----

----

----

----

| Delaware                                                            |   | 63-1020300                             |
|---------------------------------------------------------------------|--------|----------------------------------------|
|  (State or Other Jurisdiction ofIncorporation or Organization) |   |  (IRS EmployerIdentification No.) |
|                                                                |   |                                   |
| 661 East Davis StreetElba, Alabama                                  |   | 36323                                  |
|  (Address of principal executive  offices)           |   |  (Zip-Code)                       |

----

----

|  Class    | Outstanding March 26, 2010     |
|-------------------------------|----------------------------------------------------|
| Common Stock, $1.00 par value | 2,466,600 shares                                   |

----

----

| Operating results                      |   | 2009   |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |   | 2005   |   |
|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net premiums earned                    |   | $      | 59,594 |   |   | $      | 56,264 |   |   | $      | 62,250 |   |   | $      | 58,874 |   |   | $ | 53,563 |   |
| Net investment income                  |   |   | 5,289  |   |   |   | 4,368  |   |   |   | 4,749  |   |   |   | 4,463  |   |   |   | 3,964 |   |
| Net realized investment (losses) gains |   |   | 357    |   |   |   | (1,049 | )      |   |   | 1,493  |   |   |   | 2,565  |   |   |   | 3,493 |   |
| Other income                           |   |   | 764    |   |   |   | 1,107  |   |   |   | 1,071  |   |   |   | 1,211  |   |   |   | 1,416 |   |
| Total revenues                         |   | $      | 66,004 |   |   | $      | 60,690 |   |   | $      | 69,563 |   |   | $      | 67,113 |   |   | $ | 62,436 |   |
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $      | 4,224  |   |   | $      | (5,204 | )      |   | $      | 6,040  |   |   | $      | 4,250  |   |   | $ | 1,558 |   |
| Net income (loss) per share            |   | $      | 1.71   |   |   | $      | (2.11  | )      |   | $      | 2.45   |   |   | $      | 1.72   |   |   | $ | 0.63 |   |

| Other Selected Financial Data          |   | 2009   |    |   | 2008   |   |    | 2007   |   |   | 2006    |   |   | 2005   |    |
|----------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Total shareholders' equity             |   | $      | 41,168  |   |   | $      | 34,648  |   |   | $      | 48,447  |   |   | $      | 45,379  |   |   | $ | 43,556 |   |
| Book value per share                   |   | $      | 16.69   |   |   | $      | 14.04   |   |   | $      | 19.64   |   |   | $      | 18.39   |   |   | $ | 17.66 |   |
| Dividends per share                    |   | $      | 0.600   |   |   | $      | 0.900   |   |   | $      | 0.900   |   |   | $      | 0.885   |   |   | $ | 0.865 |   |
| Net change in unrealized               |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
|   capital gains (net of tax) |   | $      | 3,520   |   |   | $      | (6,147  | )      |   | $      | (664    | )      |   | $      | (244    | ) |   | $ | (2,544 | ) |
| Total assets                           |   | $      | 131,396 |   |   | $      | 124,890 |   |   | $      | 135,585 |   |   | $      | 134,911 |   |   | $ | 139,226 |   |

|    |   | Premiums |   |   | Investment & Other Income |   |   | Realized Investment Gains (Losses) |   |   | Claims and Benefit Payments |   |   | Net Income (Loss) |   |   | Net Income (Loss) Per Share |
|---------|--------|----------|--------|--------|-------------------------------|--------|--------|-----------------------------------------|--------|--------|-----------------------------|--------|--------|-------------------|--------|--------|----------------------------------|
| 2009    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                             |
| 1st QTR |   | $        | 15,220 |   |                          | $      | 1,378  |                                    |   | $      | 1                           |   |   | $                 | 7,792  |   |                             | $ | 1,481 |   |   | $ | 0.60 |   |
| 2nd QTR |   |     | 15,373 |   |                          |   | 1,566  |                                    |   |   | (231                        | )      |   |              | 11,314 |   |                             |   | 92 |   |   |   | 0.04 |
| 3rd QTR |   |     | 14,357 |   |                          |   | 1,584  |                                    |   |   | 79                          |   |   |              | 9,131  |   |                             |   | 651 |   |   |   | 0.26 |   |
| 4th QTR |   |     | 14,644 |   |                          |   | 1,525  |                                    |   |   | 508                         |   |   |              | 7,602  |   |                             |   | 2,000 |   |   |   | 0.81 |
|    |   | $        | 59,594 |   |                          | $      | 6,053  |                                    |   | $      | 357                         |   |   | $                 | 35,839 |   |                             | $ | 4,224 |   |   | $ | 1.71 |   |
|    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                             |   |   |   |   |   |   |
| 2008    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                             |   |   |   |   |   |   |   |
| 1st QTR |   | $        | 16,586 |   |                          | $      | 1,642  |                                    |   | $      | 66                          |   |   | $                 | 10,560 |   |                             | $ | 782 |   |   | $ | 0.32 |
| 2nd QTR |   |     | 13,968 |   |                          |   | 1,593  |                                    |   |   | 82                          |   |   |              | 10,812 |   |                             |   | (36 | ) |   |   | (0.01 | ) |
| 3rd QTR |   |     | 11,707 |   |                          |   | 1,586  |                                    |   |   | (1,452                      | )      |   |              | 15,795 |   |                             |   | (6,945 | ) |   |   | (2.82 |
| 4th QTR |   |     | 14,003 |   |                          |   | 654    |                                    |   |   | 255                         |   |   |              | 7,579  |   |                             |   | 995 |   |   |   | 0.40 |   |
|    |   | $        | 56,264 |   |                          | $      | 5,475  |                                    |   | $      | (1,049                      | )      |   | $                 | 44,746 |   |                             | $ | (5,204 | ) |   | $ | (2.11 |

----

| Index to Financial Statements                                                                   |   |   |
|-------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                            |   |   |
| Consolidated Financial Statements:                                                              |   |   |
|                                                                                            |   |   |
| Report of Independent Registered Public Accounting Firm                                         |   | 4      |
|                                                                                            |   |   |
| Consolidated Balance Sheets –                                                             |   |   |
|   December 31, 2009 and 2008                                                          |   | 5      |
|                                                                                            |   |   |
| Consolidated Statements of Operations –                                                   |   |   |
|   Years Ended December 31, 2009 and 2008                                              |   | 7      |
|                                                                                            |   |   |
| Consolidated Statements of Shareholders’ Equity –                                   |   |   |
|   Years Ended December 31, 2009 and 2008                                              |   | 8      |
|                                                                                            |   |   |
| Consolidated Statements of Cash Flows –                                                   |   |   |
|   Years Ended December 31, 2009 and 2008                                              |   | 9      |
|                                                                                            |   |   |
| Notes to Consolidated Financial Statements –                                              |   |   |
|   December 31, 2009                                                                   |   | 10     |
|                                                                                            |   |   |
| Financial Statement Schedules:                                                                  |   |   |
|                                                                                            |   |   |
| Schedule I.  Summary of Investments Other Than Investments in Related Parties – |
|   December 31, 2009 and 2008                                                          |   | 36     |
|                                                                                            |   |   |
| Schedule II.  Condensed Financial Information of Registrant –                   |   |   |
|   December 31, 2009 and 2008                                                          |   | 37     |
|                                                                                            |   |   |
| Schedule III.  Supplementary Insurance Information –                            |   |   |
|   December 31, 2009 and 2008                                                          |   | 41     |
|                                                                                            |   |   |
| Schedule IV.  Reinsurance –                                                     |   |   |
|   Years Ended December 31, 2009 and 2008                                              |   | 42     |
|                                                                                            |   |   |
| Schedule V.  Valuation and Qualifying Accounts –                                |   | 43     |
|   Years Ended December 31, 2009 and 2008                                              |   |   |
|                                                                                            |   |   |
| All other Schedules are not required under related instructions or are                          |
|  not applicable and therefore have been omitted.                                           |

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

| /s/ Warren, Averett, Kimbrough & Marino, LLC |
|--------------------------------------------------|
|                                             |   |
| Birmingham, Alabama                              |
| March 31, 2011                                   |   |

----

| The National Security Group, Inc.                                               |
|---------------------------------------------------------------------------------|
|                                                                            |   |   |   |   |   |   |   |   |
| CONSOLIDATED BALANCE SHEETS                                                     |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   |   |   | (Dollars in thousands) |
|                                                                            |   |   |   | December 31, |
| ASSETS                                                                          |   |   | 2009 |   |   | 2008 |
|                                                                            |   |   |   |   |   |   |   |   |
| Investments                                                                     |   |   |   |   |   |   |
|                                                                            | Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2009 - $6,080; |   |   |   |   |   |   |
|                                                                            |   |  2008 - $10,995) |   | $ |         5,942 |   | $ |       10,952 |
|                                                                            | Fixed maturities available-for-sale, at estimated fair value (cost: 2009 - $69,796; |   |   |   |   |   |   |
|                                                                            |   |  2008- $61,796) |   |   |      70,269 |   |   |       58,107 |
|                                                                            | Equity securities available-for-sale, at estimated fair value (cost: 2009 - $5,851 |   |   |   |   |   |   |
|                                                                            |   |  2008 - $5,467) |   |   |         9,035 |   |   |         7,569 |
|                                                                            | Trading securities |   |   |            374 |   |   |            253 |
|                                                                            | Receivable for securities |   |   |               96 |   |   |             513 |
|                                                                            | Mortgage loans on real estate, at cost |   |   |           1,041 |   |   |            502 |
|                                                                            | Investment real estate, at book value (accumulated depreciation: 2009 - $18; 2008 - $18) |   |   |          4,815 |   |   |         4,754 |
|                                                                            | Policy loans |   |   |           1,018 |   |   |            968 |
|                                                                            | Company owned life insurance |   |   |          5,197 |   |   |          1,957 |
|                                                                            | Other invested assets |   |   |         3,933 |   |   |         4,557 |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   | Total Investments |   |   |      101,720 |   |   |       90,132 |
|                                                                            |   |   |   |   |   |   |   |   |
| Cash                                                                            |   |   |         4,686 |   |   |         3,027 |
| Accrued investment income                                                       |   |   |            802 |   |   |            804 |
| Policy receivables and agents' balances, less allowance (2009 - $0; 2008 - $59) |   |   |         9,700 |   |   |          9,179 |
| Reinsurance recoverable                                                         |   |   |            784 |   |   |          4,146 |
| Deferred policy acquisition costs                                               |   |   |        10,210 |   |   |         9,825 |
| Property and equipment, net                                                     |   |   |         2,537 |   |   |         2,844 |
| Deferred income tax asset                                                       |   |   |                - |   |   |          1,839 |
| Accrued income tax recoverable                                                  |   |   |                - |   |   |          2,321 |
| Other assets                                                                    |   |   |            957 |   |   |            773 |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   | Total Assets |   | $ |      131,396 |   | $ |     124,890 |

