is expected on the date of this Agreement. It is
                  contemplated that, in connection with each annual meeting of
                  stockholders of Employer during the term of this Agreement
                  that coincides with the expiration of Employee's term of
                  office on the Board, the Board will nominate Employee for
                  election as a member of the Board. Despite the foregoing,
                  Employee will resign as a member of the Board upon the
                  termination of this Agreement for any reason whatsoever and to
                  that end, contemporaneously with the execution of this
                  Agreement, with effect as of the termination of Employee's
                  employment pursuant to this Agreement, Employee will resign as
                  a member of the Board of Employer by executing and delivering
                  to Employer a letter of resignation in the form of Annex A
                  hereto.

                  Employee, subject to the direction and control of the Board,
                  shall have all power and authority commensurate with his
                  position as Employer's president/chief executive officer and
                  necessary to perform his duties hereunder. Employer agrees to
                  provide to Employee such assistance and work accommodations as
                  are suitable to the character of his position with Employer
                  and adequate for the performance of his duties. Employee shall
                  devote his entire employable time, attention and best efforts
                  to the business of Employer, and shall not, without the
                  consent of the Board, during the term of this Agreement be
                  actively engaged in any other

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                  business activity, whether or not such business activity is
                  pursued for gain, profit or other pecuniary advantage; but
                  this shall not be construed as preventing Employee from
                  serving on boards of processional, community, civic,
                  educational, charitable and corporate organizations on which
                  he presently serves or may choose to serve, or from managing
                  his personal investments. For purposes of this Agreement,
                  "entire employable time" shall mean the normal work week for
                  individuals in executive management positions with Employer.

                  Employee represents and warrants to Employer that his
                  employment hereunder and compliance with the terms and
                  conditions of this Agreement will not conflict with or result
                  in the breach of any agreement or obligation to which he is a
                  party or may be bound.

         2.       TERM AND TERMINATION. The initial term of this Agreement shall
                  be for a period of two (2) years, commencing on the date of
                  this Agreement and expiring at 5:00 p.m.on July 8, 2004;
                  provided, however, that this Agreement shall automatically
                  renew for succeeding one (1) year terms, unless Employer
                  provides Employee with at least ninety (90) days' advance
                  written notice that this Agreement and Employee's employment
                  shall terminate as of the close of business on July 8th of the
                  initial or then-current renewal term (as the case may be).

                  TERMINATION WITHOUT CAUSE. Regardless of any provisions of
                  this Agreement to the contrary, or which could be construed to
                  the contrary, in the event that (a) Employer chooses to
                  terminate this Agreement upon ninety (90) days' advance
                  written notice prior to the end of the initial or then-current
                  renewal term or (b) Employee shall leave the employment of
                  Employer at any time other than as a voluntary quit or for
                  "cause" (as defined below) or Employee's employment is
                  terminated in connection with a "change of control" (as
                  defined below), this Agreement shall terminate and Employee
                  shall be entitled to severance pay equal to eighteen (18)
                  months of Employee's then-current base compensation less the
                  Signing Bonus (as defined in Section 3 below), plus any
                  bonus(es) paid to Employee at the end of the fiscal year
                  immediately preceding such termination, payable in eighteen
                  (18) equal monthly installments on the first day of each
                  month. Such payments shall be in lieu of any other payments
                  from Employer, including, without limitation, severance or
                  termination payments contained herein or otherwise and
                  Employer shall have no further liability or obligation to
                  Employee for compensation or benefits.

                  CHANGE OF CONTROL. Upon the occurrence of a "qualifying
                  termination" (as defined below) following a "change of
                  control" (as defined below) of Employer, Employee shall be
                  entitled to receive cash compensation equal to two (2) years
                  of Employee's then-current base compensation less the Signing
                  Bonus (as defined in Section 3 below), plus (a) the average
                  annual bonus paid to Employee in the last two fiscal years
                  immediately preceding such termination plus (b) any additional
                  discretionary bonus as may be determined by the Board in its
                  sole discretion, payable in a lump sum. Such payment shall be
                  in lieu of any other payments from Employer, including,
                  without limitation, severance or termination payments
                  contained herein or otherwise and Employer shall have no
                  further liability or obligation to Employee for compensation
                  or benefits.
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                  "Change of control" shall mean the occurrence of any of the
following events:

                           (i)      a tender offer shall be made and consummated
                                    for the ownership of 50.1% or more of the
                                    outstanding voting securities of Employer;

