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, 2000
                                             -----------------
                         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 executive  offices)    (Zip code)
 jurisdiction of   identification
 incorporation or  number)
 organization)

        Registrants 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, 2001 (based upon the bid price of these shares on
NASDAQ on such date) - $9,019,598

Number of Shares of Common Stock outstanding as of February 28, 2001 - 2,055,811

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

                 Total Number of Sequentially Numbered Pages: 51


                                        1

<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.
                     INDEX TO THE ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2000


Part I                                                                      Page

Item 1    Business                                                             3
Item 2    Properties                                                           9
Item 3    Legal Proceedings                                                    9
Item 4    Submission of Matters to a Vote of Security Holders                  9

Part II

Item 5    Market for Registrants Common Equity and Related
            Stockholder Matters                                               10
Item 6    Selected Financial Data                                             11
Item 7    Managements Discussion and Analysis of Financial
            Condition and Results of Operations                               12
Item 8    Consolidated Financial Statements and Supplementary Data            18
Item 9    Changes in and Disagreements with Accountants on accounting and
            Financial Disclosure                                              48

Part III

Item 10   Directors and Executive Officers of the Registrant                  49
Item 11   Executive Compensation                                              49
Item 12   Security Ownership of Certain Beneficial Owners and Management      49
Item 13   Certain Relationships and Related Transactions                      49

Part IV

Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K     50

Signature Page                                                                51


                                        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 low value dwelling fire and
windstorm,  homeowners, and personal non-standard automobile lines of insurance.
The Company's property and casualty  subsidiaries also write commercial lines of
insurance  for  small  businesses.  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 2000:

     State                         Percent of direct written premium
    ------                         ---------------------------------
  Alabama                                      45.18%
  Arkansas                                      9.69%
  Florida                                       5.00%
  Georgia                                       8.02%
  Louisiana                                    12.17%
  Mississippi                                   5.98%
  South Carolina                                5.16%

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.

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.

                                        3


<PAGE>



The following table sets forth the premiums earned and income (loss)during  the
periods reported:
                                                       Year Ended December 31
                                                       (Amounts in Thousands)

                                                   2000      1999        1998
                                                   ----      ----        ----
Net premiums earned:
      Fire, Allied lines, and Homeowners .....   $ 13,229   $ 14,600   $ 15,817
      Automobile .............................      4,126      6,086      7,715
      Other ..................................        971      1,999      1,082
                                                 --------   --------   --------
                                                 $ 18,326   $ 21,685   $ 24,614
                                                 ========   ========   ========

Income (loss) before income taxes ............   $  3,917   $  2,365   $ (1,000)
                                                 ========   ========   ========

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 five states.  The following table indicates those
states which accounted for 4% or more of the total direct premiums  collected by
the Life Company in 2000:

State                       Percentage of Total Direct Premiums

Alabama ...............................   87
Mississippi ...........................    3
Georgia ...............................    9

NSIC  primarily  writes home service life  insurance  products,  which means its
agents sell new products  directly at the home or other premises of the insured.
The products primarily consist of term and whole life insurance and 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.

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)

                                          2000            1999            1998
                                          ----            ----            ----
Life insurance in force at end of period:

Ordinary-whole life ............        $ 85,000        $ 80,200        $ 71,800
          term life ............          36,000          35,100          33,500
 Industrial ....................          30,000          30,700          32,300
 Other .........................               0               0             100
                                        --------        --------        --------
                                         151,000         146,000         137,700
                                        ========        ========        ========


                                        4
<PAGE>

                                     Year Ended December 31
                                     (Amounts in Thousands)
                                   2000      1999      1998
                                   ----      ----      ----

New life insurance issued:

  Ordinary-whole life .........   $69,400   $66,200   $41,300
  term life ...................    10,500     7,700     5,300
  Industrial ..................         0         0         0
  Other .......................       100       100       100
                                  -------   -------   -------
                                   80,000    74,000    46,700
                                  =======   =======   =======

Net premiums earned:
  Life insurance ..............   $ 3,746   $ 3,396   $ 2,914
  Accident and health insurance       848       855       923
                                  -------   -------   -------
                                    4,594     4,251     3,837
                                  =======   =======   =======

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.

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)
                                                                   2000     1999
                                                                  -----     ----
Investment Securities held-to-maturity,  at amortized cost
        (estimated fair value: 2000 - $29,035, 1999 - $30,774)   $28,875   $30,911
Investment Securities available-for-sale,  at market
        (cost: 2000 - $38,311, 1999 - $35,748) ...............    51,648    49,612
Receivable for securities sold ...............................       143         0
Mortgage loans on real estate, at cost .......................       116       112
Investment real estate, at cost ..............................     1,569     1,557
Policy loans .................................................       692       669
Short-term investments .......................................     1,675     2,129
                                                                 -------   -------
                                                                 $84,718   $84,990
                                                                 =======   =======
</TABLE>

The results with respect to the foregoing investments are as follows:
<TABLE>
<CAPTION>
<S>                                                      <C>        <C>        <C>

                                                            Year Ended December 31
                                                            2000       1999        1998
                                                           -------    -------     -------
Net investment income .................................   $ 4,434    $ 4,354    $ 4,351
Average yield on investments ..........................       5.3%       5.1%       4.9%
Economic yield on investments (includes realized and
                unrealized investment gains) ..........       6.7%       3.7%       9.0%
Net realized gains on investments (before income taxes)     1,723      1,951      4,117
Changes in net unrealized gains on investments
               (before income taxes) ..................    (  191)    (3,196)      (502)

</TABLE>

                                        5
<PAGE>



As of December 31, 2000,  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   $     0   $ 1,059   $ 1,059       1.9%
Maturity in 1-5 years ......     5,927     9,539    15,466      27.8
Maturity in 5-10 years .....    13,171     7,083    20,254      36.4
Maturity after 10 years ....     7,669    11,194    18,863      33.9
                                -------   -------   -------   -----

Totals .....................   $26,767   $28,875   $55,642     100.0%
                                =======   =======   =======   =====


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. NSIC began in 1997 to add
independent agents to its method of distribution. This method of distribution is
expected  to be more  cost  effective  and has  become  an  important  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  2000   averaged
approximately  34.8%  of  premiums.  Commissions  incurred  by the  NSFC in 2000
averaged  approximately  17.1%  of  premiums  and  ranged  from  12.5%  to 27.5%
depending  on the type  and  amount  of  insurance  sold.  During  2000,  no one
independent agent accounted for more than 10% of total net earned premium of the
property-casualty insurance subsidiaries.

NSIC is continuing the process of implementing  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 every month and 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 has
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.

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.

                                        6
<PAGE>

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 2000, 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,  2000,  the total  reserves of NSIC
(including the reserves for accident and health  insurance)  were  approximately
$20 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, 2000, the  property-casualty  subsidiaries had
reserves  for unpaid  claims of  approximately  $16 million  before  subtracting
unpaid  claims which will be due from  reinsurers  of $3.5  million  leaving net
unpaid claims of $12.5  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, 2000,  1999 or 1998. The Company
believes  such reserves are adequate to provide for  settlement  of claims.  The
Fire  Company's  loss  reserves  are  calculated  by  employees  of the Company.
Milliman  &  Robertson,  an  independent  actuarial  consulting  firm,  issues a
Statement of Actuarial Opinion regarding the adequacy of reserves.

