UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2001
                                -----------------
                         Commission File Number 0-18649

                        The National Security Group, Inc.
             (Exact name of registrant as specified in its charter)

Delaware        63-1020300     661 East Davis Street, Elba, Alabama    36323
---------       ----------     ------------------------------------    ------
(State or other (IRS Employer (Address of principal executive offices)(Zip code)
jurisdiction of  identification
incorporation or  number)
organization)

        Registrant's telephone number, including area code (334) 897-2273
                                                           --------------

                    Securities registered pursuant to Section
                               12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                     Common stock par value $1.00 per share
                               Title of Each Class

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

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

Aggregate  market  value  of the  voting  stock  held  by  nonaffiliates  of the
Registrant  as of February 28, 2002 (based upon the bid price of these shares on
NASDAQ on such date) - $10,952,043.

Number of Shares of Common Stock outstanding as of February 28, 2002 - 2,466,600

 Portions of the Annual Proxy Statement incorporated by reference into Part III.



                 Total Number of Sequentially Numbered Pages: 58

                                       1
<PAGE>

                       THE NATIONAL SECURITY GROUP, INC.
                     INDEX TO THE ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2001


Part I                                                                      Page

Item 1.  Business                                                              3
Item 2.  Properties                                                           11
Item 3.  Legal Proceedings                                                    11
Item 4.  Submission of Matters to a Vote of Security Holders                  11

Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters                                                            12
Item 6.  Selected Financial Data                                              13
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations                                                14
Item 8.  Consolidated Financial Statements and Supplementary Data             21
Item 9.  Changes in and Disagreements with Accountants and
           Financial Disclosure                                               55

Part III

Item 10. Directors and Executive Officers of the Registrant                   56
Item 11. Executive Compensation                                               56
Item 12. Security Ownership of Certain Beneficial Owners and Management       56
Item 13. Certain Relationships and Related Transactions                       56

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K      57

Signature Page                                                                58




                                        2


<PAGE>


                                     PART I

Item 1.  Business

Summary Description of The National Security Group, Inc.

The National Security Group,  Inc. (the Company),  an insurance holding company,
was  incorporated  in  Delaware  on March 20,  1990.  The  Company,  through its
property  and  casualty   subsidiaries,   writes  primarily  dwelling  fire  and
windstorm,  homeowners,  mobile homeowners, and personal non-standard automobile
lines of insurance. The Company, through its life insurance subsidiary, offers a
basic   line  of   life,   and   health   and   accident   insurance   products.
Property-casualty  insurance is the most significant segment, accounting for 80%
of total premium revenues.

Industry Segment and Geographical Area Information

Property and Casualty Insurance Segment

The  Company's  property and casualty  insurance  business is conducted  through
National  Security Fire & Casualty  Company (NSFC), a wholly owned subsidiary of
the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly
owned subsidiary of National Security Fire & Casualty Company organized in 1993.
NSFC is licensed to write insurance in the states of Alabama, Arkansas, Florida,
Georgia, Mississippi, Oklahoma, South Carolina, and Tennessee, and operates on a
surplus lines basis in the states of Kentucky,  Louisiana,  Missouri, and Texas.
Omega is licensed to write  insurance in Alabama and  Louisiana.  The  following
table  indicates  those  states  which  accounted  for more than five percent of
direct written premium during 2001:

              State                            Percent of direct written premium
              ------                           ---------------------------------
Alabama ......................................               54.37%
Arkansas .....................................                7.98%
Georgia ......................................                6.78%
Louisiana ....................................                8.75%
Mississippi ..................................                8.26%

In general,  the  property-casualty  insurance business involves the transfer by
the insured,  to an insurance  company of all or a portion of certain  risks for
the payment, by the insured, of a premium to the insurance company. A portion of
such risks is often retained by the insured in the form of deductibles which may
vary greatly from policy to policy.

The  premiums or  payments to be made by the insured for direct  products of the
property-casualty  subsidiaries  are  based  upon  expected  cost  of  providing
benefits, writing, and administering the policies. In determining the premium to
be charged,  the  property-casualty  subsidiaries  utilize data from past claims
experience and anticipated  claims  estimates along with commissions and general
expenses.   Historically,   there  has  been  more   price   competition   among
property-casualty insurers than other types of insurers.


                                        3
<PAGE>
The operating results of the property-casualty insurance industry are subject to
significant  fluctuations  from  quarter to quarter and from year to year due to
the effect of  competition  on pricing,  the  frequency  and  severity of losses
incurred in  connection  with  weather-related  and other  catastrophic  events,
general economic  conditions,  and other factors such as changes in tax laws and
the regulatory environment.

The following table sets forth the premiums earned and income (loss) during the
periods reported:

                                                    Year Ended December 31
                                                    (Amounts in Thousands)
                                                  2001       2000          1999
                                                  -----      -----        -----
Net premiums earned:
 Fire, Allied lines, and Homeowners ........     $14,037     $13,229     $14,600
 Automobile ................................       5,132       4,126       6,086
 Other .....................................       1,028         971         999
                                                 -------     -------     -------
                                                 $20,197     $18,326     $21,685
                                                 =======     =======     =======

Income (loss) before income taxes ..........     $ 5,440     $ 3,917     $ 2,365
                                                 =======     =======     =======

Life Insurance Segment

The  Company's  life  insurance  business  is  conducted  by  National  Security
Insurance  Company (NSIC), a wholly owned subsidiary  organized in 1947. NSIC is
licensed  to  write   insurance  in  six  states  Alabama,   Florida,   Georgia,
Mississippi,  South  Carolina,  and Texas.  The following  table  indicates NSIC
direct premiums collected by state in 2001:

State                       Percentage of Total Direct Premiums

Alabama .................................   80%
Georgia .................................   11%
Mississippi .............................    5%
Florida .................................    4%

NSIC has two primary methods of distribution of insurance products, home service
agents and independent agents. Home service distribution life insurance products
account for 69% of total premium  revenues in the life insurance  segment.  Home
service life products consist of products marketed directly at the home or other
premises of the insured by an employee  agent of the  Company.  The  independent
agent distribution  method accounts for 22% of total premium revenue in the life
insurance segment. Since NSIC began marketing life, accident and health products
through  independent  agents in 1999 the  distribution  channel  has  become the
fastest growing method of  distribution.  The products offered by NSIC primarily
consist of term and whole life  insurance and  supplemental  accident and health
insurance. NSIC does not sell annuities.

Term life  insurance  policies  provide death  benefits if the  insured's  death
occurs  during the specific  premium  paying term of the policy and generally do
not include a savings or investment  element in the policy  premium.  Whole-life
insurance  policies  demand a higher  premium than term life,  but provide death
benefits which are payable under  effective  policies  regardless of the time of
the insured's  death and have a savings and investment  element which may result
in the accumulation of a cash surrender  value.

                                       4
<PAGE>

Accident  and health  business  is  primarily  accident  policies  sold  through
schools,  though NSIC is beginning to experience  an increase in accident  sales
through its independent and captive agency force.  Accident and health insurance
provides coverage for losses sustained through sickness or accident and includes
individual  hospitalization and accident policies,  group  supplementary  health
policies  and  specialty  products,  such as  cancer  policies.  These  policies
generally  provide a stated  benefit  and have not  experienced  the  escalating
health  care  costs  which many  health and  accident  insurance  policies  have
experienced in recent years.

The following table sets forth certain information respecting the development of
the Life Company's business:
                                                 Year Ended December 31
                                                 (Amounts in Thousands)
                                        2001              2000             1999
                                        ----              ----             ----
Life insurance in force at
     end of period:

Ordinary-whole life ............        $104,700        $ 85,000        $ 80,200
Term Life ......................          40,300          36,000          35,100
Industrial .....................          33,000          30,000          30,700
Other ..........................               0               0               0
                                        --------        --------        --------
                                         178,000         151,000         146,000
                                        ========        ========        ========


                                                  Year Ended December 31
                                                  (Amounts in Thousands)
                                          2001           2000             1999
                                          ----           ----             ----
New life insurance issued:
Ordinary-whole life ...............        $82,700        $69,400        $66,200
Term Life .........................         13,500         10,500          7,700
Industrial ........................              0              0              0
Other .............................            100            100            100
                                           -------        -------        -------
                                            96,300         80,000         74,000
                                           =======        =======        =======
Net premiums earned:
Life insurance ......................       $4,139         $3,746         $3,396
Accident and health insurance .......        1,022            848            855
                                            ------         ------         ------
                                             5,161          4,594          4,251
                                            ======         ======         ======

Investments

The insurance  subsidiaries  are regulated as to the types of investments  which
they may make and the  amount  of  funds  they may  maintain  in any one type of
investment.  Through its  investment  policy,  the Company seeks to conserve its
capital resources and assets,  meet the investment  requirements of its reserves
and provide a reasonable return on investments.

                                       5
<PAGE>



The following table sets forth certain information respecting the Company's
investments at the date shown:
<TABLE>
<CAPTION>
<S>                                                          <C>         <C>

                                                             Year Ended December 31
                                                             (Amounts in thousands)
                                                                  2001       2000
                                                                  ----       ----

Investment Securities held-to-maturity,  at amortized cost
        (estimated fair value: 2001 - $23,922, 2000 - $29,035)   $23,135   $28,875
Investment Securities available-for-sale,  at market
        (cost: 2001 - $45,975, 2000 - $38,311) ...............    57,648    51,648
Receivable for securities sold ...............................        50       143
Note Receivable from affiliate ...............................       250         0
Mortgage loans on real estate, at cost .......................       275       116
Investment real estate, at cost ..............................     1,563     1,569
Policy loans .................................................       726       692
Investment in affiliate ......................................        53         0
Short-term investments .......................................     1,796     1,675
                                                                  ------    ------
                                                                 $85,496   $84,718
                                                                 =======    ======
</TABLE>

The results with respect to the foregoing investments are as follows:

                                           Year Ended December 31
                                            2001       2000         1999
                                            ----       ----         ----
Net investment income .................   $ 4,506     $ 4,434     $ 4,354
Average yield on investments ..........      5.3%        5.3%         5.1%
Economic yield on investments
 (includes realized and
  unrealized investment gains) .........      5.6%        6.7%        3.7%
Net realized gains on investments
(before income taxes) ..................     1,640       1,723      1,951
Changes in net unrealized gains on
  investments (before income taxes) ....    (1,366)       (191)    (3,196)

As of December 31, 2001, the maturity schedule for all bonds and notes held by
the Company, stated at amortized cost, was as follows:

Maturity Schedule (Amounts in thousands)

                                     Available    Held to             Percentage
       Maturity                      for sale    Maturity    Total     of Total
       --------                      --------    --------   ------     --------

Maturity in less than 1 year ......    $ 1,795    $ 2,384    $ 4,179        7.2%
Maturity in 1-5 years .............      6,243      5,783     12,026       20.8
Maturity in 5-10 years ............     17,734      6,046     23,780       41.1
Maturity after 10 years ...........      8,929      8,922     17,851       30.9
                                       -------    -------    -------      -----
Totals ............................    $34,701    $23,135    $57,836      100.0%
                                        =======    =======    =======     =====

                                       6

<PAGE>

Investments in affiliate:

In the fourth quarter of 2001 The Company entered into a joint investment with a
local manufacturing  firm, Cash Brothers Leasing,  Inc and formed a new company,
The Mobile  Attic,  Inc. The Mobile  Attic,  Inc,  through a network of dealers,
leases  portable  storage units.  The primary  customers of The Mobile Attic are
building contractors, retail establishments, and residential consumers.

At 12/31/2001 the Company held a 50% equity  investment in The Mobile Attic. The
investment was accounted for in the financial statements on the equity basis and
contributed  $52,000 to net income for the year. While the investment and impact
on  earnings  was not  material  in 2001,  earnings  from The  Mobile  Attic are
expected to become more significant in future periods.  Early estimates indicate
that The Mobile Attic will add 10 to 15% to consolidated earnings in 2002.

Certain Information Regarding Insurance Activities

Marketing and Distribution

NSIC  products  are  marketed  through  a field  force  of  agents  and  service
representatives  who are  employees of the Life Company and through a network of
independent  agents. The independent agent method of distribution is expected to
be  more  cost   effective  and  has  become  the  fastest   growing  method  of
distribution.  NSFC's  products  are marketed  through a network of  independent
agents and brokers,  who are independent  contractors and who generally maintain
relationships with one or more competing insurance companies.

Agents  receive  compensation  for  their  sales  efforts.  In the  case of life
insurance  agents,  compensation is paid in the form of sales commissions plus a
servicing   commission.   Commissions   incurred   by  NSIC  in  2001   averaged
approximately  34.8%  of  premiums.  Commissions  incurred  by the  NSFC in 2001
averaged  approximately  17.1%  of  premiums  and  ranged  from  12.5%  to 27.5%
depending  on the type  and  amount  of  insurance  sold.  During  2001,  no one
independent agent accounted for more than 10% of total net earned premium of the
property-casualty insurance subsidiaries.

NSIC has implemented  changes in collection of premium payments,  and the method
of marketing. If the policyholder so elects, he or she may begin making payments
by mail to the home office  rather than have a home service  agent come to their
house  periodically  to collect  premiums.  This change is being  implemented in
response to the change in lifestyles of our  policyholders.  It is  increasingly
difficult  to reach  policyholders  at home until  early  evening,  and they are
usually  too busy to be  bothered.  Those who elect to pay by mail will still be
provided  service  by an area  representative  for help with  claims  and policy
related questions. With this method of payment there have been reductions in the
number of NSIC  employee  agents.  Also,  because  it is  becoming  increasingly
difficult to employ people to contact our policy owners at home, NSIC management
is continuing to implement  changes in the method of marketing of life insurance
products.

                                       7
<PAGE>

Reinsurance

Both insurance  subsidiaries  customarily  reinsure with other insurers  certain
portions  of the  insurance  risk.  The  primary  purpose  of  such  reinsurance
arrangements is to enable the Company to limit its risk on individual  policies,
and in the  case  of  property  insurance,  limit  its  risk in the  event  of a
catastrophe  in various  geographic  areas. A reinsurance  arrangement  does not
discharge  the issuing  company from primary  liability to the insured,  and the
issuing  company is required to discharge  its  liability to the insured even if
the  reinsurer  is  unable  to  meet  its  obligations   under  the  reinsurance
arrangements.  Reinsurance,  however,  does  make the  reinsurer  liable  to the
issuing  company  to the extent of any  reinsurance  in force at the time of the
loss.  Reinsurance  arrangements  also decrease premiums retained by the issuing
company  since  that  company  pays the  reinsuring  company a portion  of total
premiums based upon the amount of liability reinsured.