                           (ii)     Employer shall be merged or consolidated
                                    with another corporation and, as a result of
                                    such merger or consolidation, less than
                                    50.1% of the outstanding voting securities
                                    of the surviving or continuing corporation
                                    shall be owned in the aggregate by the
                                    former stockholders of Employer as the same
                                    shall have existed immediately prior to such
                                    merger or consolidation; or

                           (iii)    Employer shall sell substantially all of its
                                    assets to another person or entity which is
                                    not a wholly-owned subsidiary;

                           (iv)     a person, within the meaning of Section
                                    3(a)(9) or of Section 13(d)(3) (as in effect
                                    on the date hereof) of the Exchange Act
                                    shall acquire, other than by reason of
                                    inheritance, (50.1%) or more of the
                                    outstanding voting securities of Employer
                                    (whether directly, indirectly, beneficially
                                    or of record).

                           In determining whether a "change of control" has
                           occurred, gratuitous transfers made by a person to an
                           affiliate of such person (as determined by the Board
                           of Employer), whether by gift, devise or otherwise,
                           shall not be taken into account. For purposes of this
                           Agreement, ownership of voting securities shall take
                           into account and shall include ownership as
                           determined by applying the provisions of Rule
                           13d-3(d)(1)(i) of the Exchange Act as in effect on
                           the date hereof.

                  A "qualifying termination" shall occur only if:

                           (i)      a "change of control" (as defined above)
                                    occurs; and

                           (ii)     (A)     Employee voluntarily terminates his
                                            employment hereunder; or

                                    (B)     within 12 months after the "change
                                            of control," Employer terminates
                                            Employee's employment other than for
                                            "cause" (as defined below); or

                                    (C)     within 12 months after the "change
                                            of control," Employer materially
                                            changes Employee's duties and
                                            responsibilities or assigns any
                                            duties or responsibilities that are
                                            materially inconsistent with
                                            Employee's position and Employee
                                            voluntarily terminates his
                                            employment hereunder; or

                                    (D)     within 12 months after the "change
                                            of control," Employer requires
                                            Employee to change his location of
                                            employment,

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                                    currently Cleveland, Ohio and Employee
                                    voluntarily terminates his employment
                                    hereunder.

                  TERMINATION FOR "CAUSE." Notwithstanding any other provisions
                  of this Agreement to the contrary, Employee's employment and
                  this Agreement may be terminated by the Employer at any time
                  without further liability or obligation for compensation or
                  severance pay or fringe benefits for "cause."

                  For purposes of this paragraph, "cause" shall mean if Employee
                  (a) has refused, failed or neglected to perform duties or
                  render services hereunder or has performed or rendered them
                  incompetently; (b) has been dishonest or committed a fraud or
                  breach of trust or has engaged in illegal or wrongful conduct
                  substantially detrimental to the business or reputation or
                  Employer; (c) has developed or pursued interests substantially
                  adverse to Employer; (d) is indicted for, or convicted of, a
                  crime that constitutes a felony; or (e) has otherwise
                  materially breached this Agreement.

                  If, in the opinion of the Board of Employer, Employee's
                  employment shall become subject to termination for "cause,"
                  the Board shall give Employee written notice to that effect
                  which notice shall describe the matter or matters constituting
                  such "cause." In the case of clauses (b) and (d) above, such
                  notice shall constitute notice of termination of Employee's
                  employment and Employee's employment will terminate
                  immediately. In the case of clauses (a), (c) and (e) above,
                  if, within 15 days of receipt of such notice, Employee has not
                  substantially eliminated, resolved or cured each such matter
                  or matters to the satisfaction of the Board in its sole
                  discretion, then Employer shall have the right to give
                  Employee notice that Employee's employment will terminate
                  immediately.

                  VOLUNTARY QUIT. Notwithstanding any other provision of this
                  Agreement, Employee shall have the right to voluntarily quit
                  Employee's employment and terminate this Agreement by giving
                  ninety (90) days' advance written notice to Employer at the
                  address provided herein. Except as provided in (ii)(A), (C) or
                  (D) in this Section 2 in "Change of Control" in the definition
                  of a "Qualifying Termination," if Employee shall so
                  voluntarily quit and terminate this Agreement, Employer shall
                  have no further obligations pursuant to the terms of this
                  Agreement, except to pay to Employee accrued salary to the
                  date of termination.

         3.       COMPENSATION.

                  SIGNING BONUS. Employer shall pay to Employee a signing bonus
                  in the amount of $300,000.00 (the "Signing Bonus"), less
                  applicable taxes.

                  BASE COMPENSATION. During this Agreement, Employer shall pay
                  Employee (according to Employer's normal payroll procedures)
                  and Employee agrees to accept from Employer, in full payment
                  for services under this Agreement, an annual base compensation
                  of $600,000.00. The Board may review Employee's base
                  compensation from time to time during the term of this
                  Agreement and, at its

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                  discretion, may increase Employee's base compensation based
                  upon his performance and other relevant factors.