----

| The National Security Group, Inc.                                                           |                   |
|---------------------------------------------------------------------------------------------|------------------------|
|                                                                                        |                   |   |   |   |   |   |
| CONSOLIDATED BALANCE SHEETS                                                                 |                   |
|                                                                                        |                   |   |   |   |   |   |
|                                                                                        | (Dollars in thousands) |   |
|                                                                                        | December 31,           |   |
| LIABILITIES AND SHAREHOLDERS' EQUITY                                                        |                   | 2009 |   |   | 2008 |   |
|                                                                                        |                   |   |   |   |    |   |
| Property and casualty benefit and loss reserves                                             |                   | $ | 12,646 |   |   | $ | 14,436 |   |
| Accident and health benefit and loss reserves                                               |                   |   | 1,612 |   |   |   | 1,222 |   |
| Life and annuity benefit and loss reserves                                                  |                   |   | 28,579 |   |   |   | 28,045 |   |
| Unearned premiums                                                                           |                   |   | 27,381 |   |   |   | 27,764 |   |
| Policy and contract claims                                                                  |                   |   | 535 |   |   |   | 503 |   |
| Other policyholder funds                                                                    |                   |   | 1,347 |   |   |   | 1,344 |   |
| Long-term debt                                                                              |                   |   | 12,372 |   |   |   | 12,372 |   |
| Accrued income taxes                                                                        |                   |   | 111 |   |   |   | - |   |
| Deferred income tax liability                                                               |                   |   | 61 |   |   |   | - |   |
| Other liabilities                                                                           |                   |   | 5,584 |   |   |   | 4,556 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Liabilities                                                                           |                   |   | 90,228 |   |   |   | 90,242 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Contingencies                                                                               |                   |   | - |   |   |   | - |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Shareholders' Equity                                                                        |                   |   |   |   |   |   |   |   |
| Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding        |                   |   | - |   |   |   | - |   |
| Class A common stock, $1 par value, 2,000,000 shares authorized, none issued or outstanding |                   |   | - |   |   |   | - |   |
| Common stock, $1 par value, 3,000,000 and 10,000,000 shares authorized, respectively,       |                   |   |   |   |   |   |   |   |
| 2,466,600 shares issued and outstanding                                                     |                   |   | 2,467 |   |   |   | 2,467 |   |
| Additional paid-in capital                                                                  |                   |   | 4,951 |   |   |   | 4,951 |   |
| Accumulated other comprehensive income (loss)                                               |                   |   | 2,265 |   |   |   | (1,511 | ) |
| Retained earnings                                                                           |                   |   | 31,485 |   |   |   | 28,741 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Shareholders' Equity                                                                  |                   |   | 41,168 |   |   |   | 34,648 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders' Equity                                                  |                   | $ | 131,396 |   |   | $ | 124,890 |   |

----

| The National Security Group, Inc.                 |   |
|---------------------------------------------------|--------|
|                                              |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS             |   |
|                                              |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |
|                                              |   | (Dollars in thousands |   |
|                                              |   | except per share amounts) |   |
|                                              |   | Year Ended December 31, |   |
|                                              |   | 2009 |   |   | 2008 |   |
| REVENUES                                          |   |   |   |   |    |   |
| Net premiums earned                               |   | $ | 59,594 |   |   | $ | 56,264 |   |
| Net investment income                             |   |   | 5,289 |   |   |   | 4,368 |   |
| Net realized investment gains (losses)            |   |   | 357 |   |   |   | (1,049 | ) |
| Other income                                      |   |   | 764 |   |   |   | 1,107 |   |
|                                              |   |   | 66,004 |   |   |   | 60,690 |   |
|                                              |   |   |   |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 35,839 |   |   |   | 44,746 |   |
| Amortization of deferred policy acquisition costs |   |   | 3,673 |   |   |   | 4,344 |   |
| Commissions                                       |   |   | 7,863 |   |   |   | 8,262 |   |
| General and administrative expenses               |   |   | 10,396 |   |   |   | 8,558 |   |
| Taxes, licenses and fees                          |   |   | 1,631 |   |   |   | 1,447 |   |
| Interest expense                                  |   |   | 1,126 |   |   |   | 1,147 |   |
|                                              |   |   | 60,528 |   |   |   | 68,504 |   |
|                                              |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |
| Income (Loss) Before Income Tax Expense (Benefit) |   |   | 5,476 |   |   |   | (7,814 | ) |
|                                              |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |   |   |   |   |
| Current                                           |   |   | 1,136 |   |   |   | (1,725 | ) |
| Deferred                                          |   |   | 116 |   |   |   | (885 | )  |
|                                              |   |   | 1,252 |   |   |   | (2,610 | ) |
|                                              |   |   |   |   |   |   |   |   |
| Net Income(Loss)                                  |   | $ | 4,224 |   |   | $ | (5,204 | ) |
|                                              |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |
| Net Earnings (Loss) Per Common Share              |   | $ | 1.71 |   |   | $ | (2.11 | ) |

----

| THE NATIONAL SECURITY GROUP, INC.               |                                                                        |
|-------------------------------------------------|-----------------------------------------------------------------------------|
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |                                                                        |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                          |                                                                        |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   | Accumulated |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   | Other |   |   |   |   |   |
|                                            |                                                                        |   | Comprehensive |   | Retained |   | Comprehensive | Common |   | Paid-in |   |
|                                            | Total                                                                       |   | Income (Loss) |   | Earnings |   | Income (Loss) | Stock |   | Capital |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2007                    |  $  48,447                                                   |  $ |                  -    |   | $ | 36,165 |   |  $  4,864 |  $   2,467 |   | $ | 4,951 |   |
| Comprehensive loss:                             |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss for 2008                               |       (5,204)                                 |   |        (5,204) |   |   |        (5,204) |   |                - |                 - |   |   |                - |   |
| Other comprehensive loss, net of tax            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on securities, net              |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| of reclassification adjustment of ($978)   |        (6,147)                           |   |         (6,147) |   |   |                    - |   |      (6,147) |                 - |   |   |                - |   |
| Unrealized loss on interest rate swap           |           (228)           |   |            (228) |   |   |                    - |   |        (228) |                 - |   |   |                - |   |
| Comprehensive loss                              |                                                                        |   |        (11,579) |   |   |   |   |   |   |   |   |   |   |
| Cash dividends ($0.90 per share)                |       (2,220)                                 |   |   |   |   |        (2,220) |   |                - |                 - |   |   |                - |   |
| Balance at December 31, 2008          |       34,648                                  |   |     |   |   |         28,741 |   |        (1,511) |        2,467 |   |   |        4,951 |   |
| Comprehensive income:                           |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income for 2009                             |         4,224                       |   |          4,224 |   |   |          4,224 |   |                - |                 - |   |   |                - |   |
| Other comprehensive income, net of tax          |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on securities, net              |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| of reclassification adjustment of $282     |         3,520                       |   |          3,520 |   |   |                    - |   |       3,520 |                 - |   |   |                - |   |
| Unrealized gain on interest rate swap           |             256 |   |              256 |   |   |                    - |   |          256 |                 - |   |   |                - |   |
| Comprehensive income                            |                                                                        |   |          8,000 |   |   |   |   |   |   |   |   |   |   |
| Cash dividends ($0.60 per share)                |        (1,480)                           |   |   |   |   |         (1,480) |   |                - |                 - |   |   |                - |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2009                    |  $    41,168                                       |   |   |   | $ | 31,485 |   |  $  2,265 |  $   2,467 |   | $ | 4,951 |   |