NSIC generally  reinsures all risks in excess of $50,000 with respect to any one
policy.  NSFC and Omega  generally  reinsure with third parties any liability in
excess of $100,000 on any single  policy.  In  addition,  the  property-casualty
subsidiaries have catastrophe  excess reinsurance which protects it in part with
respect to aggregate property losses arising out of a single  catastrophe,  such
as a hurricane.  In 2001, the  property-casualty  subsidiaries  had  catastrophe
protection  up to a $21 million  loss.  On a 1 in 200 year loss,  that is a loss
that has only a 1/2 of 1% chance of  occurring  in any given year,  the property
and casualty  subsidiaries would pay $2.7 million in losses and reinsurers would
pay $17.9 million.

In  addition  to  catastrophe  reinsurance,  NSFC  also  had a 50%  quota  share
reinsurance  agreement on ocean marine exposure with  additional  excess of loss
coverage.

Reserve liabilities

NSIC maintains life insurance reserves for future policy benefits to meet future
obligations  under  outstanding  policies.  These  reserves are calculated to be
sufficient to meet policy and contract  obligations  as they arise.  Liabilities
for future  policy  benefits are  calculated  using  assumptions  for  interest,
mortality,  morbidity,  expense,  and  withdrawals  determined  at the  time the
policies  were  issued.  As of December  31,  2001,  the total  reserves of NSIC
(including the reserves for accident and health  insurance)  were  approximately
$23 million.  NSIC believes  that such reserves for future policy  benefits were
calculated in accordance with generally accepted actuarial methods and that such
reserves  are  adequate  to  provide  for  future  policy  benefits.   Wakely  &
Associates,  consulting  actuaries,  provided  actuarial services in calculating
reserves.

The  property-casualty  subsidiaries are also required to maintain loss reserves
(claim  liabilities)  for all lines of insurance.  Such reserves are intended to
cover the  probable  ultimate  cost of  settling  all  claims,  including  those
incurred  but  not  yet   reported.   The  reserves  of  the   property-casualty
subsidiaries  reflect estimates of the liability with respect to incurred claims
and are  determined  by  evaluating  reported  claims on an ongoing basis and by
estimating  liabilities  for  incurred but not reported  claims.  Such  reserves
include  adjustment  expenses  to cover  the cost of  investigating  losses  and
defending lawsuits. The establishment of accurate reserves is complicated by the
fact that claims in some lines of  insurance  are  settled  many years after the
policies have been issued,  thus raising the possibility that inflation may have
a significant  effect on the amount of ultimate loss  payment,  especially  when
compared  to initial  loss  estimates.  The  subsidiaries,  however,  attempt to
restrict their writing to risks that settle within one to four years of issuance
of the policy. As of December 31, 2001, the  property-casualty  subsidiaries had
reserves for unpaid claims of  approximately  $13.9 million  before  subtracting
unpaid  claims which will be due from  reinsurers  of $2.4  million  leaving net
unpaid claims of $11.5  million.  The reserves are not  discounted  for the time
value of money. No changes were made in the  assumptions  used in estimating the
reserves  during the years ending  December 31, 2001,  2000 or 1999. The Company
believes  such  reserves  are  adequate  to provide  for  settlement  of claims.
Employees  of the Company  calculate  NSFC and Omega loss  reserves.  Milliman &
Robertson,  an  independent  actuarial  consulting  firm,  issues a Statement of
Actuarial Opinion regarding the adequacy of reserves.

                                       8
<PAGE>


Underwriting Activities

The  insurance  subsidiaries  maintain  underwriting  departments  which seek to
evaluate the risks  associated  with the issuance of an insurance  policy.  NSIC
accepts standard risks and, to an extent,  substandard risks and engages medical
doctors who review certain applications for insurance.

In the  case  of the  property-casualty  subsidiaries,  the  underwriting  staff
attempts to assess,  in light of the type of insurance  sought by an  applicant,
the  risks  associated  with  a  prospective  insured  or  insurance  situation.
Depending  upon the type of insurance  involved,  the process by which the risks
are assessed  will vary.  In the case of  automobile  liability  insurance,  the
underwriting  staff assesses the risks involved in insuring a particular driver,
and in the case of fire  insurance,  the  underwriting  staff assesses the risks
involved in insuring a particular  dwelling.  Where possible,  the  underwriting
staff of the property-casualty insurance subsidiary utilizes standard procedures
as guides  that  quantify  the hazards  associated  with a  particular  business
activity. In general, the property-casualty  subsidiaries  specialize in writing
nonstandard risks.

The  nonstandard  market in which  the  property-casualty  subsidiaries  operate
reacts  to  general  economic  conditions  in much the same way as the  standard
market.  When insurers' profits and equity are strong,  companies  generally cut
rates or not seek increases.  Also, underwriting rules are less restrictive.  As
profit and/or capital fall,  companies tighten underwriting rules, and seek rate
increases.  Premiums  in the  nonstandard  market are higher  than the  standard
market because of the increased risk of the insured,  which generally  comprises
more frequent  claims.  Drivers of autos who have prior traffic  convictions are
one such increased risk which warrants higher  premiums.  Lower valued dwellings
and mobile homes also warrant higher premiums because of the nature of the risk.
The costs of placing such  nonstandard  policies and making risk  determinations
are  similar  to those of the  standard  market.  The  added  costs  due to more
frequent  claims  servicing is reflected in the generally  higher premiums which
are charged.

Regulation

The  insurance  subsidiaries  are each subject to  regulation  by the  insurance
departments  of those  states in which they are  licensed  to conduct  business.
Although the extent of regulation varies from state to state, the insurance laws
of the various states generally establish  supervisory  departments having broad
administrative  powers with  respect to, among other  matters,  the granting and
revocation  of licenses to  transact  business;  the  licensing  of agents;  the
establishment  of  standards  of financial  solvency,  including  reserves to be
maintained,  the nature of  investments  and, in most cases premium  rates;  the
approval  of  forms  and  policies;  and  the  form  and  content  of  financial
statements.  These  regulations  have as their primary purpose the protection of
policyholders and do not necessarily confer a benefit upon stockholders.

Many states in which the insurance subsidiaries operate, including Alabama, have
laws which require that insurers become members of guaranty associations.  These
associations  guarantee that benefits due  policyholders of insurance  companies
will  continue  to be provided  even if the  insurance  company  which wrote the
business is  financially  unable to fulfill its  obligations.  To provide  these
benefits,  the associations  assess the insurance  companies licensed in a state
that write the line of insurance for which coverage is guaranteed. The amount of
an insurer's  assessment  is generally  based on the  relationship  between that
company's  premium  volume in the state and the premium  volume of all companies
writing the particular  line of insurance in the state.  The Company has paid no
material  amounts to  guaranty  associations  over the past three  years.  These
payments,  when made, are principally  related to association costs incurred due
to the insolvency of various insurance  companies.  Future assessments depend on
the number and magnitude of insurance company  insolvencies and such assessments
are therefore difficult to predict.

                                       9
<PAGE>

Most  states  have  enacted  legislation  or  adopted  administrative  rules and
regulations  covering  such matters as the  acquisition  of control of insurance
companies,  transactions between insurance companies and the persons controlling
them. The National Association of Insurance  Commissioners has recommended model
legislation  on these  subjects and all states where the Company's  subsidiaries
transact business have adopted, with some modifications, that model legislation.
Among the matters  regulated by such  statutes  are the  payments of  dividends.
These  regulations  have a direct  impact on the Company  since its cash flow is
substantially derived from dividends from its subsidiaries. However, the Company
has not had nor does it  foresee  a problem  obtaining  the  necessary  funds to
operate because of the regulation.

Competition

The  insurance  subsidiaries  are engaged in a highly  competitive  business and
compete  with  many  insurance  companies  of  substantially  greater  financial
resources,  including stock and mutual  insurance  companies.  Mutual  insurance
companies  return profits,  if any, to policyholders  rather than  stockholders;
therefore,  mutual insurance  companies may be able to charge lower net premiums
than those charged by stock insurers.  Accordingly,  stock insurers must attempt
to achieve  competitive  premium rates  through  greater  volume,  efficiency of
operations and control of expenses.

NSIC primarily  markets its life and health insurance  products through the home
service system.  Direct competition comes from other home service companies,  of
which there are many. NSIC's life and health products also compete with products
sold by ordinary life companies.  NSIC writes policies primarily in Alabama. The
market share of the total life and health  premiums  written is small because of
the number of insurers in this highly  competitive field. The primary methods of
competition  in the field are  service  and price.  NSIC  attempts  to price its
products with other home service companies.

Because of the increased costs associated with a home service  company,  premium
rates are generally  higher than ordinary  products,  so competition  from these
ordinary insurers must be met through service.

The  property-casualty  subsidiaries  market their products through  independent
agents and brokers,  concentrating on dwelling fire,  homeowners and nonstandard
auto  coverage.  NSFC,  though one of the larger writers of lower value dwelling
fire  insurance in Alabama,  nevertheless  faces a number of competitors in this
niche. Moreover, larger general line insurers also compete with NSFC. The market
share in states  other than  Alabama is small.  Price is the  primary  method of
competition.  Due  to  the  method  of  marketing  through  independent  agents,
commission rates and service to the agent are also important  factors in whether
the independent agent agrees to offer NSFC products over its competitors.

                                       10
<PAGE>

Inflation

The Company shares the same risks from inflation as other  companies.  Inflation
causes  operating  expenses to increase and erodes the  purchasing  power of the
Company's  assets. A large portion of the Company's assets are invested in fixed
maturity investments.  The purchasing power of these investments will be less at
maturity  because of inflation.  This is generally  offset by the reserves which
are a fixed  liability and will be paid with cheaper  dollars.  Also,  inflation
tends to  increase  investment  yields,  which  may  reduce  the  impact  of the
increased operating expenses caused by inflation.

Item 2.  Properties

The Company owns no property.  The Life insurance  subsidiary owns its principal
executive offices located at 661 East Davis Street, Elba, Alabama. The executive
offices are shared by the insurance  subsidiaries.  The building was constructed
in 1977 and consists of  approximately  26,000 square feet. The Company believes
this space to be  adequate  for its  foreseeable  future  needs.  The  Company's
subsidiaries own certain real estate properties,  including  approximately 2,700
acres of timberland in Alabama.

Item 3.  Legal Proceedings

The Company and its subsidiaries  are named as parties to litigation  related to
the conduct of their insurance operations. Further information regarding details
of  pending  suits  can  be  found  in  note  N to  the  consolidated  financial
statements.

Item 4.  Submission of Matters to a vote of Security Holders

There were no matters  submitted to a vote of security  holders during the three
months ended December 31, 2001.

                                       11

<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The capital stock of the Company is traded in the NASDAQ national market.
Quotations are furnished by the National Association of Security Dealers
Automated Quotations System (NASDAQ). The trade symbol is NSEC.

The number of shareholders of the Company's capital stock as of January 31,
2001, was approximately 1,100.

                  Stock Bid Prices   Dividends
                  High    Low        Per Share

2001
First Quarter    $15.63  $ 10.21  $  .183
Second Quarter    15.00    11.08     .183
Third Quarter     15.45    11.00     .19
Fourth Quarter    14.49    12.00     .20

2000
First Quarter    $11.25  $  9.17  $  .175
Second Quarter    10.21     9.17     .175
Third Quarter     14.27    10.42     .175
Fourth Quarter    16.04    11.04     .183


                                       12
<PAGE>


Item 6.  Selected Financial Data
         (Amounts in thousands, except per share)


<TABLE>
<CAPTION>
<S>                              <C>          <C>          <C>          <C>           <C>

Operating results                   2001        2000         1999           1998         1997
-----------------                   ------      ----         ----          -----         ----
     Net premiums earned ......   $  25,357    $  22,921    $  25,936    $  28,451    $  31,156
     Net investment income ....       4,506        4,434        4,354        4,351        4,204
     Net realized investment
          gains ...............       1,640        1,723        1,951        4,117        2,720
     Other income .............       1,280          597          385          385          695
                                  ---------    ---------    ---------    ---------    ---------
Total revenues ................   $  32,783    $  29,675    $  32,626    $  37,304    $  38,775
                                  =========    =========    =========    =========    =========

Net Income ....................   $   4,130    $   3,776    $   3,756    $     930    $   2,998
                                  =========    =========    =========    =========    =========

Net income per share ..........   $    1.67    $    1.53    $    1.52    $    0.35    $    1.07
                                  =========    =========    =========    =========    =========


Other Selected Financial Data

Total shareholders' equity ....   $  44,884    $  43,780    $  41,888    $  41,968    $  46,352

Book value per share ..........   $   18.18    $   17.74    $   16.98    $   17.05    $   16.70

Dividends per share ...........   $    0.76    $    0.71    $    0.68    $    0.64    $    0.58

Net change in unrealized
     capital gains (net of tax)   ($  1,161)   ($    136)   ($  2,231)   ($    351)   $   4,556

Total assets ..................   $  99,484    $  97,563    $  98,105    $ 103,973    $ 106,958

</TABLE>


                                       13

<PAGE>

Item  7.Management's  Discussion and Analysis of Financial Condition and Results
of Operations

The following  analysis of the consolidated  results of operations and financial
condition  of the  Company  should  be read in  conjunction  with  the  Selected
Financial Data and Consolidated  Financial Statements and related notes included
elsewhere herein.

Results of Operations

Consolidated Results of Operations:

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Consolidated net income for The National Security Group (The Company) was $4.130
million  in 2001  compared  to $3.776  million  in 2000.  On a per  share  basis
earnings were 1.67 in 2001 compared to 1.53 in 2000. A second  consecutive  year
of underwriting profits in the property/casualty  insurance subsidiaries boosted
earnings to the highest levels in more than a decade.  Realized capital gains in
2001 were 1.64  million and 1.72  million in 2000.  Consolidated  revenues  were
$32.8 million in 2001 compared to $29.7 million in 2000.  The operating  results
of the subsidiaries are discussed in further detail in the sections that follow.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Consolidated  net income for The National  Security  Group was $3.776 million in
2000  compared to $3.756  million in 1999.  On a per share basis  earnings  were
$1.53 in 2000  compared  to $1.52 in 1999.  Operating  results in The  Company's
property/casualty  subsidiaries  were much  improved due to the  elimination  of
several general agent auto programs,  but a non-recurring charge incurred in the
life insurance subsidiary due to a management decision to strengthen reserves in
certain blocks of industrial life policies  decreased  earnings by approximately
$.29 per share.  Realized  capital gains in 2000 were $1.72 million  compared to
$1.95 million in 1999. Consolidated revenues were $29.7 million in 2000 compared
to $32.6 million in 1999.