                  BONUS. Employer may pay to Employee such cash bonus(es), if
                  any, in an amount up to 100% of base compensation per calendar
                  year, as may be determined by the Board in its sole discretion
                  from time to time. At the sole discretion of the Board, such
                  bonus(es) may be part of Employer's bonus plan for officers or
                  such other incentive compensation or plans as may be
                  established by the Board of Employer. Notwithstanding the
                  foregoing, Employee shall be entitled to defer the receipt of
                  his salary and/or bonus pursuant to procedures adopted or
                  plans maintained by Employer.

                  OPTIONS. Upon execution of this Agreement, Employer shall
                  grant to Employee a nonqualified option to purchase one
                  hundred thousand (100,000) shares of Employer's common stock
                  pursuant to Employer's 1998 Key Employee Share Incentive Plan
                  ("Share Option"). The Share Option shall have an exercise
                  price equal to Three dollars and Ninety cents ($3.90). All of
                  the shares underlying the Share Option shall vest on the third
                  anniversary of the date of this Agreement if Employee is still
                  employed by Employer on such date; provided, however, the
                  shares shall also vest in full upon a "change of control" of
                  Employer as that term is defined in Section 2 above. The Share
                  Option shall expire ten (10) years from the date of this
                  Agreement. The Share Option shall be on the terms and
                  conditions contained in a Nonqualified Stock Option Agreement
                  in the form attached hereto as Annex B.

                  LIMITATION ON PAYMENTS. Notwithstanding any other term of this
                  Agreement, the aggregated payments by Employer to Employee
                  under this Agreement or otherwise that are determined to be
                  "parachute payments" for purposes of Section 280G of the
                  Internal Revenue Code of 1986, as amended, and the regulations
                  promulgated thereunder ("Section 280G"), shall not exceed 299%
                  of Employee's "base amount" as determined for purposes of
                  Section 280G. All determinations and computations for this
                  purpose, including the interpretation of Section 280G and its
                  application to the matters set forth herein, will be made by
                  the Compensation Committee of the Board in its sole discretion
                  and its determinations hereunder will be binding on Employee
                  and Employer. To the extent that this provision requires a
                  reduction in the amount of payment(s) that would otherwise be
                  due and owing by Employer to Employee under this Agreement or
                  otherwise, the Compensation Committee shall have sole
                  discretion, and will work in good faith, to determine the
                  method of reducing any such payment(s) in order to meet the
                  limitations imposed by this provision.

                  BENEFITS. Employee shall be entitled to participate in, and
                  receive benefits from, any insurance, medical, disability, or
                  other employee benefit plan of Employer, if any, which may be
                  in effect at any time during the term of this Agreement and
                  which shall be generally available to Employee on terms no
                  less favorable than to other executive management or
                  supervisory personnel of Employer. Nothing herein shall be
                  construed so as to prevent Employer from modifying or
                  terminating any employee benefit plans or programs, or
                  employee fringe benefits, that it has adopted or may adopt
                  from time to time.

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         4.       EXPENSES. During the first sixty (60) days of the term of this
                  Agreement (unless extended by the Board in its sole
                  discretion), Employee is authorized to incur reasonable
                  expenses for travel between his current home in Carmel,
                  Indiana and Employer's headquarters in Strongsville, Ohio.
                  Employer shall reimburse Employee for such expenses after
                  receipt of a written statement from Employee which itemizes
                  such expenses in reasonable detail, together with all receipts
                  related to such expenses.

                  If, at the direction of the Board, Employee relocates and
                  moves his home near Employer's headquarters, Employer would
                  reimburse Employee for the costs of such relocation in
                  accordance with Employer's existing relocation policy.

                  In addition, Employer agrees that it will reimburse Employee
                  for any and all necessary, customary and usual business
                  expenses incurred by Employee, subject to Employer's
                  then-current policies regarding such expenses.

         5.       COVENANTS.

                  NON-DISCLOSURE. During Employee's employment by Employer,
                  Employee will enjoy access to Employer's "confidential
                  information" and "trade secrets." For the purposes of this
                  Agreement, "confidential information" shall mean information
                  which is not publicly available including, without limitation,
                  information concerning customers, material sources, suppliers,
                  financial projections, marketing plans and operation methods,
                  Employee's access to which derives solely from Employee's
                  employment with Employer. For purposes of this Agreement,
                  "trade secrets" shall mean Employer's processes, methodologies
                  and techniques known only to those employees of Employer who
                  need to know such secrets in order to perform their duties on
                  behalf of Employer. Employer takes numerous steps, including
                  these provisions, to protect the confidentiality of its
                  confidential information and trade secrets, which it considers
                  unique, valuable and special assets.

