EXHIBIT 10.2


                        REGISTRATION RIGHTS AGREEMENT

      THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as
 of January 27,  2006, by and  between Hallmark Financial  Services, Inc.,  a
 Nevada corporation (the "Company"),  and Newcastle Special Opportunity  Fund
 [I] [II], L.P. a Delaware limited partnership (the "Investor").

                              R E C I T A L S :

      WHEREAS, the Company has entered into that certain Purchase  Agreement,
 dated as of the  date hereof (the "Purchase  Agreement"), with the  Investor
 pursuant to which the Company has agreed to issue and sell to the Investor a
 convertible promissory note (the "Note");

      WHEREAS, the Company  has agreed to  grant certain registration  rights
 with respect  to the  shares of  the Company's  Common Stock  issuable  upon
 conversion of the Note;

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

                                  ARTICLE 1

                                 DEFINITIONS

      Capitalized terms used but not defined herein shall have the respective
 meanings given to them in the Purchase Agreement.

      As used herein, the following terms shall have the following respective
 meanings:

     1.1 "Commission" shall  mean the U.S. Securities and Exchange  Commission
 or any  other  successor  federal  agency  at  the  time  administering  the
 Securities Act.

     1.2 "Common Stock" shall  mean  the Company's  common stock,  $0.03  par
 value per share.

     1.3 "Exchange Act" shall mean  the Securities Exchange  Act of 1934,  as
 amended, or any similar federal statute and the rules and regulations of the
 Commission thereunder, all as the same shall be in effect at the time.

     1.4 "Holders" shall mean  and include  the Investor  and any  transferee
 thereof who holds Registrable Securities of record.

     1.5 "Register," "registered" and "registration" refer to a  registration
 effected  by  preparing  and  filing  with  the  Commission  a  registration
 statement in  compliance with  the Securities  Act, and  the declaration  or
 ordering by  the  Commission  of  the  effectiveness  of  such  registration
 statement.

     1.6 "Registrable Securities" means any  and all shares  of Common  Stock
 (i) issued  or issuable  upon conversion  of  the Note  and (ii)  issued  or
 issuable with respect to  the Common Stock referred  to in clause (i)  above
 upon any stock  split, stock  dividend, recapitalization,  reclassification,
 exchange or other similar  event.  The  term "Registrable Securities"  shall
 exclude in all  cases, however, such  shares of Common  Stock (i)  following
 their sale by a Holder  to the public pursuant  to a registered offering  or
 pursuant to Rule  144 or (ii)  sold in a  private transaction  in which  the
 Holder's registration rights under this Agreement are not assigned.

     1.7 "Registration Expenses"  shall  mean all  reasonable  and  customary
 expenses incurred  by the  Company in  complying with  Articles 2,  3 and  5
 hereof, including, without limitation,  all registration, qualification  and
 Commission, National Association of Securities Dealers, Inc., stock exchange
 and other filing fees, printing  expenses, duplication expenses relating  to
 copies of any registration statement or prospectus delivered to any Holders,
 escrow fees, fees and disbursements of  legal counsel for the Company,  fees
 and disbursements  of  the  Company's accountants  and  blue  sky  fees  and
 expenses.

     1.8 "Rule 144" shall mean Rule 144 under the Securities Act or any other
 similar rule or regulation then in effect.

     1.9 "Securities Act"  shall mean the Securities Act of 1933, as amended,
 or any  similar  federal  statute  and the  rules  and  regulations  of  the
 Commission thereunder, all as the same shall be in effect at the time.

     1.10  "Selling Expenses" shall mean all underwriting fees, discounts and
 selling commissions applicable to  the Registrable Securities registered  on
 behalf of  the Holders  and the  fees and  expenses of  any special  counsel
 engaged by the Holders.