----

| The National Security Group, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                              |   | (Dollars in thousands)Year ended December 31, |   |
|                                                                                                                                              | 2009   |   |   | 2008 |
| Cash flows from operating activities:                                                                                                             |   |   |   |   |    |   |
|                                                                                                                                              |   |   |   |   |   |   |
| Net income (loss)                                                                                                                                 |   | $ | 4,224 |   |   | $ | (5,204 | ) |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities:                                                       |   |   |   |   |   |   |   |   |
|   Depreciation expense and amortization/accretion, net                                                                                  |   |   | 229 |   |   |   | 409 |   |
|   Increase in cash surrender of company owned life insurance                                                                            |   |   | ( 740 | ) |   |   | 543 |   |
|   Net realized (gains) losses on investments                                                                                            |   |   | ( 357 | ) |   |   | 1,049 |   |
|   Deferred income taxes                                                                                                                 |   |   | 116 |   |   |   | ( 885 | ) |
|   Amortization of deferred policy acquisition costs                                                                                     |   |   | 3,673 |   |   |   | 4,344 |   |
|   Changes in assets and liabilities:                                                                                                    |   |   |   |   |   |   |   |   |
|     Change in receivable for securities                                                                                       |   |   | 417 |   |   |   | ( 513 | ) |
|     Change in accrued investment income                                                                                       |   |   | 2 |   |   |   | ( 10 | ) |
|     Change in reinsurance recoverable                                                                                         |   |   | 3,362 |   |   |   | ( 3,229 | ) |
|     Policy acquisition costs deferred                                                                                         |   |   | ( 4,058 | ) |   |   | ( 5,176 | ) |
|     Change in accrued income taxes                                                                                            |   |   | 2,432 |   |   |   | ( 3,400 | ) |
|     Change in prepaid reinsurance premiums                                                                                    |   |   | ( 10 | ) |   |   | ( 2 | ) |
|     Change in net policy liabilities and claims                                                                               |   |   | ( 1,738 | ) |   |   | 8,105 |   |
|     Change in other liabilities                                                                                               |   |   | 1,284 |   |   |   | ( 2,204 | ) |
|     Other, net                                                                                                                |   |   | ( 113 | ) |   |   | 405 |   |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                                                                               |   |   | 8,723 |   |   |   | ( 5,768 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                             |   |   |   |   |   |   |   |   |
| Purchases of:                                                                                                                                     |   |   |   |   |   |   |   |   |
|   Available-for-sale securities                                                                                                         |   |   | (30,594 | ) |   |   | (22,514 | ) |
|   Trading securities and short-term investments                                                                                         |   |   | ( 141 | ) |   |   | ( 909 | ) |
|   Real estate held for investment                                                                                                       |   |   | ( 66 | ) |   |   | ( 446 | ) |
|   Company owned life insurance                                                                                                          |   |   | ( 2,500 | ) |   |   | ( 2,500 | ) |
|   Other invested assets                                                                                                                 |   |   | ( 108 | ) |   |   | ( 3,170 | ) |
|   Property and equipment                                                                                                                |   |   | ( 116 | ) |   |   | ( 368 | ) |
| Proceeds from sale or maturities of:                                                                                                              |   |   |   |   |   |   |   |   |
|   Held-to-maturity securities                                                                                                           |   |   | 4,926 |   |   |   | 6,377 |   |
|   Available-for-sale securities                                                                                                         |   |   | 22,830 |   |   |   | 28,938 |   |
|   Trading securities and short-term investments                                                                                         |   |   | 20 |   |   |   | 1,795 |   |
|   Real estate held for investment                                                                                                       |   |   | 19 |   |   |   | 720 |   |
|   Other invested assets                                                                                                                 |   |   | 732 |   |   |   | 716 |   |
| Other                                                                                                                                             |   |   | ( 589 | ) |   |   | ( 58 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by investing activities                                                                                     |   |   | ( 5,587 | ) |   |   | 8,581 |   |
| Cash flows from financing activities:                                                                                                             |   |   |   |   |   |   |   |   |
|   (Repayment of) Proceeds from short-term debt                                                                                          |   |   | - |   |   |   | ( 900 | ) |
|   Change in other policyholder funds                                                                                                    |   |   | 3 |   |   |   | 35 |   |
|   Dividends paid                                                                                                                        |   |   | ( 1,480 | ) |   |   | ( 2,220 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
|                   Net cash used in financing activities |   |   | ( 1,477 | ) |   |   | ( 3,085 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash                                                                                                                   |   |   | 1,659 |   |   |   | ( 272 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Cash at beginning of year                                                                                                                         |   |   | 3,027 |   |   |   | 3,299 |   |
| Cash at end of year                                                                                                                               |   | $ | 4,686 |   |   | $ | 3,027 |   |
|                                                                                                                                              |   |
| See accompanying notes to consolidated financial statements.                                                                                      |   |

----

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

----

| ·   | Securities Held-to-Maturity.  Bonds, notes and redeemable preferred stock for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using methods which approximate level yields over the period to maturity. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Securities Available-for-Sale.  Bonds, notes, common stock and non-redeemable preferred stock not classified as either held-to-maturity, or trading are reported at fair value, and adjusted for other-than-temporary declines in fair value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Trading Securities.  Trading securities are classified as such on the balance sheet and reported at fair value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------|

| ·   | the Company has the intent to sell the security |
|--------------------|-------------------------------------------------|

| ·   | it is more likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | the Company does not expect to recover the entire amortized cost basis of the security. |
|--------------------|-----------------------------------------------------------------------------------------|

----

----

----

| Layer        | Reinsurers' Limits of Liability                                   |   |
|--------------|-------------------------------------------------------------------|--------|
| First Layer  |   95% of  $6,500,000 in excess of $3,500,000  |
| Second Layer |   95% of  $7,500,000 in excess of $10,000,000 |
| Third Layer  |  100% of  $25,000,000 in excess of $17,500,000     |
| Fourth Layer |  100% of  $30,000,000 in excess of $42,500,000     |

----

| ·   | This new accounting standard states that an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more-likely-than-not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more-likely-than-not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more-likely-than-not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | This new accounting standard requires that companies record, as of the beginning of the interim period of adoption, a cumulative-effect adjustment to reclassify the noncredit component of a previously recognized OTTI loss from retained earnings to other comprehensive income if the Company does not intend to sell the security and it is more-likely-than-not that the Company will not be required to sell the security before recovery of its amortized cost basis. The adoption had no impact on our financial position or results of operations. The Company had no cumulative-effect adjustment upon adoption at the beginning of the second quarter. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                                                |   | 2009   |   |   | 2008   |   |
|-------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| NSIC - including realized capital gains (losses) of $234 and $(1,509), respectively |   | $      | 1,314  |   |   | $      | (442 | ) |
| NSFC - including realized capital gains of $198 and $615, respectively              |   | $      | 4,179  |   |   | $      | (5,730 | ) |
| Omega - including realized capital (losses) of $(78) and $(231), respectively       |   | $      | 246    |   |   | $      | (344 | ) |
|                                                                                |   |   |   |   |   |   |   |   |
| Statutory risk-based adjusted capital:                                              |   |   |   |   |   |   |   |   |
| NSIC - including AVR of $517 and $191, respectively                                 |   | $      | 9,642  |   |   | $      | 8,396 |   |
| NSFC                                                                                |   | $      | 28,742 |   |   | $      | 26,783 |   |
| Omega                                                                               |   | $      | 9,568  |   |   | $      | 9,087 |   |

----

|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |
|--------------------------------------------------|--------|------------------------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                             |   | (Dollars in thousands) |   |
|                                             |   | December 31, 2009      |   |
|                                             |   |                   |   |   | Gross      |   |   | Gross      |   |   |   |   |
|                                             |   | Amortized              |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost                   |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |                   |   |   |       |   |   |       |   |   |   |   |
| Corporate debt securities                        |   | $                      | 26,786 |   |       | $      | 1,557  |       |   | $      | 519    |   |   | $ | 27,824 |   |
| Mortgage backed securities                       |   |                   | 8,203  |   |       |   | 282    |       |   |   | 165    |   |   |   | 8,320 |   |
| Private label mortgage backed securities         |   |                   | 9,634  |   |       |   | 72     |       |   |   | 810    |   |   |   | 8,896 |   |
| Obligations of states and political subdivisions |   |                   | 15,641 |   |       |   | 211    |       |   |   | 336    |   |   |   | 15,516 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 9,532  |   |       |   | 261    |       |   |   | 80     |   |   |   | 9,713 |   |
| Total fixed maturities                           |   |                   | 69,796 |   |       |   | 2,383  |       |   |   | 1,910  |   |   |   | 70,269 |   |
| Equity securities                                |   |                   | 5,851  |   |       |   | 3,990  |       |   |   | 806    |   |   |   | 9,035 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 75,647 |   |       | $      | 6,373  |       |   | $      | 2,716  |   |   | $ | 79,304 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Mortgage backed securities                       |   | $                      | 3,175  |   |       | $      | 101    |       |   | $      | 25     |   |   |   | 3,251 |   |
| Private label mortgage backed securities         |   |                   | 187    |   |       |   | 5      |       |   |   | -      |   |   |   | 192 |   |
| Obligations of states and political subdivisions |   |                   | 2,139  |   |       |   | 51     |       |   |   | 8      |   |   |   | 2,182 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 441    |   |       |   | 14     |       |   |   | -      |   |   |   | 455 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 5,942  |   |       | $      | 171    |       |   | $      | 33     |   |   | $ | 6,080 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                             |   | December 31, 2008      |   |
|                                             |   |                   |   |   |       | Gross  |   |       | Gross  |   |   |   |   |   |
|                                             |   | Amortized              |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost                   |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Corporate debt securities                        |   | $                      | 21,153 |   |       | $      | 84     |       |   | $      | 2,277  |   |   | $ | 18,960 |   |
| Mortgage backed securities                       |   |                   | 11,101 |   |       |   | 257    |       |   |   | 24     |   |   |   | 11,334 |   |
| Private label mortgage backed securities         |   |                   | 6,590  |   |       |   | 2      |       |   |   | 1,369  |   |   |   | 5,223 |   |
| Obligations of states and political subdivisions |   |                   | 13,401 |   |       |   | 81     |       |   |   | 875    |   |   |   | 12,607 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 9,551  |   |       |   | 433    |       |   |   | 1      |   |   |   | 9,983 |   |
| Total fixed maturities                           |   |                   | 61,796 |   |       |   | 857    |       |   |   | 4,546  |   |   |   | 58,107 |   |
| Equity securities                                |   |                   | 5,467  |   |       |   | 3,130  |       |   |   | 1,028  |   |   |   | 7,569 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 67,263 |   |       | $      | 3,987  |       |   | $      | 5,574  |   |   | $ | 65,676 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Corporate debt securities                        |   | $                      | 88     |   |       | $      | -      |       |   | $      | 3      |   |   | $ | 85 |   |
| Mortgage backed securities                       |   |                   | 4,087  |   |       |   | 20     |       |   |   | 41     |   |   |   | 4,066 |   |
| Private label mortgage backed securities         |   |                   | 249    |   |       |   | -      |       |   |   | 1      |   |   |   | 248 |   |
| Obligations of states and political subdivisions |   |                   | 2,141  |   |       |   | 34     |       |   |   | 14     |   |   |   | 2,161 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 4,387  |   |       |   | 48     |       |   |   | -      |   |   |   | 4,435 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 10,952 |   |       | $      | 102    |       |   | $      | 59     |   |   | $ | 10,995 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                             |   |