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.

                                        7

<PAGE>

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.

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 to 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.

                                        8


<PAGE>

 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  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.

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  O 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, 2000.

                                        9

<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 Over-the-Counter (OTC) 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,
2000, was approximately 1,100.

               Stock Bid Prices     Dividends

               High       Low       Per Share

2000

First Quarter    $13 1/2    $11      $   .21
Second Quarter    12 1/4     11          .21
Third Quarter     17 1/8     12 1/2      .21
Fourth Quarter    19 1/4     13 1/4      .22




1999

First Quarter    $15        $12 3/16 $   .20
Second Quarter    12 3/16    11          .20
Third Quarter     13 1/4      9 1/4      .20
Fourth Quarter    14 1/4      9 7/8      .21



                                       10

<PAGE>


Item 6.  Selected Financial Data

             (Amounts in thousands, except per share)

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

Operating results                   2000          1999        1998          1997       1996
-----------------                  ------         -----       -----        -----       ----
     Net premiums earned ......   $  22,921    $  25,936    $  28,451    $  31,156   $  26,654
     Net investment income ....       4,434        4,354        4,351        4,204       3,935
     Net realized investment
          gains ...............       1,723        1,951        4,117        2,720       1,839
     Other income .............         597          385          385          695         582
                                  ---------    ---------    ---------    ---------   ---------
Total revenues ................   $  29,675    $  32,626    $  37,304    $  38,775   $  33,010
                                  =========    =========    =========    =========   =========

Net Income ....................   $   3,776    $   3,756    $     930    $   2,998   $   1,356
                                  ---------    ---------    =========    =========   =========

Net income per share ..........   $    1.84    $    1.83    $    0.42    $    1.28   $    0.58
                                  ---------    =========    =========    =========   =========


Other Selected Financial Data

Total shareholders' equity ....   $  43,780    $  41,888    $  41,968    $  46,352   $  40,519

Book value per share ..........   $   21.29    $   20.37    $   20.46    $   20.04   $   17.43

Dividends per share ...........   $    0.85    $    0.81    $    0.77    $    0.70   $    0.65

Net change in unrealized
     capital gains (net of tax)   ($    136)   ($  2,231)   ($    351)   $   4,556   $     968

Total assets ..................   $  97,563    $  98,105    $ 103,973    $ 106,958   $  98,219


</TABLE>

                                       11
<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, 2000 Compared to Year Ended December 31, 1999

Consolidated net income for The National Security Group (The Company) was $3.776
million  in 2000  compared  to $3.756  million  in 1999.  On a per  share  basis
earnings were $1.84 in 2000 compared to $1.83 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 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.  The  operating  results of the  subsidiaries  are discussed in further
detail in the sections that follow.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Consolidated net income for The National Security Group (The Company) was $3.756
million in 1999 compared to $930,000 in 1998. On a per share basis earnings were
$1.83 in 1999  compared to $0.42 in 1998.  The increase in net income was due to
improved  operating  results  in The  Company's  property/casualty  subsidiaries
operations.  Realized  capital gains in 1999 were $1.95 million compared to $4.1
million in 1998.  Consolidated  revenues  were $32.6 million in 1999 compared to
$37.3 million in 1998.

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:                                  2000       %     1999       %      1998     %
                                                  -------   -----  -------   -----   -------  -----
Life and accident and health insurance.........   $ 4,594   20.1   $ 4,251   16.4   $ 3,837    13.5
Property and casualty insurance ...............   $18,326   79.9    21,685   83.6    24,614    86.5
                                                  -------   -----  -------   -----  -------   -----
                                                  $22,920  100.0   $25,936  100.0   $28,451   100.0

Income before taxes and cumulative effect adjustment:

                                                    2000     %        1999    %      1998       %
                                                  -------    -----    ----   -----  ------   ------
Life and accident and health insurance            $ 1,667    34.5  $ 2,556   56.6  $ 2,489    225.0
Property and casualty insurance ......            $ 3,917    80.9    2,365   52.4   (1,000)   (90.4)
Other ................................               (473)   (9.8)    (110)  (2.4)    (140)   (12.7)
     Interest expense ................               (267)   (5.6)    (295)  (6.6)    (243)   (21.9)
                                                    -----   ------    -----  -----    -----   ------
                                                  $ 4,844   100.0  $ 4,516   100.0  $ 1,106   100.0
                                                  =======   =====    =====   =====    =====   =====
</TABLE>

                                       12
<PAGE>


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, 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 was 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.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998:

Income  before  income taxes in 1999 was  $2,556,000  compared to  $2,489,000 in
1998. Operating results for 1999 were very similar to 1998, with slightly higher
realized  capital gains  producing  the modest  increase in income before income
tax.

NSIC  experienced  a 10% increase in premium  income  primarily due to increased
sales of life insurance through  independent  agents. The Company began offering
life and accident insurance  products through  independent agents in 1998. Prior
to 1998 NSIC used employee agents as its only method of distribution of life and
accident insurance products.

The  increase in premium  revenues  also  produced  an  increase  in  commission
expense.  First year commissions are paid at a higher rate than commissions paid
in succeeding  years. The increase in premium revenues was produced  entirely by
sales of new insurance policies,  and consequently increased commission expense.
As these policies renew in succeeding years,  commissions on these policies will
decrease.

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, 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 for the second straight year was 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 will expire by mid 2001.  With the elimination
of this program and other similar  programs  over the last two years  management
has significantly improved underwriting results.

                                       13
<PAGE>

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.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998:

Net income before income tax was $2,365,000 in 1999 compared to a pretax loss of
$1,000,000  in  1998.  An  improvement  in  underwriting   results  and  reduced
litigation  expenses were the major factors  contributing  to the improvement in
pretax income.

NSFC had much improved  underwriting  results in the dwelling  property lines of
insurance  compared to 1998. In 1998 NSFC  incurred  over  $1,000,000 in tornado
losses,  while in 1999 tornado losses were minimal.  NSFC also did not incur any
significant  hurricane  losses in 1999. In 1998 NSFC incurred over $1,100,000 in
hurricane  losses.  The  decrease in  hurricane  and  tornado  losses of over $2
million led to much improved underwriting results in 1999 compared to 1998.

The automobile  insurance programs had underwriting losses of over $1,500,000 in
1999.  Several of these  programs  which were  managed by  independent  managing
general agents have been discontinued over the last year and management believes
that  future  losses  from the  discontinued  programs  will be greatly  reduced
compared to losses  incurred in 1998 and 1999. One program managed by a managing
general  agent  was  still in  operation  in  Florida  in 1999,  but  management
terminated the agents contract in 2000. Company management expects to maintain a
presence in the  automobile  insurance  market,  but future growth and expansion
will be through the traditional  independent agents with claims and underwriting
functions managed and closely monitored by in-house personnel.

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:

                                           2000      1999       1998
                                          -----     -----       ----
     Loss and LAE Ratio                    61.6%     70.9%      87.0%
     Underwriting Expense Ratio            34.8%     35.8%      40.3%
                                         ------    -------      -----
     Combined Ratio                        96.4%    106.7%     127.3%

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.

                                       14
<PAGE>

The  combined  ratio for 2000  compared to 1999  decreased  over ten  percentage
points.  This  improvement is primarily  attributable  to the elimination of the
previously  mentioned  managing  general  agent auto  programs over the last two
years, and no significant tornado or hurricane activity during the year.