                                  ARTICLE 2

                            REQUIRED REGISTRATION

     2.1 Request for Registration.

      (a)  At any time from and after the date hereof, the Investor may  make
 a written request to the Company to file a registration statement under  the
 Securities Act covering all or part of the Registrable Securities then  held
 by the  Investor.   No later  than 30  days following  its receipt  of  such
 written request (the  "Demand Registration Filing  Date"), the Company  will
 prepare and  file with  the Commission  a registration  statement under  the
 Securities Act covering all  of the Registrable  Securities requested to  be
 included therein, and the  Company will use its  reasonable best efforts  to
 obtain the  effectiveness of  such registration  as soon  as practicable  as
 would permit or facilitate  the original issuance  or subsequent resale  and
 distribution of  all  of such  Registrable  Securities.   If,  however,  the
 Company shall furnish  to the  Investor a  certificate signed  by the  Chief
 Operating Officer of  the Company prior  to the  Demand Registration  Filing
 Date stating that, in the good faith  judgment of the Board of Directors  of
 the Company,  it would  be  seriously detrimental  to  the Company  and  its
 shareholders for such  registration statement  to be  filed by  reason of  a
 material pending transaction, then the Company shall have the right to defer
 such filing  for  a  period of  not  more  than 60  days  after  the  Demand
 Registration Filing Date.  Such registration statement shall contain (unless
 the Investor  otherwise directs)  substantially the  "Plan of  Distribution"
 attached hereto as Annex A.

      (b)  The Company shall  be obligated  to effect  only one  registration
 pursuant to this Section 2.1.  If any registration is commenced pursuant  to
 this Section 2.1 and is not consummated for any reason whatsoever (a "Failed
 Registration"), such Failed Registration shall not be deemed to constitute a
 registration under this Section 2.1 and the Investor shall retain its rights
 pursuant to this  Section 2.1.   Any expenses  in connection  with a  Failed
 Registration shall be paid in accordance with Article 4 hereof.

     2.2 Shelf  Registration.  Not  later than the  Shelf Registration Filing
 Date (as  defined  below),  the  Company will  prepare  and  file  with  the
 Commission a registration statement under the Securities Act covering all of
 the Registrable Securities then  outstanding, and the  Company will use  its
 reasonable best efforts to obtain the effectiveness of such registration  as
 soon as practicable as would permit  or facilitate the original issuance  or
 subsequent resale and distribution of all of such Registrable Securities  by
 the Holders.   If,  however, the  Company  shall furnish  to the  Holders  a
 certificate signed by the Chief Operating  Officer of the Company within  30
 days of the Shelf Registration Filing  Date stating that, in the good  faith
 judgment of the  Board of Directors  of the Company,  it would be  seriously
 detrimental to  the  Company  and its  shareholders  for  such  registration
 statement to be filed by reason of a material pending transaction, then  the
 Company shall have the right to defer such  filing for a period of not  more
 than  sixty  60  days  after  the  Shelf  Registration  Filing  Date.   Such
 registration statement shall contain  (unless the Holders otherwise  direct)
 substantially the "Plan of Distribution" attached hereto as Annex A.  "Shelf
 Registration Filing  Date" shall  mean the  third  anniversary of  the  date
 hereof, provided that the  Company's market capitalization  on such date  is
 greater than $300 million; provided, however,  that if the Company's  market
 capitalization on such date is less than or equal to $300 million, then  the
 Shelf Registration Filing  Date shall be  30 days following  the first  date
 thereafter (the "Market Capitalization  Threshold Date") that the  Company's
 market capitalization exceeds $300 million, and  the Company shall give  the
 Investor  prompt   written  notice   of  the   occurrence  of   the   Market
 Capitalization Threshold Date.

     2.3 Underwriting.

      (a)  The  resale distribution of the Registrable  Securities covered by
 the registration statements referred to in  Section 2.1 and 2.2 above  shall
 be effected by means of the  method of distribution selected by the  Holders
 holding a majority in interest of  the Registrable Securities.  The  Holders
 holding a majority in interest of the Registrable Securities may also change
 the resale distribution method  from time to time  (subject to amendment  of
 the registration statement  at the  expense of  the Holders  as required  to
 describe such changes).   If such  distribution is effected  by means of  an
 underwriting, the  right of  any Holder  to  registration pursuant  to  this
 Article 2  shall be  conditioned upon  such Holder's  participation in  such
 underwriting and the  inclusion of such  Holder's Registrable Securities  in
 the underwriting to the extent provided herein.

      (b)  If such distribution is effected by  means of an underwriting, the
 Company (together with all Holders proposing to distribute their  securities
 through such underwriting)  shall enter  into an  underwriting agreement  in
 customary form with a managing underwriter of nationally recognized standing
 selected for such underwriting by the Company and approved by a majority  in
 interest of the Holders, which approval shall not be unreasonably  withheld;
 provided, however, that the liability of each Holder shall be limited to  an
 amount equal to the net proceeds from the offering received by such Holder.