----

|                                   |   |                   |   |   |   |   |
|----------------------------------------|--------|------------------------|--------|--------|--------|--------|
|                                   |   | (Dollars in Thousands) |   |
|                                   |   | Amortized              |   |   | Fair   |   |
| Available-for-sale securities:         |   | Cost                   |   |   | Value  |   |
| Due in one year or less                |   | $                      | 419    |   |   | $      | 425 |   |
| Due after one year through five years  |   |                   | 14,320 |   |   |   | 15,551 |   |
| Due after five years through ten years |   |                   | 24,013 |   |   |   | 24,433 |   |
| Due after ten years                    |   |                   | 31,044 |   |   |   | 29,860 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 69,796 |   |   | $      | 70,269 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Held-to-maturity securities:           |   |                   |   |   |   |   |   |   |
| Due in one year or less                |   | $                      | 303    |   |   | $      | 309 |   |
| Due after one year through five years  |   |                   | 802    |   |   |   | 828 |   |
| Due after five years through ten years |   |                   | 1,929  |   |   |   | 1,991 |   |
| Due after ten years                    |   |                   | 2,908  |   |   |   | 2,952 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 5,942  |   |   | $      | 6,080 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2009   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 1,856  |   |                | $      | 21 |   |   | $ | 6,772 |   |   | $ | 498 |   |   | $ | 8,628 |   |   | $ | 519 |   |   |   | 23 |   |
| Mortgage backed securities           |   |                   | 1,443  |   |                |   | 156 |   |   |   | 71 |   |   |   | 9 |   |   |   | 1,514 |   |   |   | 165 |   |   |   | 6 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 2,660  |   |                |   | 72 |   |   |   | 4,651 |   |   |   | 738 |   |   |   | 7,311 |   |   |   | 810 |   |   |   | 15 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 5,889  |   |                |   | 199 |   |   |   | 991 |   |   |   | 137 |   |   |   | 6,880 |   |   |   | 336 |   |   |   | 21 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | 3,708  |   |                |   | 80 |   |   |   | - |   |   |   | - |   |   |   | 3,708 |   |   |   | 80 |   |   |   | 11 |   |
| Equity securities                    |   |                   | 78     |   |                |   | 13 |   |   |   | 2,283 |   |   |   | 793 |   |   |   | 2,361 |   |   |   | 806 |   |   |   | 13 |   |
|                                 |   | $                      | 15,634 |   |                | $      | 541 |   |   | $ | 14,768 |   |   | $ | 2,175 |   |   | $ | 30,402 |   |   | $ | 2,716 |   |   |   | 89 |   |

----

|                                 |   | (Dollars in thousands) |   |   | December 31, 2008   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 9,904  |   |                | $      | 1,337 |   |   | $ | 4,396 |   |   | $ | 940 |   |   | $ | 14,300 |   |   | $ | 2,277 |   |   |   | 45 |   |
| Mortgage backed securities           |   |                   | 315    |   |                |   | 5 |   |   |   | 1,868 |   |   |   | 19 |   |   |   | 2,183 |   |   |   | 24 |   |   |   | 9 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 412    |   |                |   | 87 |   |   |   | 4,354 |   |   |   | 1,282 |   |   |   | 4,766 |   |   |   | 1,369 |   |   |   | 11 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 3,745  |   |                |   | 332 |   |   |   | 4,812 |   |   |   | 543 |   |   |   | 8,557 |   |   |   | 875 |   |   |   | 25 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | 295    |   |                |   | 1 |   |   |   | - |   |   |   | - |   |   |   | 295 |   |   |   | 1 |   |   |   | 1 |   |
| Equity securities                    |   |                   | 981    |   |                |   | 446 |   |   |   | 731 |   |   |   | 582 |   |   |   | 1,712 |   |   |   | 1,028 |   |   |   | 12 |   |
|                                 |   | $                      | 15,652 |   |                | $      | 2,208 |   |   | $ | 16,161 |   |   | $ | 3,366 |   |   | $ | 31,813 |   |   | $ | 5,574 |   |   |   | 103 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2009   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | -      |   |                | $      | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   |   | - |   |
| Mortgage backed securities           |   |                   | -      |   |                |   | - |   |   |   | 333 |   |   |   | 25 |   |   |   | 333 |   |   |   | 25 |   |   |   | 2 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 160    |   |                |   | 4 |   |   |   | 351 |   |   |   | 4 |   |   |   | 511 |   |   |   | 8 |   |   |   | 2 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                 |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | $                      | 160    |   |                | $      | 4 |   |   | $ | 684 |   |   | $ | 29 |   |   | $ | 844 |   |   | $ | 33 |   |   |   | 4 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2008   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 84     |   |                | $      | 3 |   |   | $ | - |   |   | $ | - |   |   | $ | 84 |   |   | $ | 3 |   |   |   | 1 |   |
| Mortgage backed securities           |   |                   | -      |   |                |   | - |   |   |   | 2,408 |   |   |   | 41 |   |   |   | 2,408 |   |   |   | 41 |   |   |   | 7 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 249    |   |                |   | 1 |   |   |   | - |   |   |   | - |   |   |   | 249 |   |   |   | 1 |   |   |   | 1 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | -      |   |                |   | - |   |   |   | 646 |   |   |   | 14 |   |   |   | 646 |   |   |   | 14 |   |   |   | 2 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                 |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | $                      | 333    |   |                | $      | 4 |   |   | $ | 3,054 |   |   | $ | 55 |   |   | $ | 3,387 |   |   | $ | 59 |   |   |   | 11 |   |

----

|                                              | (Dollars in thousands)  |   |
|---------------------------------------------------|-------------------------|--------|
|                                              | Year ended December 31, |   |
|                                              |                    | 2009   |   |   | 2008 |   |
|                                              |                    |   |   |   |   |   |
| Fixed maturities                                  |                    | $      | 4,075 |   |   | $ | 4,357 |   |
| Equity securities                                 |                    |   | 199 |   |   |   | 364 |   |
| Mortgage loans on real estate                     |                    |   | 62 |   |   |   | 32 |   |
| Investment real estate                            |                    |   | 82 |   |   |   | 65 |   |
| Policy loans                                      |                    |   | 73 |   |   |   | 68 |   |
| Company owned life insurance                      |                    |   | 740 |   |   |   | (543 | ) |
| Other, principally short-term investments         |                    |   | 346 |   |   |   | 367 |   |
|                                              |                    |   | 5,577 |   |   |   | 4,710 |   |
| Less: Investment expenses                         |                    |   | 288 |   |   |   | 342 |   |
| Net investment income                             |                    | $      | 5,289 |   |   | $ | 4,368 |   |
|                                              |                    |   |   |   |   |   |   |   |
| An analysis of investment gains (losses) follows: | Year ended December 31, |   |
|                                              |                    |   | 2009 |   |   |   | 2008 |   |
| Net realized investment gains (losses):           |                    |   |   |   |   |   |   |   |
| Fixed maturities                                  |                    | $      | 548 |   |   | $ | 179 |   |
| Equity securities                                 |                    |   | 234 |   |   |   | 1,313 |   |
| Other, principally real estate                    |                    |   | 18 |   |   |   | 432 |   |
| Other than temporary impairments                  |                    |   | (443 | ) |   |   | (2,973 | ) |
|                                              |                    | $      | 357 |   |   | $ | (1,049 | ) |

----

|                                                |   |                    |   |   |   |   |
|-----------------------------------------------------|--------|-------------------------|--------|--------|--------|--------|
|                                                |   | (Dollars in thousands)  |   |
|                                                |   | Year ended December 31, |   |
|                                                |   | 2009                    |   |   | 2008   |   |
|                                                |   |                    |   |   |   |   |
| Net change in unrealized appreciation on available- |   |                    |   |   |   |   |
| for-sale securities before deferred tax             |   | $                       | 5,304  |   |   | $      | (8,335 | ) |
| Deferred income tax                                 |   |                    | (1,784 | )      |   |   | 2,188 |   |
|                                                |   |                    |   |   |   |   |   |   |
| Net change in unrealized appreciation on available- |   |                    |   |   |   |   |   |   |
| for-sale securities                                 |   | $                       | 3,520  |   |   | $      | (6,147 | ) |

----

|                                 |   | Fair Value Measurements at Reporting Date Using |   |
|--------------------------------------|--------|-------------------------------------------------|--------|
| Description                          |   | Total                                           |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
| Financial Assets                     |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Fixed maturities available-for-sale  |   | $                                               | 70,269 |   |   | $ | 9,214 |   |   | $ | 60,478 |   |   | $ | 577 |   |
| Short-term investments               |   |                                            | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Trading securities                   |   |                                            | 374    |   |   |   | 374 |   |   |   | - |   |   |   | - |   |
| Equity securities available-for-sale |   |                                            | 9,035  |   |   |   | 8,373 |   |   |   | - |   |   |   | 662 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Assets               |   | $                                               | 79,678 |   |   | $ | 17,961 |   |   | $ | 60,478 |   |   | $ | 1,239 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities                |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap                   |   | $                                               | 60     |   |   | $ | - |   |   | $ | - |   |   | $ | 60 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Liabilities          |   | $                                               | 60     |   |   | $ | - |   |   | $ | - |   |   | $ | 60 |   |

|                                                           |   | For the year ended December 31, 2009 |   |
|----------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                           |   | Fixed Maturities Available for sale  |   |   | Equity Securities Available for Sale |   |   | Interest |   |
| (In Thousands)                                                 |   | Rate Swap                            |   |
| Beginning balance                                              |   | $                                    | 652    |   |   | $ | 733 |   |   | $ | (316 | ) |
|   Total gains or losses (realized and                |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     unrealized):                           |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     Included in earnings                   |   |                                 | -      |   |   |   | - |   |   |   | - |   |
|     Included in other comprehensive income |   |                                 | (75    | ) |   |   | (71 | ) |   |   | 256 |   |
|   Purchases, sales, issuances and settlements,       |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     net                                    |   |                                 | -      |   |   |   | - |   |   |   | - |   |
|   Transfers in/(out) of Level 3                      |   |                                 | -      |   |   |   | - |   |   |   | - |   |
| Ending balance                                                 |   | $                                    | 577    |   |   | $ | 662 |   |   | $ | (60 | ) |
| The amount of total gains or losses for the                    |   |                                 |   |   |   |   |   |   |   |   |   |   |
|   period included in earnings attributable to the    |   |                                 |   |   |   |   |   |   |   |   |   |   |
|   change in unrealized gains or losses relating      |   |                                 |   |   |   |   |   |   |   |   |   |   |
|   to assets and liabilities still held as of         |   |                                 |   |   |   |   |   |   |   |   |   |   |
|   December 31, 2009                                  |   | $                                    | -      |   |   | $ | - |   |   | $ | - |   |

