---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-K

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

For the fiscal year
ended December 31, 2002Commission File Number
0-18649

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

|                                |                                     
|------------------------------- | ------------------------------------
|Delaware                        | 63-1020300                          
|(State or other jurisdiction of | (IRS Employer identification number)
|incorporation or organization) 

661 East Davis
Street Elba, Alabama          36323(Address of principal executive
offices)      (Zip code)

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

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

None

Securities registered
pursuant to Section 12(g) of the Act:Common stock par
value $1.00 per shareTitle 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. (X) Yes ( )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)

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) ( ) Yes (X) No

Aggregate market value of the voting
stock held by nonaffiliates of the Registrant as of February 28, 2003 (based upon the bid
price of these shares on NASDAQ on such date)  $16,497,437.

Number of Shares of Common Stock
outstanding as of February 28, 2003 - 2,466,600

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

Total Number of
Sequentially Numbered Pages: 64



---

THE NATIONAL SECURITY
GROUP, INC.INDEX TO THE ANNUAL
REPORT ON FORM 10-KFOR THE YEAR ENDED
DECEMBER 31, 2002

|         |                                                                                       |     
|-------- | ------------------------------------------------------------------------------------- | ----
|Part I   |                                                                                       | Page
|Item 1   | Business                                                                              | 3   
|Item 2   | Properties                                                                            | 11  
|Item 3   | Legal Proceedings                                                                     | 11  
|Item 4   | Submission of Matters to a Vote of Security Holders                                   | 11  
|Part II 
|Item 5   | Market for Registrant's Common Equity and Related Stockholder Matters                 | 12  
|Item 6   | Selected Financial Data                                                               | 13  
|Item 7   | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14  
|Item 7A  | Quantitative and Qualitative Disclosures About Market Risk                            | 22  
|Item 8   | Consolidated Financial Statements and Supplementary Data                              | 23  
|Item 9   | Changes in and Disagreements with Accountants on Financial Disclosure                 | 57  
|Part III
|Item 10  | Directors and Executive Officers of the Registrant                                    | 58  
|Item 11  | Executive Compensation                                                                | 58  
|Item 12  | Security Ownership of Certain Beneficial Owners and Management                        | 58  
|Item 13  | Certain Relationships and Related Transactions                                        | 58  
|Item 14  | Controls and Procedures                                                               | 58  
|Part IV 
|Item 15  | Exhibits, Financial Statement Schedules and Reports of Form 8-K                       | 59  
|         | Signature Page                                                                        | 60  
|         | Certifications                                                                        | 61  
|        

2

---

# PART I

# Item 1. Business

Summary Description of
The National Security Group, Inc.

The National Security Group, Inc.
(the Company), an insurance holding company, was incorporated in Delaware on March 20,
1990. The Company, through its property and casualty subsidiaries, writes primarily
dwelling fire and windstorm, homeowners, mobile homeowners, and personal non-standard
automobile lines of insurance. The Company, through its life insurance subsidiary, offers
a basic line of life, and health and accident insurance products. Property-casualty
insurance is the most significant segment, accounting for 84% 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 1992. 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 2002:

| |            
| | -----------
| | State      
| | Alabama    
| | Arkansas   
| | Georgia    
| | Louisiana  
| | Mississippi

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

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

3

---

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

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

|                                   | Year Ended December 31
(Amounts in Thousands)
|---------------------------------- | ---------------------------------------------
|
|Net premiums earned:               |                                              
|Fire, Allied lines, and Homeowners |                                              
|Automobile                         |                                              
|Other                              |                                              
|                                   |                                              
|                                   |                                              
|                                   |                                              
|Income before income taxes         |                                              
|                                   |                                              
|                                   |                                              

# Life Insurance Segment

National Security Insurance Company
(NSIC), a wholly owned subsidiary organized in 1947, conducts the Companys life
insurance business. NSIC is licensed to write insurance in six states: Alabama, Florida,
Georgia, Mississippi, South Carolina, and Texas. The following table indicates NSIC direct
premiums collected by state in 2002:

| |            
| | -----------
| | State      
| | Alabama    
| | Georgia    
| | Mississippi
| | Florida    

NSIC has two primary methods of
distribution of insurance products, home service agents and independent agents. The home
service distribution method of life insurance products accounts for 59% of total premium
revenues in the life insurance segment. Home service life products consist of products
marketed directly at the home or other premises of the insured by an employee agent of the
Company. The independent agent distribution method accounts for 31% of total premium
revenue in the life insurance segment. Since NSIC began marketing life, accident and
health products through independent agents in 1999 the distribution channel has become the
fastest growing method of distribution. The products offered by NSIC primarily consist of
term and whole life insurance and supplemental accident and health insurance. NSIC does
not sell annuities.

4

---

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)
|----------------------------- | --------------------------------------------
|
|Life insurance in force at    |                                             
|end of period:                |                                             
|Ordinary-whole life           |                                             
|Term Life                     |                                             
|Industrial                    |                                             
|Other                         |                                             
|                              |                                             
|                              |                                             
|                              |                                             
|New life insurance issued:    |                                             
|Ordinary-whole life           |                                             
|Term Life                     |                                             
|Industrial                    |                                             
|Other                         |                                             
|                              |                                             
|                              |                                             
|                              |                                             
|Net premiums earned:          |                                             
|Life insurance                |                                             
|Accident and health insurance |                                             
|                              |                                             
|                              |                                             
|                              |                                             

5

---

# Investments

The insurance subsidiaries are regulated
as to the types of investments that 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:

|                                                           | Year Ended December 31
(Amounts in thousands)
|---------------------------------------------------------- | ---------------------------------------------
|
|Investment Securities held-to-maturity,  at amortized cost |                                              
|(estimated fair value: 2002 - $20,267, 2001 - $23,922)     |                                              
|Investment Securities available-for-sale,  at market       |                                              
|(cost: 2002 - $52,310, 2001 - $45,975)                     |                                              
|Receivable for securities sold                             |                                              
|Note Receivable from affiliate                             |                                              
|Mortgage loans on real estate, at cost                     |                                              
|Investment real estate, at cost                            |                                              
|Policy loans                                               |                                              
|Investment in affiliate                                    |                                              
|Short-term investments                                     |                                              
|                                                           |                                              
|                                                           |                                              
|                                                           |                                              

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

|                                                        | Year Ended December 31
|------------------------------------------------------- | ----------------------
|
|Net investment income                                   |                       
|Average yield on investments                            |                       
|Economic yield on investments (includes realized and    |                       
|unrealized investment gains)                            |                       
|Net realized gains on investments (before income taxes) |                       
|Changes in net unrealized gains on investments          |                       
|(before income taxes)                                   |                       

6

---

As of December 31, 2002, the maturity
schedule for all bonds and notes held by the Company, stated at amortized cost, was as
follows:

Maturity Schedule (Amounts in thousands)

|Maturity                     | Availablefor sale | Held toMaturity | Total | Percentageof Total
|---------------------------- | ----------------- | --------------- | ----- | ------------------
|Maturity in less than 1 year |                   |                 | $     | 501               
|Maturity in 1-5 years        |                   |                 |       | 9,523             
|Maturity in 5-10 years       |                   |                 |       | 19,782            
|Maturity after 10 years      |                   |                 |       | 11,412            
|                             |                   |                 |       |                   
|Totals                       |                   |                 | $     | 41,218            
|                             |                   |                 |       |                   
|                             |                   |                 |       |                   
|Investments in affiliate:    |                   |                

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

At 12/31/2002 the Company held a 50%
equity investment in The Mobile Attic.  The investment was accounted for in the financial
statements on the equity basis.  Further details of the financial results of The Mobile
Attic, Inc. are discussed in the Management Discussion and Analysis Section of Form 10-K.

Certain Information Regarding
Insurance Activities

Marketing and Distribution

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

Agents receive compensation for
their sales efforts.  In the case of life insurance agents, compensation is paid in the
form of sales commissions plus a servicing commission.  Commissions incurred by NSIC in
2002 averaged approximately 44% of premiums.  Commissions incurred by the NSFC in 2001
averaged approximately 22% of premiums and ranged from 12.5% to 27.5% depending on the
type and amount of insurance sold.  During 2002, no one independent agent accounted for
more than 10% of total net earned premium of the property-casualty insurance subsidiaries.

At December 31, 2002 NSIC employed
19 home service agents and three managers.  NSIC also had approximately 325 independent
agents actively producing new business.

At December 31, 2002 NSFC had
contracts with approximately 1,300 independent agents in twelve states.

7

---

Reinsurance

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

NSIC generally reinsures all risks
in excess of $50,000 with respect to any one insured.  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 2002, 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 a1/2of 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, 2002, the total reserves of NSIC
(including the reserves for accident and health insurance) were approximately $23
million.  NSIC believes that such reserves for future policy benefits were calculated in
accordance with generally accepted actuarial methods and that such reserves are adequate
to provide for future policy benefits.  Wakely & Associates, consulting actuaries,
provided actuarial services in calculating reserves.