Industry Segment Data

Certain  financial  information for The National Security Group's three segments
(life and accident and health insurance,  property and casualty  insurance,  and
other) is summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S>                                     <C>      <C>   <C>       <C>    <C>     <C>

Premium revenues:                          2001     %    2000      %      1999      %
                                           ----     -   -----      --    -----     --
Life and accident and health insurance   $ 5,161  20.4  $ 4,594   20.1  $  4,251  16.4
Property and casualty insurance          $20,196  79.6   18,326   79.9    21,685  83.6
                                          ------  ----   ------   ----   -------  ----
                                         $25,357 100.0  $22,920  100.0  $25,936  100.0
</TABLE>

                                       14

<PAGE>

Income before taxes and equity in income of affiliate:
<TABLE>
<CAPTION>
<S>                                     <C>       <C>    <C>      <C>    <C>       <C>


                                          2001      %      2000       %     1999       %
                                          ----      -      ----       -     -----      --
Life and accident and health insurance   $   586   10.7  $ 1,667    34.5  $ 2,556    56.6
Property and casualty insurance ......   $ 5,440   99.4    3,917    80.9    2,365    52.4
Other ................................      (313)  (5.7)    (473)   (9.8)    (110)   (2.4)
Interest expense .....................      (243)  (4.4)    (267)   (5.6)    (295)   (6.6)
                                         -------  -----    -------  -----  -------   -----
                                         $ 5,470  100.0  $ 4,844   100.0  $ 4,516   100.0
                                         =======  =====   =======  =====  =======   =====
</TABLE>


Life and Accident and Health Insurance Operations:

The Company's life,  accident and health insurance business is conducted through
National  Security  Insurance  Company (NSIC),  a wholly owned subsidiary of the
Company organized in 1947.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000:

Income before income taxes in 2001 was $586,000  compared to $1,667,000 in 2000.
Increased  field cost and general  expenses  and a decrease in realized  capital
gains were the primary  factors  contributing  to the  decrease in income in the
life insurance subsidiary.

NSIC increased premium income 12.3% to $5,161,000 in 2001 compared to $4,594,000
in 2000. Life insurance premium income increased 10.5% in 2001, and accident and
health insurance also had an increase of 20.5% in 2001. The life insurance sales
through independent agents were the source of premium growth in NSIC in 2001.

Commission  expenses  increased  due to the  continued  increase in new business
production.   Life  insurance   commissions  are  front  loaded,   meaning  that
significantly  higher  commission  rates are paid in the early years of a policy
and decrease significantly particularly after the first two years of the policy.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999:

Income  before  income taxes in 2000 was  $1,667,000  compared to  $2,556,000 in
1999.  A one  time  charge  for  reserve  increases  on  certain  blocks  of old
industrial  life  insurance  which NSIC no longer  sells was the primary  factor
contributing to the decrease in income before income taxes.

NSIC increased premium income 8% to $4,594,000 in 2000 compared to $4,251,000 in
1999.  Life insurance  premium income  increased 10.3% in 2000, and accident and
health  insurance  decreased  slightly  compared to 1999.  Life insurance  sales
through independent agents were the source of premium growth in NSIC in 2000.

As experienced in 1999,  life insurance  commission  expense  increased again in
2000. Life insurance  issued by NSIC pays a higher  commission in early years of
the policy and the commission rate decreases in succeeding years. Since NSIC has
experienced  a large  increase in new business  volume,  commission  expense has
increased.



                                       15

<PAGE>




Property & Casualty Operations:

The  Company's  property and casualty  insurance  business is conducted  through
National  Security Fire & Casualty  Company (NSFC), a wholly owned subsidiary of
the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly
owned subsidiary of National Security Fire & Casualty Company organized in 1993.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000:

Net income  before  income tax was  $5,440,000 in 2001 compared to $3,917,000 in
2000.  Improved   underwriting  results  continued  to  be  the  primary  factor
contributing to the improvement in income before taxes.

Earned  premium for 2001 was  $20,196,000  compared to  $18,326,000 in 2000. The
property/casualty  subsidiaries  experienced  premium  growth in dwelling  fire,
homeowners, and private passenger auto lines of business.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999:

Net income  before  income tax was  $3,917,000 in 2000 compared to $2,365,000 in
1999. Improved  underwriting results were the primary factor contributing to the
improvement  in income  before  tax.  The  elimination  of several  unprofitable
private passenger and commercial auto insurance programs run by managing general
agents  was the  primary  factor  leading  to the  improvement  in  underwriting
results.

Management  terminated  the contract of the last  remaining  auto general  agent
program in 2000. The program,  which produced private  passenger auto premium in
Florida,  was terminated due to continued poor underwriting  results.  The final
policies in force on this program  expired in mid 2001.  With the elimination of
this program and other similar  programs over the last two years  management has
significantly improved underwriting results.

The elimination of the general agent programs  combined with slight decreases in
other core lines of business  led to a 16%  decrease  in earned  premium in 2000
compared to 1999. However, in the last half of 2000 NSFC did begin to experience
a slight  turnaround  in premium  production  in core lines of  business,  which
management attributes to an increase focus on marketing to independent insurance
agents.  Also,  the  elimination  of the  unprofitable  managing  general  agent
programs greatly improved underwriting profitability.

In an effort to increase premium production in internally managed auto programs,
as opposed the managing general agent form of distribution,  Omega acquired 100%
of the outstanding stock of Liberty Southern  Insurance Company for a total cash
purchase price of  approximately  $700,000.  The purchase was consummated in the
second  quarter of 2000.  With the  purchase of Liberty  Southern,  Omega gained
entry into the  monthly  bill  private  passenger  auto  market.  The program is
expected to produce $1,500,000 in direct written premium in 2001.

                                       16

<PAGE>


Property & Casualty Combined Ratio:

A measure used to analyze a property/casualty insurer's underwriting performance
is the statutory combined ratio. It is the sum of two ratios:

a.   The loss and loss expense ratio,  which measures losses and loss adjustment
     expenses incurred as a percentage of premiums earned.

b.   The  underwriting  expense  ratio,  which  measures  underwriting  expenses
     incurred   (e.g.,   agents'   commissions,   premium   taxes,   and   other
     administrative  underwriting  expenses) as a percentage of premiums written
     during the year.

The results of these ratios for the past three years were:

                               2001    2000    1999
                               ----    ----    ----
Loss and LAE Ratio .......     54.3%   61.6%    70.9%
Underwriting Expense Ratio     36.1%   34.8%    35.8%
                               ----    ----    -----
Combined Ratio ...........     90.4%   96.4%   106.7%

Maintaining a combined  ratio below 100%,  which  indicates  that the company is
making an underwriting  profit,  depends upon many factors  including  hurricane
activity  in the  Gulf  of  Mexico  and  the  southern  Atlantic  coast,  strict
underwriting of risks,  and adequate and timely premium rates. A major hurricane
hitting the coast of Alabama, Georgia, South Carolina,  Mississippi,  Louisiana,
or Texas could  cause the  combined  ratio to  fluctuate  materially  from prior
years. The property and casualty subsidiaries  maintain catastrophe  reinsurance
to minimize the effect of a major catastrophe.

The combined ratio for 2001 compared to 2000  decreased six  percentage  points.
This  improvement  was  attributable to a lack of storm activity in the dwelling
property  lines of business and the  elimination of  unprofitable  general agent
auto programs from prior years.

Asset Portfolio Review:  The life insurance and  property/casualty  subsidiaries
primarily invest in highly liquid  investment grade debt and equity  securities.
At December 31, 2001, the company's holdings in debt securities  amounted to 68%
of total  investments  and 58% of total assets.  The following is a breakdown of
the bond  portfolio  quality  according  to National  Association  of  Insurance
Commissioners (NAIC) Securities Valuation Office (SVO) rating standards, and the
nationally  recognized rating  organization  equivalents of Moody's and Standard
and Poor's:

                                          SVO Equivalents          % of Total
SVO Class                Moody's          Standard and Poor's    Bond Portfolio
---------                -------          ----------------       --------------
1                       Aaa to A3          AAA to A-                    82.2
2                       Baa to Baa3        BBB+ to BBB-                 15.4
3                       Ba1 to Ba3         BB+ to BB-                    2.4
4                       B1 to B3           B+ to B-                      0.0
5                       Caa to Ca          CCC+ to C                     0.0
6                       C                  CI to D                       0.0

                                       17

<PAGE>

As of January 1, 1994, the Company adopted Financial  Accounting Standards Board
Statement  115 and  reclassified  a  portion  of its fixed  maturity  securities
portfolio  as  "available-for-sale,"  with the  remainder  being  classified  as
"held-to-maturity."  With that  reclassification,  the fixed maturity securities
classified as "available-for-sale" are carried at fair value and changes in fair
values,  net of related income taxes,  are charged or credited to  shareholders'
equity (see Note D to the consolidated financial statements).

The insurance  subsidiaries' fixed maturity  securities include  mortgage-backed
bonds,  primarily  collateralized  mortgage obligations (CMO's), of $9.2 million
and  $11.4   million  at   December   31,  2001  and  2000   respectively.   The
mortgage-backed  bonds are subject to risks associated with variable prepayments
of the underlying  mortgage loans.  Prepayments  cause those  securities to have
different  actual  maturities  than  that  expected  at the  time  of  purchase.
Securities  that are  purchased at a premium to par value and prepay faster than
expected will incur a reduction in yield or loss.  Securities that are purchased
at a discount to par value and prepay  faster  than  expected  will  generate an
increase  in yield or gain.  The degree to which a security  is  susceptible  to
either gains or losses is influenced by the  difference  between  amortized cost
and par value, the relative  sensitivity of the underlying mortgages backing the
assets to prepayments in a changing  interest rate environment and the repayment
priority of the securities in the overall securitization structure.

Market Risk Disclosures:  Since the Company's assets and liabilities are largely
monetary in nature, the Company's financial position and earnings are subject to
risks resulting from changes in interest rates at varying maturities, changes in
spreads over U.S.  Treasuries on new  investment  opportunities,  changes in the
yield curve and equity pricing risks.

The  Company  is exposed to equity  price  risk on its  equity  securities.  The
Company holds common stock with a fair value of $23 million. If the market value
of the S & P 500 Index decreased 10% from its December 31, 2001 value,  the fair
value of the  Company's  common  stock  would  decrease  by  approximately  $2.3
million.

Certain fixed interest rate market risk sensitive  instruments may not give rise
to incremental  income or loss during the period  illustrated but may be subject
to changes in fair values.  Note A presents  additional  disclosures  concerning
fair values of Financial Assets and Financial  Liabilities,  and is incorporated
by reference herein.

The Company limits the extent of its market risk by purchasing  securities  that
are backed by stable  collateral,  the majority of the assets are issued by U.S.
government  sponsored  entities.  Also, the majority of all of the subsidiaries'
CMO's are Planned  Amortization  Class (PAC) bonds.  PAC bonds are typically the
lowest risk CMO's, and provide greater cash flow predictability. Such securities
with  reduced risk  typically  have a lower yield,  but higher  liquidity,  than
higher-risk  mortgage  backed  bonds.  To reduce  the risk of loss of  principal
should prepayments exceed  expectations,  the Company does not purchase mortgage
backed securities at significant premiums over par value.

The Company's  investment approach in the equity markets is based primarily on a
fundamental  analysis of value. This approach requires the investment  committee
to invest in well managed, primarily dividend paying companies, which have a low
debt to capital ratio,  above average return on net worth for a sustained period
of time, and low price to book value or low volatility rating (beta) relative to
the market.  The dividends  provide a steady cash flow to help pay current claim
liabilities,  and it has been the Company's  experience  that by following  this
investment  strategy,  long term investment  results have been superior to those
offered  by bonds,  while  keeping  the risk of loss of  capital  to a  minimum.

                                       18

<PAGE>

Liquidity and Capital Resources: Due to regulatory restrictions, the majority of
the Company's cash is required to be invested in investment-grade  securities to
provide ample  protection for  policyholders.  The  liabilities of the insurance
subsidiaries are of various terms and,  therefore,  those subsidiaries invest in
securities with various  maturities spread over periods usually not exceeding 10
years.

The liquidity  requirements for the Company are primarily met by funds generated
from   operations  of  the  life  insurance  and   property/casualty   insurance
subsidiaries.  Premium and investment  income as well as maturities and sales of
invested  assets  provide  the  primary  sources  of cash  for both the life and
property/casualty  businesses,  while  applications  of cash are applied by both
businesses to the payment of policy benefits, the cost of acquiring new business
(principally commissions),  operating expenses, purchases of new investment, and
in the case of life insurance, policy loans.

The National Security Group's consolidated statement of cash flows indicate that
operating activities provided (used) cash of $2,913,000, $(442,000), $868,000 in
2001,  2000, and 1999  respectively.  Those  statements  also classify the other
sources and uses of cash by investing  activities,  and financing activities and
disclose  the  amount  of  cash  available  at the end of the  year to meet  the
Company's obligations.

The Company has standby  letters of credit of less than  $25,000.  These letters
are used to guarantee  obligations  of the  property/casualty  subsidiary  under
assumed  reinsurance  contracts.  The  letters of credit are  secured by certain
invested assets of the Company.  The Company also routinely incurs liability for
declared  but  unpaid  dividends.  Long  term  liquidity  needs  of the  Company
constitute only those items which are directly related to the principal business
operations of the Company.

The Company has notes  payable of $2.1 million at December  31, 2001.  The notes
payable are to be repaid in quarterly installments over five years.