----

|                                 |   | Fair Value Measurements at Reporting Date Using |   |
|--------------------------------------|--------|-------------------------------------------------|--------|
|                                 |   |                                            |   |   | Quoted Prices in Active Markets for Identical Assets |   |   | Significant Other Observable Inputs |   |   | Significant Unobservable Inputs |   |
| Description                          |   | 12/31/2008                                      |   |   | (Level 1) |   |   | (Level 2) |   |   | (Level 3) |   |
| Financial Assets                     |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Fixed maturities available-for-sale  |   | $                                               | 58,107 |   |   | $ | 9,726 |   |   | $ | 47,729 |   |   | $ | 652 |   |
| Short-term investments               |   |                                            | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Trading securities                   |   |                                            | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Equity securities available-for-sale |   |                                            | 7,569  |   |   |   | 6,836 |   |   |   | - |   |   |   | 733 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Assets               |   | $                                               | 65,676 |   |   | $ | 16,562 |   |   | $ | 47,729 |   |   | $ | 1,385 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities                |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap                   |   | $                                               | 316    |   |   | $ | - |   |   | $ | - |   |   | $ | 316 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Liabilities          |   | $                                               | 316    |   |   | $ | - |   |   | $ | - |   |   | $ | 316 |   |

|                                                           |   | For the year ended December 31, 2008 |   |   |                                 |   |
|----------------------------------------------------------------|--------|--------------------------------------|--------|--------|--------------------------------------|--------|
|                                                           |   | Fixed Maturities Available for sale  |   |   | Equity Securities Available for Sale |   |   | Interest |   |
| (In Thousands)                                                 |   | Rate Swap                            |   |
| Year ended December 31, 2008                                   |   |                                 |   |   |                                 |   |   |   |   |
| Beginning balance                                              |   | $                                    | 702    |   |                                 | $      | 999 |   |   | $ | (88 | ) |
|   Total gains or losses (realized and                |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     unrealized):                           |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     Included in earnings                   |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
|     Included in other comprehensive income |   |                                 | (50    | )      |                                 |   | (266 | ) |   |   | (228 | ) |
|   Purchases, sales, issuances and settlements,       |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     net                                    |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
|   Transfers in/(out) of Level 3                      |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
| Ending balance                                                 |   | $                                    | 652    |   |                                 | $      | 733 |   |   | $ | (316 | ) |
| The amount of total gains or losses for the                    |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|   period included in earnings attributable to the    |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|   change in unrealized gains or losses relating      |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|   to assets and liabilities still held as of         |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|   December 31, 2008                                  |   | $                                    | -      |   |                                 | $      | - |   |   | $ | - |   |

----

|                                |   | In Thousands of Dollars at December 31, |   |
|-------------------------------------|--------|-----------------------------------------|--------|
|                                |   | 2009                                    |   |   | 2008 |   |
|                                |   | Carrying                                |   |   | Estimated |   |   | Carrying |   |   | Estimated |   |
|                                |   | Value                                   |   |   | Fair Value |   |   | Value |   |   | Fair Value |   |
| Assets and related instruments      |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans                      |   | $                                       | 1,041  |   |   | $ | 1,041 |   |   | $ | 502 |   |   | $ | 502 |   |
| Policy loans                        |   |                                    | 1,018  |   |   |   | 1,018 |   |   |   | 968 |   |   |   | 968 |   |
| Company owned life insurance        |   |                                    | 5,197  |   |   |   | 5,197 |   |   |   | 1,957 |   |   |   | 1,957 |   |
| Other invested assets               |   |                                    | 3,933  |   |   |   | 3,933 |   |   |   | 4,557 |   |   |   | 4,557 |   |
|                                |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and related instruments |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other policyholder funds            |   |                                    | 1,347  |   |   |   | 1,347 |   |   |   | 1,344 |   |   |   | 1,344 |   |
| Long-term debt                      |   |                                    | 12,372 |   |   |   | 12,372 |   |   |   | 12,372 |   |   |   | 12,372 |   |

|                                 |   | (Dollars in Thousands) |   |
|--------------------------------------|--------|------------------------|--------|
|                                 |   | 2009                   |   |   | 2008 |   |
| Building and improvements            |   | $                      | 3,196  |   |   | $ | 3,196 |   |
| Electronic data processing equipment |   |                   | 2,472  |   |   |   | 2,549 |   |
| Furniture and fixtures               |   |                   | 1,005  |   |   |   | 1,085 |   |
|                                 |   |                   | 6,673  |   |   |   | 6,830 |   |
| Less accumulated depreciation        |   |                   | 4,136  |   |   |   | 3,986 |   |
|                                 |   | $                      | 2,537  |   |   | $ | 2,844 |   |

----

|                                                 |   | (Dollars in Thousands) |   |
|------------------------------------------------------|--------|------------------------|--------|
|                                                 |   | December 31,           |   |   | December 31, |   |
|                                                 |   | 2009                   |   |   | 2008 |   |
| General insurance expenses                           |   | $                      | 1,135  |   |   | $ | 769 |   |
| Unearned premiums                                    |   |                   | 1,814  |   |   |   | 1,885 |   |
| Claims liabilities                                   |   |                   | 298    |   |   |   | 337 |   |
| Unrealized losses on securities available-for-sale   |   |                   | -      |   |   |   | 392 |   |
| Other than temporary impairments on securities owned |   |                   | 501    |   |   |   | 734 |   |
|   Deferred tax assets                      |   |                   | 3,748  |   |   |   | 4,117 |   |
|                                                 |   |                   |   |   |   |   |   |   |
| Depreciation                                         |   |                   | (126   | ) |   |   | (118 | ) |
| Deferred policy acquisition costs                    |   |                   | (2,291 | ) |   |   | (2,160 | ) |
| Unrealized gains on securities available-for-sale    |   |                   | (1,392 | ) |   |   | - |   |
|   Deferred tax liabilities                 |   |                   | (3,809 | ) |   |   | (2,278 | ) |
|                                                 |   |                   |   |   |   |   |   |   |
| Net deferred tax (liability) asset                   |   | $                      | (61    | ) |   | $ | 1,839 |   |

|                                                 |   | (Dollars in thousands)  |   |
|------------------------------------------------------|--------|-------------------------|--------|
|                                                 |   | Year ended December 31, |   |
|                                                 |   | 2009                    |   |   | 2008 |   |
|                                                 |   |                    |   |   |   |   |
| Federal income tax rate applied to pre-tax income    |   | $                       | 1,862  |   |   | $ | (2,657 | ) |
| Dividends received deduction and tax-exempt interest |   |                    | (201   | ) |   |   | (233 | ) |
| Company owned life insurance                         |   |                    | (252   | ) |   |   | 185 |   |
| Small life deduction                                 |   |                    | (145   | ) |   |   | (169 | ) |
| Other, net                                           |   |                    | (12    | ) |   |   | 264 |   |
|                                                 |   |                    |   |   |   |   |   |   |
| Federal income tax expense (benefit)                 |   | $                       | 1,252  |   |   | $ | (2,610 | ) |

|                              |   | Year ended December 31, |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | 2009                    |   |   | 2008 |   |
|                              |   |                    |   |   |   |   |
| Deferred policy acquisition costs |   | $                       | 131    |   |   | $ | 261 |   |
| Other-than-temporary impairments  |   |                    | 233    |   |   |   | (734 | )  |
| Unearned premiums                 |   |                    | 71     |   |   |   | (362 | ) |
| General insurance expenses        |   |                    | (366   | ) |   |   | 69 |   |
| Depreciation                      |   |                    | 8      |   |   |   | (40 | )  |
| Claim liabilities                 |   |                    | 39     |   |   |   | (79 | )  |
|                              |   |                    |   |   |   |   |   |   |
|                              |   | $                       | 116    |   |   | $ | (885 | )  |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (Dollars in thousands) |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2009                   |   |   | 2008 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                   |   |   |   |   |
| Subordinated debentures issued on December 15, 2005 with fixed interest rate of 8.83% each distribution period thereafter until December 15, 2015 when the coupon rate shall equal the 3-month LIBOR plus 3.75% applied to the outstanding principal; maturity December 2035.  Interest payments due quarterly.  All may be redeemed at any time following the tenth anniversary of issuance.  Unsecured. |   | $                      | 9,279  |   |   | $ | 9,279 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                   |   |   |   |   |   |   |
| Subordinated debentures issued on June 21, 2007 with a floating interest rate equal to the 3 Month LIBOR plus 3.40% applied to the outstanding principal; maturity June 15, 2037. Interest payments due quarterly.  All may be redeemed at any time following the fifth anniversary of issuance.  Unsecured.                                                                                                        |   |                   | 3,093  |   |   |   | 3,093 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                      | 12,372 |   |   | $ | 12,372 |   |

----

|                                                          |   | (Dollars in thousands) |   |
|---------------------------------------------------------------|--------|------------------------|--------|
|                                                          |   | 2009                   |   |   |    2008 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |
|    reserves at beginning of year               |   | $                      | 14,436 |   |   | $ | 11,973 |   |
| Less reinsurance recoverables on                              |   |                   |   |   |   |   |   |   |
|    unpaid losses                               |   |                   | 2,421  |   |   |   | 555 |   |
| Net balances at beginning of year                             |   |                   | 12,015 |   |   |   | 11,418 |   |
| Provision for claims and claim adjustment                     |   |                   |   |   |   |   |   |   |
|    expenses for claims arising in current year |   |                   | 34,239 |   |   |   | 43,284 |   |
| Estimated claims and claim adjustment                         |   |                   |   |   |   |   |   |   |
|    expenses for claims arising in prior years  |   |                   | (2,626 | ) |   |   | (2,374 | ) |
| Total increases                                               |   |                   | 31,613 |   |   |   | 40,910 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |   |   |
|    payments for claims arising in:             |   |                   |   |   |   |   |   |   |
|       Current year              |   |                   | 25,941 |   |   |   | 35,516 |   |
|       Prior years               |   |                   | 5,590  |   |   |   | 4,797 |   |
| Total payments                                                |   |                   | 31,531 |   |   |   | 40,313 |   |
| Net balance at end of year                                    |   |                   | 12,097 |   |   |   | 12,015 |   |
| Plus reinsurance recoverables on                              |   |                   |   |   |   |   |   |   |
|    unpaid losses                               |   |                   | 549    |   |   |   | 2,421 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |   |   |
|    reserves at end of year                     |   | $                      | 12,646 |   |   | $ | 14,436 |   |
|                                                          |   |                   |   |   |   |   |   |   |
|                                                          |   |                   |   |   |   |   |   |   |