The property-casualty subsidiaries
are also required to maintain loss reserves (claim liabilities) for all lines of
insurance.  Such reserves are intended to cover the probable ultimate cost of settling
all claims, including those incurred but not yet reported.  The reserves of the
property-casualty subsidiaries reflect estimates of the liability with respect to
incurred claims and are determined by evaluating reported claims on an ongoing basis and
by estimating liabilities for incurred but not reported claims.  Such reserves include
adjustment expenses to cover the cost of investigating losses and defending lawsuits.
 The establishment of accurate reserves is complicated by the fact that claims in some
lines of insurance are settled many years after the policies have been issued, thus
raising the possibility that inflation may have a significant effect on the amount of
ultimate loss payment, especially when compared to initial loss estimates.  The
subsidiaries, however, attempt to restrict their writing to risks that settle within one
to four years of issuance of the policy.  As of December 31, 2002, the property-casualty
subsidiaries had

8

---

reserves for unpaid claims of
approximately $11.5 million before subtracting unpaid claims which will be due from
reinsurers of  $1.56 million leaving net unpaid claims of $9.94 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, 2002, 2001 or 2000.
 The Company believes such reserves are adequate to provide for settlement of claims.
 Employees of the Company calculate NSFC and Omega loss reserves.  Milliman & Robertson,
an independent actuarial consulting firm, issues a Statement of Actuarial Opinion
regarding the adequacy of reserves.

Underwriting Activities

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

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

The nonstandard market in which the
property-casualty subsidiaries operate reacts to general economic conditions in much the
same way as the standard market.  When insurers' profits and equity are strong, companies
generally cut rates or do 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 that 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 that 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.

9

---

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 and independent producers.
Direct competition comes from other home service companies and other insurance companies
that utilize independent producers to sell insurance products, of which there are many.
 NSIC's life and health products also compete with products sold by ordinary life
companies.  NSIC writes policies primarily in Alabama, Georgia and Mississippi.  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.

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.
  Initial costs of distribution through independent agents are generally more than
through home service distribution methods, but lower commissions are paid in years
subsequent to the first year of the policy so costs decline rapidly as policies renew
after the first year.  The primary factor in controlling cost in under the independent
agents distribution method is maintaining a high persistency rate.  The persistency rate
is the rate at which new business is maintained in renewal periods subsequent to the
first year.  The higher the persistency percentage that can be maintained, the lower
overall distribution costs become due to lower commission rate payments on policies in
force subsequent to the first year.

10

---

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

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 is 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 that 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 P 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, 2002.

11

---

# PART
II

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

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

The number of shareholders of the
Company's capital stock as of January 31, 2003, was approximately 1,100.

|               | Stock Bid Prices | Dividends
|-------------- | ---------------- | ---------
|
|2002           |                  |          
|First Quarter  |                  | $        
|Second Quarer  |                  |          
|Third Quarter  |                  |          
|Forth Quarter  |                  |          
|               |                  |          
|2001           |                  |          
|First Quarter  |                  | $        
|Second Quarter |                  |          
|Third Quarter  |                  |          
|Forth Quarter  |                  |          

12

---

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



|Operating results             | 2002 | 2001 | 2000 | 1999   | 1998
|----------------------------- | ---- | ---- | ---- | ------ | ----
|Net premiums earned           |      |      | $    | 32,631 |     
|Net investment income         |      |      |      | 4,235  |     
|Net realized investment gains |      |      |      | 1,168  |     
|Other income                  |      |      |      | 1,051  |     
|                              |      |      |      |        |     
|Total revenues                |      |      | $    | 39,085 |     
|                              |      |      |      |        |     
|Net Income                    |      |      | $    | 908    |     
|                              |      |      |      |        |     
|Net income per share          |      |      | $    | 0.37   |     
|                              |      |      |      |        |     

|Other Selected Financial Data | 2002 | 2001 | 2000 | 1999      | 1998
|----------------------------- | ---- | ---- | ---- | --------- | ----
|Total shareholders' equity    |      |      | $    | 42,159    |     
|Book value per share          |      |      | $    | 17.09     |     
|Dividends per share           |      |      | $    | .805      |     
|Net change in unrealized      |      |     
|capital gains (net of tax)    |      |      |      | ($  1,647 | )   
|Total assets                  |      |      | $    | 101,602   |     

13

---

|Item 7. | Managements Discussion and Analysis of Financial Conditionand 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 OperationsConsolidated Results of
Operations:

# Year Ended December
31, 2002 Compared to Year Ended December 31, 2001

Consolidated net income for The
National Security Group (The Company) was $908,000 in 2002 compared to $4.13 million in
2001. On a per share basis earnings were $0.37 in 2002 compared to $1.67 in 2001. Realized
capital gains were $1.168 million in 2002 compared to $1.640 million in 2001. Consolidated
revenues were $39.085 million in 2002 compared to $32.783 million in 2001. Increased
insurance premium production in the property/casualty insurance subsidiaries was the
primary factor contributing to the increase in revenues in 2002. However, adverse
underwriting results in the property/casualty insurance segment were the primary factor
contributing to the decline in earnings for 2002 compared to 2001.

A 50% owned subsidiary contributed
$136,000 to net income in 2002. This subsidiary, The Mobile Attic, Inc., is in the
business of leasing portable storage containers through independent dealers in Alabama,
Florida, and Tennessee.

The operating results of the
subsidiaries are discussed in further detail in the sections that follow.

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

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

Industry Segment DataCertain 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):

Premium revenues:

|                                    | 2002 | % | 2001 | %      | 2000 | %     
|----------------------------------- | ---- | - | ---- | ------ | ---- | ------
|Life, accident and health insurance |      |   | $    | 5,396  |      | 16.54 
|Property and casualty insurance     |      |   |      | 27,235 |      | 83.46 
|                                    |      |   |      |        |      |       
|                                    |      |   | $    | 32,631 |      | 100.00
|                                    |      |   |      |        |      |       
|                                    |      |   |      |        |      |       

14

---

Income before taxes and equity in
income of affiliate:

|                                    | 2002 | % | 2001 | %     | 2000 | %     
|----------------------------------- | ---- | - | ---- | ----- | ---- | ------
|Life, accident and health insurance |      |   | $    | 1,118 |      | 93.63 
|Property and casualty insurance     |      |   |      | 518   |      | 43.38 
|Other                               |      |   |      | (196  | )    | -16.42
|Interest expense                    |      |   |      | (246  | )    | -20.60
|                                    |      |   |      |       |      |       
|                                    |      |   | $    | 1,194 |      | 100.00
|                                    |      |   |      |       |      |       

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,
2002 Compared to Year Ended December 31, 2001:

Income before income taxes in 2002
was $1,186,000 compared to $586,000 in 2001. A decrease in litigation related expenses
boosted income before income tax by over $200,000. A decline in general expenses is the
other significant item contributing to the increase in income before income taxes in 2002
compared to 2001.

Premium revenue increased to
$5,396,000 in 2002 compared to $5,161,000 in 2001, an increase of 4.6%. Insurance sales
through independent agent distribution channels increased over 40% in 2002 over prior
year; while sales through NSICs traditional home service distribution channel
declined by 4%. While management is pleased with new business production from the
independent agents distribution channel, an increased focus is now being placed on
increasing retention of new business. Increased retention and persistency will not only
further increase premium growth in the independent agent distribution channel, but also
reduce commission expense as a percent of premium because most commission paid on an
insurance contract sold through independent agents is paid in the first two years the
policy is in force.

Commission expense increased 16% in
2002 compared to 2001. The continuing increases in new sales through independent agents
and a change in the home service agents commission contract were the primary factors
contributing to the increase in commission. Independent agents typically receive much
higher commission rates in the early years of a policy compared to employee agents in the
home service market, which typically receive a lower and more level commission over a
longer number of years. With premium growth generated exclusively through independent
agents, commission expense will rise at a faster rate than premium growth until a more
significant block of insurance business rolls into subsequent years at lower commission
rates. The second factor contributing to the increase in commission expense was a change
in employee home service agents contract in 2002. Under the new contract agents
received an increase in base salary and could achieve bonuses upon obtaining varying
levels of persistency. To offset the increase in salaries, management reduced the number
of agents and combined sales territories. Because the salary increases were implemented
early in 2002 and efficiency efforts were not fully implemented until later in 2002, no
cost savings were realized and in fact total field cost in the home service program
increased. However, as a result of these efforts, home service field cost are expected to
stabilize in 2003 and subsequent years.

15

---

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

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

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

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

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 1992.

# Year Ended December 31,
2002 Compared to Year Ended December 31, 2001:

Property and casualty premium
revenues increased $7,039,000 for the year ended December 31, 2002 compared to the same
period in 2001, an increase of over 35%. Increased marketing efforts certainly had a
significant impact on the increase in premium revenue, but market changes also
significantly influenced the influx of new business. Over the last two years many
companies have become much more restrictive in their underwriting guidelines, or have
completely exited some markets that we serve. As a result of these market changes we have
seen a decrease in competition and an opportunity to significantly increase market share.
However, as will be discussed in the paragraphs that follow, we will have to strictly
monitor underwriting results and proactively manage growth in order to improve
underwriting profitability.

Net income before income tax was
$518,000 in 2002 compared to $5,440,000 in 2001. Adverse claims experience from
hurricane losses in the fourth quarter of 2002 and an increased severity of losses on new
business issued were the primary reasons for the significant decrease in income. In
October of 2002 Hurricane Lili swept across Louisiana causing over $1,300,000 in insured
losses in NSFC and Omega. However, the most significant impact on property/casualty net
income for the year was poor underwriting results on new business issued. Historically,
new property insurance business issued has carried a higher loss ratio than renewal
business. In 2002 the property/casualty subsidiaries issued more new business than has
been issued in recent history with an increase in premium revenue of over 35%.