The combined ratio for 1999 improved substantially compared to 2000. Catastrophe
losses  and very  unfavorable  underwriting  results in  private  passenger  and
commercial automobile lines of business contributed to the higher combined ratio
in 1998.

Asset Portfolio Review:  The life insurance and  property/casualty  subsidiaries
primarily invest in highly liquid  investment grade debt and equity  securities.
At December 31, 2000, the company's holdings in debt securities  amounted to 66%
of total  investments  and 57% 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-                   92.4
  2                   Baa to Baa3              BBB+ to BBB-                 6.1
  3                   Ba1 to Ba3               BB+ to BB-                   1.5
  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

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 $11.4 million
and $12.8  million at December  31, 2000 and 1999  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 $25 million. If the market value
of the S & P 500 Index decreased 10% from its December 31, 2000 value,  the fair
value of the  Company's  common  stock  would  decrease  by  approximately  $2.5
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.

                                       15
<PAGE>
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,  investment results have been superior to those offered by
bonds, while keeping the risk of loss of capital to a minimum.

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 (used) provided cash of $(422,000),  $868,000, $(1,897,000)
in 2000, 1999, and 1998  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 $2.4 million at December  31, 2000.  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, 2000, the Company had no known  impairments
of assets or changes in  operation  which would have a material  adverse  effect
upon liquidity.  Approximately 88% 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.

                                       16
<PAGE>

Except as  discussed in Note O 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.

As disclosed in note K to the consolidated  financial  statements,  in 2000, the
amount that The National Security Group's insurance subsidiaries can transfer in
the form of  dividends  to the parent  company is limited to $1.2 million in the
life insurance  subsidiary and $2.4 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.  The RBC  formula  will be  used  by  state  insurance
regulators 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, 2000.

National  Security  Insurance  Company (life  insurer) has  regulatory  adjusted
capital of $14.3  million  and $15.2  million  at  December  31,  2000 and 1999,
respectively,  and a ratio of regulatory  total  adjusted  capital to authorized
control  level RBC of 12.9 and 10.9 at December 31, 2000 and 1999  respectively.
Accordingly,   National  Security   Insurance  Company  meets  the  minimum  RBC
requirements.

National  Security  Fire &  Casualty  Company  (property/casualty  insurer)  has
regulatory  adjusted  capital of $24.1 million and $23.4 million at December 31,
2000 and 1999, respectively, and a ratio of regulatory total adjusted capital to
authorized  control  level  RBC of 9.7 and 9.2 at  December  31,  2000  and 1999
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 $4.1 million and $3.2
million at December 31, 2000 and 1999,  respectively,  and a ratio of regulatory
total  adjusted  capital  to  authorized  control  level  RBC of 8.4  and 4.6 at
December  31,  2000 and 1999  respectively.  Accordingly,  Omega  One  Insurance
Company meets the minimum RBC requirements.

                                       17
<PAGE>

Item 8.  Consolidated Financial Statements and Supplementary Data

Index to Financial Statements

Consolidated Financial Statements:

Reports of Independent Certified Public Accountants ......................    19

Consolidated Statements of Income -
  Years Ended December 31, 2000, 1999, and 1998 ..........................    20

Consolidated Balance Sheets - December 31, 2000 and 1999 .................    21

Consolidated Statements of Shareholders' Equity -
  Years Ended December 31, 2000, 1999, and 1998 ..........................    22

Consolidated Statements of Cash Flows -
  Years Ended December 31, 2000, 1999, and 1998 ..........................    23

Notes to Consolidated Financial Statements - December 31, 2000............    24

Financial Statement Schedules:

Reports of Independent Certified Public Accountants
  on Financial Statement Schedules .......................................    40

Schedule I.  Summary of Investments - December 31, 2000 and 1999..........    41

Schedule III.  Condensed Financial Information of Registrant -
  December 31, 2000 and 1999 .............................................    42

Schedule V.  Supplementary Insurance Information -
  December 31, 2000, 1999, and 1998 ......................................    46

Schedule VI.  Reinsurance - Years Ended December 31, 2000, 1999, and 1998.    47

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

                                       18

<PAGE>

                          INDEPENDENT AUDITORS REPORT



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


We have  audited the  accompanying  consolidated  balance  sheet of The National
Security Group,  Inc. and  subsidiaries as of December 31, 2000, and the related
consolidated  statement of income,  shareholders  equity and cash flows for the
year ended December 31, 2000. These  consolidated  financial  statements are the
responsibility of the Company 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 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 audit
provides 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, 2000, and the
results of their operations and their cash flows for the year ended December 31,
2000, in conformity with accounting  principles generally accepted in the United
States of America.

Barfield, Murphy, Shank & Smith, P.C.
Birmingham, Alabama
February 16, 2001


                                       19

<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  balance  sheet of The National
Security  Group,  Inc. and  subsidiaries as of December 31, 1999 and the related
consolidated statements of income,  shareholders' equity and cash flows for each
of the two years in the period  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 audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  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 as of December 31, 1999, and the
results  of their  operations  and their cash flows for each of the two years in
the period ended  December 31,  1999,  in  conformity  with  generally  accepted
accounting principles.

DUDLEY, HOPTON-JONES, SIMS & FREEMAN, PLLP
Birmingham, Alabama
February 18, 2000


                                      19.1
<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,
                                                              2000         1999       1998
REVENUES
         Net premiums earned .............................   $22,921    $ 25,936    $ 28,451
         Net investment income ...........................     4,434       4,354       4,351
         Net realized investment gains ...................     1,723       1,951       4,117
         Other income ....................................       597         385         385
                                                              ------      ------      ------
                                                              29,675      32,626      37,304

BENEFITS AND EXPENSES
         Policyholder benefits paid or provided ..........    14,125      17,275      22,880
         Amortization of deferred policy acquisition costs     1,302       1,202       1,856
         Commissions .....................................     3,206       3,563       3,764
         General insurance expenses ......................     5,157       4,786       6,261
         Insurance taxes, licenses and fees ..............       774         987       1,194
         Interest expense ................................       267         297         243
                                                              ------      ------      ------
                                                              24,831      28,110      36,198
                                                              ------      ------      ------
         Income Before Income Taxes ......................     4,844       4,516       1,106


INCOME TAX EXPENSE
                Current ..................................       608         925         (43)
                Deferred .................................       460        (165)        219
                                                              ------      ------      ------
                                                               1,068         760         176
                                                              ------      ------      ------
              Net Income .................................   $ 3,776      $3,756       $ 930
                                                              ------      ======      ======

EARNINGS PER COMMON SHARE

              Net Income .................................   $  1.84      $ 1.83      $ 0.42
                                                              ======      ======      ======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       20
<PAGE>
                        THE NATIONAL SECURITY GROUP, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S>                                                                                                      <C>         <C>

                                                                                                           (Dollars in thousands)
                                                                                                                December 31,

ASSETS                                                                                                    2000          1999