The ability of the Company to meet its  commitments for timely payment of claims
and other expenses  depends,  in addition to current cash flow, on the liquidity
of its investments.  On December 31, 2001, the Company had no known  impairments
of assets or changes in operation,  which would have a material  adverse  effect
upon liquidity.  Approximately 83% of the Company's assets are invested in cash,
investment  grade fixed income  securities,  short-term  investments and broadly
traded  equity  securities  which  are  highly  liquid.   The  values  of  these
investments  are  subject  to the  conditions  of the  markets in which they are
traded.  Past  fluctuations  in these  markets  have had  little  effect  on the
liquidity of the Company.  The Company has relatively  little  exposure to lower
grade fixed income  investments  which might be especially  subject to liquidity
problems due to thinly traded markets.

Except as  discussed in Note N to the  consolidated  financial  statements,  the
Company is aware of no known trends, events, or uncertainties  reasonably likely
to have a material effect on its liquidity,  capital  resources,  or operations.
Additionally,  the  Company  has not been made aware of any  recommendations  of
regulatory authorities, which if implemented, would have such an effect.

                                       19
<PAGE>

As disclosed in note K to the consolidated  financial  statements,  in 2002, the
amount that The National Security Group's insurance subsidiaries can transfer in
the form of  dividends  to the parent  company is limited to $1.1 million in the
life insurance  subsidiary and $2.7 million in the  property/casualty  insurance
subsidiary.  However,  that condition poses no short-term or long-term liquidity
concerns for the parent company.

Statutory  Risk-Based  Capital of Insurance  Subsidiaries:  The NAIC has adopted
Risk-Based  Capital (RBC)  requirements  for life/health  and  property/casualty
insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks such as asset quality,  mortality and
morbidity,  asset and liability matching, benefit and loss reserve adequacy, and
other business factors.  State insurance  regulators will use the RBC formula as
an early  warning tool to  identify,  for the purpose of  initiating  regulatory
action,  insurance companies that potentially are inadequately  capitalized.  In
addition, the formula defines new minimum capital standards that will supplement
the current system of low fixed minimum  capital and surplus  requirements  on a
state-by-state  basis.  Regulatory  compliance  is  determined by a ratio of the
company's  regulatory  total  adjusted  capital,  as defined by the NAIC, to its
authorized  control level RBC, as defined by the NAIC.  Companies below specific
trigger  points or ratios are classified  within levels,  each of which requires
corrective action. The levels and ratios are as follows:

                                            Ratio of Total Adjusted Capital to
                                               Authorized Control Level RBC
         Regulatory Event                       (Less Than or Equal to)
         ----------------                      -----------------------
         Company action level                         2
         Regulatory action level                      1.5
         Authorized control level                     1
         Mandatory control level                      0.7

The ratios of Total  Adjusted  Capital to  Authorized  Control Level RBC for The
National   Security   Group's   life/health  and   property/casualty   insurance
subsidiaries are all in excess of eight to one at December 31, 2001.

National  Security  Insurance  Company (life  insurer) has  regulatory  adjusted
capital  of $13  million  and  $14.3  million  at  December  31,  2001 and 2000,
respectively,  and a ratio of regulatory  total  adjusted  capital to authorized
control  level RBC of 15.7 and 12.9 at December 31, 2001 and 2000  respectively.
Accordingly,   National  Security   Insurance  Company  meets  the  minimum  RBC
requirements.

National  Security  Fire &  Casualty  Company  (property/casualty  insurer)  has
regulatory  adjusted  capital of $23.6 million and $24.1 million at December 31,
2001 and 2000, respectively, and a ratio of regulatory total adjusted capital to
authorized  control  level  RBC of 7.0 and 9.7 at  December  31,  2001  and 2000
respectively.  Accordingly,  National Security Fire & Casualty Company meets the
minimum RBC requirements.

Omega One Insurance  Company  (property/casualty  insurer),  which began writing
business in late 1995, has regulatory  adjusted capital of $5.0 million and $4.1
million at December 31, 2001 and 2000,  respectively,  and a ratio of regulatory
total  adjusted  capital  to  authorized  control  level  RBC of 8.4  and 8.4 at
December  31,  2001 and 2000  respectively.  Accordingly,  Omega  One  Insurance
Company meets the minimum RBC requirements.

                                       20
<PAGE>


Item 8.  Consolidated Financial Statements and Supplementary Data

Index to Financial Statements

Consolidated Financial Statements:

Reports of Independent Certified Public Accountants                          22

Consolidated Statements of Income -
  Years Ended December 31, 2001, 2000, and 1999                              24

Consolidated Balance Sheets -
  December 31, 2001 and 2000                                                 25

Consolidated Statements of Shareholders' Equity -
  Years Ended December 31, 2001, 2000, and 1999                              26

Consolidated Statements of Cash Flows -
  Years Ended December 31, 2001, 2000, and 1999                              27

Notes to Consolidated Financial Statements -
  December 31, 2001                                                          28

Financial Statement Schedules:

Reports of Independent Certified Public Accountants
  on Financial Statement Schedules                                           47

Schedule I.  Summary of Investments -
  December 31, 2001 and 2000                                                 48

Schedule II.  Condensed Financial Information of Registrant -
  December 31, 2001 and 2000                                                 49

Schedule III.  Supplementary Insurance Information -
  December 31, 2001, 2000, and 1999                                          53

Schedule IV.  Reinsurance -
  Years Ended December 31, 2001, 2000, and 1999                              54

All other Schedules are not required under related instructions or are
inapplicable and therefore have been omitted.

                                       21


<PAGE>

                          INDEPENDENT AUDITORS REPORT



To the Board of Directors
and Shareholders of
The National Security Group, Inc.
Elba, Alabama

We have audited the  accompanying  consolidated  balance  sheets of The National
Security Group,  Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated  statements of income,  shareholders equity and cash flows
for the years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Companys management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of The
National  Security Group,  Inc. and  subsidiaries at December 31, 2001 and 2000,
and the  results  of their  operations  and their  cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

Barfield, Murphy, Shank & Smith, P.C.

Birmingham, Alabama
February 22, 2002


                                       22
<PAGE>
               Report of Independent Certified Public Accountants


To the Board of Directors
and Shareholders of
The National Security Group, Inc.


We have  audited the  accompanying  consolidated  statements  of income and cash
flows of The National  Security Group,  Inc. and subsidiaries for the year ended
December  31,   1999.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated statements of income and cash flows referred to
above present fairly,  in all material  respects,  the  consolidated  results of
operations and cash flows of The National  Security Group, Inc. and subsidiaries
for the year ended December 31, 1999, in conformity with  accounting  principles
generally accepted in the United States of America.

DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP

Birmingham, Alabama
February 18, 2000

                                       23

<PAGE>
                          THE NATIONAL SECURITY GROUP, INC.

                          CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S>                                                             <C>       <C>        <C>
                                                                   (Dollars in thousands
                                                                    except per share amounts)
                                                                     Years Ended December 31,
                                                                 ---------------------------
                                                                 ---------------------------

REVENUES                                                           2001      2000      1999
   Net premiums earned ........................................   $25,357   $22,921   $25,936
   Net investment income ......................................     4,506     4,434     4,354
   Net realized investment gains ..............................     1,640     1,723     1,951
   Other income ...............................................     1,280       597       385
                                                                   ------    ------    ------
                                                                   32,783    29,675    32,626

BENEFITS AND EXPENSES
   Policyholder benefits paid or provided .....................    13,516    14,125    17,275
   Amortization of deferred policy acquisition costs ..........     1,778     1,302     1,202
   Commissions ................................................     4,338     3,206     3,563
   General insurance expenses .................................     6,223     5,157     4,786
   Insurance taxes, licenses and fees .........................     1,215       774       987
   Interest expense ...........................................       243       267       297
                                                                   ------    ------    ------
                                                                   27,313    24,831    28,110
                                                                   ------    ------    ------
   Income Before Income Taxes and Equity in Income of Affiliate     5,470     4,844     4,516

INCOME TAX EXPENSE
   Current ....................................................     1,051       608       925
   Deferred ...................................................       341       460      (165)
                                                                   ------    ------    ------
                                                                    1,392     1,068       760
                                                                   ------    ------    ------
   Income Before Equity in Income of Affiliate                      4,078     3,776     3,756

   Equity in Income of Affiliate                                       52      --        --
                                                                   ------    ------    ------
                                                     Net Income   $ 4,130   $ 3,776   $ 3,756
                                                                   ======    ======    ======
   EARNINGS PER COMMON SHARE
                                                     Net Income   $  1.67   $  1.53   $  1.52
                                                                   ======    ======    ======
</TABLE>

See notes to consolidated financial statements.

                                       24
<PAGE>
                        THE NATIONAL SECURITY GROUP, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S>                                                                                                   <C>          <C>
                                                                                                       (Dollars in thousands)
                                                                                                            December 31,
                                                                                                      -------------------------
                                                                                                      -------------------------
ASSETS                                                                                                    2001          2000

Investments
   Securities held-to-maturity, at amortized cost (estimated fair value: 2001 - $23,922
    2000 - $29,035) ..................................................................................   $ 23,135   $ 28,875
   Securities available-for-sale, at estimated fair value (cost: 2001 - $45,975;
     2000 - $38,311) .................................................................................     57,648     51,648
   Receivable for securities .........................................................................         50        143
   Note receivable from affiliate ....................................................................        250       --
   Mortgage loans on real estate, at cost ............................................................        275        116
   Investment real estate, at book value (accumulated depr.: 2001 - $17; 2000 - $39) .................      1,563      1,569
   Policy loans ......................................................................................        726        692
   Investment in affiliate ...........................................................................         53       --
   Short-term investments ............................................................................      1,796      1,675
                                                                                                           ------     ------
                                                                                     Total Investments     85,496     84,718
                                                                                                           ------     ------

Cash .................................................................................................      1,595        954
Accrued investment income ............................................................................        938        881
Reinsurance recoverable ..............................................................................      3,524      3,534
Deferred policy acquisition costs ....................................................................      4,615      4,469
Prepaid reinsurance premiums .........................................................................        291        293
Other assets .........................................................................................      3,025      2,714
                                                                                                           ------     ------
                                                                                          Total Assets   $ 99,484   $ 97,563
                                                                                                           ======     ======
LIABILITIES AND SHAREHOLDERS' EQUITY

Policy and claim reserves ............................................................................   $ 41,739   $ 41,918
Checks outstanding in excess of bank balance .........................................................      1,905      1,107
Other policyholder funds .............................................................................      1,503      1,488
Long-term debt .......................................................................................      2,108      2,401
Accrued income taxes .................................................................................        593        336
Other liabilities ....................................................................................      3,669      3,114
Deferred income tax ..................................................................................      3,083      3,419
                                                                                                           ------     ------
                                                                                     Total Liabilities     54,600     53,783
                                                                                                           ======     ======
Commitments and Contingencies ........................................................................       --         --

Shareholders' Equity
   Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding ..............       --         --
   Class A common stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding .......       --         --
   Common stock, $1 par value, 2,500,000 shares authorized, 2,466,600 and 2,339,848
    shares issued and 2,466,600 and 2,055,811 shares outstanding, respectively .......................      2,467      2,340
   Additional paid in capital ........................................................................      4,951         17
   Accumulated other comprehensive income ............................................................      8,618      9,779
   Retained earnings .................................................................................     28,848     35,225
   Treasury stock, at cost (0 and 284,037 shares, respectively) ......................................       --       (3,581)
                                                                                                           ------     ------
                                                                            Total Shareholders' Equity     44,884     43,780
                                                                                                           ------     ------
                                                            Total Liabilities and Shareholders' Equity   $ 99,484   $ 97,563
                                                                                                           ======     ======
</TABLE>

See notes to consolidated financial statements

                                       25

<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
<S>                                          <C>         <C>        <C>       <C>       <C>        <C>        <C>

                                                        (Dollars in thousands)
                                             ---------------------------------------------------------------------------------
                                             ---------------------------------------------------------------------------------
                                                                               Accumulated
                                                                                Other
                                                       Comprehensive  Retained Comprehensive Common   Paid-in   Treasury
                                                Total     Income      Earnings  Income       Stock    Capital    Stock
                                              ---------  ---------   ---------  -------    -------    --------  ---------
                                              ---------  ---------   ---------  -------    -------    --------  ---------

Balance at January 1, 2000 ................  $41,888                $33,197    $9,915    $2,340    $    17     $(3,581)
Comprehensive income:
     Net income for 2000 ..................    3,776    $3,776        3,776        --       --          --         --
     Other comprehensive income, net of tax
         Unrealized loss on securities, net
          of reclassification adjustment ..     (136)     (136)       --         (136)      --          --         --
                                                         -----
Comprehensive income ......................             $3,640
     Cash dividends .......................   (1,748)    =====       (1,748)       --       --          --         --
                                               -----                  -----     -----     -----       -----      -----
Balance at December 31, 2000 ..............   43,780                 35,225     9,779     2,340         17      (3,581)
Comprehensive income:
     Net income for 2001 ..................    4,130     4,078        4,130        --       --          --         --
     Other comprehensive income, net of tax
         Unrealized loss on securities, net
         of reclassification adjustment ...   (1,161)    (1,161)       --      (1,161)      --          --         --
                                                          -----
Comprehensive income ......................              $2,917
                                                          =====
     Retirement of treasury stock .........       --                 (3,297)               (284)                 3,581
     Stock dividend (20%) .................                          (5,345)                411      4,934
     Cash dividends .......................   (1,865)                (1,865)       --        --          --        --
                                               -----                 ------     -----     -------   ------       ------
Balance at December 31, 2001 ..............  $44,884                $28,848    $8,618    $  2,467   $4,951      $  --
                                              ======                 ======    ======     =======   ======       ======
</TABLE>


See notes to consolidated financial statements

                                       26

<PAGE>
                          THE NATIONAL SECURITY GROUP, INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S>                                                                     <C>        <C>        <C>
                                                                          (Dollars in thousands)
                                                                           Year ended December 31,
                                                                        --------------------------------
                                                                        --------------------------------
                                                                            2001       2000      1999
Cash flows from operating activities:
Net income ..........................................................   $  4,130    $  3,776   $  3,756