----

|    |   | (Dollars in Thousands) |
|---------|--------|------------------------|
|    |   | 2009                   |
|    |   | Life                   |   | Property & Casualty |
|    |   |  Written          |   |  Earned |   |  Written |   |  Earned |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
| Direct  |   | $                      |          7,251 |   |  $ |    7,247 |   |  $ |       58,185 |   |  $ |       59,213 |
| Assumed |   |                   |                    - |   |   |               - |   |   |                    - |   |   |                    - |
| Ceded   |   |                   |              (48) |   |   |          (48) |   |   |       (6,660) |   |   |        (6,818) |
| Net     |   | $                      |         7,203 |   |  $ |     7,199 |   |  $ |       51,525 |   |  $ |      52,395 |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
|    |   | 2008                   |
|    |   | Life                   |   |   Property & Casualty |
|    |   |  Written          |   |  Earned |   |  Written |   |  Earned |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
| Direct  |   | $                      |         7,049 |   |  $ |    7,003 |   |  $ |        61,197 |   |  $ |      55,866 |
| Assumed |   |                   |                    - |   |   |               - |   |   |                    - |   |   |                    - |
| Ceded   |   |                   |              (47) |   |   |          (47) |   |   |       (6,487) |   |   |       (6,558) |
| Net     |   | $                      |         7,002 |   |  $ |    6,956 |   |  $ |       54,710 |   |  $ |      49,308 |

----

----

----

|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|-----------------------------------|--------|--------|---------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
| (Dollars in thousands)            |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   | Total  |    |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| December 31, 2009                 |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Selected Assets                   |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Investments                       |   | $      | 101,720 |   |                         | $      | 60,768 |                      |   | $      | 40,079                   |   |   | $ | 873 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Reinsurance recoverable           |   | $      | 784     |   |                         | $      | 784    |                      |   | $      | -                        |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Deferred policy acquisition costs |   | $      | 10,210  |   |                         | $      | 3,915  |                      |   | $      | 6,295                    |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Assets                      |   | $      | 131,396 |   |                         | $      | 79,321 |                      |   | $      | 49,872                   |   |   | $ | 2,203 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Liabilities                 |   | $      | 90,228  |   |                         | $      | 43,099 |                      |   | $      | 34,348                   |   |   | $ | 12,781 |   |

|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|-----------------------------------|--------|--------|---------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
| (Dollars in thousands)            |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   | Total  |    |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| December 31, 2008                 |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Selected Assets                   |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Investments                       |   | $      | 90,132  |   |                         | $      | 56,422 |                      |   | $      | 33,200                   |   |   | $ | 510 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Reinsurance recoverable           |   | $      | 4,146   |   |                         | $      | 4,146  |                      |   | $      | -                        |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Deferred policy acquisition costs |   | $      | 9,825   |   |                         | $      | 4,037  |                      |   | $      | 5,788                    |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Assets                      |   | $      | 124,890 |   |                         | $      | 78,802 |                      |   | $      | 43,653                   |   |   | $ | 2,435 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Liabilities                 |   | $      | 90,242  |   |                         | $      | 45,476 |                      |   | $      | 31,627                   |   |   | $ | 13,139 |   |

----

| (Dollars in thousands)                            |   |   |   |   |                         |   |   |                      |   |   |                     |   |
|---------------------------------------------------|--------|--------|--------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
|                                              |   | Total  |   |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| Year ended December 31, 2009                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| REVENUE                                           |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| Net premiums earned                               |   | $      | 59,594 |   |                         | $      | 52,395 |                      |   | $      | 7,199                    |   |   | $ | - |   |
| Net investment income                             |   |   | 5,289  |   |                         |   | 3,125  |                      |   |   | 2,114                    |   |   |   | 50 |   |
| Net realized investment gains                     |   |   | 357    |   |                         |   | 120    |                      |   |   | 234                      |   |   |   | 3 |   |
| Other income                                      |   |   | 764    |   |                         |   | 761    |                      |   |   | 3                        |   |   |   | - |   |
|                                              |   |   | 66,004 |   |                         |   | 56,401 |                      |   |   | 9,550                    |   |   |   | 53 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 35,839 |   |                         |   | 30,908 |                      |   |   | 4,931                    |   |   |   | - |   |
| Amortization of deferred policy acquisition costs |   |   | 3,673  |   |                         |   | 3,397  |                      |   |   | 276                      |   |   |   | - |   |
| Commissions                                       |   |   | 7,863  |   |                         |   | 7,317  |                      |   |   | 546                      |   |   |   | - |   |
| General and administrative expenses               |   |   | 10,396 |   |                         |   | 6,775  |                      |   |   | 2,543                    |   |   |   | 1,078 |   |
| Insurance taxes, licenses and fees                |   |   | 1,631  |   |                         |   | 1,387  |                      |   |   | 244                      |   |   |   | - |   |
| Interest expense                                  |   |   | 1,126  |   |                         |   | -      |                      |   |   | 49                       |   |   |   | 1,077 |   |
|                                              |   |   | 60,528 |   |                         |   | 49,784 |                      |   |   | 8,589                    |   |   |   | 2,155 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Income (Loss) Before Income Taxes                 |   |   | 5,476  |   |                         |   | 6,617  |                      |   |   | 961                      |   |   |   | (2,102 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Current                                           |   |   | 1,136  |   |                         |   | 1,369  |                      |   |   | 105                      |   |   |   | (338 | ) |
| Deferred                                          |   |   | 116    |   |                         |   | 97     |                      |   |   | 392                      |   |   |   | (373 | ) |
|                                              |   |   | 1,252  |   |                         |   | 1,466  |                      |   |   | 497                      |   |   |   | (711 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| NET INCOME (LOSS)                                 |   | $      | 4,224  |   |                         | $      | 5,151  |                      |   | $      | 464                      |   |   | $ | (1,391 | ) |

----

| (Dollars in thousands)                            |   |   |   |   |                         |   |   |                      |   |   |                     |   |
|---------------------------------------------------|--------|--------|--------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
|                                              |   | Total  |   |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| Year ended December 31, 2008                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| REVENUE                                           |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| Net premiums earned                               |   | $      | 56,264 |   |                         | $      | 49,308 |                      |   | $      | 6,956                    |   |   | $ | - |   |
| Net investment income                             |   |   | 4,368  |   |                         |   | 2,309  |                      |   |   | 1,940                    |   |   |   | 119 |   |
| Net realized investment (losses) gains            |   |   | (1,049 | )      |                         |   | 372    |                      |   |   | (1,423                   | )      |   |   | 2 |   |
| Other income                                      |   |   | 1,107  |   |                         |   | 1,047  |                      |   |   | 60                       |   |   |   | - |   |
|                                              |   |   | 60,690 |   |                         |   | 53,036 |                      |   |   | 7,533                    |   |   |   | 121 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 44,746 |   |                         |   | 39,719 |                      |   |   | 5,027                    |   |   |   | - |   |
| Amortization of deferred policy acquisition costs |   |   | 4,344  |   |                         |   | 3,312  |                      |   |   | 1,032                    |   |   |   | - |   |
| Commissions                                       |   |   | 8,262  |   |                         |   | 7,772  |                      |   |   | 490                      |   |   |   | - |   |
| General and administrative expenses               |   |   | 8,558  |   |                         |   | 6,722  |                      |   |   | 1,614                    |   |   |   | 222 |   |
| Insurance taxes, licenses and fees                |   |   | 1,447  |   |                         |   | 1,159  |                      |   |   | 288                      |   |   |   | - |   |
| Interest expense                                  |   |   | 1,147  |   |                         |   | 1      |                      |   |   | 61                       |   |   |   | 1,085 |   |
|                                              |   |   | 68,504 |   |                         |   | 58,685 |                      |   |   | 8,512                    |   |   |   | 1,307 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Loss Before Income Taxes                          |   |   | (7,814 | )      |                         |   | (5,649 | )                         |   |   | (979                     | )      |   |   | (1,186 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Current                                           |   |   | (3,495 | )      |                         |   | (2,919 | )                         |   |   | (281                     | )      |   |   | (295 | ) |
| Deferred                                          |   |   | 885    |   |                         |   | 867    |                      |   |   | 161                      |   |   |   | (143 | ) |
|                                              |   |   | (2,610 | )      |                         |   | (2,052 | )                         |   |   | (120                     | )      |   |   | (438 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| NET LOSS                                          |   | $      | (5,204 | )      |                         | $      | (3,597 | )                         |   | $      | (859                     | )      |   | $ | (748 | ) |