Investments
   Securities held-to-maturity at amortized cost (estimated fair value: 2000 - $29,035;
     1999 - $30,774) .................................................................................    $28,875     $30,911
   Securities available-for-sale, at estimated fair value (cost: 2000 - $38,311;
    1999 -$ 35,748) .................................................................................      51,648      46,612
Receivable for securities ............................................................................        143           0
Mortgage loans on real estate, at cost ...............................................................        116         112
Investment real estate, at book value (accumulated depr.: 2000 - $39; 1999 - $37) ....................      1,569       1,557
Policy loans .........................................................................................        692         669
Short-term investments ...............................................................................      1,675       2,129
                                                                                                           ------      ------
                                                                                     Total Investments     84,718      84,990

Cash .................................................................................................        954       1,383
Accrued investment income ............................................................................        881         830
Reinsurance recoverable ..............................................................................      3,534       4,687
Deferred policy acquisition costs ....................................................................      4,469       4,273
Prepaid reinsurance premiums .........................................................................        293         257
Other assets .........................................................................................      2,714       1,685
                                                                                                           ------     -------
                                                                                          Total Assets     97,563      98,105
                                                                                                           ======     =======
LIABILITIES AND SHAREHOLDERS' EQUITY

Policy and claim reserves ............................................................................     41,918      44,939
Checks outstanding in excess of bank balance .........................................................      1,107         912
Other policyholder funds .............................................................................      1,488       1,526
Notes payable ........................................................................................      2,401       2,672
Accrued income taxes .................................................................................        336          53
Other liabilities ....................................................................................      3,114       3,101
Deferred income tax ..................................................................................      3,419       3,014
                                                                                                           ------      ------
                                                                                     Total Liabilities     53,783      56,217
Contingencies

Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding .................          0           0
Class A common stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding ..........          0           0
Common stock, $1 par value, 2,500,000 shares authorized and 2,339,848 shares issued
 and 2,055,811 outstanding ...........................................................................      2,340       2,340
Additional paid in capital ...........................................................................         17          17
Accumulated other comprehensive income ...............................................................      9,779       9,915
Retained earnings ....................................................................................     35,225      33,197
Treasury stock at cost (284,037 shares) ..............................................................     (3,581)     (3,581)
                                                                                                           ------      -------
                                                                            Total Shareholders' Equity     43,780      41,888
                                                                                                           ------      -------
                                                            Total Liabilities and Shareholders' Equity     97,563      98,105
                                                                                                           ======     =======

</TABLE>


See accompanying notes to consolidated financial statements.

                                       21
<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 December 31, 1998 .................    $41,968                $31,106     $12,146      $2,340          $17    $(3,641)
Comprehensive Income
     Net Income for 1999 .....................      3,756    $  3,756      3,756
     Other comprehensive income (net of tax)
         Unrealized loss on securities, net
         of reclassification adjustment ......     (2,231)     (2,231)                 (2,231)
                                                               ------
Comprehensive Income .........................               $  1,525
                                                               ======
     Cash dividends ($.81 per share) .........     (1,665)                (1,665)
     Treasury stock sold .....................         60                                                                     60
                                                   ------                 ------     ------       -----          -----   -------
Balance at December 31, 1999 .................    $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 .........................                 $3,640
                                                                =====
     Cash dividends ($.85 per share) .........     (1,748)                (1,748)
                                                   ------                 -------     ------       -----           ----    -------
Balance at December 31, 2000 .................    $43,780               $ 35,225    $ 9,779      $2,340          $  17   $(3,581)
                                                   ======                 =======     ======      ======          =====    =======
</TABLE>


                                       22
<PAGE>
                          THE NATIONAL SECURITY GROUP, INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S>                                                                                             <C>         <C>           <C>

                                                                                                        Year ended December 31,
                                                                                                 -----------------------------------
                                                                                                 -----------------------------------
                                                                                                    2000         1999          1998
Cash flows from operating activities:
Net income ..................................................................................     $  3,776    $  3,756     $    930

Adjustments to reconcile net income to net cash provided by
   operating activities:
    Change in accrued investment income .....................................................          (51)        (66)          69
    Change in reinsurance recoverable .......................................................        1,153       2,146        1,656
    Amortization of deferred policy acquisition costs .......................................        1,119       1,201        1,856
    Change in receivable for securities .....................................................         (143)          0            0
    Net realized gains on investments .......................................................       (1,941)     (2,024)      (4,117)
    Gain on disposal of property and equipment ..............................................          (32)          0            0
    Policy acquisition costs deferred .......................................................       (1,315)     (1,320)      (1,794)
    Change in current income taxes receivable ...............................................            0          75          (75)
    Change in prepaid reinsurance premiums ..................................................          (36)          9           75
    Depreciation and amortization expense ...................................................          115         219          142
    Change in policy liabilities and claims .................................................       (3,021)     (4,514)        (323)
    Change in income tax payable ............................................................          459          53         (147)
    Change in deferred income taxes .........................................................          284        (166)         219
    Change in other liabilities .............................................................           13         109         (694)
    Other, net ..............................................................................         (822)      1,390          306
                                                                                                     ------     ------       ------
                                  Net cash provided by (used in) operating activities .......         (442)        868       (1,897)
                                                                                                     ------     ------       ------
Cash flows from investing activities:
   Purchases of held-to-maturity securities .................................................         (668)     (3,759)      (4,881)
   Purchases of available-for-sale securities ...............................................       (7,139)    (10,189)      (5,731)
   Proceeds from maturities of held-to-maturity securities ..................................        2,622       3,805        4,501
   Proceeds from sales of available-for-sale securities .....................................        6,973      10,747       10,549
   (Purchase of)proceeds from real estate held for investment ...............................          (13)         71           15
   Proceeds from sales and maturities of short-term investments .............................          454       1,161          234
   Receipts from repayment of loans, net ....................................................          (27)         (1)         188
   Purchase of property and equipment .......................................................         (378)       (230)        (110)
   Proceeds from sale of property and equipment .............................................           51          36           18
                                                                                                     ------     ------        -----
                                            Net cash provided by investing activities .......        1,875       1,641        4,783

Cash flows from financing activities:
   Proceeds from short-term notes payable ...................................................            0           0        3,100
   Payments on notes payable ................................................................         (271)       (332)         (96)
   Change in other policyholder funds .......................................................          (38)       (109)         (94)
   Dividends paid ...........................................................................       (1,748)     (1,664)      (1,712)
   Change in treasury stock .................................................................            0          60       (3,251)
   Change in checks outstanding in excess of bank balances ..................................          195         136         (414)
                                                                                                     ------     ------       ------
                                               Net cash used in financing activities ........       (1,862)     (1,909)      (2,467)

                                                      Net (decrease) increase in cash .......         (429)        600          419

Cash at beginning of year ...................................................................        1,383         783          364
                                                                                                    ------      ------       ------
Cash at end of year .........................................................................     $    954    $  1,383     $    783
                                                                                                    ======      ======       ======
Cash paid during the year for:
   Interest .................................................................................     $    266    $    296     $     91
                                                                                                    ======      ======       ======
   Income taxes .............................................................................     $    500    $    630     $     97
                                                                                                    ======      ======       ======

</TABLE>


See accompanying notes to consolidate financial statements.


                                       23
<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 includes a wholly-owned
subsidiary  -  Liberty  Southern   Insurance  Company  (LSIC).  All  significant
intercompany transactions and accounts have been eliminated.

Description of Major Products

NSIC is  licensed  in the states of  Alabama,  Georgia,  Mississippi,  Texas 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.  LSIC  operates in automobile  physical  damage and
liability lines.