Adjustments to reconcile net income to net cash provided by (used in)
   operating activities:
    Change in accrued investment income .............................        (57)        (51)       (66)
    Change in reinsurance recoverable ...............................         10       1,153      2,146
    Amortization of deferred policy acquisition costs ...............      1,778       1,119      1,201
    Change in receivable for securities .............................         93        (143)        --
    Net realized gains on investments ...............................     (1,593)     (1,941)    (2,024)
    Gain on disposal of property and equipment ......................        (47)        (32)        --
    Policy acquisition costs deferred ...............................     (1,924)     (1,315)    (1,320)
    Change in current income taxes receivable .......................       --          --           75
    Change in prepaid reinsurance premiums ..........................          2         (36)         9
    Depreciation expense and amortization/accretion .................        (42)        115        219
    Change in policy liabilities and claims .........................       (179)     (3,021)    (4,514)
    Change in income tax payable ....................................        257         459         53
    Change in deferred income taxes .................................        169         284       (166)
    Change in other liabilities .....................................        555          13        109
    Equity in earnings of investee ..................................        (52)       --           --
    Other, net ......................................................       (187)       (822)     1,390
                                                                           ------      ------    -------
       Net cash (used in) provided by operating activities ..........      2,913        (442)       868

Cash flows from investing activities:
   Purchases of held-to-maturity securities .........................       (982)       (668)    (3,759)
   Purchases of available-for-sale securities .......................    (16,575)     (7,139)   (10,189)
   Proceeds from maturities of held-to-maturity securities ..........      6,926       2,622      3,805
   Proceeds from sales of available-for-sale securities .............     10,508       6,973     10,747
   (Purchases of) proceeds from real estate held for investment .....         38         (13)        71
   Net (purchases) proceeds from short-term investment ..............       (121)        454      1,161
   Receipts from repayment of loans, net ............................       (443)        (27)        (1)
   Purchase of property and equipment ...............................       (335)       (378)      (230)
   Proceeds from sale of property and equipment .....................         57          51         36
                                                                           ------      ------    ------
       Net cash (used in) provided by investing activities ..........       (927)      1,875      1,641

Cash flows from financing activities:
   Payments on notes payable ........................................       (293)       (271)      (332)
   Change in other policyholder funds ...............................         15         (38)      (109)
   Dividends paid ...................................................     (1,865)     (1,748)    (1,664)
   Change in treasury stock .........................................       --          --           60
   Change in checks outstanding in excess of bank balances ..........        798         195        136
                                                                           ------      ------     ------
       Net cash used in financing activities ........................     (1,345)     (1,862)    (1,909)
                                                                           ------      ------     ------
       Net (decrease) increase in cash ..............................        641        (429)       600

Cash at beginning of year ...........................................        954       1,383        783
                                                                           ------      -----     ------
Cash at end of year .................................................   $  1,595    $    954     $1,383
                                                                           ======      =====     ======
Cash paid during the year for:
   Interest .........................................................   $    241    $    266     $  296
                                                                           ======      =====     ======
   Income taxes .....................................................   $    800    $    500     $  630
                                                                           ======      =====     ======

</TABLE>

                                       27

<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of The
National Security Group,  Inc. (the Company) and its wholly-owned  subsidiaries:
National Security Insurance Company (NSIC),  National Security Fire and Casualty
Company  (NSFC)  and  NATSCO,  Inc.  (NATSCO).   NSFC  includes  a  wholly-owned
subsidiary - Omega One Insurance Company (Omega).  Omega included a wholly-owned
subsidiary - Liberty  Southern  Insurance  Company (LSIC) through  September 30,
2001.  LSIC was liquidated on September 30, 2001. All  significant  intercompany
transactions and accounts have been eliminated.


Investment in Affiliate

The  companys  investment  in  affiliate  consists of a 50%  interest in Mobile
Attic,  Inc., a portable storage leasing company.  The company accounts for this
investment using the equity method (see note N  commitment).

Description of Major Products

NSIC is licensed in the states of Alabama,  Georgia,  Mississippi,  Texas, South
Carolina  and  Florida  and was  organized  in 1947 to  provide  life and burial
insurance  policies to the home service  market.  Premiums  sold and serviced by
company agents primarily include industrial life, larger ordinary life, accident
and  health,  limited  hospital,  cancer and low  valued  life  insurance.  NSFC
operates in various  property and casualty lines,  the most significant of which
are low valued  dwelling  property,  home service fire,  nonstandard  automobile
physical damage and liability,  nonstandard commercial,  ocean marine and inland
marine.  Omega operates in property and casualty lines,  the most significant of
which is commercial auto liability.

Basis of Presentation

The significant  accounting  policies  followed by The National  Security Group,
Inc. and subsidiaries that materially affect financial  reporting are summarized
below. The accompanying  consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which, as to the
subsidiary  insurance  companies,  differ from  statutory  accounting  practices
permitted by regulatory authorities.

                                       28
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Investments

The Companys  securities  are classified in two categories and accounted for as
follows:

o    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.

o    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,  adjusted  for  other-than-temporary
     declines in fair value.

The Company and its subsidiaries have no trading securities.


Unrealized   holding   gains   and   losses,   net   of   tax,   on   securities
available-for-sale  are  reported  as a net  amount in a separate  component  of
shareholders equity until realized.

Realized  gains and  losses  on the sale of  securities  available-for-sale  are
determined using the specific-identification method.

Mortgage  loans and policy loans are stated at the unpaid  principal  balance of
such loans.  Investment  real estate is reported at cost,  less  allowances  for
depreciation  computed on the straight-line  basis.  Short-term  investments are
carried at cost, which  approximates  market value.  Investments with other than
temporary impairment in value are written down to estimated realizable values.

Disclosures About Fair Value of Financial Instruments

SFAS  No.  107  defines  fair  value  as the  quoted  market  prices  for  those
instruments that are actively traded in financial markets. In cases where quoted
market prices are not available,  fair values are estimated  using present value
or other valuation  techniques.  The fair value estimates are made at a specific
point in time,  based on available  market  information  and judgments about the
financial instrument,  such as estimates of timing and amount of expected future
cash flows.  Such  estimates  do not reflect any premium or discount  that could
result from  offering for sale at one time the  Companys  entire  holdings of a
particular  financial  instrument,  nor do they  consider  the tax impact of the
realization  of  unrealized  gains or  losses.  In many  cases,  the fair  value
estimates cannot be substantiated by comparison to independent  markets, nor can
the disclosed value be realized in immediate settlement of the instrument.

                                       29
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Disclosures About Fair Value of Financial Instruments  continued

SFAS No. 107 excludes  certain  financial  instruments,  particularly  insurance
liabilities other than financial guarantees and investment  contracts,  from its
disclosure requirements. In evaluating the Companys management of interest rate
and  liquidity  risk,  the fair values of all assets and  liabilities  should be
taken into consideration.

The fair values of cash, cash equivalents,  short-term  investments and balances
due on accounts from agents,  reinsurers and others  approximate  their carrying
amounts as reflected in the consolidated  balance sheets due to their short-term
availability or maturity.

The fair values of debt and equity  securities have been determined using values
supplied  by  independent  pricing  services  and are  disclosed  together  with
carrying amounts in Note D.

The fair value of the mortgage  loan  portfolio was  approximately  equal to the
carrying  amount of $275,000 on December  31,  2001  ($116,000  on December  31,
2000).

As of December  31,  2001,  the fair value of policy  loans  approximated  their
carrying amount of $726,000 ($692,000 as of December 31, 2000).

The  fair  value  of  other  policyholder  funds  on  deposit  is  estimated  to
approximate their carrying amount of $1,503,000 on December 31, 2001 ($1,488,000
on December 31, 2000).


Statement of Cash Flows

For purposes of reporting  cash flows,  cash  includes  cash-on-hand  and demand
deposits with banks.

Premium Revenues

Life  insurance  premiums  are  recognized  as revenues  when due.  Property and
casualty insurance premiums, less amounts ceded to reinsurers, are recognized on
a pro rata basis over the terms of the policies.  Reinsurance  premiums  assumed
are recognized as reported by the ceding company.


                                       30

<PAGE>




                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

Deferred Policy Acquisition Costs

The costs of acquiring  new insurance  business are deferred and amortized  over
the lives of the  policies.  Deferred  costs include  commissions,  other agency
compensation and expenses,  and other underwriting  expenses directly related to
the level of new business produced.

Acquisition  costs  relating to life  contracts are  amortized  over the premium
paying period of the contracts, or the first renewal period of term policies, if
earlier. Assumptions utilized in amortization are consistent with those utilized
in computing policy liabilities.

The method of computing the deferred policy  acquisition  costs for property and
casualty policies limits the amount deferred to a percentage of related unearned
premiums.

Policy Liabilities

The liability for future life insurance  policy benefits is computed using a net
level premium method including the following assumptions:
                        Years of Issue   Interest Rate
                          1947 - 1968          4%
                          1969 - 1978    6% graded to 5%
                          1979 - 2001    7% graded to 6%

Mortality  assumptions  include  various  percentages of the 1955-60 and 1965-70
Select and Ultimate Basic Male Mortality Table. Withdrawal assumptions are based
on the Companys experience.

Claim Liabilities

The liability for unpaid claims  represents  the estimated  liability for claims
reported to the Company and its  subsidiaries  plus claims  incurred but not yet
reported and the related  adjustment  expenses.  The  liabilities for claims and
related  adjustment  expenses are determined  using  case-basis  evaluations and
statistical  analyses  and  represent  estimates of the ultimate net cost of all
losses  incurred  through  December  31  of  each  year.  Although  considerable
variability  is  inherent  in  such  estimates,  management  believes  that  the
liabilities for unpaid claims and related adjustment expenses are adequate.  The
estimates are continually  reviewed and adjusted as necessary;  such adjustments
are included in current operations.

                                       31
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Earnings Per Share

Earnings per share of common stock is based on the  weighted  average  number of
shares  outstanding  during each year.  The  adjusted  weighted  average  shares
outstanding were 2,466,600 (2,466,600 in 2000 and 1999).


Reinsurance

In the normal  course of business,  NSFC seeks to reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results by
reinsuring  certain  levels of risk in  various  areas of  exposure  with  other
insurance  enterprises or reinsurers.  Amounts  recoverable  from reinsurers are
estimated in a manner  consistent with the claim  liability  associated with the
reinsured  policy.  Amounts  paid  for  prospective  reinsurance  contracts  are
reported  as prepaid  reinsurance  premiums  and  amortized  over the  remaining
contract period.

In the normal  course of  business,  NSIC seeks to limit its exposure to loss on
any  single  insured  and to  recover  a  portion  of  benefits  paid by  ceding
reinsurance to other insurance  enterprises or reinsurers  under excess coverage
contracts.  NSIC retains a maximum of $30,000 of coverage per  individual  life.
The  cost  of  reinsurance  is  amortized  over  the  contract   period  of  the
reinsurance.

Reclassifications

Certain  reclassifications  have been made in the previously  reported financial
statements  to make the prior year  amounts  comparable  to those of the current
year. Such reclassifications had no effect on the previously reported net income
or shareholders equity.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Recently Issued Accounting Standards

On January 1, 2001,  the  Company  adopted  Statement  of  Financial  Accounting
Standards (SFAS) No. 133,  Accounting for Derivative  Instruments and Hedging
Activities.  SFAS No. 133, as amended by SFAS Nos.  137 and 138,  requires  the
Company  to record all  derivative  financial  instruments  at fair value on the
balance sheet. Changes in fair value of a derivative  instrument are reported in
net income or other comprehensive income, depending on the designated use of the
derivative  instrument.  The  adoption  of SFAS No.  133 did not have a material
effect  on  the  Companys   financial   position  or  results  of   operations.
Prospectively,  the  adoption  of No.  133 may  introduce  volatility  into  the
Companys


                                       32
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Recently Issued Accounting Standards continued

reported net income and other  comprehensive  income  depending on future market
conditions and the Companys hedging activities.

In September  2000 the FASB issued SFAS No. 140,  Accounting  for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,  a replacement
of SFAS No.  125.  SFAS No.  140  revises  the  standards  for  accounting  for
securitizations  and other  transfers of  financial  assets.  This  Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001.

Recently Issued Accounting Standards- Continued

The adoption of this  accounting  standard did not have a material effect on the
Companys financial position or results of operations.

In June 2001, the FASB issued SFAS Nos. 141, Business  Combinations,  and 142,
Goodwill  and Other  Intangible  Assets.  SFAS No. 141 requires  that business
combinations  initiated after June 30, 2001, be accounted for using the purchase
method.  SFAS No. 142 revises the standards for accounting for acquired goodwill
and  other  intangible  assets.  SFAS No.  142 is  effective  for  fiscal  years
beginning  after December 15, 2001, and effective for any goodwill or intangible
asset  acquired after June 30, 2001. The Company does not expect the adoption of
SFAS No. 142 to have a material  effect on the Companys  financial  position or
results of operations.

In July 2001,  the FASB issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations.  SFAS No. 143 requires that  companies  record the fair value of a
liability  for an  asset  retirement  obligation  in the  period  in  which  the
liability is incurred.  The  Statement is effective  for fiscal years  beginning
after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to
have a  material  effect on the  Companys  financial  position  or  results  of
operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived  Assets.  SFAS No. 144 revises SFAS No. 121 by requiring
that one  accounting  model be used for  long-lived  assets to be disposed of by
sale, whether previously held and used or newly acquired,  and by broadening the
presentation of discontinued  operations to include more disposal  transactions.
SFAS No. 144 is effective for fiscal years  beginning  after  December 15, 2001.
The  Company  does not  expect the  adoption  of SFAS No. 144 to have a material
effect on the Companys financial position or results of operations.

                                       33

<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - BUSINESS COMBINATION

During the second quarter of 2000, Omega acquired 100% of the outstanding  stock
of Liberty Southern  Insurance Company (LSIC) for a total cash purchase price of
approximately  $700,000.  Effective  December 31, 2000,  all  insurance  related
assets  and  liabilities  of LSIC were  transferred  to Omega as the result of a
novation.  This transaction was approved by the Alabama  Department of Insurance
during a hearing relating to the acquisition of LSIC by Omega.


The  purchase of LSIC was  accounted  for by the  purchase  method,  whereby the
underlying   assets  acquired  and   liabilities   assumed  from  the  purchased
corporation are recorded by Omega at their fair value.  The excess of the amount
paid over the fair value of LSICs  identifiable  net  assets was  approximately
$200,000,  which has been  recorded as a charge to  earnings  in year 2000.  The
operating  results  of LSIC have been  included  in the  Companys  consolidated
financial  statements  since the date of  acquisition.  The  purchase  agreement
provides  for  additional  consideration  to be  paid  the  former  stockholders
contingent upon specified premium growth of the LSIC block of business.