----

----

| THE NATIONAL SECURITY GROUP, INC.                                              |   |
|--------------------------------------------------------------------------------|--------|
| SCHEDULE I. SUMMARY OF INVESTMENTS (CONSOLIDATED)                         |   |
| (Dollars in Thousands)                                                         |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   | Amount per |   |   |   |   |   |   |   |   | Amount per |   |
|                                                                           |   |   |   |   | Fair |   |   |           the Balance |   |   |   |   |   | Fair |   |   |           the Balance |   |
|                                                                           |   | Cost |   |   | Value |   |   | Sheet |   |   | Cost |   |   | Value |   |   | Sheet |   |
| Securities Held-to-Maturity:                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States government . . . . . . . . . . .                                 |   | $ | 441 |   |   | $ | 455 |   |   | $ | 441 |   |   | $ | 4,387 |   |   | $ | 4,435 |   |   | $ | 4,387 |   |
| States, municipalities and                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| political subdivisions . . .                                                   |   |   | 2,139 |   |   |   | 2,182 |   |   |   | 2,139 |   |   |   | 2,141 |   |   |   | 2,161 |   |   |   | 2,141 |   |
| Mortgage backed securities . . . . . . . . . . .                               |   |   | 3,175 |   |   |   | 3,251 |   |   |   | 3,175 |   |   |   | 4,087 |   |   |   | 4,066 |   |   |   | 4,087 |   |
| Private label mortgage backed securities . . . . .                             |   |   | 187 |   |   |   | 192 |   |   |   | 187 |   |   |   | 249 |   |   |   | 248 |   |   |   | 249 |   |
| Industrial and Miscellaneous . . . . . . . . .                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 88 |   |   |   | 85 |   |   |   | 88 |   |
| Total Securities Held-to-Maturity . . . . . . .                                |   |   | 5,942 |   |   |   | 6,080 |   |   |   | 5,942 |   |   |   | 10,952 |   |   |   | 10,995 |   |   |   | 10,952 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities Available-for-Sale:                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|           Equity Securities: |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Banks and insurance companies  . . . . . .                           |   |   | 1,489 |   |   |   | 989 |   |   |   | 989 |   |   |   | 1,256 |   |   |   | 1,699 |   |   |   | 1,699 |   |
| Industrial and all other . . . . . . . . . . . . . .                           |   |   | 4,362 |   |   |   | 8,046 |   |   |   | 8,046 |   |   |   | 4,211 |   |   |   | 5,870 |   |   |   | 5,870 |   |
| Total equity securities  . . . . . . . . . . . . .                   |   |   | 5,851 |   |   |   | 9,035 |   |   |   | 9,035 |   |   |   | 5,467 |   |   |   | 7,569 |   |   |   | 7,569 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|           Debt Securities:   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States government . . . . . . . . . . .                                 |   |   | 9,532 |   |   |   | 9,713 |   |   |   | 9,713 |   |   |   | 9,551 |   |   |   | 9,983 |   |   |   | 9,983 |   |
| States, municipalities and                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| political subdivisions . . .                                                   |   |   | 15,641 |   |   |   | 15,516 |   |   |   | 15,516 |   |   |   | 13,401 |   |   |   | 12,607 |   |   |   | 12,607 |   |
| Mortgage backed securities . . . . . . . . . . .                               |   |   | 8,203 |   |   |   | 8,320 |   |   |   | 8,320 |   |   |   | 11,101 |   |   |   | 11,334 |   |   |   | 11,334 |   |
| Private label mortgage backed securities . . . . .                             |   |   | 9,634 |   |   |   | 8,896 |   |   |   | 8,896 |   |   |   | 6,590 |   |   |   | 5,223 |   |   |   | 5,223 |   |
| Public Utilities . . . . . . . . . .  . . . . . . . . .              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 549 |   |   |   | 554 |   |   |   | 554 |   |
| Industrial and Miscellaneous . . . . . . . . .                                 |   |   | 26,786 |   |   |   | 27,824 |   |   |   | 27,824 |   |   |   | 20,604 |   |   |   | 18,406 |   |   |   | 18,406 |   |
| Total Debt Securities . . . . . . . . . . . . . .                              |   |   | 69,796 |   |   |   | 70,269 |   |   |   | 70,269 |   |   |   | 61,796 |   |   |   | 58,107 |   |   |   | 58,107 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Available-for-Sale . . . . . . . . .                                     |   |   | 75,647 |   |   |   | 79,304 |   |   |   | 79,304 |   |   |   | 67,263 |   |   |   | 65,676 |   |   |   | 65,676 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities . . . . . . . . . . . . . . ..                                |   |   | 81,589 |   |   |   | 85,384 |   |   | $ | 85,246 |   |   |   | 78,215 |   |   |   | 76,671 |   |   |   | 76,628 |   |
| Trading securities. . . . . . . . . . . .  . . . . .. . . . . . .    |   |   | 314 |   |   |   | 374 |   |   |   | 374 |   |   |   | 354 |   |   |   | 253 |   |   |   | 253 |   |
| Receivable for securities. . . . . . . . . . . . .                             |   |   | 96 |   |   |   | 96 |   |   |   | 96 |   |   |   | 513 |   |   |   | 513 |   |   |   | 513 |   |
| Mortgage loans on real estate . . . . . . . . . . . . .                        |   |   | 1,041 |   |   |   | 1,041 |   |   |   | 1,041 |   |   |   | 502 |   |   |   | 502 |   |   |   | 502 |   |
| Investment real estate . . . . . . . . . . . . . . . . . . . .                 |   |   | 4,815 |   |   |   | 4,815 |   |   |   | 4,815 |   |   |   | 4,754 |   |   |   | 4,754 |   |   |   | 4,754 |   |
| Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .           |   |   | 1,018 |   |   |   | 1,018 |   |   |   | 1,018 |   |   |   | 968 |   |   |   | 968 |   |   |   | 968 |   |
| Company  owned life insurance. . . . . . . . . . . . . .             |   |   | 5,000 |   |   |   | 5,197 |   |   |   | 5,197 |   |   |   | 2,500 |   |   |   | 1,957 |   |   |   | 1,957 |   |
| Other invested assets. . . . . . . . . . . . . . . . . . . .                   |   |   | 3,933 |   |   |   | 3,933 |   |   |   | 3,933 |   |   |   | 4,557 |   |   |   | 4,557 |   |   |   | 4,557 |   |
| Total investments . . .                                                        |   | $ | 97,806 |   |   | $ | 101,858 |   |   | $ | 101,720 |   |   | $ | 92,363 |   |   | $ | 90,175 |   |   | $ | 90,132 |   |

----

|                                                                                 |   |         |   |   |   |   |
|--------------------------------------------------------------------------------------|--------|--------------|--------|--------|--------|--------|
| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                                   |   |
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT                          |   |
| BALANCE SHEETS                                                                       |   |
| (Amounts in thousands)                                                               |   |
|                                                                                 |   |         |   |   |   |   |
|                                                                                 |   | December 31, |   |
|                                                                                 |   | 2009         |   |   | 2008   |   |
| Assets                                                                               |   |         |   |   |   |   |
| Cash                                                                                 |   | $            | 382    |   |   | $      | 454 |   |
| Investment in subsidiaries (equity method)                                           |   |         |   |   |   |   |   |   |
|     eliminated upon consolidation                                |   |         | 51,658 |   |   |   | 45,380 |   |
| Other assets                                                                         |   |         | 2,866  |   |   |   | 2,269 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Assets                               |   | $            | 54,906 |   |   | $      | 48,103 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
| Liabilities and Shareholders' Equity                                                 |   |         |   |   |   |   |   |   |
| Accrued general expenses                                                             |   | $            | 1,366  |   |   | $      | 1,083 |   |
| Notes payable                                                                        |   |         | 12,372 |   |   |   | 12,372 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Liabilities                          |   |         | 13,738 |   |   |   | 13,455 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Shareholders' Equity                 |   |         | 41,168 |   |   |   | 34,648 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Liabilities and Shareholders' Equity |   | $            | 54,906 |   |   | $      | 48,103 |   |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                |   |
|-------------------------------------------------------------------|--------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT       |   |
| STATEMENTS OF INCOME (LOSS)                                       |   |
| (Amounts in thousands)                                            |   |
|                                                              |   | Years Ended |   |
|                                                              |   | December 31, |   |
|                                                              |   | 2009 |   |   | 2008 |   |
| Income                                                            |   |   |   |   |   |   |
|                                                              |   |   |   |   |   |   |
|     Dividends (eliminated upon consolidation) |   | $ | 2,800 |   |   | $ | - |   |
|     Other income                              |   |   | 52 |   |   |   | 119 |   |
|                                                              |   |   | 2,852 |   |   |   | 119 |   |
|                                                              |   |   |   |   |   |   |   |   |
| Expenses                                                          |   |   |   |   |   |   |   |   |
| State taxes                                                       |   |   | 1 |   |   |   | 1 |   |
| Other expenses                                                    |   |   | 2,154 |   |   |   | 1,300 |   |
|                                                              |   |   | 2,155 |   |   |   | 1,301 |   |
| Income before income taxes and equity in                          |   |   |   |   |   |   |   |   |
| undistributed earnings (loss) of subsidiaries                     |   |   | 697 |   |   |   | (1,182 | ) |
| Income tax (benefit) expense                                      |   |   | (711 | ) |   |   | (437 | ) |
|                                                              |   |   |   |   |   |   |   |   |
| Income (loss) before equity in undistributed earnings (loss)      |   |   |   |   |   |   |   |   |
| of subsidiaries                                                   |   |   | 1,408 |   |   |   | (745 | ) |
| Equity in undistributed (losses) earnings of subsidiaries         |   |   | 2,816 |   |   |   | (4,459 | ) |
|                                                              |   |   |   |   |   |   |   |   |
| Net (loss) income                                                 |   | $ | 4,224 |   |   | $ | (5,204 | ) |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                            |   |
|-------------------------------------------------------------------------------|--------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT                   |   |
| STATEMENTS OF CASH FLOWS                                                      |   |
| (Amounts in thousands)                                                        |   |
|                                                                          |   | Years Ended |   |
|                                                                          |   | December 31, |   |
|                                                                          |   | 2009 |   |   | 2008 |   |
| Cash flows from operating activities:                                         |   |   |   |   |   |   |
| Net income (loss)                                                             |   | $ | 4,224 |   |   | $ | (5,204 | ) |
| Adjustments to reconcile net income (loss) to net                             |   |   |   |   |   |   |   |   |
| cash provided by operating activities:                                        |   |   |   |   |   |   |   |   |
|     Equity in undistributed loss (income) of subsidiaries |   |   | (2,816 | ) |   |   | 4,459 |   |
|     Change in other assets                                |   |   | (539 | ) |   |   | 3,246 |   |
|     Change in accrued general expenses                    |   |   | 539 |   |   |   | (659 | ) |
| Net cash provided by                                                          |   |   |   |   |   |   |   |   |
|     operating activities                                  |   |   | 1,408 |   |   |   | 1,842 |   |
|                                                                          |   |   |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                         |   |   |   |   |   |   |   |   |
| Net cash provided by investing activities                                     |   |   | - |   |   |   | - |   |
| Net cash provided by                                                          |   |   |   |   |   |   |   |   |
|     investing activities                                  |   |   | - |   |   |   | - |   |
|                                                                          |   |   |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                         |   |   |   |   |   |   |   |   |
| Cash dividends                                                                |   |   | (1,480 | ) |   |   | (2,220 | ) |
| Net cash used in                                                              |   |   |   |   |   |   |   |   |
|     financing activities                                  |   |   | (1,480 | ) |   |   | (2,220 | ) |
|                                                                          |   |   |   |   |   |   |   |   |
| Net (decrease) increase in cash and cash equivalents                          |   |   | (72 | ) |   |   | (378 | ) |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash at beginning of year                                                     |   |   | 454 |   |   |   | 832 |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash at end of year                                                           |   | $ | 382 |   |   | $ | 454 |   |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)     |
|--------------------------------------------------------|
| Notes to Condensed Financial Information of Registrant |
|                                                   |   |   |   |   |   |   |   |   |
|                                                   |   |   |   |   |   |   |   |   |
| Note 1-Basis of Presentation                           |   |   |   |   |   |   |
|                                                   | Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial |
|                                                   | Information of the Registrant does not include all of the information and notes normally included with financial |
|                                                   | statements prepared in accordance with generally accepted accounting principles.  It is, therefore, suggested |
|                                                   | that this Condensed Financial Information be read in conjunction with the Consolidated Financial Statements |
|                                                   | and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 44. |
|                                                   |   |   |   |   |   |   |   |   |
| Note 2-Cash Dividends from Subsidiaries                |   |   |   |   |   |   |
|                                                   | In 2009, dividends of $2.8 million were paid to the Registrant by its subsidiaries.  No dividends were |
|                                                   | received from subsidiaries during 2008. |   |   |   |   |   |   |