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.

Investments

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

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

Securities  Available-for-Sale.  Bonds, notes, common stock and non-redeemable
preferred  stock not  classified  as either  held-to-maturity,  or  trading  are
reported  at fair  value,  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.

                                       24

<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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.

SFAS No. 107 excludes  certain  financial  instruments,  particularly  insurance
liabilities other than financial guarantees and investment  contracts,  from its
disclosure requirements. In evaluating the Company 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 $116,000 on December  31, 2000 and  $112,000 on December 31,
1999.

As of December 31, 2000 and 1999,  the fair value of policy  loans  approximated
their carrying amount of $692,000 and $669,000, respectively.

The  fair  value  of  other  policyholder  funds  on  deposit  is  estimated  to
approximate  their  carrying  amount of  $1,488,000  on  December  31,  2000 and
$1,526,000 on December 31, 1999.

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.

                                       25

<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 - 2000                                 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.

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 was 2,055,811 in 2000 and 1999 and 2,228,940 in 1998.

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.

                                       26
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

              NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Reinsurance - Continued

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 shareholder 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

In June 1999, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards  (SFAS) No. 137,  Accounting for Derivative
Instruments and Hedging  Activities - Deferral of the Effective Date of SFAS No.
133, which deferred, for one year, the effective date for the implementation of
SFAS No. 133,  Accounting for Derivative  Instruments and Hedging  Activities.
SFAS No. 133  establishes  accounting  and reporting  standards  for  derivative
instruments and for hedging activities and requires that an entity recognize all
derivatives  as either  assets or  liabilities  on the balance sheet and measure
those  instruments  at fair  values.  The Company will be required to adopt this
standard for financial  statements  issued beginning the first quarter of fiscal
year 2001. The Company is currently evaluating the effect the standard will have
on its financial statements.

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  Company  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.

                                       27
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

              NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - BUSINESS COMBINATION - CONTINUED

When the contingency is resolved and additional  consideration is distributable,
Omega  shall  record  the  current  fair  value of the  consideration  issued or
issuable as additional cost of the LSIC acquisition.

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         $26,778
Income before taxes             $ 4,653         $ 4,450
Net Income                      $ 3,585         $ 3,690
Earnings per common share       $  1.74         $  1.79



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,  (d) deferred  income taxes are not provided,  and (e)
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,
                                                                      2000       1999      1998

Net gain from operations:
NSIC - including realized capital gains of $986, $818 and $658,
  respectively                                                       $1,016     $2,092     $2,082
                                                                     ======     ======     ======
NSFC - including realized capital gains of $709, $684 and
  $3,163 respectively                                                $2,140     $1,703     $  657
                                                                     ======     ======     ======
OMEGA - including realized capital gains of $257, $480, and
  $504, respectively                                                 $1,155    $   231    $(1,420)
                                                                     ======     ======     ======
LSIC                                                                 $    8    $     0    $     0
                                                                     ======     ======     ======
Statutory capital and surplus:
NSIC - including AVR of $1,780, $2,639 and $2,458,
  respectively                                                      $14,925    $15,202    $14,505
                                                                     ======     ======     ======
NSFC                                                                $24,170    $23,443    $25,072
                                                                     ======     ======     ======
OMEGA                                                               $ 4,079    $ 3,182    $ 3,210
                                                                     ======     ======     ======
LSIC                                                                $   500    $     0    $     0
                                                                     ======     ======     ======
</TABLE>



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


                                       28

<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, 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
                                                                                  ======     ======     =======    =======
Held-to-maturity securities:
   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
                                                                                 =======    =======     =======    =======

                                                                                            (Dollars in thousands)
                                                                                               December 31, 1999
                                                                        -----------------------------------------------------------
                                                                        -----------------------------------------------------------
                                                                                             Gross      Gross
                                                                               Amortized   Unrealized  Unrealized   Fair
                                                                                  Cost       Gains      Losses      Value
Available-for-sale securities:
   Corporate debt securities ................................................    $ 8,735    $    10    $  (751)    $ 7,994
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..............................     14,330          2       (390)     13,942
   Equity securities ........................................................     12,683     15,950       (957)     27,676
                                                                                 -------    -------    --------    -------
                                                               Total ........    $35,748    $15,962    $(2,098)    $49,612
                                                                                 =======    =======    ========    =======

                                       29

</TABLE>

<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, 1999
                                                                        -----------------------------------------------------------
                                                                        -----------------------------------------------------------
                                                                                             Gross      Gross
                                                                               Amortized   Unrealized  Unrealized   Fair
                                                                                  Cost       Gains      Losses      Value
Held-to-maturity securities:
   Corporate debt securities ................................................    $11,418    $    20    $  (220)    $11,218
   Obligations of states and political subdivisions .........................      4,297        246       (120)      4,423
   U.S. Treasury securities and obligations of
     U.S. government corporations and agencies ..............................     15,196          8        (71)     15,133
                                                                                 -------     -------    -------    -------
                                                               Total ........    $30,911    $   274    $  (411)    $30,774
                                                                                 =======     =======    =======    =======

</TABLE>

The amortized cost and aggregate  fair value of debt  securities at December 31,
2000, 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.

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

                                                                                        (Dollars in Thousands)
                                                                                      -----------------------
                                                                                      -----------------------
                                                                                         Amortized   Fair
Available-for-sale securities:                                                              Cost     Value
   Due in one year or less ...........................................................   $     0   $     0
   Due after one year through five years .............................................     5,927     5,852
   Due after five years through ten years ............................................    13,171    13,215
   Due after ten years ...............................................................     7,669     7,618
                                                                                          -------   -------
                                                                                 Total   $26,767   $26,685
                                                                                          =======  =======

Held-to-maturity securities:
   Due in one year or less ...........................................................   $ 1,059   $ 1,071
   Due after one year through five years .............................................     9,539     9,622
   Due after five years through ten years ............................................     7,083     7,149
   Due after ten years ...............................................................    11,194    11,193
                                                                                         -------   -------
                                                                                 Total   $28,875   $29,035
                                                                                         =======   =======
</TABLE>


Gross gains of  $2,715,057  and  $2,041,304  and gross  losses of  $774,196  and
$30,319   for  2000  and  1999,   respectively,   were   realized  on  sales  of
available-for-sale-securities.