      (c)  Notwithstanding any other provision  of  this Article  2,  if  the
 managing underwriter determines that marketing factors require a  limitation
 of the number of shares to be underwritten, the Company shall so advise  all
 Holders of Registrable Securities, and the  number of shares of  Registrable
 Securities to be included in the  underwriting shall be allocated among  the
 Holders of Registrable Securities that have  elected to participate in  such
 underwritten offering  pro  rata  according to  the  number  of  Registrable
 Securities held  by each  Holder.   Without  the consent  of a  majority  in
 interest of the  Holders, no  securities other  than Registrable  Securities
 shall be covered by such registration.

      (d)  If any Holder disapproves  of the terms  of the underwriting, such
 Holder may elect to withdraw therefrom by written notice to the Company, the
 managing underwriter and the other Holders.   The Registrable Securities  so
 withdrawn shall also be withdrawn from registration.

                                  ARTICLE 3

                             COMPANY REGISTRATION

     3.1 Notice of  Registration to Investor.  If at any time or from time to
 time from and after the date hereof, the Company shall determine to register
 any of  its securities,  either for  its own  account or  the account  of  a
 security holder or holders, other than (i) a registration relating solely to
 employee benefit  plans  on  Form  S-8  (or  any  successor  form),  (ii)  a
 registration on Form S-4  (or any successor form),  (iii) a registration  on
 any form  that  does not  permit  secondary  sales or  (iv)  a  registration
 relating solely to a rights offering, the Company will:

      (a)  promptly give to the Investor written notice thereof; and

      (b)  include in such registration (and  any related qualification under
 blue sky  laws  or  other compliance),  and  in  any  underwriting  involved
 therein, all of the Registrable Securities  specified in a written  request,
 made within 15 days  after receipt of such  written notice from the  Company
 described in Section 3.1(a),  by the Investor, but  only to the extent  that
 the original issuance or resale distribution of such Registrable  Securities
 is not already covered by an effective registration statement under  Article
 2 above.

     3.2 Underwriting.

      (a)  If the registration of  which the Company  gives notice  is for an
 offering involving an underwriting, the Company shall so advise the Investor
 as part of the  written notice given  pursuant to Section  3.1(a).  In  such
 event, the right of the Investor to registration pursuant to this Article  3
 shall be conditioned upon the Investor's participation in such  underwriting
 and  the  inclusion  of  the   Investor's  Registrable  Securities  in   the
 underwriting to the extent  provided herein.   The Investor shall  (together
 with the Company)  enter into an  underwriting agreement  in customary  form
 with the managing underwriter selected for such underwriting by the Company;
 provided, however, that the liability of the Investor shall be limited to an
 amount equal to the net proceeds from the offering received by the Investor.

      (b)  Notwithstanding any other provision  of  this Article  3,  if  the
 managing underwriter determines that marketing factors require a  limitation
 of the number of shares to be underwritten, the Company shall so advise  the
 Investor, and the number of  shares of Common Stock  to be included in  such
 registration shall be allocated as follows:   (i) first, for the account  of
 the Company, all shares of Common Stock proposed to be sold by the  Company;
 and (ii) second, for the account of the Investor and any other  shareholders
 of the Company participating in such  registration, the number of shares  of
 Common Stock requested to  be included in the  registration by the  Investor
 and such other shareholders in proportion, as nearly as practicable, to  the
 respective number of shares that are proposed to be offered and sold by  the
 Investor and such other shareholders at the time of filing the  registration
 statement.   No  Registrable Securities  or  other shares  of  Common  Stock
 excluded  from  the  underwriting  in  this  Article  3  by  reason  of  the
 underwriters' marketing limitation shall be included in such registration.

      (c) The Company shall so advise the Investor and the other shareholders
 distributing  their  securities  through  such  underwriting  of  any   such
 limitation  and  the  number  of  shares   that  may  be  included  in   the
 registration.   If  the  Investor  disapproves of  the  terms  of  any  such
 underwriting, the Investor may elect to withdraw therefrom by written notice
 to the Company  and the managing  underwriter.  Any  securities excluded  or
 withdrawn from such underwriting shall be withdrawn from such registration.

      (d)  The  Company shall have  the right  to  terminate or  withdraw any
 registration initiated by it under this Article 3 prior to the effectiveness
 of such registration,  whether or not  the Investor has  elected to  include
 Registrable Securities in such registration.