                  Employee, recognizing Employer's significant investment of
                  time, effort and money in developing and preserving its
                  confidential information and trade secrets, shall not, during
                  his employment hereunder and for a period of three (3) years
                  after the end of Employee's employment hereunder, use for his
                  direct or indirect personal benefit any of Employer's
                  confidential information or trade secrets. During the term of
                  this Agreement and for a period of three (3) years after the
                  end of Employee's employment hereunder, Employee shall not
                  disclose to any person any of Employer's confidential
                  information or trade secrets.

                  No termination of this Agreement shall terminate the rights
                  and obligations of the parties under this Section 5, but such
                  rights and obligations shall survive such termination in
                  accordance with the terms of this Section.

         6.       NON-DISPARAGEMENT. Following the termination of this Agreement
                  for any reason, Employee agrees that he shall not indulge in
                  any conduct which may

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                  reflect adversely upon, nor make any statements disparaging
                  of, Employer, or the officers, directors, stockholders or
                  employees of Employer.

         7.       REMEDIES. Employee agrees that the remedy at law for any
                  violation or threatened violation by Employee of Sections 5
                  and 6 will be inadequate and that, accordingly, Employer shall
                  be entitled to injunctive relief in the event of a violation
                  or threatened violation without being required to post bond or
                  other surety. The foregoing remedies shall be in addition to,
                  and not in limitation of, any other rights or remedies to
                  which Employer is or may be entitled at law, or in equity, or
                  under this Agreement.

         8.       DEATH. Notwithstanding any other provisions of this Agreement,
                  this Agreement shall be deemed automatically terminated upon
                  death. In such event, Employer shall pay to Employee's
                  personal representative or executor any compensation accrued
                  but unpaid as of such date. Upon the payment of such accrued
                  compensation, Employer shall have no further obligations under
                  this Agreement, including, but not limited to, an obligation
                  to pay a salary, severance or termination pay or any other
                  form of compensation, or to provide any further fringe
                  benefits of any kind or nature.

         9.       DISABILITY. If Employee is unable substantially to perform his
                  duties under this Agreement by reason of physical or mental
                  illness, injury, or incapacity for one hundred twenty (120)
                  consecutive days, Employer may terminate this Agreement
                  forthwith upon notice to Employee and thereupon shall have no
                  further liability or obligation to Employee hereunder,
                  including, but not limited to, an obligation for severance or
                  termination pay or any other form of compensation, or to
                  provide any further fringe benefits of any kind of nature,
                  except as may be prescribed under the terms of any benefit
                  plans or arrangements referred to in Section 3 in which
                  Employee participated at the close of business on the first
                  day of such 120 day period. In the event of a dispute under
                  this Section 9, Employee agrees to submit to a physical or
                  mental examination by a licensed physician selected by
                  Employer, whose decision as to Employee's disability shall be
                  conclusive and binding upon Employer and Employee. Employer
                  shall bear the cost of such examination

         10.      ENTIRE AGREEMENT. This written Agreement contains the sole and
                  entire agreement between the parties and shall supersede any
                  and all other agreements, whether oral or written, between the
                  parties. The parties acknowledge and agree that neither of
                  them has made any representation with respect to the subject
                  matter of this Agreement or any representations inducing its
                  execution and delivery, except such representations as are
                  specifically set forth in this writing, and the parties
                  acknowledge that they have relied on their own judgment in
                  entering into the same. The parties further acknowledge that
                  any statements or representations that may have been made by
                  either of them to the other are void and of no effect and that
                  neither of them has relied on such statements or
                  representations in connection with its dealings with the
                  other.

         11.      WAIVER/MODIFICATION. It is agreed that no waiver or
                  modification of this Agreement or of any covenant, condition
                  or limitation contained in it shall be

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                  valid unless it is in writing and duly executed by the party
                  to be charged with it, and that no evidence of any waiver or
                  modification shall be offered or received in evidence in any
                  proceeding, arbitration or litigation between the parties
                  arising out of or affecting this Agreement, or the rights or
                  obligations of any party under it, unless such waiver or
                  modification is in writing, duly executed as above. The
                  parties agree that the provisions of this paragraph may not be
                  waived, except by a duly executed writing. No waiver of any of
                  the provisions of this Agreement shall be deemed, or shall
                  constitute, a waiver of any other provision, whether or not
                  similar, nor shall any waiver constitute a continuing waiver.
                  No waiver of any breach of condition of this Agreement shall
                  be deemed to be a waiver of any other subsequent breach of
                  condition, whether of like or different nature.