16

---

NSFC incurred numerous total losses
on business in force less than one year, mostly fire losses. 33% of all dwelling property
losses incurred in 2002 were attributable to fire losses of over $25,000 per occurrence.
Historically, fire losses are more numerous in the winter months of December and January,
but a higher frequency of fire losses was experienced throughout the year. It is difficult
to prove that these higher frequency losses were connected to any single cause, such as a
colder than normal winter or lightning strikes, but with the overall economy in a downturn
and personal bankruptcy at record highs in some of the states in which NSFC and Omega
writes business, management believes that at least some of the losses could be
attributable to arson, which is most cases is virtually impossible to prove. In an effort
to stem the frequency of total fire losses, we have instituted additional underwriting
standards in some states, such as providing proof of prior insurance coverage and closer
evaluation of prior claims history. We will closely monitor
underwriting results in 2003 and make further improvements and adjustments as deemed
necessary to improve underwriting profitability.

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

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

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

The improved underwriting results in
2001 compared to 2000 were primarily attributable to the completion of the runoff period
for several general agent programs that were started through out the 1990s. Adverse
loss development on these programs led to higher underwriting losses in the late
1990s. These programs, primarily commercial and private passenger auto programs,
were discontinued in 1999 and 2000.

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.

17

---

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

|                           | 2002   | 2001  | 2000 
|-------------------------- | ------ | ----- | -----
|Loss and LAE Ratio         | 75.5%  | 54.3% | 61.6%
|Underwriting Expense Ratio | 31.9%  | 36.1% | 34.8%
|Combined Ratio             | 107.4% | 90.4% | 96.4%

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

The combined ratio for 2002 compared
to 2001 increased seventeen percentage points.  The loss and LAE component of the
combined ratio increased over twenty percentage points.  The previously discussed
hurricane related losses and a higher loss ratio on new business is the primary reason
for the significant increase in the combined ratio.  On a positive note, the expense
ratio declined over four percentage points in 2002 compared to 2001.  While the large
influx of new business had an adverse impact on the loss and LAE ratio, the increase in
new business did enable us to begin to achieve some economies of scale and reduce the
expense ratio significantly.  A primary objective for us in 2003 will be to focus on
maintaining a manageable level of growth while reducing the loss and LAE ratio.  As
discussed earlier in the Property and Casualty operations section of this report, we are
proactively managing our risk to mitigate the continuing negative impact of adverse
underwriting results on the Company.

Leasing operations:

The Company's leasing operations are
conducted through its 50% owned subsidiary, Mobile Attic, Inc.  The investment in Mobile
Attic is accounted for under the Equity Method in the Consolidated Financial Statements
of the Company.  Mobile Attic was incorporated in August of 2001 and is a joint venture
with a manufacturing partner, Cash Brothers Leasing of Elba, Alabama.

Mobile Attic is in the business of
leasing portable storage containers to individual and commercial customers through an
independent dealer network primarily in Alabama, but also operating in Florida and
Tennessee.  At December 31, 2003 Mobile Attic had available approximately 1,800 storage
containers for lease and thirteen independent dealers.  The portable storage containers
are eight feet wide and eight feet tall and are available in lengths of 8, 16, 20, and 40
feet.  Independent dealers market these portable storage containers primarily to
household customers in need of a convenient alternative to fixed location mini-storage,
commercial customers in need of secure storage facilities at job sites, and retail
customers for storage of seasonal inventory.

In 2002 Mobile Attic contributed
$136,000 in net income to the Company compared to net income of $52,000 in 2001.  In
2001, the year in which operations began, gross rental revenues were $87,000.  In 2002
gross rental revenues were $557,000.  It is anticipated that Mobile Attic will produce
rental revenue of over $2,000,000 in 2003 with over 3,000 storage containers available
for lease by year-end 2003.

18

---

Asset Portfolio Review:

The life insurance and
property/casualty subsidiaries primarily invest in highly liquid investment grade debt
and equity securities.  At December 31, 2002, the company's holdings in debt securities
amounted to 71% of total investments and 62% 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    
|1                                                                | Aaa to A3  
|2                                                                | Baa to Baa3
|3                                                                | Ba1 to Ba3 
|4                                                                | B1 to B3   
|5                                                                | Caa to Ca  
|6                                                                | C          

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 E to the consolidated financial statements).

The insurance subsidiaries' fixed
maturity securities include mortgage-backed bonds, primarily collateralized mortgage
obligations (CMO's), of $5.4 million and $9.2 million at December 31, 2002 and 2001
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.

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.

19

---

The National Security Group's
consolidated statement of cash flows indicate that operating activities provided (used)
cash of $4,321,000, $2,913,000, $(442,000) in 2002, 2001, and 2000 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.  Certain invested
assets of the Company secure the letters of credit.  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
$3.4 million at December 31, 2002.  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, 2002, the
Company had no known impairments of assets or changes in operation, which would have a
material adverse effect upon liquidity.  Approximately 81% of the Company's assets are
invested in cash, investment grade fixed income securities, short-term investments and
broadly traded equity securities which are highly liquid.  The values of these
investments are subject to the conditions of the markets in which they are traded.  Past
fluctuations in these markets have had little effect on the liquidity of the Company.
 The Company has relatively little exposure to lower grade fixed income investments which
might be especially subject to liquidity problems due to thinly traded markets.

Except as discussed in Note P 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 M to the
consolidated financial statements, in 2003, the amount that The National Security Group's
insurance subsidiaries can transfer in the form of dividends to the parent company is
limited to $1.1 million in the life insurance subsidiary and $2.0 million in the
property/casualty insurance subsidiary.  However, that condition poses no short-term or
long-term liquidity concerns for the parent company.

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

20

---

The levels and ratios are as follows:

|                         |                                                                                      
|------------------------ | -------------------------------------------------------------------------------------
|Regulatory Event         | Ratio of Total Adjusted Capital toAuthorized Control Level RBC(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 five to one at December 31,
2002.

National Security Insurance Company
(life insurer) has regulatory adjusted capital of $11.47 million and $13 million at
December 31, 2002 and 2001, respectively, and a ratio of regulatory total adjusted capital
to authorized control level RBC of 17.1 and 15.75 at December 31, 2002 and 2001
respectively. Accordingly, National Security Insurance Company meets the minimum RBC
requirements.

National Security Fire & Casualty
Company (property/casualty insurer) has regulatory adjusted capital of $20.2 million and
$23.6 million at December 31, 2002 and 2001, respectively, and a ratio of regulatory total
adjusted capital to authorized control level RBC of 5.3 and 7.0 at December 31, 2002 and
2001 respectively. Accordingly, National Security Fire & Casualty Company meets the
minimum RBC requirements.

Omega One Insurance Company
(property/casualty insurer), which began writing business in late 1995, has regulatory
adjusted capital of $5.7 million and $5.0 million at December 31, 2002 and 2001,
respectively, and a ratio of regulatory total adjusted capital to authorized control level
RBC of 8.7 and 8.4 at December 31, 2002 and 2001 respectively. Accordingly, Omega One
Insurance Company meets the minimum RBC requirements.

# Information about
Forward-Looking Statements

Any statement contained in this
report which is not a historical fact, or which might otherwise be considered an opinion
or projection concerning the Company or its business, whether expressed or implied, is
meant as and should be considered a forward-looking statement as that term is defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks, including but
not limited to changes in market conditions, natural disasters and other catastrophic
events, increased competition, changes in availability and cost of reinsurance, changes in
governmental regulations, technological changes, political and legal contingencies and
general economic conditions, as well as other risks and uncertainties more completely
described in the Companys filings with the Securities and Exchange Commission. If
any of these assumptions or opinions prove incorrect, any forward-looking statements made
on the basis of such assumptions or opinions may also prove materially incorrect in one or
more respects and may cause future results to differ materially from those contemplated,
projected, estimated or budgeted in such forward-looking statements.

21

---

# Item 7A.                                                    Quantitative
and Qualitative Disclosures About Market Risk

The Companys primary objectives
in managing its investment portfolio are to maximize investment income and total
investment returns while minimizing overall credit risk. Investment strategies are
developed based on many factors including changes in interest rates, overall market
conditions, underwriting results, regulatory requirements, and tax position. Investment
decisions are made by management and reviewed and approved by the Board of Directors.
Market risk represents the potential for loss due to adverse changes in fair value of
securities. The three potential risks related to the Companys fixed maturity
portfolio are interest rate risk, prepayment risk, and default risk. The primary risk
related to the Companys equity portfolio is equity price risk

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
$16.7 million. If the market value of the S & P 500 Index decreased 10% from its
December 31, 2002 value, the fair value of the Companys common stock would decrease
by approximately $1.7 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 in the
consolidated financial statements presents additional disclosures concerning fair values
of Financial Assets and Financial Liabilities, and is incorporated by reference herein.