                                  ARTICLE 4
                           EXPENSES OF REGISTRATION

      All Registration Expenses incurred in connection with any registration,
 qualification or compliance pursuant to Articles  2, 3 and 5 hereof and  the
 reasonable fees of one counsel for the Holders of Registrable Securities  in
 the case of a registration pursuant to Article 2 hereof (up to $5,000) shall
 be borne  by the  Company.   All Selling  Expenses relating  to  Registrable
 Securities registered on behalf of a Holder shall be borne by such Holder.

                                  ARTICLE 5

                           REGISTRATION PROCEDURES

      (a)  In the case of each registration  effected by the Company pursuant
 to this Agreement, the Company will  keep each Holder advised in writing  as
 to the initiation  of each registration  and as to  the completion  thereof.
 The Company agrees  to use its  reasonable best efforts  to effect or  cause
 such registration to permit the sale  of the Registrable Securities  covered
 thereby by the  Holders thereof in  accordance with the  intended method  or
 methods of distribution  thereof described in  such registration  statement.
 In connection  with  any registration  of  any Registrable  Securities,  the
 Company shall:

           (i)  prepare and file with the Commission a registration statement
      with respect to such Registrable Securities and use its reasonable best
      efforts to cause such registration statement filed to become effective;

           (ii) prepare  and  file with the  Commission such  amendments  and
      supplements to such registration statement and the prospectus  included
      therein as may be necessary to effect and maintain the effectiveness of
      such registration  statement  pursuant  to  the  applicable  rules  and
      regulations of the  Commission and the  instructions applicable to  the
      form of  such  registration  statement  (provided,  however,  that  the
      Company shall  not be  obliged to  maintain the  effectiveness of  such
      registration statement longer than through the earlier of (A) two years
      following the effective  date of  such registration  statement and  (B)
      such time as all Registrable Securities registered thereunder have been
      sold pursuant  to  such registration  statement),  and furnish  to  the
      Holders of the  Registrable Securities  covered thereby  copies of  any
      such supplement or amendment  prior to its use  and/or filing with  the
      Commission;

           (iii) permit  one legal counsel  for  the Holders  of  Registrable
      Securities to be  included in a  registration statement  to review  and
      comment  upon  a  registration   statement,  and  all  amendments   and
      supplements thereto, within a  reasonable amount of  time prior to  its
      filing with the Commission, and not file any registration statement, or
      amendment or supplement thereto, in a form to which such legal  counsel
      reasonably and timely objects.  The Company shall furnish to such legal
      counsel,  without  charge,  copies  of  any  correspondence  from   the
      Commission to  the  Company  or its  representatives  relating  to  any
      registration statement;

           (iv) promptly notify the Holders of  Registrable Securities to  be
      included in a registration statement hereunder, the sales or  placement
      agent, if any, therefor and the managing underwriter of the  securities
      being  sold,  and  confirm  such  advice  in  writing,  (A)  when  such
      registration statement  or  the  prospectus  included  therein  or  any
      prospectus amendment or supplement or post-effective amendment has been
      filed and, with  respect to such  registration statement  or any  post-
      effective amendment, when  the same has  become effective,  (B) of  the
      issuance  by  the   Commission  of  any   stop  order  suspending   the
      effectiveness of such registration statement  or the initiation of  any
      proceedings for that purpose, (C) of the receipt by the Company of  any
      notification with respect to the suspension of the qualification of the
      Registrable Securities for sale in  any jurisdiction or the  initiation
      or threatening of any proceeding for  such purpose, (D) of any  request
      by the Commission  for any amendment  or supplement  to a  registration
      statement or related prospectus  or related information  or (E) if,  at
      any time  when a  prospectus  is required  to  be delivered  under  the
      Securities Act,  such  registration  statement or  prospectus,  or  any
      document incorporated by reference in any of the foregoing, contains an
      untrue statement of a material fact or omits to state any material fact
      required to  be stated  therein or  necessary  to make  the  statements
      therein not misleading in light of the circumstances then existing.  In
      the case of clause (E), the Company shall promptly prepare a supplement
      or amendment  to such  registration statement  to correct  such  untrue
      statement or omission;