                                       30
<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,
                                                 ------------------------------
                                                 ------------------------------
                                                    2000       1999      1998


Fixed maturities ..............................   $ 3,629    $ 3,567    $ 3,503
Equity securities .............................       642        630        682
Mortgage loans on real estate .................         7          9         17
Investment real estate ........................       142         18         18
Policy loans ..................................        43         33         38
Other, principally short-term investments .....       121        129        136
                                                    ------    ------      ------
                                                    4,584      4,386      4,394

Less: Investment expenses .....................      (150)       (32)       (43)
                                                    ------    ------      ------
Net investment income .........................   $ 4,434    $ 4,354    $ 4,351
                                                    ======    ======      ======

An analysis of investment gains follows:
                                                       Year ended December 31,
                                                    2000       1999       1998
Net realized investment gains (losses):
   Fixed maturities ...........................   $  (419)   $   (16)   $    53
   Other, principally equity securities .......     2,142      1,967      4,064
                                                    ------    ------      ------
                                                  $ 1,723    $ 1,951    $ 4,117
                                                    ======    ======      ======


An analysis of net decrease in  unrealized  appreciation  on  available-for-sale
securities follows:

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

                                                                                                 Year ended December 31,
                                                                                          --------------------------------------
                                                                                          --------------------------------------
                                                                                               2000            1999          1998

Change in unrealized appreciation on available-for-
   sale securities before deferred tax .......................................              $ ( 191)         $(3,196)       $ (502)
Deferred income tax ..........................................................                   55              965           151
                                                                                              ------           ------       ------
Change in unrealized appreciation on available-for-
   sale securities ...........................................................              $ ( 136)         $(2,231)       $ (351)
                                                                                              ======           ======       =======

</TABLE>



                                     31

<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,
                                                                                          --------------------------------------
                                                                                          --------------------------------------
                                                                                        2000                1999             1998

Federal income tax rate applied to pre-tax income .........................           $ 1,647            $ 1,535            $   376
Dividends received deduction and tax-exempt interest ......................              (213)              (198)              (174)
Alternative minimum tax effect ...........................................                  0                  0                468
Small life insurance company deduction ....................................              (209)              (410)              (440)
other, net ................................................................              (157)              (167)              ( 54)
                                                                                      --------           --------           --------
Federal income tax expense ................................................           $ 1,068            $   760            $   176
                                                                                      ========           ========           ========
</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,
                                                      2000                 1999
                                                    ---------------------------

Deferred policy acquisition costs                  $ (1,519)         $   (1,453)
Policy liabilities                                      419                 488
Unearned premiums                                       383                 327
Claim liabilities                                       432                 548
General insurance expenses                              694                 712
Alternative minimum tax credit carryforward              67                 314
Unrealized gains on securities available-for-sale    (3,895)             (3,950)
                                                    --------           --------
Net deferred tax liabilities                      $  (3,419)         $   (3,014)
                                                    ========           ========
                                       32
<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,
                                                ----------------------
                                                ----------------------
                                               2000     1999     1998

Deferred policy acquisition costs ..........  $   66    $  41    $ (22)
Policy liabilities .........................      69      (25)      56
Unearned premiums ..........................     (56)     113        2
General insurance expenses .................      18       (1)     222
Alternative minimum tax credit carryforward      247     (314)       0
Claim liabilities ..........................     116       21     ( 39)
                                               ------ --------   -------
                                               $ 460  $  (165)   $ 219
                                               ====== ========   =======

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, 2000,  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,
2000.


NOTE G - LONG-TERM DEBT

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

                                                        (Dollars in thousands)
                                                        2000            1999
                                                        ----            ----
Note payable to bank with 7% interest rate
dated October 9, 1998; matures May 28, 2004.
Payments of $63,575 due quarterly. Unsecured.         $2,208          $2,300

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.           193             372
                                                      ------          ------
                                                      $2,401          $2,672
                                                      ======          ======


Aggregate  annual  maturities  on  long-term  debt for  each of the  four  years
subsequent  to  December  31,  2000  are  as  follows  (dollars  in  thousands):
2001-$273, 2002-$131, 2003-$118, 2004-$1879.

                                       33

<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)
                                                          2000            1999
                                                          ----            ----
Benefit and loss reserves
  Property and casualty ......................          $15,409          $18,471
  Accident and health ........................              301              285
  Life and annuity ...........................           19,486           18,701
Unearned premiums ............................            6,364            7,088
Policy and contract claims ...................              358              394
                                                        -------          -------
                                                        $41,918          $44,939
                                                        =======          =======
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)
                                                --------------------------------
                                                 2000         1999         1998

Claims and claim adjustment expense
  reserves at beginning of year                 $18,471     $21,528     $21,860
Less reinsurance recoverables on
  unpaid losses                                   3,907       5,889       7,146
                                                 ------      ------      ------
Net balances at beginning of year                14,564      15,639      14,714
Provision for claims and claim adjustment
  expenses for claims arising in current year    14,465      15,859      22,194
Estimated claims and claims adjustment
  expenses for claims arising in prior years     (5,411)     (3,074)     (3,855)
                                                 ------      ------      ------
Total increases                                   9,054      12,785      18,339
Claims and claim adjustment expense
  payments for claims arising in:
    Current year                                  8,792       9,934      13,536
    Prior years                                   2,509       3,926       3,878
                                                 ------      ------      ------
Total payments                                   11,301      13,860      17,414
                                                 ------      ------      ------
Net balance at end of year                       12,317      14,564      15,639
Plus reinsurance recoverables on
  unpaid losses                                   3,092       3,907       5,889
                                                 ------      ------      ------
Claims and claim adjustment expense
  reserves at end of year                       $15,409     $18,471     $21,528
                                                 ======      ======      ======

                                       34
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H - POLICY AND CLAIM RESERVES - CONTINUED

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,
2000,  reinsurance  receivables  with a carrying  value of $912,000  and prepaid
reinsurance  premiums of $293,000 were associated with a single  reinsurer.  The
amounts of recoveries  pertaining to  reinsurance  contracts  that were deducted
from losses  incurred during 2000,  1999 and 1998 were  approximately  $605,000,
$1,819,000, and $2,203,000, respectively.


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

                                    (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
                         ======       =======      ========      ========

                                       35
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I - REINSURANCE - CONTINUED

                                    (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
                         ======       ======       ========      ========

                                    (Dollars in Thousands)
                                            1998
                       ----------------------------------------------------
                       ----------------------------------------------------
                                  NSIC                       NSFC
                       ----------------------- ----------------------------
                       ----------------------- ----------------------------
                        Written       Earned      Written         Earned

Direct ...........       $3,886      $  3,892      $ 26,085      $ 26,194
Assumed ..........         --            --            --            --
Ceded ............          (55)          (55)       (1,503)       (1,580)
                         ------       -------      --------      --------
Net ..............       $3,831      $  3,837      $ 24,582      $ 24,614
                         ======       ======       ========      ========



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 2000,  1999,  and 1998
amounted to $127,000, $161,000, and $61,000, 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 2000,  1999,  and 1998  amounted  to  approximately  $54,755,  $48,490,  and
$90,300, respectively.



                                       36
<PAGE>

                        THE NATIONAL SECURITY GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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, 2000,  NSICs retained
earnings  unrestricted  for  the  payment  of  dividends  in  2001  amounted  to
$1,254,587.  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 $2,417,050 in 2001.

Securities with market values of $3,745,717 and $3,060,389, at December 31, 2000
and 1999, respectively, 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.

Under applicable  Alabama  insurance laws and  regulations,  LSIC is required to
maintain a minimum  total surplus (to include both paid-in and  contributed  and
unassigned surplus) of $500,000.


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.