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

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

22

---

# Item 8. Consolidated
Financial Statements and Supplementary Data

|                                                              |   
|------------------------------------------------------------- | --
|Index to Financial Statements                                 |   
|Consolidated Financial Statements:                           
|Report of Independent Certified Public Accountants            | 24
|Consolidated Statements of Income                           
|Years Ended December 31, 2002, 2001, and 2000                 | 25
|Consolidated Balance Sheets                                 
|December 31, 2002 and 2001                                    | 26
|Consolidated Statements of Shareholders Equity             
|Years Ended December 31, 2002, 2001, and 2000                 | 27
|Consolidated Statements of Cash Flows                       
|Years Ended December 31, 2002, 2001, and 2000                 | 28
|Notes to Consolidated Financial Statements                  
|December 31, 2002                                             | 29
|Financial Statement Schedules:                               
|Reports of Independent Certified Public Accountants          
|on Financial Statement Schedules                              | 49
|Schedule I.  Summary of Investments -                        
|December 31, 2002 and 2001                                    | 50
|Schedule II.  Condensed Financial Information of Registrant -
|December 31, 2002 and 2001                                    | 51
|Schedule III.  Supplementary Insurance Information -         
|December 31, 2002, 2001, and 2000                             | 55
|Schedule IV. Reinsurance                                    
|Years Ended December 31, 2002, 2001, and 2000                 | 56

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

23

---

# INDEPENDENT
AUDITORS REPORT

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

We have audited the accompanying
consolidated balance sheets of The National Security Group, Inc. and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of income,
shareholders equity and cash flows for each of the years in the three-year period
ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The National Security Group, Inc. and subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

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

Birmingham, AlabamaFebruary
26, 2003

24

---

# THE NATIONAL SECURITY
GROUP, INC.

CONSOLIDATED STATEMENTS
OF INCOME

|                                                             | (Dollars in thousands
except per share amounts)Years Ended December 31,
|------------------------------------------------------------ | -----------------------------------------------------------------------
|
|REVENUES                                                     |                                                                        
|Net premiums earned                                          |                                                                        
|Net investment income                                        |                                                                        
|Net realized investment gains                                |                                                                        
|Other income                                                 |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|BENEFITS AND EXPENSES                                        |                                                                        
|Policyholder benefits paid or provided                       |                                                                        
|Amortization of deferred policy acquisition costs            |                                                                        
|Commissions                                                  |                                                                        
|General insurance expenses                                   |                                                                        
|Insurance taxes, licenses and fees                           |                                                                        
|Interest expense                                             |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|Income Before Income Taxes and Equity in Income of Affiliate |                                                                        
|INCOME TAX EXPENSE                                           |                                                                        
|Current                                                      |                                                                        
|Deferred                                                     |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|                                                             |                                                                        
|Income Before Equity in Income of Affiliate                  |                                                                        
|                                                             |                                                                        
|Equity in Income of Affiliate                                |                                                                        
|                                                             |                                                                        
|Net Income                                                   |                                                                        
|                                                             |                                                                        
|EARNINGS PER COMMON SHARE                                    |                                                                        
|Net Income                                                   |                                                                        
|                                                             |                                                                        

See notes to consolidated financial
statements.

25

---

# THE NATIONAL SECURITY
GROUP, INC.

CONSOLIDATED BALANCE
SHEETS

|                                                                                            | (Dollars in thousands)
December 31,
|------------------------------------------------------------------------------------------- | -----------------------------------
|
|Investments                                                                                 |                                    
|Securities held-to-maturity, at amortized cost (estimated fair value: 2002 - $20,267        |                                    
|2001 - $23,922)                                                                             |                                    
|Securities available-for-sale, at estimated fair value (cost: 2002 - $52,310;               |                                    
|2001 - $45,975)                                                                             |                                    
|Receivable for securities                                                                   |                                    
|Notes receivable from affiliate                                                             |                                    
|Mortgage loans on real estate, at cost                                                      |                                    
|Investment real estate, at book value (accumulated depr.: 2002 - $17; 2001 - $17)           |                                    
|Policy loans                                                                                |                                    
|Investment in affiliate                                                                     |                                    
|Short-term investments                                                                      |                                    
|                                                                                            |                                    
|Total Investments                                                                           |                                    
|Cash                                                                                        |                                    
|Accrued investment income                                                                   |                                    
|Receivable from agents, less allowance for credit losses (2002-$176; 2001-$176)             |                                    
|Reinsurance recoverable                                                                     |                                    
|Deferred policy acquisition costs                                                           |                                    
|Prepaid reinsurance premiums                                                                |                                    
|Property and equipment, net                                                                 |                                    
|Other assets                                                                                |                                    
|                                                                                            |                                    
|Total Assets                                                                                |                                    
|                                                                                            |                                    
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                        |                                    
|Policy and claim reserves                                                                   |                                    
|Checks outstanding in excess of bank balance                                                |                                    
|Other policyholder funds                                                                    |                                    
|Long-term debt                                                                              |                                    
|Accrued income taxes                                                                        |                                    
|Other liabilities                                                                           |                                    
|Deferred income tax                                                                         |                                    
|                                                                                            |                                    
|Total Liabilities                                                                           |                                    
|Contingencies                                                                               |                                    
|Shareholders' Equity                                                                        |                                    
|Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding        |                                    
|Class A common stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding |                                    
|Common stock, $1 par value, 2,500,000 shares authorized, 2,466,600                          |                                    
|shares issued and outstanding                                                               |                                    
|Additional paid-in capital                                                                  |                                    
|Accumulated other comprehensive income                                                      |                                    
|Retained earnings                                                                           |                                    
|                                                                                            |                                    
|Total Shareholders' Equity                                                                  |                                    
|                                                                                            |                                    
|Total Liabilities and Shareholders' Equity                                                  |                                    
|                                                                                            |                                    

See notes to consolidated financial
statements.

26

---

# THE NATIONAL SECURITY
GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                     | (Dollars in thousands)
|------------------------------------ | ----------------------
|
|Balance at January 1, 2000           |                       
|Comprehensive income:                |                       
|Net income for 2001                  |                       
|Other comprehensive loss, net of tax |                       
|Unrealized loss on securities, net   |                       
|of reclassification adjustment       |                       
|                                     |                       
|Comprehensive income                 |                       
|                                     |                       
|Cash dividends                       |                       
|                                     |                       
|Balance at December 31, 2000         |                       
|Comprehensive income:                |                       
|Net income for 2001                  |                       
|Other comprehensive loss, net of tax |                       
|Unrealized loss on securities, net   |                       
|of reclassification adjustment       |                       
|                                     |                       
|Comprehensive income                 |                       
|                                     |                       
|Retirement of treasury stock         |                       
|Stock dividend                       |                       
|Cash dividends                       |                       
|                                     |                       
|Balance at December 31, 2001         |                       
|Comprehensive loss:                  |                       
|Net income for 2002                  |                       
|Other comprehensive loss, net of tax |                       
|Unrealized loss on securities, net   |                       
|of reclassification adjustment       |                       
|                                     |                       
|Comprehensive loss:                  |                       
|                                     |                       
|Cash dividends                       |                       
|                                     |                       
|Balance at December 31, 2002         |                       
|                                     |                       

See notes to consolidated financial statements.

27

---

# THE NATIONAL SECURITY
GROUP, INC.

CONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                      | (Dollars in thousands)Year ended December 31,
|--------------------------------------------------------------------- | ---------------------------------------------
|
|Cash flows from operating activities:                                 |                                              
|Net income                                                            |                                              
|Adjustments to reconcile net income to net cash provided by (used in) |                                              
|operating activities:                                                 |                                              
|Change in accrued investment income                                   |                                              
|Change in reinsurance recoverable                                     |                                              
|Amortization of deferred policy acquisition costs                     |                                              
|Change in receivable for securities                                   |                                              
|Net realized gains on investments                                     |                                              
|Gain on disposal of property and equipment                            |                                              
|Policy acquisition costs deferred                                     |                                              
|Change in prepaid reinsurance premiums                                |                                              
|Depreciation expense and amortization/accretion                       |                                              
|Change in policy liabilities and claims                               |                                              
|Change in income tax payable                                          |                                              
|Change in deferred income taxes                                       |                                              
|Change in other liabilities                                           |                                              
|Equity in earnings of investee                                        |                                              
|Other, net                                                            |                                              
|                                                                      |                                              
|Net cash provided (used in) by operating activities                   |                                              
|Cash flows from investing activities:                                 |                                              
|Purchases of held-to-maturity securities                              |                                              
|Purchases of available-for-sale securities                            |                                              
|Proceeds from maturities of held-to-maturity securities               |                                              
|Proceeds from sales of available-for-sale securities                  |                                              
|Proceeds from real estate held for investment                         |                                              
|Purchases of real estate held for investment                          |                                              
|Net (purchases) proceeds from short-term investment                   |                                              
|Advances on loans, net                                                |                                              
|Purchase of property and equipment                                    |                                              
|Proceeds from sale of property and equipment                          |                                              
|                                                                      |                                              
|Net cash (used in) provided by investing activities                   |                                              
|Cash flows from financing activities:                                 |                                              
|Proceeds from notes payable                                           |                                              
|Payments on notes payable                                             |                                              
|Change in other policyholder funds                                    |                                              
|Dividends paid                                                        |                                              
|Change in checks outstanding in excess of bank balances               |                                              
|                                                                      |                                              
|Net cash used in financing activities                                 |                                              
|                                                                      |                                              
|Net (decrease) increase in cash                                       |                                              
|Cash at beginning of year                                             |                                              
|                                                                      |                                              
|Cash at end of year                                                   |                                              
|                                                                      |                                              

See notes to consolidated financial
statements.