           (v) use its reasonable best  efforts to obtain  the withdrawal  of
      any order suspending the  effectiveness of such registration  statement
      or any post-effective amendment thereto or  of any order suspending  or
      preventing  the  use  of  any  related  prospectus  or  suspending  the
      qualification  of   any  Registrable   Securities  included   in   such
      registration statement for  sale in  any jurisdiction  at the  earliest
      practicable date;

           (vi) furnish to  each  Holder  of  Registrable  Securities  to  be
      included in such  registration statement hereunder,  each placement  or
      sales agent, if any,  therefor and each  underwriter, if any,  thereof,
      without charge, a conformed copy of such registration statement and any
      amendment and supplement thereto (in  each case including all  exhibits
      and documents incorporated by reference) and  such number of copies  of
      the prospectus included in such registration statement (including  each
      preliminary prospectus,  any summary  prospectus and  any free  writing
      prospectus), and any amendment or  supplement thereto, as such  Holder,
      agent, if any, and underwriter, if any, may reasonably request in order
      to facilitate the  disposition of the  Registrable Securities owned  by
      such Holder, sold by such agent or underwritten by such underwriter and
      to permit such Holder, agent and underwriter to satisfy the  prospectus
      delivery requirements of the Securities Act;

           (vii) use its reasonable best efforts  to (A) register or  qualify
      the  Registrable  Securities  to  be  included  in  such   registration
      statement under such  other securities laws  or blue sky  laws of  such
      states of  the United  States or  the District  of Columbia  as may  be
      reasonably requested by the Holders of  a majority of such  Registrable
      Securities participating in such registration, each placement or  sales
      agent, if any, therefor or the  managing underwriter, if any,  thereof,
      (B) keep such registrations or qualifications in effect and comply with
      such laws at all times during the period described in Section  5(a)(ii)
      above, and  (C) take  any and  all such  actions as  may be  reasonably
      necessary to enable  such Holder, agent,  if any,  and underwriter,  if
      any, to  consummate  the  disposition in  such  jurisdictions  of  such
      Registrable Securities; provided, however, that in order to fulfill the
      foregoing obligations under this  Section 5(a)(vii), the Company  shall
      not (unless  otherwise  required  to do  so  in  any  jurisdiction)  be
      required to (1) qualify generally to  do business as a foreign  company
      or a broker-dealer, (2) execute a general consent to service of process
      or (3) subject itself to taxation;

           (viii) furnish, at the  request of the  Holders of  a majority  of
      such Registrable Securities participating in such registration, on  the
      date that such Registrable Securities are delivered to the underwriters
      for sale, if such securities are  being sold through underwriters,  or,
      if such securities are not being sold through underwriters, on the date
      that the registration statement with respect to such securities becomes
      effective,  (i)  an  opinion,  dated  as  of  such  date,  of   counsel
      representing the Company for the purposes of such registration, in form
      and  substance  as   is  customarily  given   to  underwriters  in   an
      underwritten public offering and reasonably satisfactory to a  majority
      in interest of the Holders, addressed to the underwriters, if any,  and
      to such Holders  and (ii) a  letter, dated as  of such  date, from  the
      independent certified public  accountants of the  Company, in form  and
      substance as  is  customarily  given by  independent  certified  public
      accountants to  underwriters in  an  underwritten public  offering  and
      reasonably satisfactory  to  a majority  in  interest of  the  Holders,
      addressed to the underwriters, if any, and, if permitted by  applicable
      accounting standards, to such Holders; and

           (ix) otherwise use its reasonable best efforts to comply with  all
      applicable rules and regulations of  the Commission in connection  with
      any registration hereunder.

      (b) The Company may require each Holder of Registrable Securities as to
 which any  registration is  being  effected to  furnish  in writing  to  the
 Company such information regarding such Holder  and such Holder's method  of
 distribution of such Registrable Securities as the Company may from time  to
 time reasonably request.  Each such  Holder agrees to notify the Company  as
 promptly  as  practicable  of  any  inaccuracy  or  change  in   information
 previously furnished by such Holder to  the Company or of the occurrence  of
 any event as a result of which any prospectus relating to such  registration
 contains an untrue statement of a material fact regarding such Holder or the
 distribution of such Registrable Securities or  omits to state any  material
 fact  regarding  such  Holder  or  the  distribution  of  such   Registrable
 Securities required to be stated therein or necessary to make the statements
 therein not  misleading in  light of  the circumstances  then existing,  and
 promptly to furnish to  the Company any  additional information required  to
 correct and update any previously furnished information or required so  that
 such prospectus  shall not  contain,  with respect  to  such Holder  or  the
 distribution of  such  Registrable  Securities, an  untrue  statement  or  a
 material fact or omit to state a material fact required to be stated therein
 or necessary to make the statements  therein not misleading in light of  the
 circumstances then existing.