Pro forma results of  consolidated  operations  for 2000 and 1999,  assuming the
LSIC acquisition was made at the beginning of each year, is as follows:

                                                           2000             1999
Net premiums earned ..........................          $23,817          $26,787
Income before taxes ..........................          $ 4,653          $ 4,450
Net income ...................................          $ 3,585          $ 3,690
Earnings per common share ....................          $  1.45          $  1.50


                                       34
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - STATUTORY ACCOUNTING PRACTICES

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with generally  accepted  accounting  principles (GAAP) which vary in
certain respects from reporting  practices  prescribed or permitted by insurance
regulatory  authorities.  The significant  differences  for statutory  reporting
include:  (a)  acquisition  costs of  acquiring  new  business  are  charged  to
operations as incurred,  (b) life policy  liabilities are established  utilizing
interest and  mortality  factors  specified by regulatory  authorities,  (c) the
Asset  Valuation  Reserve (AVR) and the Interest  Maintenance  Reserve (IMR) are
recorded as liabilities,  and (d) non-admitted  assets (furniture and equipment,
agents debit balances and prepaid expenses) are charged directly to surplus.

Statutory  net  gains  from  operations  and  capital  and  surplus,   excluding
intercompany transactions, are summarized as follows:
<TABLE>
<CAPTION>
<S>                                                             <C>         <C>       <C>
                                                                     (Dollars in thousands)
                                                                     Year Ended December 31,
                                                                   ---------------------------
                                                                   ---------------------------
                                                                     2001      2000   1999
NSIC - including realized capital gains of  $652, $986 and $818,
  respectively .................................................   $   709   $ 1,016   $ 2,092
                                                                    ======    ======    ======
NSFC - including realized capital gains of $875, $709 and
  $684, respectively ...........................................   $ 2,720   $ 2,140   $ 1,703
                                                                    ======    ======    ======
Omega - including realized capital gains of $152, $257, and
  $480, respectively ...........................................   $ 1,047   $ 1,155   $   231
                                                                    ======    ======    ======
LSIC (nine months ended September 30 for 2001) .................   $     6   $     8   $  --
                                                                    ======    ======    ======
Statutory capital and surplus:
NSIC - including AVR of $1,586, $1,780 and $2,639,
  respectively .................................................   $11,416   $14,925   $15,202
                                                                    ======    ======    ======
NSFC ...........................................................   $23,572   $24,170   $23,443
                                                                    ======    ======    ======
Omega ..........................................................   $ 5,000   $ 4,079   $ 3,182
                                                                    ======    ======    ======
LSIC ...........................................................  $      0   $   500   $     0
                                                                    ======    ======    ======

</TABLE>

The above amounts  exclude  allocation of overhead from the Company.  NSIC, NSFC
and Omega are in compliance with statutory  restrictions  with regard to minimum
amounts of surplus and capital. LSIC was liquidated on September 30, 2001.

                                       35
<PAGE>





                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE D - INVESTMENT SECURITIES

The amortized cost and aggregate fair values of investments in securities are as
follows:

<TABLE>
<CAPTION>
<S>                                                       <C>        <C>       <C>        <C>
                                                               (Dollars in thousands)
                                                                  December 31, 2001
                                                                      Gross       Gross
                                                          Amortized   Unrealized Unrealized  Fair
                                                           Cost        Gains      Losses     Value

Available-for-sale securities:
   Corporate debt securities ............................   $19,564   $   356   $  (441)   $19,479
   Obligations of states and political subdivisions .....     2,895        99        (4)     2,990
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..........    12,242       436        (2)    12,676
   Equity securities ....................................    11,274    12,237    (1,008)    22,503
                                                            -------    ------    -------    ------
                                                    Total   $45,975   $13,128   $(1,455)   $57,648
                                                            =======    ======    =======    ======

Held-to-maturity securities:
   Corporate debt securities ............................   $ 9,517   $   324   $   (65)   $ 9,776
   Obligations of states and political subdivisions .....     4,235       273       (12)     4,496
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..........     9,383       281       (14)     9,650
                                                            -------    ------    -------    ------
                                                    Total   $23,135   $   878   $   (91)   $23,922
                                                            =======    ======    =======    ======


                                                               (Dollars in thousands)
                                                                  December 31, 2000
                                                                          Gross       Gross
                                                           Amortized     Unrealized  Unrealized Fair
                                                            Cost         Gains       Losses     Value

Available-for-sale securities:
   Corporate debt securities ............................   $10,870  $    120   $  (418)   $10,572
   Obligations of states and political subdivisions .....     2,447        40       (28)     2,459
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..........    13,450       255       (51)    13,654
   Equity securities ....................................    11,544    14,628    (1,209)    24,963
                                                            -------    ------    -------    ------
                                                    Total   $38,311   $15,043   $(1,706)   $51,648
                                                            =======    ======    =======    ======
</TABLE>
                                       36
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE D - INVESTMENT SECURITIES  CONTINUED

<TABLE>
<CAPTION>
<S>                                                       <C>          <C>       <C>      <C>

                                                               (Dollars in thousands)
                                                                  December 31, 2000
                                                                         Gross     Gross
                                                             Amortized Unrealized Unrealized  Fair
Held-to-maturity securities:                                   Cost     Gains      Losses    Value

   Corporate debt securities ............................   $10,683   $   116   $  (108)   $10,691
   Obligations of states and political subdivisions .....     4,338       245       (66)     4,517
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..........    13,854       113      (140)    13,827
                                                            -------    ------    -------    ------
                                                    Total   $28,875   $   474   $  (314)   $29,035
                                                            =======    ======    =======    ======
</TABLE>


The amortized cost and aggregate  fair value of debt  securities at December 31,
2001, by contractual maturity,  are as follows.  Expected maturities will differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.

                                                          (Dollars in Thousands)
                                                            Amortized   Fair
Available-for-sale securities:                                 Cost     Value
   Due in one year or less ...............................   $ 1,795     1,812
   Due after one year through five years .................     6,243     6,285
   Due after five years through ten years ................    17,734    18,142
   Due after ten years ...................................     8,929     8,906
                                                             -------   -------
                                                     Total   $34,701   $35,145
                                                             =======   =======
Held-to-maturity securities:
   Due in one year or less ...............................   $ 2,384    $2,454
   Due after one year through five years .................     5,783     6,049
   Due after five years through ten years ................     6,046     6,262
   Due after ten years ...................................     8,922     9,157
                                                              ------    ------
                                                     Total   $23,135   $23,922
                                                              ======    ======

For 2001,  gross gains of $1,785,394  ($2,715,057  for 2000) and gross losses of
$323,829     ($774,196     for    2000)    were    realized    on    sales    of
available-for-sale-securities.

                                       37
<PAGE>




                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE E - NET INVESTMENT INCOME

Major categories of investment income are summarized as follows:

                                                     (Dollars in thousands)
                                                     Year ended December 31,
                                                 ------------------------------
                                                 ------------------------------
                                                    2001       2000      1999


Fixed maturities ..............................   $ 3,819    $ 3,629    $ 3,567
Equity securities .............................       544        642        630
Mortgage loans on real estate .................        16          7          9
Investment real estate ........................       138        142         18
Policy loans ..................................        35         43         33
Other, principally short-term investments .....        88        121        129
                                                    ------    ------      ------
                                                    4,640      4,584      4,386

Less: Investment expenses .....................      (134)      (150)       (32)
                                                    ------    ------      ------
Net investment income .........................   $ 4,506    $ 4,434    $ 4,354
                                                    ======    ======      ======

An analysis of investment gains follows:
                                                       Year ended December 31,
                                                    2001       2000       1999
Net realized investment gains (losses):
   Fixed maturities ...........................   $   149    $  (419)   $   (16)
   Other, principally equity securities .......     1,491      2,142      1,967
                                                    ------    ------      ------
                                                  $ 1,640    $ 1,723    $ 1,951
                                                    ======    ======      ======


An analysis of net decrease in  unrealized  appreciation  on  available-for-sale
securities follows:
<TABLE>
<CAPTION>
<S>                                                       <C>        <C>       <C>
                                                               Year ended December 31,
                                                        --------------------------------------
                                                        --------------------------------------
                                                             2001       2000        1999

Net Decrease in unrealized appreciation on available-for-
   sale securities before deferred tax ..................   $ (1,366)   $(191)   $(3,196)
Deferred income tax .....................................        205       55        965
                                                            --------   -------    -------
Net Decrease in unrealized appreciation on available-for-
   sale securities ......................................   $ (1,161)   $(136)   $ (2,231)
                                                            ========   =======    =======

</TABLE>
                                       38
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE F - INCOME TAXES

Total  income tax expense  varies  from  amounts  computed  by applying  current
federal  income tax rates to income before  income  taxes.  The reason for these
differences  and the  approximate  tax effects are as follows:

<TABLE>
<CAPTION>
<S>                                                   <C>        <C>        <C>
                                                          (Dollars in thousands)
                                                          Year ended December 31,
                                                      -----------------------------
                                                      -----------------------------
                                                          2001       2000       1999

Federal income tax rate applied to pre-tax income ..   $ 1,860    $ 1,647    $ 1,535
Dividends received deduction and tax-exempt interest      (182)      (213)      (198)
Small life insurance company deduction .............      (122)      (209)      (410)
other, net .........................................      (164)      (157)      (167)
                                                       -------    -------    -------
Federal income tax expense .........................   $ 1,392    $ 1,068    $   760
                                                       =======    =======    =======
</TABLE>


Net deferred tax  liabilities are determined  based on the estimated  future tax
effects of differences  between the financial  statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws.

The tax  effect of  significant  differences  representing  deferred  assets and
liabilities are as follows:

                                                      (Dollars in Thousands)
                                                    ---------------------------
                                                    ---------------------------
                                                       Year ended December 31,
                                                      2001                 2000
                                                    ---------------------------

Deferred policy acquisition costs                  $ (1,569)         $   (1,519)
Policy liabilities                                      349                 419
Unearned premiums                                       464                 383
Claim liabilities                                       310                 432
General insurance expenses                              757                 694
Alternative minimum tax credit carryforward               0                  67
Unrealized gains on securities available-for-sale    (3,394)             (3,895)
                                                    --------           --------
Net deferred tax liabilities                      $  (3,083)         $   (3,419)
                                                    ========           ========

                                       39
<PAGE>




                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F - INCOME TAXES - CONTINUED

The  appropriate  income tax effects of changes in temporary  differences are as
follows:
                                               Year ended December 31,
                                                ----------------------
                                                ----------------------
                                               2001     2000     1999

Deferred policy acquisition costs ..........  $   49    $  66    $  41
Policy liabilities .........................      70       69      (25)
Unearned premiums ..........................     (81)     (56)     113
General insurance expenses .................     (62)      18       (1)
Alternative minimum tax credit carryforward      243      247     (314)
Claim liabilities ..........................     122      116       21
                                               ------ --------   -------
                                               $ 341  $   460    $(165)
                                               ====== ========   =======

Under  pre-1984 life  insurance  company tax laws, a portion of NSIC's gain from
operations was not subject to current income  taxation,  but was accumulated for
tax purposes in a memorandum account designated  "policyholders'  surplus".  The
aggregate  balance in this account,  $3,720,000  at December 31, 2001,  would be
taxed at current rates only if  distributed  to  shareholders  or if the account
exceeded a prescribed  minimum.  The Deficit  Reduction  Act of 1984  eliminated
additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have
not been provided on amounts designated as policyholders'  surplus. The deferred
income tax liability not recognized is approximately  $1,270,000 at December 31,
2001.


NOTE G - LONG-TERM DEBT

Long-term debt consisted of the following as of December 31:

                                                    (Dollars in thousands)
                                                    ----------------------
                                                        2001     2000
Note payable to bank with a 7% interest rate
dated October 9, 1998; matures May 28, 2004
Payments of $63,575 due quarterly. Unsecured ......   $2,108   $2,208

Note payable to bank with a 7.44% interest rate
dated February 25, 1998; matures February 26, 2003
Payments of $45,374 due quarterly. Unsecured ......
                                                         0        193
                                                      ------   ------
                                                       2,108   $2,401

Aggregate maturities of long-term debt for each of the three years subsequent to
December 31, 2001 are as follows (dollars in thousands):  2002-$110;  2003-$118;
2004-$1,880.



                                       40
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - POLICY AND CLAIM RESERVES

At December 31, policy and claim reserves consisted of the following:

                                                         (Dollars in thousands)
                                                          2001            2000
                                                          ----            ----
Benefit and loss reserves
  Property and casualty ......................          $11,489          $15,409
  Accident and health ........................              318              301
  Life and annuity ...........................           22,416           19,486
Unearned premiums ............................            7,115            6,364
Policy and contract claims ...................              401              358
                                                        -------          -------
                                                        $41,739          $41,918
                                                        =======          =======


The following  table is a  reconciliation  of beginning and ending  property and
casualty reserve balances for claims and claim adjustment  expense for the years
ended December 31:


                                                        (Dollars in thousands)
                                                --------------------------------
                                                 2001         2000         1999

Claims and claim adjustment expense
  reserves at beginning of year                 $15,409     $18,471     $21,528
Less reinsurance recoverables on
  unpaid losses                                   3,092       3,907       5,889
                                                 ------      ------      ------
Net balances at beginning of year                12,317      14,564      15,639
Provision for claims and claim adjustment
  expenses for claims arising in current year    14,045      14,465      15,859
Estimated claims and claims adjustment
  expenses for claims arising in prior years     (3,089)     (5,411)     (3,074)
                                                 ------      ------      ------
Total increases                                  10,956       9,054      12,785
Claims and claim adjustment expense
  payments for claims arising in:
    Current year                                  9,891       8,792       9,934
    Prior years                                   4,289       2,509       3,926
                                                 ------      ------      ------
Total payments                                   14,180      11,301      13,860
                                                 ------      ------      ------
Net balance at end of year                        9,093      12,317      14,564
Plus reinsurance recoverables on
  unpaid losses                                   2,396       3,092       3,907
                                                 ------      ------      ------
Claims and claim adjustment expense
  reserves at end of year                       $11,489     $15,409     $18,471
                                                 ======      ======      ======
                                       41
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - POLICY AND CLAIM RESERVES - CONTINUED

As a result of  changes  in  estimates  of insured  events in prior  years,  the
provision  of  claims  and  claim   adjustment   expenses  (net  of  reinsurance
recoveries)  decreased in 2001, 2000 and 1999 because of  lower-than-anticipated
losses in commercial and private passenger automobile lines of business.