28

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES

# Principles of Consolidation

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

# Investment in Affiliate

The companys investment in
affiliate consists of a 50% interest in Mobile Attic, Inc., a portable storage leasing
company. The company accounts for this investment using the equity method (see Notes B, P
and R).

# Description of Major
Products

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

# Basis of Presentation

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

# Investments

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

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

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

The Company and its subsidiaries have
no trading securities.

29

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

# Investments 
continued

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

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

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

# Receivable from Agents

Agent balances are reported at unpaid
balances, less a provision for credit losses.

# Property and Equipment

Property and equipment is carried at
cost less accumulated depreciation and includes expenditures that substantially increase
the useful lives of existing property and equipment. Maintenance, repairs, and minor
renovations are charged to expense as incurred. Upon sale or retirement of property and
equipment, the cost and related accumulated depreciation are eliminated from the
respective account and the resulting gain or loss is included in the results of
operations. The Company provides for depreciation of property and equipment using the
straight-line method designed to amortize costs over estimated useful lives. Estimated
useful lives range up to 40 years for buildings and from 3-20 years for electronic data
processing equipment and furniture and fixtures.

# Fair Value of Financial
Instruments

The table below presents the carrying
value and fair value of the Companys financial instruments, as defined in accordance
with applicable requirements. Fair values of the Companys financial instruments are
estimated by reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. 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 Companys 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.

Certain financial instruments,
particularly insurance liabilities other than financial guarantees and investment
contracts, leases and affiliate investments, are excluded from the disclosures. In
evaluating the Companys management of interest rate and liquidity risk, the fair
values of all assets and liabilities should be taken into consideration.

30

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

# Fair Value of Financial
Instruments  continued

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.

|                                    | In Thousands of Dollars at December 31,
|----------------------------------- | ---------------------------------------
|
|
|Assets and related instruments      |                                        
|Debt and equity securities          |                                        
|Mortgage loans                      |                                        
|Policy loans                        |                                        
|Liabilities and related instruments |                                        
|Other policyholder funds            |                                        
|Long-term debt                      |                                        

# 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.

# 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.

31

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

# 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 - 2002    | 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 Companys 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 were 2,466,600 (2,466,600 in 2001 and 2000).

# Reinsurance

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

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

# Reclassifications

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

32

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

# 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.

# Advertising

The Company expenses advertising
costs as incurred. Advertising costs were $101,000 for the year ended December 31, 2002
($110,000 and $83,000 for the years ended December 31, 2001 and 2000, respectively).

# Concentration of Credit
Risk

The Company maintains cash depository
accounts, which at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.

# Recently Issued
Accounting Standards

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

In September 2000, the Financial
Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The adoption of this statement is not expected to have a material
effect on the Companys financial position or results of operations.

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

33

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE A 
SIGNIFICANT ACCOUNTING POLICIES  CONTINUED

# Recently Issued
Accounting Standards  continued

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

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

In July 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
which addresses financial accounting and reporting for costs associated with exit or
disposal activities, and must be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statement is not expected to have
a material impact on the Companys financial position or results of operations.

# NOTE B  INVESTMENT
IN AFFILIATE

Summarized  financial  information
for the Company's  investment in Mobile Attic, Inc., accounted for by the equity method,
follows:

|                       | (Dollars in thousands)
|---------------------- | ----------------------
|
|
|Current assets         |                       
|                       |                       
|Noncurrent assets      |                       
|                       |                       
|Current liabilities    |                       
|                       |                       
|Noncurrent liabilities |                       

|                   | (Dollars in thousands)
|------------------ | ----------------------
|
|
|Gross revenue      |                       
|Operating expenses |                       
|Net income         |                       

34

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE C  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 LSICs 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s consolidated financial
statements since the date of acquisition. The purchase agreement provides for additional
consideration to be paid the former stockholders contingent upon specified premium growth
of the LSIC block of business.

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

|                          | 2000
|------------------------- | ----
|Net premiums earned       |     
|Income before taxes       |     
|Net income                |     
|Earnings per common share |     

# NOTE D  STATUTORY
ACCOUNTING PRACTICES

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

35

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE D  STATUTORY
ACCOUNTING PRACTICES  CONTINUED

Statutory net gains from operations
and capital and surplus, excluding intercompany transactions, are summarized as follows:

|                                                                 | (Dollars in thousands)
Year Ended December 31,
|---------------------------------------------------------------- | ----------------------------------------------
|
|NSIC - including realized capital gains of  $356, $652 and $986, |                                               
|respectively                                                     |                                               
|NSFC - including realized capital gains of $622, $875 and        |                                               
|$709, respectively                                               |                                               
|Omega - including realized capital gains of $150, $152, and      |                                               
|$257, respectively                                               |                                               
|LSIC (nine months ended September 30 for 2001)                   |                                               
|Statutory capital and surplus:                                   |                                               
|NSIC - including AVR of $580, $1,586 and $1,780,                 |                                               
|respectively                                                     |                                               
|NSFC                                                             |                                               
|Omega                                                            |                                               
|LSIC                                                             |                                               

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

36

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE E  INVESTMENT
SECURITIES

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

|                                                 | (Dollars in thousands)
December 31, 2002
|------------------------------------------------ | ----------------------------------------
|
|Available-for-sale securities:                   |                                         
|Corporate debt securities                        |                                         
|Obligations of states and political subdivisions |                                         
|U.S. Treasury securities and obligations of      |                                         
|U.S. government corporations and agencies        |                                         
|Equity securities                                |                                         
|                                                 |                                         
|Total                                            |                                         
|                                                 |                                         
|Held-to-maturity securities:                     |                                         
|Corporate debt securities                        |                                         
|Obligations of states and political subdivisions |                                         
|U.S. Treasury securities and obligations of      |                                         
|U.S. government corporations and agencies        |                                         
|                                                 |                                         
|Total                                            |                                         
|                                                 |                                         

|                                                 | December 31, 2001
|------------------------------------------------ | -----------------
|
|Available-for-sale securities:                   |                  
|Corporate debt securities                        |                  
|Obligations of states and political subdivisions |                  
|U.S. Treasury securities and obligations of      |                  
|U.S. government corporations and agencies        |                  
|Equity securities                                |                  
|                                                 |                  
|Total                                            |                  
|                                                 |                  

37

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE E  INVESTMENT
SECURITIES  CONTINUED

|                                                 | (Dollars in thousands)
December 31, 2001
|------------------------------------------------ | ----------------------------------------
|Held-to-maturity securities:                     | AmortizedCost                           
|Corporate debt securities                        |                                         
|Obligations of states and political subdivisions |                                         
|U.S. Treasury securities and obligations of      |                                         
|U.S. government corporations and agencies        |                                         
|                                                 |                                         
|                                                 |                                         
|                                                 |                                         
|Total                                            |                                         
|                                                 |                                         

The amortized cost and aggregate fair
value of debt securities at December 31, 2002, by contractual maturity, are as follows.
Expected maturities will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment penalties.

|                                       | (Dollars in Thousands)
|-------------------------------------- | ----------------------
|Available-for-sale securities:         | Amortized
Cost        
|Due in one year or less                |                       
|Due after one year through five years  |                       
|Due after five years through ten years |                       
|Due after ten years                    |                       
|                                       |                       
|Total                                  |                       
|                                       |                       
|Held-to-maturity securities:           |                       
|Due in one year or less                |                       
|Due after one year through five years  |                       
|Due after five years through ten years |                       
|Due after ten years                    |                       
|                                       |                       
|Total                                  |                       
|                                       |                       

For 2002, gross gains of $1,411,676
($1,785,394 for 2001) and gross losses of $317,862 ($323,829 for 2001) were realized on
sales of available-for-sale-securities.

38

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE F  NET
INVESTMENT INCOME

Major categories of investment income
are summarized as follows:

|                                          | (Dollars in thousands)
Year ended December 31,
|----------------------------------------- | ----------------------------------------------
|
|Fixed maturities                          |                                               
|Equity securities                         |                                               
|Mortgage loans on real estate             |                                               
|Investment real estate                    |                                               
|Policy loans                              |                                               
|Other, principally short-term investments |                                               
|                                          |                                               
|                                          |                                               
|Less: Investment expenses                 |                                               
|                                          |                                               
|Net investment income                     |                                               
|                                          |                                               

|An analysis of investment gains follows: | Year ended December 31,
|---------------------------------------- | -----------------------
|
|Net realized investment gains (losses):  |                        
|Fixed maturities                         |                        
|Other, principally equity securities     |                        
|                                         |                        
|                                         |                        
|                                         |                        

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

|                                                          | Year ended December 31,
|--------------------------------------------------------- | -----------------------
|
|Net decrease in unrealized appreciation on available-for- |                        
|sale securities before deferred tax                       |                        
|Deferred income tax                                       |                        
|                                                          |                        
|Net decrease in unrealized appreciation on available-for- |                        
|sale securities                                           |                        
|                                                          |                        

39

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE G  PROPERTY
AND EQUIPMENT

At December 31, property and
equipment consisted of the following:

|                                     | (Dollars in Thousands)
|------------------------------------ | ----------------------
|
|Building and improvements            |                       
|Electronic data processing equipment |                       
|Furniture and fixtures               |                       
|                                     |                       
|                                     |                       
|Less accumulated depreciation        |                       
|                                     |                       
|                                     |                       
|                                     |                       

Depreciation expense for the year
ended December 31, 2002 was $206,000 ($197,000 for the year ended December 31, 2001 and
$153,000 for the year ended December 31, 2000).