      (c) Each of  the  Holders  will  comply  with  the  provisions  of  the
 Securities Act with respect to disposition of the Registrable Securities  to
 be included in any registration statement filed by the Company.

                                  ARTICLE 6

                               INDEMNIFICATION

     6.1 The Company  will  indemnify each  Holder,  each  of  its  officers,
 directors  and  partners,  such  Holder's  legal  counsel  and   independent
 accountants, if any, each person controlling such Holder within the  meaning
 of Section 15  of the  Securities Act, each  underwriter, if  any, and  each
 person who controls any underwriter within the meaning of Section 15 of  the
 Securities Act against all expenses, claims, losses, damages and liabilities
 (or actions in respect thereof), including any of the foregoing incurred  in
 settlement of any  litigation, commenced or  threatened, arising  out of  or
 based on any untrue  statement (or alleged untrue  statement) of a  material
 fact contained in any registration statement or prospectus, or any amendment
 or supplement  thereto,  or any  omission  (or alleged  omission)  to  state
 therein a material fact required to  be stated therein or necessary to  make
 the statements therein not  misleading, or any violation  by the Company  of
 any rule or  regulation promulgated under  the Securities Act  or any  state
 securities laws applicable to the Company and relating to action or inaction
 by the Company in  connection with any  such registration, qualification  or
 compliance, and  will reimburse  each such  Holder,  each of  its  officers,
 directors  and  partners,  such  Holder's  legal  counsel  and   independent
 accountants, each person controlling such Holder, each such underwriter  and
 each person  who controls  any  such underwriter  for  any legal  and  other
 expenses reasonably incurred in connection with investigating, preparing  or
 defending any  such  claim, loss,  damage,  liability or  action;  provided,
 however, that the Company will not be liable in any such case to the  extent
 that any such expense, claim, loss,  damage, liability or action arises  out
 of or  is  based on  any  untrue statement  or  omission or  alleged  untrue
 statement or omission made in reliance  upon and in conformity with  written
 information furnished to  the Company by  such Holder expressly  for use  in
 such registration statement  or prospectus, or  any amendment or  supplement
 thereto.

     6.2 Each Holder will, if Registrable Securities held by such Holder  are
 included in the securities as to  which such registration, qualification  or
 compliance is being effected, severally indemnify  the Company, each of  its
 directors and officers, its legal counsel and independent accountants,  each
 underwriter,  if  any,  of  the  Company's  securities  covered  by  such  a
 registration statement,  each  person  who  controls  the  Company  or  such
 underwriter within the meaning of Section 15 of the Securities Act, and each
 other such Holder, each of its officers, directors, partners, legal  counsel
 and independent accountants, if any, and each person controlling such Holder
 within the  meaning  of  Section  15 of  the  Securities  Act,  against  all
 expenses, claims, losses,  damages and  liabilities (or  actions in  respect
 thereof), including  any of  the foregoing  incurred  in settlement  of  any
 litigation, commenced or threatened, arising out  of or based on any  untrue
 statement (or alleged untrue statement) of a material fact contained in  any
 such registration statement  or prospectus, or  any amendment or  supplement
 thereto, or any omission (or alleged  omission) to state therein a  material
 fact required  to be  stated therein  or necessary  to make  the  statements
 therein not misleading, and will reimburse  the Company, such Holders,  such
 directors,  officers,  partners,  legal  counsel,  independent  accountants,
 underwriters and control persons for any legal and other expenses reasonably
 incurred in connection with investigating,  preparing or defending any  such
 claim, loss, damage, liability  or action, in each  case to the extent,  but
 only to the extent, that such untrue statement (or alleged untrue statement)
 or omission (or alleged omission) is made in such registration statement  or
 prospectus or amendment  or supplement in  reliance upon  and in  conformity
 with written information furnished to the  Company by such Holder  expressly
 for use in such  registration statement or prospectus,  or any amendment  or
 supplement thereto; provided, however, that  the obligations of each  Holder
 hereunder shall be limited to  an amount equal to  the net proceeds to  such
 Holder  of  Registrable  Securities  sold  pursuant  to  such   registration
 statement.