                                       37

<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, 2000, 1999 and 1998 are summarized below:


                                                     (Dollars in thousands)
                                                     Year ended December 31,
                                                       2000      1999     1998
                                                       ----     -----    ------
Premium Revenues:
  Individual life and accident and health insurance   $ 4,595 $ 4,251   $ 3,837
  Property and casualty insurance                      18,326  21,685    24,614
                                                       ------  ------    ------
                                                      $22,921 $25,936   $28,451
                                                       ------  ======    ======

Income (loss) before income taxes:
  Individual life and accident and health insurance   $ 1,667   $2,556   $2,489
  Property and casualty insurance                       3,917    2,365   (1,000)
  Other                                                  (473)    (110)    (140)
                                                       ------    ------   ------
                                                        5,111    4,811    1,349
                                                         (267)    (295)    (243)
                                                       ------    ------   ------
  Interest expense                                    $ 4,844    $4,516   $1,106
                                                       ======    ======   ======

Assets
  Individual life and accident and health insurance   $42,150   $41,323  $41,935
  Property and casualty insurance                      55,256    56,714   61,842
  Other                                                   157        68      196
                                                       ------    ------   ------
                                                      $97,563   $98,105 $103,973
                                                       ======    ======   ======

Amortization of deferred policy acquisition costs and
  depreciation expense:
    Individual life and accident and health insurance $   (61)    $ (252)  $ 450
    Property and casualty Insurance                     1,406      1,615   1,599
                                                       ------     ------  ------
                                                      $ 1,345     $1,363  $2,049
                                                       ======     ======  ======

Capital expenditures are not material, and consequently, are not reported.


NOTE N - COMMITMENT

During the second quarter of 2000,  NSIC submitted a bid proposal to the Florida
Life and Health  Insurance  Guaranty  Association  to acquire  certain  in-force
premium-paying  life  insurance  business of Central Life  Insurance  Company of
Florida.  NSIC was notified of being awarded the business subject to negotiation
of  the  details  and  approval  of  the  Florida  Insurance  Department  for an
Assumption Reinsurance Agreement. NSIC submitted their bid based on investing in
five-year Treasury bonds to match the asset and liability  responsibility of the
business.  Because of continued delays by the Florida  Insurance  Department and
the continued  decrease in the interest rates,  NSIC has requested an adjustment
to their bid. NSIC anticipates a closing date during the first quarter of 2001.

                                       38
<PAGE>


                        THE NATIONAL SECURITY GROUP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE O - 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 Company  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. These actions
are in the initial phases and no discovery has been  undertaken and no class has
been  certified.  The issues  raised in these  actions 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 Company  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
Company  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 P - 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, 2000
that exceeded the balance insured by the FDIC in the amount of $802,797.



                                       39
<PAGE>

                          INDEPENDENT AUDITORS REPORT
                        ON FINANCIAL STATEMENT SCHEDULES



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


Under date of  February  16,  2001,  we  reported  on the  balance  sheet of The
National  Security  Group,  Inc.  as of  December  31,  2000,  and  the  related
statements  of  income,  shareholder  equity  and cash flows for the year 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 Company 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 16, 2001


                                       40
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors
and Shareholders of

The National Security Group, Inc.


Under date of  February  18,  2000,  we  reported  on the  balance  sheet of The
National  Security  Group,  Inc.  as of  December  31,  1999,  and  the  related
statements of income,  shareholder equity and cash flows for each of the years
in the two-year period ended December 31, 1999,  which are included in this Form
10-K. In connection with our audits 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  Company  management.  Our  responsibility  is to express an opinion on
these financial statement schedules based on our audits.

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.

Dudley, Hopton-Jones, Sims & Freeman PLLP


Birmingham, Alabama
February 18, 2000





                                      40.1

<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, 2000           December 31, 1999
                                              -------------------------  -------------------------

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

United States government ..................   14,080   14,093   14,104   14,421   14,433   14,425
States, municipalities and
   political subdivisions .................    4,037    4,214    4,052    4,983    5,122    5,068
Public Utilities ..........................    1,597    1,570    1,595    1,721    1,637    1,731
Industrial and Miscellaneous ..............    9,075    9,158    9,124    9,572    9,580    9,687
                                              ------   ------   ------   ------   ------   ------
Total Securities Held to Maturity .........   28,789   29,035   28,875   30,697   30,772   30,911
                                              ------   ------   ------   ------   ------   ------

Securities Available for Sale:

Equity Securities:
Public utilities ..........................    1,443    3,345    3,345    2,367    4,738    4,738
Banks and insurance companies .............    1,952    5,500    5,500    1,952    5,104    5,104
Industrial and all other ..................    8,150   16,118   16,118    8,479   17,834   17,834
                                              ------   ------   ------   ------   ------   ------
Total equity securities ...................   11,545   24,963   24,963   12,798   27,676   27,676
                                              ------   ------   ------   ------   ------   ------

Debt Securities:
United States government ..................   13,450   13,654   13,654   12,904   12,610   12,610
States, municipalities and
   political subdivisions .................    2,447    2,459    2,459    1,425    1,331    1,331
Public Utilities ..........................      191      196      196      400      400      400
Industrial and Miscellaneous ..............   10,680   10,376   10,376    8,335    7,594    7,594
                                              ------   ------   ------   ------   ------   ------
Total Debt Securities .....................   26,768   26,685   26,685   23,064   21,935   21,935
                                              ------   ------   ------   ------   ------   ------

Total Available for Sale ..................   38,313   51,648   51,648   35,862   49,611   49,611
                                              ------   ------   ------   ------   ------   ------

Total Securities ..........................   67,102   80,683   80,523   66,559   80,883   80,522
Receivable for securities ................       143               143        0                 0
Mortgage loans on real estate .............      116               116      112               112
Investment real estate ....................    1,569             1,569    1,557             1,557
Policy loans ..............................      692               692      669               669
Short term investments ....................    1,675             1,675    2,129             2,129
                                              ------            ------   ------            ------
                    Total investments .....   71,297            84,718   71,026            84,989
                                              ======            ======   ======            ======
</TABLE>




                                       41
<PAGE>




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

                                                                  December 31,
                                                              ------------------
                                                               2000        1999
                                                              -----       ------
Assets
     Cash ..............................................     $    66     $    68
     Investment in subsidiaries (equity method)
       eliminated upon consolidation ...................      46,481      44,904
     Other assets ......................................         458         390
                                                             -------     -------

        Total Assets ...................................     $47,005     $45,362
                                                             =======     =======

Liabilities and Shareholders' Equity
     Accrued general expenses ..........................     $   824     $   802
       Notes Payable ...................................       2,401       2,672
                                                             -------     -------

     Total Liabilities .................................       3,225       3,474
                                                             -------     -------

     Total Shareholders' Equity ........................     $43,780     $41,888
                                                             -------     -------

     Total Liabilities and Shareholders' Equity ........     $47,005     $45,362
                                                             =======     =======



The "Notes to Consolidated  Financial Statements of The National Security Group,
Inc."  are an  integral  part of this  condensed  financial  information  of the
registrants.

See  accompanying  "Notes to Condensed  Financial  Information  of
Registrant"





                                       42
<PAGE>




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

                                                         For the Years Ended December 31,
                                                         --------------------------------
                                                             2000       1999       1998
                                                            -------    -------    -------
Income
    From subsidiaries-eliminated upon consolidation
    Dividends ...........................................   $ 2,400    $ 2,300    $ 2,000
                                                            -------    -------    -------

Expenses
       State taxes ......................................        13         26         26
    Other expenses ......................................       454        304        113
                                                            -------    -------    -------
                                                                467        330        139
                                                            -------    -------    -------
Income before income taxes and equity in
    undistributed earnings of subsidiaries ..............     1,933      1,970      1,861
Income tax benefit ......................................      (129)       (17)       (73)
                                                            -------    -------    -------

Income before equity in undistributed earnings
    of subsidiaries .....................................     2,062      1,987      1,934
Equity in undistributed (losses) earnings of subsidiaries     1,714      1,769     (1,004)
                                                            -------    -------    -------

        Net Income ......................................   $ 3,776    $ 3,756    $   930
                                                            =======    =======    =======

</TABLE>


The "Notes to Consolidated  Financial Statements of The National Security Group,
Inc."  are an  integral  part of this  condensed  financial  information  of the
registrants.