# NOTE H  INCOME
TAXES

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

|                                                     | (Dollars in thousands)
|---------------------------------------------------- | ----------------------
|
|
|Federal income tax rate applied to pre-tax income    |                       
|Dividends received deduction and tax-exempt interest |                       
|Small life insurance company deduction               |                       
|Other, net                                           |                       
|                                                     |                       
|Federal income tax expense                           |                       
|                                                     |                       

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

40

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE H  INCOME
TAXES

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

The appropriate income tax effects of
changes in temporary differences are as follows:

|                                                  | (Dollars in Thousands)
|------------------------------------------------- | ----------------------
|
|
|Deferred policy acquisition costs                 |                       
|Policy liabilities                                |                       
|Unearned premiums                                 |                       
|Claim liabilities                                 |                       
|General insurance expenses                        |                       
|Unrealized gains on securities available-for-sale |                       
|                                                  |                       
|Net deferred tax liabilities                      |                       
|                                                  |                       

The appropiate income tax effects of
changes in temporary differences are as follows:

|                                             | Year ended December 31,
|-------------------------------------------- | -----------------------
|
|Deferred policy acquisition costs            |                        
|Policy liabilities                           |                        
|Unearned premiums                            |                        
|General insurance expenses                   |                        
|Alternative minimum tax credit carryforwards |                        
|Claim liabilities                            |                        
|                                             |                        
|                                             |                        
|                                             |                        

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, 2002, 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,
2002.

41

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE I  LONG-TERM
DEBT

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

|                                                           | (Dollars in thousands)
|---------------------------------------------------------- | ----------------------
|
|Note payable to bank with a 7% interest rate               |                       
|dated October 9, 1998; matures May 28, 2004                |                       
|Payments of $63,575 due quarterly. Unsecured               |                       
|Note payable to bank with an interest rate based on LIBOR  |                       
|(4.18% at December 31, 2002) dated March 28, 2002; matures |                       
|March 28, 2007. Payments of $112,953 due quarterly with    |                       
|balloon payment at maturity. Unsecured                     |                       
|                                                           |                       
|                                                           |                       
|                                                           |                       
|                                                           |                       

Aggregate maturities of long-term
debt for each of the five years subsequent to December 31, 2002 are as follows (dollars in
thousands): 2003-$316; 2004-$328; 2005-$342; 2006-$357; 2007-$2,037.

# NOTE J  POLICY AND
CLAIM RESERVES

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

|                           | (Dollars in thousands)
|-------------------------- | ----------------------
|
|Benefit and loss reserves  |                       
|Property and casualty      |                       
|Accident and health        |                       
|Life and annuity           |                       
|Unearned premiums          |                       
|Policy and contract claims |                       
|                           |                       
|                           |                       
|                           |                       

42

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE J  POLICY AND
CLAIM RESERVES  CONTINUED

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)
|------------------------------------------- | ----------------------
|
|Claims and claim adjustment expense         |                       
|reserves at beginning of year               |                       
|Less reinsurance recoverables on            |                       
|unpaid losses                               |                       
|                                            |                       
|Net balances at beginning of year           |                       
|Provision for claims and claim adjustment   |                       
|expenses for claims arising in current year |                       
|Estimated claims and claim adjustment       |                       
|expenses for claims arising in prior years  |                       
|                                            |                       
|                                            |                       
|Total increases                             |                       
|                                            |                       
|Claims and claim adjustment expense         |                       
|payments for claims arising in:             |                       
|Current year                                |                       
|Prior years                                 |                       
|                                            |                       
|Total payments                              |                       
|                                            |                       
|Net balance at end of year                  |                       
|Plus reinsurance recoverables on            |                       
|unpaid losses                               |                       
|                                            |                       
|Claims and claim adjustment expense         |                       
|reserves at end of year                     |                       
|                                            |                       

As a result of changes in estimates
of insured events in prior years, the provision of claims and claim adjustment expenses
(net of reinsurance recoveries) decreased in 2002, 2001 and 2000 because of
lower-than-anticipated losses in commercial and private passenger automobile lines of
business.

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

43

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE K  REINSURANCE

The Companys 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, 2002, reinsurance receivables with a carrying value of $220,000 ($618,000
at December 31, 2001) and prepaid reinsurance premiums of $343,000 ($291,000 at December
31, 2001) were associated with a single reinsurer. The amounts of recoveries pertaining to
reinsurance contracts that were deducted from losses incurred during 2002, 2001 and 2000
were approximately $374,000, $989,000, and $605,000, respectively

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

|        | (Dollars in Thousands)
|------- | ----------------------
|
|
|
|Direct  |                       
|Assumed |                       
|Ceded   |                       
|        |                       
|Net     |                       
|        |                       

|        |  |  |   |      
|------- |  |  | - | -----
|
|
|
|Direct  |  |  | $ | 5,047
|Assumed |  | 
|Ceded   |  |  |   | (45  
|        |  |  |   |      
|        |  |  |   |      
|Net     |  |  | $ | 5,002
|        |  |  |   |      

|        |  |  |   |      
|------- |  |  | - | -----
|
|
|
|Direct  |  |  | $ | 4,456
|Assumed |  |  |   | --   
|Ceded   |  |  |   | (51  
|        |  |  |   |      
|Net     |  |  | $ | 4,405
|        |  |  |   |      

44

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE L  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 2002, 2001, and 2000 amounted to
$177,337, $130,000, and $127,000, 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 2002, 2001, and 2000 amounted to approximately $19,649, $35,065, and
$54,755, respectively.

# NOTE M  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, 2002,
NSICs retained earnings unrestricted for the payment of dividends in 2003 amounted
to $1,089,472.

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 $2,020,058 in 2003.

At December 31, 2002, securities with
market values of $3,563,587 ($3,458,441 at December 31, 2001) were deposited with various
states pursuant to statutory requirements.

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

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

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

# NOTE N 
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.

45

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED

# NOTE N -
SHAREHOLDERS' EQUITY

# 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.

NOTE O - 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, 2002, 2001 and 2000 are summarized
below:

|                                                                          | (Dollars in thousands)
Year ended December 31,
|------------------------------------------------------------------------- | ----------------------------------------------
|
|Premium Revenues:                                                         |                                               
|Individual life and accident and health insurance                         |                                               
|Property and casualty insurance                                           |                                               
|                                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|Income (loss) before income taxes:                                        |                                               
|Individual life and accident and health insurance                         |                                               
|Property and casualty insurance                                           |                                               
|Other                                                                     |                                               
|                                                                          |                                               
|                                                                          |                                               
|Interest expense                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|Assets                                                                    |                                               
|Individual life and accident and health insurance                         |                                               
|Property and casualty insurance                                           |                                               
|Other                                                                     |                                               
|                                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|Amortization of deferred policy aquisition costs and depreciation         |                                               
|expense:                                                                  |                                               
|Individual life and accident and health insurance                         |                                               
|Property and casualty insurance                                           |                                               
|                                                                          |                                               
|                                                                          |                                               
|                                                                          |                                               
|Capital expenditures are not material, and consequently, are not reported |                                               

46

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE P 
CONTINGENCIES

# Financial Guarantee

At December 31, 2002, the Company
guaranteed the $5 million balance on the line of credit of its affiliate, Mobile Attic,
Inc. The Company is paid a guaranty fee based on the average balance of the line of
credit. For 2002, the Company received $14,683 in guaranty fees. The term of the guarantee
is two years. Credit risk represents the accounting loss that would be recognized at the
reporting date if Mobile Attic, Inc. failed to perform completely as contracted. The
credit risk of $5 million assumes that no amounts could be recovered from other parties.

# Litigation

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

The company establishes and maintains
reserves on contingent liabilities. In many instances, however, it is not feasible to
predict the ultimate outcome with any degree of accuracy. While a resolution of these
matters may significantly impact consolidated earnings and the Companys consolidated
financial position, it remains managements opinion, based on information presently
available, that the ultimate resolution of these matters will not have a material impact
on the Companys 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 Q 
SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest during 2002
was $261,000 ($241,000 in 2001 and $266,000 in 2000). Cash paid for income taxes in 2002
was $76,328 ($800,000 in 2001 and $500,000 in 2000). Noncash investing activity consisted
of the conversion of a $725,000 note receivable to an equity investment.

47

---

# THE NATIONAL SECURITY
GROUP, INC.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  CONTINUED

# NOTE R  RELATED
PARTY TRANSACTIONS

At December 31, notes receivable from
affiliate consisted of the following:

|                                                      | Dollars in thousands
|----------------------------------------------------- | --------------------
|
|5.25% short-term note dated December 18, 2002;        |                     
|matured February 16, 2003. Principle and interest due |                     
|February 16, 2003, secured by portable storage units  |                     
|6.25% term note dated October 1, 2002; matures        |                     
|October 1, 2007. Payments of $16,116 due quarterly,   |                     
|secured by portable storage units                     |                     
|                                                      |                     
|8% $1 million convertible line of credit dated        |                     
|September 18, 2001; principle and interest due        |                     
|September 18, 2002, secured by portable storage units |                     
|                                                      |                     
|                                                      |                     
|                                                      |                     

During 2002, the balance on the
convertible line of credit was increased to $1 million and, under the terms of the line of
credit, $725,000 of the balance was converted to common equity of the affiliate. The
remaining $275,000 was converted to the long-term note described above. On February 16,
2003, the short-term note was extended.