         12.      ARBITRATION. If a dispute of any kind arises from or relates
                  in any manner to this Agreement or the breach thereof, and if
                  such dispute cannot be settled through direct discussions, the
                  parties agree to endeavor to first settle the dispute in an
                  amicable manner by mediation administered in the state in
                  which Employer's headquarters is located by and through the
                  American Arbitration Association in accordance with its
                  Commercial Mediation Rules before resorting to arbitration.
                  Thereafter, any unresolved controversy or claim arising from
                  or relating to this Agreement or breach thereof shall be
                  settled by arbitration administered by and through the
                  American Arbitration Association in accordance with its
                  Commercial Arbitration Rules, provided however that only one
                  arbitrator shall be appointed, which arbitrator shall be an
                  attorney licensed in the state in which Employer's
                  headquarters is located or an active or retired judge, having
                  experience in employment contracts, and judgment on the award
                  rendered by the arbitrator may be entered in any court having
                  jurisdiction thereof.

         13.      GOVERNING LAW. The parties agree that it is their intention
                  and covenant that this Agreement be construed in accordance
                  with and under and pursuant to the laws of the State of Ohio,
                  without giving effect to principles of conflicts of law.

         14.      SUCCESSORS AND ASSIGNS. Employee may not assign any rights or
                  obligations under this Agreement without the prior written
                  consent of Employer. This Agreement shall be binding upon and
                  inure to the benefit of Employee and his lawful heirs,
                  guardians, executors, administrators, and permitted successors
                  and assigns.

                  Employer may not assign any rights or obligations under this
                  Agreement without the prior written consent of Employee except
                  to the surviving corporation in connection with a merger or
                  consolidation involving Employer or to the purchaser of assets
                  in connection with a sale of all or substantially all of its
                  assets, so long as the assignee expressly assumes Employer's
                  rights or obligations. This Agreement shall be binding upon
                  and inure to the benefit of Employer and its permitted
                  successors and assigns.

                  This Agreement does not create, and shall not be construed as
                  creating, any rights enforceable by any person not a party to
                  this Agreement, except as provided in this Section 14.

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         15.      COUNTERPARTS. This Agreement may be executed in one or more
                  counterparts, each of which shall be deemed to constitute an
                  original but all of which together will constitute one and the
                  same instrument.

         16.      RETURN OF PROPERTY. Upon termination of this Agreement for any
                  reason, Employee shall immediately return any property of
                  Employer, including, but not limited to, any equipment, credit
                  cards, advertising materials, booklets, training guides or any
                  other such similar information, materials or documents that
                  Employee has in Employee's possession or control.

         17.      SEVERABILITY. If any clause, paragraph, or section of this
                  Agreement be held invalid or unenforceable, the remaining
                  provisions of this Agreement shall not be affected thereby and
                  shall be valid and remain enforceable to the extent permitted
                  by law. Moreover, if any one or more of the provisions in this
                  Agreement shall for any reason by held to be excessively broad
                  as to duration, geographical scope, activity, or subject, it
                  shall be construed by limiting and reducing it, so as to be
                  enforceable to the extent compatible with then applicable law.

         18.      NOTICES. All notices required to be provided under the terms
                  of this Agreement shall be sent by United States mail,
                  certified, return receipt requested, and to the following
                  addresses:

                  TO EMPLOYER:
                  Ceres Group, Inc.
                  Attn:  General Counsel
                  17800 Royalton Road
                  Strongsville, Ohio 44136

                  TO EMPLOYEE:
                  Thomas J. Kilian
                  10550 Hussey Lane
                  Carmel, Indiana 46032

         ACKNOWLEDGMENT BY EMPLOYEE: BY SIGNING THIS AGREEMENT, I AFFIRM THAT I
         HAVE CAREFULLY READ AND CONSIDERED ALL OF THE TERMS AND CONDITIONS OF
         THIS AGREEMENT AND THAT SUCH TERMS AND CONDITIONS ARE UNDERSTOOD,
         ACCEPTED AND AGREED.

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         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

EMPLOYER:                                      EMPLOYEE:
CERES GROUP, INC.                              THOMAS J. KILIAN

By:      /s/ Kathleen L. Mesel                          /s/ Thomas J. Kilian
   --------------------------------------      -----------------------------

Its:     Corporate Secretary

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                                     ANNEX A

July 9, 2002

Board of Directors
Ceres Group, Inc.
17800 Royalton Road
Strongsville, Ohio 44136

Ladies and Gentlemen:

I, Thomas J. Kilian, hereby resign as a member of the Board of Directors of
Ceres Group, Inc., effective as of the termination of my employment with Ceres
Group (for whatever reason) pursuant to my Employment Agreement, dated as of
July 9, 2002, between Ceres Group and me.