The Company has a geographic  exposure to catastrophe losses in certain areas of
the country.  Catastrophes can be caused by various events including hurricanes,
windstorms,  earthquakes, hail, severe winter weather, explosions and fires, and
the incidence and severity of  catastrophes  are inherently  unpredictable.  The
extent of losses from a  catastrophe  is a function of both the total  amount of
insured  exposure  in the area  affected  by the event and the  severity  of the
event.  Most  catastrophe  losses  are  restricted  to small  geographic  areas;
however,  hurricanes and  earthquakes may produce  significant  damage in large,
heavily  populated areas. The Company  generally seeks to reduce its exposure to
catastrophes  through  individual risk selection and the purchase of catastrophe
reinsurance.


NOTE I - REINSURANCE

The Companys insurance operations  participate in reinsurance in order to limit
losses, minimize exposure to large risks, provide additional capacity for future
growth  and  effect   business-sharing   arrangements.   Life   reinsurance   is
accomplished through yearly renewable term. Property and casualty reinsurance is
placed  on both a  quota-share  and  excess  of loss  basis.  Reinsurance  ceded
arrangements do not discharge the insurance subsidiaries as the primary insurer,
except for cases  involving a  novation.  Failure of  reinsurers  to honor their
obligations could result in losses to the insurance subsidiaries.  The insurance
subsidiaries  evaluate the financial  conditions of their reinsurers and monitor
concentrations  of  credit  risk  arising  from  similar   geographic   regions,
activities,  or economic  characteristics  of the  reinsurers to minimize  their
exposure to significant  losses from reinsurance  insolvencies.  At December 31,
2001,  reinsurance  receivables  with a carrying value of $618,000  ($912,000 at
December 31,  2000) and prepaid  reinsurance  premiums of $291,000  ($293,000 at
December  31,  2000) were  associated  with a single  reinsurer.  The amounts of
recoveries  pertaining to  reinsurance  contracts that were deducted from losses
incurred during 2001, 2000 and 1999 were approximately  $988,801,  $605,000, and
$1,819,000, respectively



The effect of reinsurance on premiums written and earned was as follows:


                                    (Dollars in Thousands)
                                            2001
                       ----------------------------------------------------
                       ----------------------------------------------------
                                  NSIC                       NSFC
                       ----------------------- ----------------------------
                       ----------------------- ----------------------------
                        Written       Earned      Written         Earned

Direct ...........       $5,047      $  5,206      $ 22,528      $ 21,777
Assumed ..........         --            --            --            --
Ceded ............          (45)          (45)       (1,579)       (1,581)
                         ------       -------      --------      --------
Net ..............       $5,002      $  5,161      $ 20,949      $ 20,196
                         ======       =======      ========      ========

                                       42
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I - REINSURANCE - CONTINUED

                                    (Dollars in Thousands)
                                            2000
                       ----------------------------------------------------
                       ----------------------------------------------------
                                  NSIC                       NSFC
                       ----------------------- ----------------------------
                       ----------------------- ----------------------------
                        Written       Earned      Written         Earned

Direct ...........       $4,456      $  4,645      $ 18,951      $ 20,628
Assumed ..........         --            --            --            --
Ceded ............          (51)          (51)       (1,460)       (2,302)
                         ------       -------      --------      --------
Net ..............       $4,405      $  4,594      $ 17,491      $ 18,326
                         ======       =======      ========      ========

                                   (Dollars in Thousands)
                                            1999
                       ----------------------------------------------------
                       ----------------------------------------------------
                                  NSIC                       NSFC
                       ----------------------- ----------------------------
                       ----------------------- ----------------------------
                        Written       Earned      Written         Earned

Direct ...........       $4,047      $  4,300      $ 21,421      $ 23,078
Assumed ..........         --            --            --            --
Ceded ............          (49)          (49)       (1,385)       (1,393)
                         ------       -------      --------      --------
Net ..............       $3,998      $  4,251      $ 20,036      $ 21,685
                         ======       ======       ========      ========

NOTE J - EMPLOYEE BENEFIT PLAN

In 1989, the Company and its subsidiaries  established a retirement savings plan
and  transferred  the assets from the defined  contribution  profit sharing plan
into the new  plan.  All  full-time  employees  who have  completed  one year of
service at January 1 or July 1 are  eligible  to  participate  and all  employee
contributions  are fully vested for employees who have completed  1,000 hours of
service in the year of  contribution.  Contributions  for 2001,  2000,  and 1999
amounted to $130,000, $127,000, and $161,000, respectively. Contributions are at
the Board of Directors discretion subject to governmental limitations.

In 1987, the Company  established a deferred  compensation plan for its Board of
Directors.  The Board  members have an option of deferring  their fees to a cash
account or to a stock  account and all share  deferrals are recorded at the fair
market value on the date of the award.  Costs of the deferred  compensation plan
for 2001,  2000,  and 1999  amounted  to  approximately  $35,065,  $54,755,  and
$48,490, respectively.

NOTE K - REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS

The  amount  of  dividends  paid from  NSIC to the  Company  in any year may not
exceed, without prior approval of regulatory authorities,  the greater of 10% of
statutory surplus as of the end of the preceding year, or the statutory net gain
from  operations for the preceding  year. At December 31, 2001,  NSICs retained
earnings  unrestricted  for  the  payment  of  dividends  in  2002  amounted  to
$1,141,562.

                                       43
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE K - REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS - CONTINUED

NSFC is similarly  restricted in the amount of dividends payable to the Company;
dividends  may not exceed the greater of 10% of statutory  surplus as of the end
of the  preceding  year,  or net income  for the  preceding  year.  As a result,
dividends from NSFC to the Company are limited to $2,719,538 in 2002.

At December 31, 2001, securities with market values of $3,458,441 ($3,745,717 at
December 31, 2000) were  deposited  with  various  states  pursuant to statutory
requirements.

Under applicable  Alabama  insurance laws and  regulations,  NSFC is required to
maintain a minimum  total surplus (to include both paid-in and  contributed  and
unassigned surplus) of $100,000.

Under applicable  Alabama  insurance laws and  regulations,  NSIC is required to
maintain a minimum  total surplus (to include both paid-in and  contributed  and
unassigned surplus) of $200,000.

Under applicable  Alabama  insurance laws and regulations,  Omega is required to
maintain a minimum  total surplus (to include both paid-in and  contributed  and
unassigned surplus) of $600,000.


NOTE L - SHAREHOLDERS EQUITY


Preferred Stock

The  Preferred  Stock may be issued in one or more  series as shall from time to
time be determined and  authorized by the Board of Directors.  The directors may
make specific  provisions  regarding (a) the voting  rights,  if any (b) whether
such  dividends  are  to be  cumulative  or  noncumulative  (c)  the  redemption
provisions,  if any (d)  participating  rights,  if any (e) any sinking  fund or
other retirement  provisions (f) dividend rates (g) the number of shares of such
series and (h) liquidation preference.

Common Stock

The holders of the Class A Common Stock will have  one-twentieth of one vote per
share, and the holders of the common stock will have one vote per share.

In the event of any  liquidation,  dissolution or  distribution of the assets of
the Company  remaining  after the payments to the holders of the Preferred Stock
of the full  preferential  amounts to which they may be  entitled as provided in
the resolution or resolutions  creating any series thereof, the remaining assets
of the  Company  shall be  divided  and  distributed  among the  holders of both
classes  of  common  stock,  except as may  otherwise  be  provided  in any such
resolution or resolutions.


                                       44
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE M - INDUSTRY SEGMENTS

The Company and its subsidiaries  operate  primarily in the insurance  industry.
Premium  revenues and operating  income by industry  segment for the years ended
December 31, 2001, 2000 and 1999 are summarized below:


                                                     (Dollars in thousands)
                                                     Year ended December 31,
                                                       2001      2000     1999
                                                       ----     -----    ------
Premium Revenues:
  Individual life and accident and health insurance   $ 5,161 $ 4,595   $ 4,251
  Property and casualty insurance                      20,196  18,326    21,685
                                                       ------  ------    ------
                                                      $25,357 $22,921   $25,936
                                                       ======  ======    ======

Income (loss) before income taxes:
  Individual life and accident and health insurance   $   586   $1,667   $2,556
  Property and casualty insurance                       5,440    3,917    2,365
  Other                                                  (313)    (473)    (110)
                                                       ------    ------   ------
                                                        5,713    5,111    4,811
                                                         (243)    (267)    (295)
                                                       ------    ------   ------
  Interest expense                                    $ 5,470    $4,844   $4,516
                                                       ======    ======   ======

Assets
  Individual life and accident and health insurance   $44,513   $42,150  $41,323
  Property and casualty insurance                      54,962    55,256   56,714
  Other                                                   509       157       68
                                                       ------    ------   ------
                                                      $99,984   $97,563 $ 98,105
                                                       ======    ======   ======

Amortization of deferred policy acquisition costs and
  depreciation expense:
    Individual life and accident and health insurance $   609     $ ( 61) $(252)
    Property and casualty Insurance                     1,279      1,406   1,615
                                                       ------     ------  ------
                                                      $ 1,888     $1,345  $1,363
                                                       ======     ======  ======

Capital expenditures are not material, and consequently not reported.


NOTE N - COMMITMENTS AND CONTINGENCIES

Commitments

The Company is obligated  under a commitment  to extend  credit to Mobile Attic,
Inc.,  in the form of a $1,000,000  credit  line.  The credit line is secured by
inventory  and  matures on  September  18,  2002.  Interest is due on the unpaid
principal at the rate of 8% per annum. The Company may, at its option anytime on
or before the payment by Mobile  Attic,  Inc. of all  outstanding  principal and
interest,  elect to convert the outstanding  principal and accrued interest to a
proportionate share of common stock in Mobile Attic, Inc.

                                       45
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED


Contingencies

The Company and its  subsidiaries  continue to be named as parties to litigation
related to the  conduct  of their  insurance  operations.  These  suits  involve
alleged breaches of contracts, torts, including bad faith and fraud claims based
on alleged wrongful or fraudulent acts of agents of the Companys  subsidiaries,
and miscellaneous  other causes of action. Most of these lawsuits include claims
for punitive damages in addition to other specified relief.

NSFC, a subsidiary of the Company, was named as a defendant in a purported class
action filed in Lee County,  Alabama.  On January 4, 2000,  the Circuit Court of
Lee County  preliminarily  approved a consent  settlement to this action and the
settlement  was  finalized in the second  quarter of 2000. A provision  for this
settlement was reflected in the 1999 results of operations of the Company.

In two  separate  recently  filed  actions,  NSIC is  named  as a  defendant  in
purported  class  actions  relating  to  the  past  sale  of  industrial  burial
insurance.  The actions  address whether the premiums  charged were  excessive
relative to the benefit  provided and whether the  premiums  charged were in any
manner  discriminatory  relative to the race of the person insured. In addition,
several  individual  actions on behalf of  specifically  named persons have been
filed with  similar  allegations.  These  actions are in the initial  phases and
little discovery has been undertaken and no class has been certified.  While the
cases entail separate and distinguishable facts, the legal issues are similar to
the issues  pending in  numerous  other  actions  currently  pending  nationwide
against  numerous  insurers.  While NSIC did at one time sell industrial  burial
insurance, no such plans have been sold for several decades.

The company  establishes and maintains  reserves on contingent  liabilities.  In
many instances, however, it is not feasible to predict the ultimate outcome with
any degree of accuracy.  While a resolution of these  matters may  significantly
impact consolidated earnings and the Companys  consolidated financial position,
it remains managements opinion, based on information presently available,  that
the ultimate  resolution of these matters will not have a material impact on the
Companys  consolidated  financial  position.  However,  it should be noted that
instances of class action  lawsuits  against  insurance  companies  appear to be
increasing  in several  states in which  insurance  subsidiaries  of the company
operate.

NOTE O - CONCENTRATION OF CREDIT RISK

The Company maintains its cash accounts primarily with banks located in Alabama.
The total cash  balances  are insured by the FDIC up to $100,000  per bank.  The
Company had cash  balances on deposit  with  Alabama  banks at December 31, 2001
that exceeded the balance insured by the FDIC in the amount of $617,888.


                                       46
<PAGE>


                          INDEPENDENT AUDITORS REPORT
                        ON FINANCIAL STATEMENT SCHEDULES



To the Board of Directors
and Shareholders of
The National Security Group, Inc.

Elba, Alabama

Under date of February  22,  2002,  we  reported  on the  balance  sheets of The
National  Security Group, Inc. as of December 31, 2001 and 2000, and the related
statements  of  income,  shareholders  equity and cash flows for the years then
ended, which are included in this Form 10-K. In connection with our audit of the
aforementioned  financial  statements,  we also  audited the  related  financial
statement  schedules listed in the accompanying index. These financial statement
schedules are the responsibility of the Companys management. Our responsibility
is to express an opinion on these  financial  statement  schedules  based on our
audit.

In our opinion, such financial statement schedules,  when considered in relation
to the basic  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.


Barfield, Murphy, Shank & Smith, P.C.