48

---

# INDEPENDENT
AUDITORS REPORTON FINANCIAL STATEMENT SCHEDULES

To the Board of Directorsand
Shareholders ofThe National Security
Group, Inc.

Elba, Alabama

Under date of February 26, 2003, we
reported on the balance sheets of The National Security Group, Inc. as of December 31,
2002 and 2001, and the related statements of income, shareholders equity and cash
flows for each of the three year period ended December 31, 2002, 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s 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.

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

Birmingham, AlabamaFebruary
26, 2003

49

---

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

|                                  | December 31, 2002 | December 31, 2001
|--------------------------------- | ----------------- | -----------------
|
|Securities Held to Maturity:      |                   |                  
|United States Government          |                   |                  
|States, municipalities and        |                   |                  
|political subdivisions            |                   |                  
|Public Utilities                  |                   |                  
|Industrial and Miscellaneous      |                   |                  
|                                  |                   |                  
|Total Securities Held to Maturity |                   |                  
|                                  |                   |                  
|                                  |                   |                  
|Securities Available for Sale:    |                   |                  
|Equity Securities:                |                   |                  
|Public Utillities                 |                   |                  
|Banks and insurance companies     |                   |                  
|Industrial and all other          |                   |                  
|                                  |                   |                  
|Total equity securities           |                   |                  
|                                  |                   |                  
|                                  |                   |                  
|Debt Securities:                  |                   |                  
|United States Government          |                   |                  
|States, municipalities and        |                   |                  
|Political Subdivisions            |                   |                  
|Public Utilities                  |                   |                  
|Industrial and Miscellaneous      |                   |                  
|                                  |                   |                  
|Total Debt Securities             |                   |                  
|                                  |                   |                  
|                                  |                   |                  
|Total Available for Sale          |                   |                  
|                                  |                   |                  
|                                  |                   |                  
|Total Securities                  |                   |                  
|                                  |                   |                  
|Recievable for securities         |                   |                  
|Note Recievable from Affiliate    |                   |                  
|Motgage loans on real estate      |                   |                  
|Investment real estate            |                   |                  
|Poliicy Loans                     |                   |                  
|Investment in Affiliate           |                   |                  
|Short term investments            |                   |                  
|                                  |                   |                  
|Total investments                 |                   |                  
|                                  |                   |                  
|                                  |                   |                  

50

---

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

|                                           | December 31,
|------------------------------------------ | ------------
|
|Assets                                     |             
|Cash                                       |             
|Investment in subsidiaries (equity method) |             
|eliminated upon consolidation              |             
|Notes Receivable - Affiliates              |             
|Other assets                               |             
|                                           |             
|                                           |             
|Total Assets                               |             
|                                           |             
|                                           |             
|Liabilities and Shareholders' Equity       |             
|Accrued general expenses                   |             
|Notes Payable - Affiliates                 |             
|Notes Payable                              |             
|                                           |             
|                                           |             
|Total Liabilities                          |             
|                                           |             
|                                           |             
|Total Shareholders' Equity                 |             
|                                           |             
|                                           |             
|Total Liabilities and Shareholders' Equity |             
|                                           |             

51

---

THE NATIONAL SECURITY
GROUP, INC. (PARENT COMPANY)SCHEDULE II  CONDENSED FINANCIAL INFORMATION OF
REGISTRANTSTATEMENTS OF INCOMESTATEMENTS OF INCOME(AMOUNTS IN THOUSANDS)

|                                                          | For the Years Ended December 31,
|--------------------------------------------------------- | --------------------------------
|
|Income                                                    |                                 
|From subsidiaries-eliminated upon consolidation           |                                 
|Dividends                                                 |                                 
|Other Income                                              |                                 
|                                                          |                                 
|                                                          |                                 
|                                                          |                                 
|                                                          |                                 
|Expenses                                                  |                                 
|State taxes                                               |                                 
|Other expenses                                            |                                 
|                                                          |                                 
|                                                          |                                 
|                                                          |                                 
|Income before income taxes and equity in                  |                                 
|undistributed earnings of subsidiaries                    |                                 
|Income tax benefit                                        |                                 
|                                                          |                                 
|                                                          |                                 
|Income before equity in undistributed earnings            |                                 
|of subsidiaries                                           |                                 
|Equity in undistributed (losses) earnings of subsidiaries |                                 
|                                                          |                                 
|                                                          |                                 
|Net Income                                                |                                 
|                                                          |                                 
|                                                          |                                 

52

---

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



|                                                      | For the Years Ended December 31,
|----------------------------------------------------- | --------------------------------
|
|Cash flows from operating activities:                 |                                 
|Net income                                            |                                 
|Adjustments to reconcile net income to net            |                                 
|cash provided by operating activities:                |                                 
|Equity in undistributed (income) loss of subsidiaries |                                 
|Change in other assets                                |                                 
|Change in other liabilities                           |                                 
|                                                      |                                 
|Net cash provided by                                  |                                 
|operating activities                                  |                                 
|                                                      |                                 
|                                                      |                                 
|                                                      |                                 
|Cash flows from investing activities:                 |                                 
|Capital contribution to subsidiary                    |                                 
|                                                      |                                 
|Net cash used in                                      |                                 
|investing activities                                  |                                 
|                                                      |                                 
|                                                      |                                 
|                                                      |                                 
|Cash flows from financing activities:                 |                                 
|Proceeds from notes payable                           |                                 
|Payments on notes payable                             |                                 
|Cash dividends                                        |                                 
|                                                      |                                 
|Net cash used in                                      |                                 
|financing activities                                  |                                 
|                                                      |                                 
|                                                      |                                 
|Net increase (decrease) in cash and cash equivalents  |                                 
|                                                      |                                 
|Cash and due from banks at beginning of year          |                                 
|                                                      |                                 
|                                                      |                                 
|Cash and due from banks at end of year                |                                 
|                                                      |                                 
|                                                      |                                 

53

---

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

|Note 1-Basis of Presentation
|----------------------------
|                            

|Note 2-Cash dividends from Subsidaries
|--------------------------------------
|                                      
|                                      
|                                      

54

---

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

|                                       | Deferred
Acquisition
Costs | Future
Policy
Benefits | Unearned
Premiums | PolicyClaims
and Other
Benefits
Payable
|-------------------------------------- | -------------------------- | ---------------------- | ----------------- | ---------------------------------------
|
|At December 31, 2002:                  |                            |                        |                   |                                        
|Life and accident and health insuranc. |                            |                        | $                 | 3,516                                  
|Property and casualty insurance        |                            |                        |                   | 1,727                                  
|                                       |                            |                        |                   |                                        
|Total                                  |                            |                        | $                 | 5,243                                  
|                                       |                            |                        |                   |                                        
|                                       |                            |                        |                   |                                        
|At December 31, 2001:                  |                            |                       
|Life and accident and health insurance |                            |                        | $                 | 3,306                                  
|Property and casualty insurance        |                            |                        |                   | 1,309                                  
|                                       |                            |                        |                   |                                        
|Total                                  |                            |                        | $                 | 4,615                                  
|                                       |                            |                        |                   |                                        
|                                       |                            |                        |                   |                                        
|At December 31, 2000:                  |                            |                       
|Life and accident and health insurance |                            |                        | $                 | 3,240                                  
|Property and casualty insurance        |                            |                        |                   | 1,229                                  
|                                       |                            |                        |                   |                                        
|Total                                  |                            |                        | $                 | 4,469                                  
|                                       |                            |                        |                   |                                        
|                                       |                            |                       

|                            | Premium
Revenue | Net
Investment
Income | Other
Income | Benefits,
Claims,
Losses and
Settlement
Expenses | CommissionsAmortization
of Deferred
Policy
Acquisition
Costs | General
Expenses,
Taxes,
Licenses
and Fees | Premiums
Written
|--------------------------- | --------------- | --------------------- | ------------ | ------------------------------------------------ | ------------------------------------------------------------ | ------------------------------------------ | ----------------
|
|For the year ended December |                 |                       |              |                                                  |                                                              |                                            |                 
|31, 2002:                   |                 |                      
|Life and accident and       |                 |                      
|Health insurance            |                 |                       | $            | 5,395                                            |                                                              | $                                          | 1,970           
|Property and casualty       |                 |                       |              |                                                  |                                                              |                                            |                 
|insurance                   |                 |                       |              | 27,236                                           |                                                              |                                            | 2,192           
|Other                       |                 |                       |              | 73                                               |                                                              |                                            | 0               
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|Total                       |                 |                       | $            | 32,631                                           |                                                              | $                                          | 4,235           
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|For the year ended December |                 |                      
|31, 2001:                   |                 |                      
|Life and accident and       |                 |                      
|health insurance            |                 |                       | $            | 5,161                                            |                                                              | $                                          | 2,303           
|Property and casualty       |                 |                       |              |                                                  |                                                              |                                            |                 
|insurance                   |                 |                       |              | 20,196                                           |                                                              |                                            | 2,203           
|Other                       |                 |                       |              |                                                  |                                                              |                                            |                 
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|Total                       |                 |                       | $            | 25,357                                           |                                                              | $                                          | 4,506           
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|For the year ended December |                 |                       |              |                                                  |                                                              |                                            |                 
|31, 2000:                   |                 |                      
|Life and accident and       |                 |                      
|health insurance            |                 |                       | $            | 4,594                                            |                                                              | $                                          | 2,160           
|Property and casualty       |                 |                       |              |                                                  |                                                              |                                            |                 
|insurance                   |                 |                       |              | 18,327                                           |                                                              |                                            | 2,274           
|Other                       |                 |                       |              |                                                  |                                                              |                                            |                 
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|Total                       |                 |                       | $            | 22,921                                           |                                                              | $                                          | 4,434           
|                            |                 |                       |              |                                                  |                                                              |                                            |                 
|                            |                 |                       |              |                                                  |                                                              |                                            |                 