Very truly yours,

/s/ Thomas J. Kilian

Thomas J. Kilian

<PAGE>

                                     ANNEX B

                      NON-QUALIFIED STOCK OPTION AGREEMENT

                           UNDER THE CERES GROUP, INC.

                     1998 KEY EMPLOYEE SHARE INCENTIVE PLAN

         This Non-Qualified Stock Option Agreement ("Agreement") is made on July
9, 2002, by and between Ceres Group, Inc., a Delaware corporation ("Ceres" or
the "Company"), and Thomas J. Kilian ("Optionee").

         Ceres and Optionee agree that the option granted by this Agreement does
not qualify as an "incentive stock option" ("ISO") within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). Ceres makes
this grant of an option pursuant to the Ceres Group, Inc., 1998 Key Employee
Share Incentive Plan ("Plan"). The option granted by this Agreement shall be
subject to all the provisions of the Plan, which are incorporated herein by
reference, and shall be subject to the following provisions of this Agreement:

         1. NUMBER OF COMMON SHARES AND OPTION PRICE. Ceres hereby grants
Optionee an option ("Option") to purchase 100,000 shares of the Company's $0.001
par value common stock ("Common Shares") for a purchase price ("Option Price")
of $3.90 (Three dollars and Ninety cents) per Common Share.

         2. GENERAL TERMS, PERIOD, VESTING AND EXERCISABILITY.

(a) The term of the Option and the term of this Agreement shall commence on the
date hereof ("Date of Grant") and shall terminate upon the expiration of ten
(10) years from the Date of Grant ("Maximum Term") if not terminated or
extinguished earlier by operation of this Agreement or the terms of the Plan.
Upon termination of the Optionee's employment (regardless of reason) with Ceres
or one of its subsidiary corporations, as the case may be, all Options evidenced
by this Agreement that remain outstanding but are not then vested and
exercisable shall terminate and expire. Upon termination of the Optionee's
employment with Ceres or a subsidiary company other than by death or permanent
and total disability and more than three (3) months prior to the end of the
Maximum Term, those Options evidenced by this Agreement that are vested and
exercisable shall terminate and expire three (3) months following the date such
employment terminates. Upon termination of the Optionee's employment with Ceres
or a subsidiary company, by death or permanent and total disability and more
than one (1) year prior to the end of the Maximum Term, those Options evidenced
by this Agreement that are vested and exercisable shall terminate and expire one
(1) year following the date of such death or permanent and total disability (as
determined by the Compensation Committee of the Board of Directors of Ceres).
Options that terminate, expire or lapse on a given date shall do so on such date
at 5:00 p.m., Cleveland, Ohio time.

(b) The Option shall vest and first become exercisable on July 9, 2005 and shall
terminate on July 9, 2012.

(c) Notwithstanding any contrary provisions of this Agreement and subject only
to the terms of the Plan, the Compensation Committee of the Board of Directors
of Ceres ("Committee") in

<PAGE>

its sole discretion may cancel and extinguish this Agreement, incident to or as
a result of any reorganization, merger, consolidation, recapitalization,
dissolution or similar restructuring or corporate event involving Ceres, by
paying to the Optionee (or other party then in rightful possession of the
Option) the value of said Option (to the extent then vested and exercisable),
determined as of the date of such restructuring or corporate event and based on
the excess, if any, of the fair market value of Common Shares over the Option
Price.

         3. METHOD OF EXERCISE: The Option shall be exercisable from time to
time by written notice (in substantially the form attached hereto as Exhibit A)
to the Company that shall:

         (a)      state that the Option is thereby being exercised, the number
                  of Common Shares with respect to which the Option is being
                  exercised, each person in whose name any certificates for the
                  Common Shares should be registered and his or her address and
                  social security number;

         (b)      be signed by the person or persons entitled to exercise the
                  Option and, if the Option is being exercised by anyone other
                  than the Optionee, be accompanied by proof satisfactory to
                  counsel for Ceres of the right of such person or persons to
                  exercise the Option under the Plan and all applicable laws and
                  regulations; and

         (c)      be accompanied by such representations, warranties or
                  agreements with respect to the investment intent of such
                  person or persons exercising the Option as Ceres may
                  reasonably request in form and substance satisfactory to
                  counsel for Ceres.