Birmingham, Alabama
February 22, 2002

                                       47

<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.
                SCHEDULE I. SUMMARY OF INVESTMENTS (CONSOLIDATED)
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                               <C>           <C>        <C>           <C>         <C>              <C>

                                            December 31, 2001                        December 31, 2000
                                    ----------------------------------     --------------------------------------

                                                             Amount                                    Amount
                                                             per the                                    per the
                                    Original      Fair        Balance      Original        Fair        Balance
                                     Cost         Value       Sheet          Cost         Value          Sheet
                                    --------     --------    ---------     ---------    -----------    ----------
Securities Held to Maturity:

       United States government     $9,364       $9,650       $9,383       $14,080        $14,093       $14,104
       States, municipalities
       and political subdivisions    4,224        4,496        4,235         4,037          4,214         4,052
       Public Utilities                974          989          969         1,597          1,570         1,595
       Industrial and Miscellaneous  8,506        8,787        8,549         9,075          9,158         9,124
                                    --------     --------    ---------     ---------    -----------    ----------
       Total Securities Held to
       Maturity . . . . . . .        23,068       23,922       23,136        28,789         29,035        28,875
                                    --------     --------    ---------     ---------    -----------    ----------

Securities Available for Sale:

       Equity Securities:
       Public utilities               1,543        2,953        2,953         1,443          3,345         3,345
       Banks and insurance
       companies                      1,758        4,886        4,886         1,952          5,500         5,500
       Industrial and all other       7,973       14,664       14,664         8,150         16,118        16,118
                                    --------     --------    ---------     ---------    -----------    ----------
       Total equity securities       11,274       22,503       22,503        11,545         24,963        24,963
                                    --------     --------    ---------     ---------    -----------    ----------

            Debt Securities:
       United States government      12,243       12,676       12,676        13,450         13,654        13,654
       States, municipalities
       and political subdivisions     2,895        2,990        2,990         2,447          2,459         2,459
       Public Utilities                 656          667          667           191            196           196
       Industrial and Miscellaneous  18,907       18,811       18,811        10,680         10,376        10,376
                                    --------     --------    ---------     ---------    -----------    ----------
       Total Debt Securities         34,701       35,144       35,144        26,768         26,685        26,685
                                    --------     --------    ---------     ---------    -----------    ----------

       Total Available for Sale      45,975       57,647       57,647        38,313         51,648        51,648
                                    --------     --------    ---------     ---------    -----------    ----------

       Total Securities              69,043       81,569       80,783        67,102         80,683        80,523
Receivable for securities                50                        50           143                          143
Note receivable from affiliate          250                       250             0                            0
Mortgage loans on real estate           275                       275           116                          116
Investment real estate                1,563                     1,563         1,569                        1,569
Policy loans                            726                       726           692                          692
Investment in affiliate                  53                        53             0                            0
Short term investments                1,796                     1,796         1,675                        1,675
                                    --------                 ---------     ---------                   ----------
          Total investments         $73,756                   $85,496       $71,297                      $84,718
                                    ========                 =========     =========                   ==========
</TABLE>


                                       48
<PAGE>


               THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS
                             (AMOUNTS IN THOUSANDS)

                                                          December 31,
                                                      ------------------------
                                                       2001            2000
                                                      ------           ----
Assets
  Cash                                                 $101             $66
  Investment in subsidiaries (equity method)
      eliminated upon consolidation                  47,062          46,481
  Other assets                                          722             458
                                                      -----          ------
   Total Assets                                     $47,885         $47,005
                                                     ======          ======

Liabilities and Shareholders Equity
  Accrued general expenses                            $893             $824
  Notes Payable                                      2,108            2,401
                                                     -----           ------
   Total Liabilities                                 3,001            3,225
                                                     -----           ------
   Total Shareholders' Equity                      $44,884          $43,780
                                                    ------           ------
   Total Liabilities and Shareholders' Equity      $47,885          $47,005
                                                   =======           ======


                                       49
<PAGE>




               THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              STATEMENTS OF INCOME
                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S>                                                <C>        <C>        <C>

                                                   For the Years Ended December 31,
                                                     ----------------------------
                                                      2001       2000      1999
                                                     -------    -----     -----
Income
   From subsidiaries-eliminated upon consolidation
       Dividends .................................   $ 2,550    $ 2,400    $ 2,300
                                                     -------    -------    -------

Expenses
   State taxes ...................................        19         13         26
   Other expenses ................................       543        454        304
                                                     -------    -------    -------
                                                         562        467        330
                                                     -------    -------    -------
Income before income taxes and equity in
   undistributed earnings of subsidiaries ........     1,988      1,933      1,970
Income tax benefit ...............................      (407)      (129)       (17)
                                                     -------    -------    -------

Income before equity in undistributed earnings
   of subsidiaries ...............................     2,395      2,062      1,987
Equity in undistributed earnings (losses) of
subsidiaries .....................................     1,735      1,714      1,769
                                                     -------    -------    -------

   Net Income ....................................   $ 4,130    $ 3,776    $ 3,756
                                                     =======    =======    =======

</TABLE>

                                       50
<PAGE>


               THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
          SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                   <C>        <C>           <C>
                                                       For the Years Ended December 31,
                                                       --------------------------------
                                                        2001       2000        1999
                                                       ------      -----       ----
Cash flows from operating activities:
Net income ..........................................   $ 4,130    $ 3,776    $ 3,756
Adjustments to reconcile net income to net
 cash provided by operating activities:
 Equity in undistributed (income) loss of
   subsidiaries .....................................    (1,735)    (1,714)    (1,769)
 Change in other assets .............................      (271)       (68)       (33)
 Change in other liabilities ........................        69         22        (69)
                                                        -------    -------    -------
 Net cash provided by operating activities ..........     2,193      2,016      1,885
                                                        -------    -------    -------

Cash flows from financing activities:
Proceeds from notes payable .........................         0          0          0
Payments on notes payable ...........................      (293)      (271)      (332)
Purchase of treasury stock ..........................         0          0         60
Cash dividends ......................................    (1,865)    (1,747)    (1,664)
                                                        -------    -------    -------
 Net cash used in financing activities ..............    (2,158)    (2,018)    (1,936)
                                                        -------    -------    -------

Net increase (decrease) in cash and cash equivalents         35         (2)       (51)

Cash and due from banks at beginning of year ........        66         68        119
                                                        -------    -------    -------

Cash and due from banks at end of year ..............   $   101    $    66    $    68
                                                        =======    =======    =======
</TABLE>


                                       51
<PAGE>



             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 18.

Note 2-Cash Dividends from Subsidiaries  Dividends of $2.5 million in 2001, $2.4
     million in 2000 and $2.3 million in 1999 were paid to the  Registrant by it
     subsidiaries.


                                       52
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.
         SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
                             (Amounts in thousands)

                                                                         Policy
                                                                         Claims
                                          Deferred    Future           and Other
                                          Acquisition Policy   Unearned Benefits
                                             Costs    Benefits Premiums  Payable
                                            -------   -------  -------  ------
At December 31, 2001:
  Life and accident and health insurance       $3,306  $22,734      $0     $401
  Property and casualty insurance               1,309        0   7,115   11,489
                                                -----  -------   -----  -------
      Total                                    $4,615  $22,734  $7,115  $11,890
                                                =====  =======   =====  =======

At December 31, 2000:
  Life and accident and health insurance       $3,240  $19,787      $0     $358
  Property and casualty insurance               1,229        0   6,364   15,409
                                               ------  -------   -----  -------
      Total                                    $4,469  $19,787  $6,364  $15,767
                                               ======  =======  ======  =======

At December 31, 1999:
  Life and accident and health insurance       $2,881  $18,987     $0      $394
       Property and casualty insurance          1,392        0  7,088    18,471
                                               ------   ------  -----    ------
      Total                                    $4,273  $18,987 $7,088   $18,865
                                               ======   ======  =====    ======


<TABLE>
<CAPTION>
<S>                                   <C>       <C>        <C>       <C>        <C>         <C>        <C>

                                                                                 Commissions,
                                                                      Benefits,  Amortization  General
                                                                      Claims,    of Deferred  Expenses,
                                                  Net                Losses and  Policy        Taxes,
                                       Premium   Investment  Other   Settlement  Acquisition  Licenses  Premiums
                                       Revenue    Income     Income   Expenses   Costs        and Fees  Written
                                       -------   --------    ------  ---------    -----      -------   --------
For the year ended December 31, 2001:
       Life and accident
       and health
       insurance ....................   $ 5,161   $ 2,303   $     4   $ 3,183   $ 1,753      $ 3,096   $ 5,002
       Property and
       casualty insurance ...........    20,196     2,203     1,276    10,333     4,363        4,017    20,949

       Other ........................         0         0         0         0         0          568         0
                                        -------   -------   -------   -------   -------      -------   -------
           Total ....................   $25,357   $ 4,506   $ 1,280   $13,516   $ 6,116      $ 7,681   $25,951
                                        =======   =======   =======   =======   =======      =======   =======

For the year ended December 31, 2000:
       Life and accident
       and health
       insurance ....................   $ 4,594   $ 2,160   $    11   $ 3,263   $   970      $ 2,430   $ 4,405
       Property and
       casualty insurance ...........    18,327     2,274       586    10,862     3,538        3,292    17,491
       Other ........................         0         0         0         0         0          476         0
                                        -------   -------   -------   -------   -------      -------   -------
           Total ....................   $22,921   $ 4,434   $   597   $14,125   $ 4,508      $ 6,198   $21,896
                                        =======   =======   =======   =======   =======      =======   =======

For the year ended December 31, 1999:
       Life and accident
       and health
       insurance ....................   $ 4,252   $ 2,124   $     2   $ 2,404   $   593      $ 1,895   $ 3,998
       Property and
       casualty insurance ...........    21,685     2,230       383    14,871     4,172        3,845    20,036
       Other ........................         0         0         0         0         0          330         0
                                        -------   -------   -------   -------   -------      -------   -------
           Total ....................   $25,937   $ 4,354   $   385   $17,275   $ 4,765      $ 6,070   $24,034
                                        =======   =======   =======   =======   =======      =======   =======
</TABLE>




Note:  Investment income and other operating expenses are reported separately by
segment and not allocated.

                                       53
<PAGE>



                        THE NATIONAL SECURITY GROUP, INC.
                     SCHEDULE IV. REINSURANCE (CONSOLIDATED)
                             (Amounts in thousands)
<TABLE>
<CAPTION>
<S>                                         <C>         <C>        <C>     <C>        <C>
                                                                                      Percentage
                                                         Ceded     Assumed             of Amount
                                               Gross    to Other  from Other    Net    Assumed
                                               Amount   Companies  Companies   Amount   to Net
                                              --------   -------    -----     -------    ---

For the year ended December 31, 2001:
Life insurance in force ...................   $184,128   $  6,555   $  0   $177,573     0.0%
                                               =======    =======   ====    =======     ===

Premiums:
            Life insurance and accident and
            health insurance ..............   $  5,206   $     45   $   0   $  5,161    0.0%
            Property and casualty insurance     21,777      1,581       0     20,196    0.0%
                                               -------    -------    ----   --------    ---

                Total premiums ............   $ 26,983   $  1,626   $   0   $ 25,357    0.0%
                                              ========   ========   =====   ========    ===

For the year ended December 31, 2000:
Life insurance in force ...................   $155,924   $  5,320   $   0   $150,604    0.0%
                                              ========   ========   =====   ========    ===

Premiums:
            Life insurance and accident and
            health insurance ..............   $  4,645   $     51   $   0   $  4,594    0.0%
            Property and casualty insurance     20,629      2,302       0     18,327    0.0%
                                              --------   --------   -----   --------    ---

                Total premiums ............   $ 25,274   $  2,353   $   0   $ 22,921    0.0%
                                              ========   ========   =====   ========    ===



For the year ended December 31, 1999:
Life insurance in force ...................   $146,096   $  5,449   $   0   $140,647    0.0%
                                              ========   ========   =====   ========    ===

Premiums:
            Life insurance and accident and
            health insurance ..............   $  4,300   $     49   $   0   $  4,251    0.0%
            Property and casualty insurance     23,078      1,393       0     21,685    0.0%
                                              --------   --------   -----   --------    ---

                Total premiums ............   $ 27,378   $  1,442   $   0   $ 25,936    0.0%
                                              ========   ========   =====   ========    ===
</TABLE>


                                       54
<PAGE>



Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

               None.


                                       55
<PAGE>






                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

The information  contained on pages 2-4 of The National  Security  Group's Proxy
Statement dated March 18, 2002, with respect to directors and executive officers
of the Company, is incorporated herein by reference in response to this item.

Item 11.  Executive Compensation

The  information  contained  on pages 7 and 8 of The National  Security  Group's
Proxy Statement dated March 18, 2002, with respect to executive compensation and
transactions, is incorporated herein by reference in response to this item.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

The  information  contained on page 10 of The National  Security  Group's  Proxy
Statement  dated March 18, 2002,  with respect to security  ownership of certain
beneficial  owners and management,  is incorporated  herein by reference to this
item.


Item 13.  Certain Relationships and Related Transactions

The  information  contained  on pages 6 and 7 of The National  Security  Group's
Proxy Statement dated March 18, 2002, with respect to certain  relationships and
related  transactions,  is incorporated  herein by reference in response to this
item.

                                       56
<PAGE>


                                    PART IV

Item 14.    Exhibits, financial statement schedules, and reports on Form 8-K


a.  The following documents are filed as part of this report:            Page #

    Reports of Independent Certified Public Accountants                   22

    Consolidated Statements of Income--Years Ended
      December 31, 2001, 2000, and 1999                                   24

    Consolidated Balance Sheets--December 31, 2001 and 2000               25

    Consolidated Statements of Shareholders' Equity--Years
      Ended December 31, 2001, 2000, and 1999                             26

    Consolidated Statements of Cash Flows--Years Ended
      December 31, 2001, 2000, and 1999                                   27

    Notes To Consolidated Financial Statements--December 31, 2001         28

    Schedule I. Summary Of Investments--December 31, 2001 and 2000        48

    Schedule II. Condensed Financial Information of
      Registrant--December 31, 2001 and 2000                              49

    Schedule III. Supplementary Insurance Information--
       December 31, 2001, 2000, and 1999                                  53

    Schedule IV. Reinsurance--Years Ended December 31, 2001,
       2000, and 1999                                                     54


All other Schedules are not required under the related instructions or are
inapplicable and therefore have been omitted.

b.    Reports on Form 8-K

Incorporated by reference to the  Registrant's  Current Report on Form 8-K filed
on April 20, 2001.


                                       57
<PAGE>


                                    SIGNATURE

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

                      THE NATIONAL SECURITY GROUP, INC.

/s/ M.L. Murdock                                       /s/ W.L. Brunson, Jr.
------------------                                    -----------------------
M.L. Murdock                                          W.L. Brunson, Jr.
Sr. Vice President,                                   President, Chief Executive
Treasurer                                             Officer and Director

Date: March 29, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in their capacity as a Director of The National Security Group, Inc. On March
29, 2002.

                                    SIGNATURE

/s/ D.M. English                                     /s/ Fred D. Clark Jr.

/s/ Winfield Baird                                   /s/ M.L. Murdock

/s/ Carolyn Brunson                                  /s/ James B. Saxon

/s/ J.E. Brunson                                     /s/ Walter P. Wilkerson

/s/ J.R. Brunson                                     /s/ William L. Brunson,Jr.

                                       58

<PAGE>