     6.3 Each party entitled  to indemnification  under this  Article 6  (the
 "Indemnified Party")  shall give  notice to  the party  required to  provide
 indemnification (the "Indemnifying Party")  promptly after such  Indemnified
 Party has actual knowledge of any claim as to which indemnity may be sought,
 and shall permit the  Indemnifying Party to assume  the defense of any  such
 claim or any litigation resulting therefrom,  provided that counsel for  the
 Indemnifying  Party,  who  shall  conduct  the  defense  of  such  claim  or
 litigation, shall be approved by the Indemnified Party (whose approval shall
 not unreasonably be  withheld).  The  Indemnified Party  may participate  in
 such  defense  at  such  party's   expense;  provided,  however,  that   the
 Indemnifying Party shall bear the expense of such defense of the Indemnified
 Party if  representation  of both  parties  by  the same  counsel  would  be
 inappropriate due to actual or potential conflicts of interest.  The failure
 of any Indemnified Party to give notice as provided herein shall not relieve
 the Indemnifying Party of its obligations under this Agreement, unless  such
 failure is materially prejudicial to the  ability of the Indemnifying  Party
 to defend the action.   No Indemnifying  Party, in the  defense of any  such
 claim or  litigation, shall,  except with  the consent  of each  Indemnified
 Party, consent to entry of any  judgment or enter into any settlement  which
 does not include as an unconditional term thereof the giving by the claimant
 or plaintiff to such  Indemnified Party of a  release from all liability  in
 respect of such claim or litigation.

     6.4 If  the  indemnification  provided  for in  Section  6.1  or  6.2 is
 unavailable or insufficient to hold harmless an Indemnified Party, then each
 Indemnifying Party shall contribute  to the amount paid  or payable by  such
 Indemnified Party as a  result of the expenses,  claims, losses, damages  or
 liabilities (or actions or  proceedings in respect  thereof) referred to  in
 Section 6.1 or  6.2, in  such proportion as  is appropriate  to reflect  the
 relative fault of the Company on the one hand and the Holders of Registrable
 Securities on  the other  hand in  connection with  statements or  omissions
 which resulted in such expenses, claims, losses, damages or liabilities  (or
 actions or proceedings  in respect thereof), as well  as any other  relevant
 equitable  considerations.   The  relative  fault  shall  be  determined  by
 reference to,  among  other things, whether  the  untrue or  alleged  untrue
 statement of a material fact or the omission or alleged omission to state  a
 material fact relates to information supplied by the Company or the  Holders
 of Registrable  Securities  and  the parties'  relative  intent,  knowledge,
 access to  information and  opportunity to  correct or  prevent such  untrue
 statement or omission.  The Company and the Holders agree that it would  not
 be just and equitable if contributions pursuant to this Section 6.4 were  to
 be determined by  pro rata allocation  (even if all  Holders of  Registrable
 Securities were treated  as one  entity for such  purpose) or  by any  other
 method  of  allocation  which  does  not  take  account  of  the   equitable
 considerations referred to in the first  sentence of this Section 6.4.   The
 amount paid by  an Indemnified Party  as a result  of the expenses,  claims,
 losses, damages  or  liabilities  (or  actions  or  proceedings  in  respect
 thereof) referred to  in the  first sentence of  this Section  6.4 shall  be
 deemed to include any  legal or other expenses  reasonably incurred by  such
 Indemnified Party in connection with  investigating or defending any  claim,
 action or proceeding which is  the subject of this  Section 6.4.  No  person
 guilty of fraudulent misrepresentation (within the meaning of Section  11(f)
 of the Securities Act) shall be entitled to contribution from any person who
 was not guilty  of such fraudulent  misrepresentation.   The obligations  of
 Holders of Registrable Securities to contribute pursuant to this Section 6.4
 shall be  several in  proportion to  the  respective amount  of  Registrable
 Securities sold by them pursuant to  a registration statement, and shall  be
 limited to  an amount  equal to  the net  proceeds to  each such  Holder  of
 Registrable Securities sold pursuant to such registration statement.