         4. PAYMENT OF OPTION PRICE. Upon exercise of the Option, Ceres shall
deliver a certificate or certificates for such Common Shares to the specified
person or persons at the specified time upon receipt of the full purchase price
for such Common Shares by any method of payment authorized by the Plan.

         5. TRANSFERABILITY. The Option shall not be transferable or assignable
by the Optionee except as expressly provided by the Plan. The Option shall be
exercisable (subject to any other applicable restrictions on exercise) only by
the Optionee for his or her own account, except that (a) in the event of the
death of the Optionee, the Option shall be exercisable (subject to any other
applicable restrictions on exercise) only by the Optionee's estate (acting
through its fiduciary) or by the Optionee's duly authorized legal
representative; (b) in the event of the permanent and total disability of the
Optionee, the Option shall be exercisable by the Optionee's authorized
representative (unless the Optionee has legal capacity); and (c) in the event of
a divorce or other marriage dissolution resulting in a change in ownership of
some or all of the Options covered by this Agreement, the Option shall be
exercisable only by the ex-spouse of the Optionee within the three (3) month
period ending on the date of such change in ownership.

         6. RESTRICTIONS ON EXERCISE. The Option is subject to all restrictions
in this Agreement or in the Plan. As a condition of any exercise of the Option,
Ceres may require the Optionee or his successor to make any representation and
warranty to comply with any applicable law or regulation or to confirm any
factual matters reasonably requested by counsel for Ceres.

<PAGE>

         7. TAXES. The Optionee hereby agrees to pay to Ceres, in accordance
with the terms of the Plan, any federal, state or local taxes of any kind
required by law to be withheld with respect to the Option granted hereunder. If
the Optionee does not make such payment, Ceres shall have the right to deduct
from any payment of any kind otherwise due to the Optionee from Ceres, any
federal, state or local taxes of any kind required by law to be withheld with
respect to the Option or the Common Shares to be purchased by the Optionee under
this Agreement.

         8. NO CONTRACT OF EMPLOYMENT. Neither the Plan nor this Agreement, nor
any other action taken by Ceres or any committee or representative thereof,
shall constitute or otherwise evidence a contract of employment, regardless
whether express or implied, between the Optionee and Ceres.

         9. DEFINITIONS. Unless otherwise defined in this Agreement, capitalized
terms will have the same meanings given them in the Plan.

         10. AMENDMENT AND CONTROLLING LAW. This Agreement may be amended or
modified at any time, but only by a written instrument signed by the parties
hereto (or their successors and assigns). This Agreement is to be governed and
construed according to the laws of the state of incorporation of Ceres, without
regard to its conflicts of law principles or statutes.

                                            CERES GROUP, INC.

DATE OF GRANT:  JULY 9, 2002                By: /s/ KATHLEEN L. MESEL
                                                ------------------------------
                                                Kathleen L. Mesel
                                                Secretary

---------------------------(Return signed page 3 only)-------------------------

                             ACCEPTANCE OF AGREEMENT
                             -----------------------

         The Optionee hereby: (a) acknowledges receiving a copy of the Plan,
which is attached to this Non-Qualified Stock Option Agreement, and represents
that he/she is familiar with all provisions of the Plan; (b) accepts this
Non-Qualified Stock Option Agreement and the Option granted under this Agreement
subject to all provisions of the Plan and this Agreement; and (c) agrees to
accept as binding, conclusive and final all decisions or interpretations of
Ceres.

Date:  _______________                  _______________________________________
                                                     Signature

                                        _______________________________________
                                                       Printed Name
                                                         Optionee

<PAGE>

                                    EXHIBIT A

                     EXERCISE OF NON-QUALIFIED STOCK OPTION

TO:
Secretary
Ceres Group, Inc.
17800 Royalton Road
Strongsville, Ohio  44136

Dear Secretary:

                  The undersigned Optionee hereby exercises the Non-qualified
Stock Option granted to him/her pursuant to the Non-Qualified Stock Option
Agreement dated May 1, 2001, between Ceres Group, Inc. and the Optionee with
respect to ________________ Common Shares covered by said Option, and tenders
herewith $__________________________ in payment of the purchase price thereof by
delivery of
-------------------------------------------------------.

                  The name and registered address on such certificate should be:

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

                  The Optionee's social security number is: ______-_____-______.

Dated:  __________                            ______________________________
                                                            Optionee<PAGE>
                                                                   Exhibit 10-1

                                    AGREEMENT
                         (14% Junior Subordinated Notes)

        This Agreement dated as of June 30, 2002 (the "Agreement"), between
Lexington Precision Corporation, a Delaware corporation (the "Company"), and
Michael A. Lubin ("Holder").