----

| THE NATIONAL SECURITY GROUP, INC.                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)                                            |   |
| (Amounts in thousands)                                                                                          |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Deferred |   |   | Future |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Acquisition |   |   | Policy |   |   | Unearned |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Costs |   |   | Benefits |   |   | Premiums |   |
| At December 31, 2009:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance . . . . . . . . . . . . . . .                                            |   |   |   |   |   | $ | 6,295 |   |   | $ | 30,726 |   |   | $ | 16 |   |
| Property and casualty insurance . . . . . ... . . . . . . . . . . . .                                      |   |   |   |   |   | 3,915 |   |   |   | - |   |   |   | 27,365 |   |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        |   |   | $ | 10,210 |   |   | $ | 30,726 |   |   | $ | 27,381 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2008:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance . . . . . . . . . . . . . . .                                            |   |   |   |   |   | $ | 5,788 |   |   | $ | 29,770 |   |   | $ | 44 |   |
| Property and casualty insurance . . . . . ... . . . . . . . . . . . .                                      |   |   |   |   |   | 4,037 |   |   |   | - |   |   |   | 27,720 |   |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        |   |   | $ | 9,825 |   |   | $ | 29,770 |   |   | $ | 27,764 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Commissions, |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Benefits, |   |   | Amortization |   |   | General |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Claims, |   |   | of Deferred |   |   | Expenses, |   |
|                                                                                                            |   |   |   |   | Net |   |   |   |   |   | Losses and |   |   | Policy |   |   | Taxes, |   |
|                                                                                                            |   | Premium |   |   | Investment |   |   | Other |   |   | Settlement |   |   | Acquisition |   |   | Licenses |   |
|                                                                                                            |   | Revenue |   |   | Income |   |   | Income |   |   | Expenses |   |   | Costs |   |   | and Fees |   |
| For the year ended December 31, 2009:                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance                                                                          |   | $ | 7,199 |   |   | $ | 2,114 |   |   | $ | 3 |   |   | $ | 4,931 |   |   | $ | 822 |   |   | $ | 2,787 |   |
| Property and casualty insurance . . . . . .                                                                     |   |   | 52,395 |   |   |   | 3,125 |   |   |   | 761 |   |   |   | 30,908 |   |   |   | 10,714 |   |   |   | 8,162 |   |
| Other . . . . . . . . .                                                                                         |   |   | - |   |   |   | 50 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,078 |   |
|     Total . . . .. . . .                                                                    |   | $ | 59,594 |   |   | $ | 5,289 |   |   | $ | 764 |   |   | $ | 35,839 |   |   | $ | 11,536 |   |   | $ | 12,027 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2008:                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance                                                                          |   | $ | 6,956 |   |   | $ | 1,940 |   |   | $ | 60 |   |   | $ | 5,027 |   |   | $ | 1,522 |   |   | $ | 1,614 |   |
| Property and casualty insurance . . . . . .                                                                     |   |   | 49,308 |   |   |   | 2,309 |   |   |   | 1,047 |   |   |   | 39,719 |   |   |   | 11,084 |   |   |   | 6,722 |   |
| Other . . . . . . . . .                                                                                         |   |   | - |   |   |   | 119 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 222 |   |
|     Total . . . .. . . .                                                                    |   | $ | 56,264 |   |   | $ | 4,368 |   |   | $ | 1,107 |   |   | $ | 44,746 |   |   | $ | 12,606 |   |   | $ | 10,005 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Note: Investment income and other operating expenses are reported separately by segment and not allocated. |   |   |   |   |   |   |   |   |   |

----

| THE NATIONAL SECURITY GROUP, INC.                                                                                    |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| SCHEDULE IV. REINSURANCE (CONSOLIDATED)                                                                         |   |
| (Amounts in thousands)                                                                                               |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   | Percentage |   |
|                                                                                                                 |   |   |   |   | Ceded |   |   | Assumed |   |   |   |   |   | of Amount |   |
|                                                                                                                 |   | Gross |   |   | to Other |   |   | from Other |   |   | Net |   |   | Assumed |   |
|                                                                                                                 |   | Amount |   |   | Companies |   |   | Companies |   |   | Amount |   |   | to Net |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2009                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance in force  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   |   | $ | 215,028 |   |   | $ | 12,034 |   |   | $ | - |   |   | $ | 202,994 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums:                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance and accident and health insurance . . . . . . . . . . . . .                                           |   |   | 7,247 |   |   |   | 48 |   |   |   | - |   |   |   | 7,199 |   |   |   | 0.00 | % |
| Property and casualty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              |   |   | 59,213 |   |   |   | 6,818 |   |   |   | - |   |   |   | 52,395 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Total premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |   | $ | 66,460 |   |   | $ | 6,866 |   |   | $ | - |   |   | $ | 59,594 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2008:                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance in force  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   |   | $ | 214,160 |   |   | $ | 10,115 |   |   | $ | - |   |   | $ | 204,045 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums:                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance and accident and health insurance . . . . . . . . . . . . .                                           |   |   | 7,003 |   |   |   | 47 |   |   |   | - |   |   |   | 6,956 |   |   |   | 0.00 | % |
| Property and casualty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              |   |   | 55,866 |   |   |   | 6,558 |   |   |   | - |   |   |   | 49,308 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Total premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |   | $ | 62,869 |   |   | $ | 6,605 |   |   | $ | - |   |   | $ | 56,264 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| The National Security Group, Inc                   |
|----------------------------------------------------|
|                                               |   |   |   |   |   |   |
| Schedule V. Valuation and Qualifying Accounts |
| Years ended December 31, 2009 and 2008        |
|                                               |   |   |   |   |   |   |
|                                               |   |   |   |   |   |   |
|                                               | 2009 |   | 2008 |   |
|                                               |      (Dollars in thousands) |   |
|                                               |   |   |   |   |   |   |
| Balance, January 1                                 |   | $ | 59 |   |   | $ | 110 |   |
| Additions                                          |   |   | 0 |   |   |   | 0 |   |
| Deletions                                          |   |   | 59 |   |   |   | 51 |   |
|                                               |   |   |   |   |   |   |   |   |
| Balance, December 31                               |   | $ | 0 |   |   | $ | 59 |   |

----

| 1.   | Consolidated financial statements, notes thereto and related information of The National Security Group, Inc. (the “Company”) are included in Item 8 of Part II of this report: |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Report of Independent Registered Public Accounting Firm (2009) |
|--------|----------------------------------------------------------------|

|   | Consolidated Statements of Operation – Years ended December 31, 2009 and 2008 |
|--------|-------------------------------------------------------------------------------------|

|   | Consolidated Balance Sheets – December 31, 2009 and 2008 |
|--------|----------------------------------------------------------------|

|   | Consolidated Statements of Shareholders’ Equity – Years ended December 31, 2009 and 2008 |
|--------|------------------------------------------------------------------------------------------------------|

|   | Consolidated Statements of Cash Flows – Years ended December 31, 2009 and 2008 |
|--------|--------------------------------------------------------------------------------------|

|   | Consolidated Notes to the Financial Statements (2009 and 2008) |
|--------|----------------------------------------------------------------|

| 2.   | Additional financial statement schedules and report of independent registered accounting firm are furnished herewith pursuant to the requirements of Form 10-K: |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                              |                                                             |   |
|-----------------------------------|------------------------------------------------------------------|--------|
| The National Security Group, Inc. |                                                             |
|                              |                                                             |   |
| Schedule I                        | Summary of Investments Other Than Investments in Related Parties |
| Schedule II                       | Condensed Financial Information of Registrant                    |   |
| Schedule III                      | Supplementary Insurance Information (Consolidated)               |   |
| Schedule IV                       | Reinsurance (Consolidated)                                       |   |
| Schedule V                        | Valuation and Qualifying Accounts                                |   |

| 3.   | Exhibits filed as part of this Form 10-K: |
|----------------|-------------------------------------------|

----

SIGNATURE

| /s/ Brian R. McLeod         |   | /s/ William L. Brunson, Jr. |
|-----------------------------|--------|-----------------------------|
| Brian R. McLeod             |   | William L. Brunson, Jr.     |
| Chief Financial Officer and |   | President, Chief Executive  |
| Treasurer                   |   | Officer and Director        |

----