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

55

---

THE NATIONAL SECURITY GROUP, INC. SCHEDULE IV. REINSURANCE (CONSOLIDATED)(Amounts in thousands)

|                                                 | Gross
Amount | Ceded
to Other
Companies | Assumed
from Other
Companies | Net
Amount | Percentage
of Amount
Assumed
to Net
|------------------------------------------------ | ------------ | ------------------------ | ---------------------------- | ---------- | -----------------------------------
|For the year ended December 31, 2002:            |              |                          |                              |            |                                    
|Life insurance in force                          |              |                          | $                            | 183,393    |                                    
|                                                 |              |                          |                              |            |                                    
|Premiums:                                        |              |                         
|Life insurance and accident and health insurance |              |                          | $                            | 5,441      |                                    
|Property and casualty insurance                  |              |                          |                              | 29,350     |                                    
|                                                 |              |                          |                              |            |                                    
|Total premiums                                   |              |                          | $                            | 34,791     |                                    
|                                                 |              |                          |                              |            |                                    
|For the year ended December 31, 2001:            |              |                         
|Life insurance in force                          |              |                          | $                            | 184,128    |                                    
|                                                 |              |                          |                              |            |                                    
|Premiums:                                        |              |                         
|Life insurance and accident and health insurance |              |                          | $                            | 5,206      |                                    
|Property and casualty insurance                  |              |                          |                              | 21,777     |                                    
|                                                 |              |                          |                              |            |                                    
|Total premiums                                   |              |                          | $                            | 26,983     |                                    
|                                                 |              |                          |                              |            |                                    
|For the year ended December 31, 2000:            |              |                         
|Life insurance in force                          |              |                          | $                            | 155,924    |                                    
|                                                 |              |                          |                              |            |                                    
|Premiums:                                        |              |                         
|Life insurance and accident and health insurance |              |                          | $                            | 4,645      |                                    
|Property and casualty insurance                  |              |                          |                              | 20,629     |                                    
|                                                 |              |                          |                              |            |                                    
|Total premiums                                   |              |                          | $                            | 25,274     |                                    
|                                                 |              |                          |                              |            |                                    

56

---

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

None.

57

---

# PART III

# Item 10. Directors and
Executive Officers of the Registrant

The
information contained on pages 3-5 of The National Security Groups Proxy Statement
dated March 17, 2003, 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 9 and 10 of The National Security Groups Proxy
Statement dated March 17, 2003, 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 12 of The National Security Groups Proxy Statement
dated March 17, 2003, 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 page 8 of The National Security Groups Proxy Statement
dated March 17, 2003, with respect to certain relationships and related transactions, is
incorporated herein by reference in response to this item.

# Item 14. Controls and
Procedures

Company management, including the
Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal controls, or
in factors that could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their evaluation.

58

---

# PART IV

# Item 15.    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            | 24    
|Consolidated Statements of Income--Years Ended                
|December 31, 2002, 2001, and 2000                              | 25    
|Consolidated Balance Sheets--December 31, 2002 and 2001        | 26    
|Consolidated Statements of Shareholders' Equity--Years        
|Ended December 31, 2002, 2001, and 2000                        | 27    
|Consolidated Statements of Cash Flows--Years Ended            
|December 31, 2002, 2001, and 2000                              | 28    
|Notes To Consolidated Financial Statements--December 31,      
|2002                                                           | 29    
|Schedule I. Summary Of Investments--December 31, 2002         
|and 2001                                                       | 50    
|Schedule II. Condensed Financial Information of               
|Registrant--December 31, 2002 and 2001                         | 51    
|Schedule III. Supplementary Insurance Information--           
|December 31, 2002, 2001, and 2000                              | 55    
|Schedule IV. Reinsurance--Years Ended December 31, 2002,      
|2001, and 2000                                                 | 56    
|Exhibit 99.1. Certification pursuant to 18 U.S.C. Section 1350
|as adopted pursuant to Section 302 of the Sarbanes-Oxley      
|Act of 2002                                                    | 61    
|Exhibit 99.2. Certification pursuant to 18 U.S.C. Section 1350
|as adopted pursuant to Section 302 of the Sarbanes-Oxley      
|Act of 2002                                                    | 62    
|Exhibit 99.3. Certification pursuant to 18 U.S.C. Section 1350
|as adopted pursuant to Section 906 of the Sarbanes-Oxley      
|Act of 2002                                                    | 63    
|Exhibit 99.4. Certification pursuant to 18 U.S.C. Section 1350
|as adopted pursuant to Section 906 of the Sarbanes-Oxley      
|Act of 2002                                                    | 64    

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

59

---

# 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/ Brian R. McLeod                                 | /s/ William L. Brunson, Jr.                                           
|Brian R. McLeodChief Financial Officer andTreasurer | William L. Brunson, Jr.President, Chief Executive Officer and Director
|                                                    |                                                                       

Date: March 31, 2003

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 31, 2003.

# SIGNATURE

|                                                                                                                             |                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
|/s/ Winfield Baird/s/ Carolyn Brunson/s/ Jack R. Brunson/s/ Jack E. Brunson/s/ William L. Brunson, Jr./s/ Fred D. Clark, Jr. | /s/ Mickey L. Murdock/s/ Donald Pittman/s/ James B. Saxon/s/ Paul C. Wesch/s/ L. Brunson White /s/ Walter P. Wilkerson

60

---

The National Security
Group, Inc.CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF
2002

I, William L. Brunson, Jr. certify
that:

1.    
          I have reviewed this annual report on Form 10-K of The National Security Group,
          Inc.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statement made, in light of the circumstances under which such statement were
          made, not misleading with respect to the period covered by this annual report;

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;

4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:

a)    
          designed such disclosure controls and procedures to ensure that material
          information relating to the registrant, including its consolidated subsidiaries,
          is made known to us by others within those entities, particularly during the
          period in which this annual report is being prepared; b) evaluated the
          effectiveness of the registrants disclosure controls and procedures as of
          a date within 90 days prior to the filing date of this annual report (the
          Evaluation Date); and c) presented in this annual report our
          conclusions about the effectiveness of the disclosure controls and procedures
          based on our evaluation as of the Evaluation Date;

5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):

a)    
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weakness in internal controls: and b)
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and

6.    
          The registrants other certifying officers and I have indicated in this
          annual report whether or not there were significant changes in internal controls
          or in other factors that could significantly affect internal controls subsequent
          to the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weakness.

Date: March 31, 2003

/s/ W L Brunson Jr.

---

William L. Brunson, Jr.Chief
Executive Officer

61

---

The National Security
Group, Inc.CERTIFICATION PURSUANT
TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF
2002





I, Brian R. McLeod certify that:

1.    
          I have reviewed this annual report on Form 10-K of The National Security Group,
          Inc.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statement made, in light of the circumstances under which such statement were
          made, not misleading with respect to the period covered by this annual report;

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;

4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:

a)    
          designed such disclosure controls and procedures to ensure that material
          information relating to the registrant, including its consolidated subsidiaries,
          is made known to us by others within those entities, particularly during the
          period in which this annual report is being prepared; b) evaluated the
          effectiveness of the registrants disclosure controls and procedures as of
          a date within 90 days prior to the filing date of this annual report (the
          Evaluation Date); and c) presented in this annual report our
          conclusions about the effectiveness of the disclosure controls and procedures
          based on our evaluation as of the Evaluation Date;

5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):

a)    
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weakness in internal controls: and b)
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and

6.    
          The registrants other certifying officers and I have indicated in this
          annual report whether or not there were significant changes in internal controls
          or in other factors that could significantly affect internal controls subsequent
          to the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weakness.

Date: March 31, 2003

/s/ Brian R McLeod

---

Brian R. McLeod, CPAChief
Financial Officer

62

---

The National Security
Group, Inc.

CERTIFICATION PURSUANT
TOSECTION 906 OFTHE SARBANES-OXLEY ACT OF
2002

I, William L. Brunson, Jr. certify
that:

| | 1. 
The periodic report containing the financial statements fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2.  Information contained in the periodic report fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 31, 2003

/s/ W L Brunson Jr.

---

William L. Brunson, Jr.Chief
Executive Officer

63

---

The National Security
Group, Inc.

CERTIFICATION PURSUANT
TOSECTION 906 OFTHE SARBANES-OXLEY ACT OF
2002

I, Brian R. McLeod certify that:

| | 1. 
The periodic report containing the financial statements fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2.  Information contained in the periodic report fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 31, 2003

/s/ Brian R McLeod

---

Brian R. McLeod, CPAChief
Financial Officer

64