See accompanying "Notes to Condensed Financial Information of Registrant"



                                       43
<PAGE>




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

                                                           For the Years Ended December 31,
                                                           --------------------------------
                                                             2000        1999       1998
                                                            -------    -------    -------
Cash flows from operating activities:
Net income ..............................................   $ 3,776    $ 3,756    $   930
Adjustments to reconcile net income to net
    cash provided by operating activities:
    Equity in undistributed loss (income) of subsidiaries    (1,714)    (1,769)     1,004
    Change in other assets ..............................       (68)       (33)        23
    Change in other liabilities .........................        22        (69)       (45)
                                                            -------    -------    -------
                           Net cash provided by
                           operating activities .........     2,016      1,885      1,912
                                                            -------    -------    -------

Cash flows from financing activities:
Proceeds from notes payable .............................         0          0      3,100
Payments on notes payable ...............................      (271)      (332)       (96)
Purchase of treasury stock ..............................         0         60     (3,251)
Cash dividends ..........................................    (1,747)    (1,664)    (1,713)
                                                            -------    -------    -------
                               Net cash used in
                           financing activities .........    (2,018)    (1,936)    (1,960)
                                                            -------    -------    -------

Net increase in cash and cash equivalents ...............        (2)       (51)       (48)

Cash and due from banks at beginning of year ............        68        119        167
                                                            -------    -------    -------

Cash and due from banks at end of year ..................   $    66    $    68    $   119
                                                            =======    =======    =======

</TABLE>




The "Notes to Consolidated  Financial Statements of The National Security Group,
Inc."  are an  integral  part of this  condensed  financial  information  of the
registrants.

See accompanying "Notes to Condensed Financial Information of Registrant"


                                       44
<PAGE>


               THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
             Notes to Condensed Financial Information of Registrant


Note 1-Basis of Presentation

     Pursuant  to the rules  and  regulations  of the  Securities  and  Exchange
     Commission,  the Condensed Financial Information of the Registrant does not
     include all of the information  and notes normally  included with financial
     statements  prepared  in  accordance  with  generally  accepted  accounting
     principles.  It is,  therefore,  suggested  that this  Condensed  Financial
     Information  be  read  in  conjunction  with  the  Consolidated   Financial
     Statements and Notes thereto included in the Registrant's  Annual Report as
     referenced in Form 10-K, Part II, Item 8, page 18.

Note 2-Cash Dividends from Subsidiaries

     Dividends of $2.4 million in 2000,  $2.3 million in 1999 and $2 million in
     1998 were paid to the Registrant by its subsidiaries.



                                       45
<PAGE>




                        THE NATIONAL SECURITY GROUP, INC.
         SCHEDULE V. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
                             (Amounts in thousands)
<TABLE>
<CAPTION>
<S>                                                                 <C>                <C>              <C>          <C>

                                                                                                                       Policy Claims
                                                                        Deferred          Future                         and Other
                                                                       Acquisition        Policy           Unearned      Benefits
                                                                          Costs           Benefits         Premiums       Payable
                                                                       ----------         --------         --------       --------
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
                                                                          =======          =======          =======          =======

At December 31, 1998:
         Life and accident and health insurance ................          $ 2,588          $18,833          $     0          $   347
         Property and casualty insurance .......................            1,566                0            8,745           21,528
                                                                          -------          -------          -------          -------
         Total .................................................          $ 4,154          $18,833          $ 8,745          $21,875
                                                                          =======          =======          =======          =======


</TABLE>
<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, 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
                                                   =======    =======    =======    =======    =======      =======    =======

For the year ended December 31, 1998:
  Life and accident and health insurance ......    $ 3,837    $ 2,018    $     4    $ 2,130    $ 1,104      $ 1,736    $ 3,831
  Property and casualty insurance .............     24,614      2,333        381     20,750      4,516        5,816     24,582
  Other .......................................          0          0          0          0          0          146          0
                                                   -------    -------    -------    -------    -------      -------    -------
  Total .......................................    $28,451    $ 4,351    $   385    $22,880    $ 5,620      $ 7,698    $28,413
                                                   =======    =======    =======    =======    =======      =======    =======




</TABLE>


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






                                       46
<PAGE>




                        THE NATIONAL SECURITY GROUP, INC.
                     SCHEDULE VI. 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, 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 ........    $  4,202      $     49      $      0      $  4,153        0.0%
         Property and casualty insurance .........................      23,078         1,393             0        21,685        0.0%
                                                                       --------      --------      --------      --------      ---

         Total premiums ..........................................    $ 27,280      $  1,442      $      0      $ 25,838        0.0%
                                                                       ========      ========      ========      ========      ===

For the year ended December 31, 1998:
Life insurance in force ..........................................    $137,785      $  5,782      $      0      $132,003        0.0%
                                                                       ========      ========      ========      ========      ===

Premiums:
         Life insurance and accident and health insurance ........    $  3,892      $     55      $      0      $  3,837        0.0%
         Property and casualty insurance .........................      26,194         1,580             0        24,614        0.0%
                                                                       --------      --------      --------      --------      ---

         Total premiums ..........................................    $ 30,086      $  1,635      $      0      $ 28,451        0.0%
                                                                       ========      ========      ========      ========      ===


</TABLE>

                                      47
<PAGE>


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

None.














                                       48

<PAGE>

                                    PART III

Item 10.  Directors and Officers of the Registrant

The information  contained on pages 2-4 of The National  Security  Group Proxy
Statement dated March 19, 2001, 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
Proxy Statement dated March 19, 2001, 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  Proxy
Statement  dated March 19, 2001,  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
Proxy Statement dated March 19, 2001, with respect to certain  relationships and
related  transactions,  is incorporated  herein by reference in response to this
item.





                                       49



<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                       19

    Consolidated Statements of Income--
      Years Ended December 31, 2000, 1999, and 1998                           20

    Consolidated Balance Sheets--December 31, 2000 and 1999                   21

    Consolidated Statements of Shareholders' Equity--
      Years Ended December 31, 2000, 1999, and 1998                           22

    Consolidated Statements of Cash Flows--
      Years Ended December 31, 2000, 1999, and 1998                           23

    Notes To Consolidated Financial Statements--December 31, 2000             24

    Schedule I. Summary Of Investments--December 31, 2000 and 1999            41

    Schedule III. Condensed Financial Information of Registrant--
       December 31, 2000 and 1999                                             42

    Schedule V. Supplementary Insurance Information--
      December 31, 2000, 1999, and 1998                                       46

    Schedule VI. Reinsurance--
      Years Ended December 31, 2000, 1999, and 1998                           47

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

b.    Reports on Form 8-K

      None

                                       50



<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.
Senior Vice President,
Chief Financial Officer,                        President, Chief Executive
Treasurer and Director                          Officer and Director


Date: March 29, 2001

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, 2001.

                                    SIGNATURE

/s/ Lewis Avinger                                    /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.















                                       51


<PAGE>