        WHEREAS, Holder is the holder of certain 14% Junior Subordinated Notes
due November 1, 2000, of the Company in the aggregate original principal amount
of the U.S. $346,666.67 (individually, a "Note" and collectively, the "Notes");

        WHEREAS, the Company and Holder desire to, among other things, extend
the maturity date of the Notes, defer the payment of certain interest on the
Notes, and provide for the waiver of certain events of default, all on and
subject to the terms hereof;

        NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto intending to be legally
bound, hereby agree as follows:

        1. Waiver. Subject to paragraph 2 hereof, the Holder hereby waives any
Event of Default under the Notes resulting solely from the failure of the
Company to pay any principal or interest due on (a) the Company's 12 3/4% Senior
Subordinated Notes due February 1, 2000, or (b) the Company's 10 1/2% Senior
Note due April 30, 2002 (the indebtedness referred to in clauses (a) and (b) is
referred to herein as the "Other Indebtedness").

        2. Rescission of Waivers. The waivers in paragraph 1 hereof shall be
automatically rescinded, without notice to the Company, in the event that the
holders of the Other Indebtedness, or the trustee in respect thereof, seeks to
enforce or exercise any remedies in respect thereof.

        3. Modification of Notes.

           Notwithstanding anything to the contrary in the Notes, the Company
and the Holder hereby agree that (a) the maturity date of the Notes is extended
to November 1, 2002, and (b) the interest on the Notes that is due and payable
on July 1, 2002 (the "July 2002 Interest Payment"), will be deemed to be
Defaulted Interest but will be payable on November 1, 2002.

        4. Effective Date; Applicability; Legend.

           This Agreement shall be deemed effective as of June 30, 2002. This
Agreement shall modify each Note and any replacement note issued upon transfer
of, in exchange for, or in lieu of any Note or any replacement note. Holder
agrees that Holder will cause the following legend to be placed prominently on
each Note and that any replacement note or notes issued by the Company upon
transfer of, in exchange for, or in lieu of the Note or any replacement note
shall have such legend placed thereon:

           THIS NOTE HAS BEEN MODIFIED PURSUANT TO THOSE CERTAIN AGREEMENTS
        DATED AS OF JANUARY 31, 2000, APRIL 30, 2000, JULY 31, 2000, OCTOBER 31,
        2000, JANUARY 31, 2001, APRIL 30, 2001, JULY 31, 2001, OCTOBER 31, 2001,
        JANUARY 31, 2002, APRIL 30, 2002, AND JUNE 30, 2002, COPIES OF WHICH ARE
        AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY AT 767 THIRD

<PAGE>

        AVENUE, 29TH FLOOR, NEW YORK, NEW YORK, AND REFERENCE SHOULD BE MADE
        THERETO FOR THE TERMS THEREOF.

        5. Representations and Warranties. Each of the parties represents and
warrants that: (a) the execution, delivery and performance of this Agreement
have been duly authorized by all requisite action on his or its part; and (b)
this Agreement has been duly executed and delivered by him or it and constitutes
his or its legal, valid, and binding agreement, enforceable against him or it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforceability of creditors' rights generally or general equitable
principles.

        6. No Other Amendments.

           Except as expressly amended, waived, modified, and supplemented
hereby, each Note shall remain in full force and effect in accordance with its
terms. Without limiting the generality of the foregoing, except as set forth in
Section 1, 2 or 3 of this Agreement, nothing herein shall constitute a waiver of
any rights or remedies of the Holder upon the occurrence of any Event of
Default.

        7. General Provisions.

           (a) Defined Terms. Capitalized terms used herein, unless otherwise
defined herein, shall have the meaning ascribed thereto in the Notes.

           (b) Counterparts. This Agreement may be executed by the parties in
any number of counterparts and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. This Amendment may be signed
by facsimile transmission of the relevant signature pages hereof.

           (c) Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the internal laws of the State
of New York.

           (d) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the heirs, successors, and assigns of the parties hereto
and any and all transferees and holders of the Notes or any replacement note.

           (e) Headings. The paragraph headings of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.

<PAGE>

           IN WITNESS WHEREOF, the Company and Holder have caused this
Agreement to be duly executed and delivered as of the date first written above.

                                               LEXINGTON PRECISION CORPORATION

                                               By:    Michael A. Lubin
                                                      -------------------------
                                               Name:  Michael A. Lubin
                                                      -------------------------
                                               Title: Chairman of the Board
                                                      -------------------------

                                                        Michael A. Lubin
                                                -------------------------------
                                                        Michael A. Lubin

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