                                  ARTICLE 7

                              RULE 144 REPORTING

      With a  view to  making available  the benefits  of certain  rules  and
 regulations of  the Commission  that may  at  any time  permit the  sale  of
 securities of the Company  to the public  without registration, the  Company
 agrees to use its reasonable best efforts to:

     7.1 Make and keep public information regarding the Company available, as
 those terms are understood and defined in  Rule 144, at all times after  the
 date hereof; and

     7.2 File  with the Commission in  a timely manner  all reports and other
 documents required of the Company under the Securities Act and the  Exchange
 Act.

                                  ARTICLE 8

                       TRANSFER OF REGISTRATION RIGHTS

      The rights  to cause  the Company  to register  Registrable  Securities
 under Section 2.2 of  this Agreement, together with  all related rights  and
 obligations, may be  assigned by  a Holder  to any  other person;  provided,
 however, that (A) the transferor shall furnish to the Company written notice
 of the name and  address of such transferee  or assignee and the  securities
 with respect to which such registration  rights are being assigned prior  to
 such transfer and (B) such transferee shall  agree in writing to be  subject
 to all applicable restrictions set forth  in this Agreement.  In each  case,
 such rights may only be transferred together with the underlying Registrable
 Securities in  a transfer  permitted by  the Securities  Act and  applicable
 state securities laws.  Any such  permitted transferee or assignee shall  be
 deemed a Holder hereunder.

                                  ARTICLE 9

        LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES

      From and  after the  date of  this Agreement,  the Company  shall  not,
 without the  prior written  consent of  the  Holders of  a majority  of  the
 Registrable Securities then outstanding, enter  into any agreement with  any
 holder or prospective holder of any securities of the Company providing  for
 the grant to such  holder of registration rights  superior to those  granted
 herein.

                                 ARTICLE 10

                                MISCELLANEOUS

    10.1 Governing Law.   The laws of  the State  of Texas  shall govern  the
 interpretation, validity and  performance of  the terms  of this  Agreement,
 regardless of the law that might be applied under principles of conflicts of
 law.

    10.2 Successors  and  Assigns.   Except  as otherwise  expressly provided
 herein, the provisions hereof shall inure to the benefit of, and be  binding
 upon, the successors  and assigns of  each of the  parties hereto and  shall
 inure to the benefit of and be  binding upon each Holder of any  Registrable
 Securities.

    10.3 Entire  Agreement.  This  Agreement constitutes the  full and entire
 understanding and agreement between the parties  with regard to the  subject
 matter hereof.

    10.4 Notices.  All notices,  requests, consents  and other communications
 hereunder shall be made in writing and  shall be deemed given (i) when  made
 if made by hand delivery, (ii)  one business day after being deposited  with
 an overnight courier  if made  by courier  guaranteeing overnight  delivery,
 (iii) on the date indicated on the notice of receipt if made by  first-class
 mail, return  receipt requested  or  (iv) on  the  date of  confirmation  of
 receipt of transmission by facsimile, addressed as follows:

      (a)  if to the Company, at

           Hallmark Financial Services, Inc.
           777 Main Street, Suite 1000
           Fort Worth, TX 76102
           Facsimile: (817) 348-1815
           Attention:  Chief Financial Officer

           with a copy to:

           McGuire, Craddock & Strother, P.C.
           3550 Lincoln Plaza
           500 N. Akard Street
           Dallas, Texas  75201
           Facsimile:  (214) 954-6868
           Attention:  Steven D. Davidson, Esq.

      (b)  if to the Investor, in care of:

           Newcastle Partners, L.P.
           300 Crescent Court, Suite 1110
           Dallas, TX  75201
           Facsimile:  (214) 661-7475
           Attention:  Steven J. Pully

           with a copy to:

           Olshan Grundman Frome Rosenzweig & Wolosky LLP
           65 East 55th Street
           New York, New York  10022
           Facsimile: (212) 451-2222
           Attention:  Steven Wolosky, Esq.

      (c)  if to a  Holder, to the  address reflected  on the  records of the
 Company, or such other address or addresses as shall have been furnished  in
 writing by  such party  to the  Company and  to the  other parties  to  this
 Agreement.

    10.5 Severability.  The invalidity, illegality or unenforceability of one
 or more of the  provisions of this Agreement  in any jurisdiction shall  not
 affect the validity,  legality or enforceability  of the  remainder of  this
 Agreement in such jurisdiction or  the validity, legality or  enforceability
 of this Agreement, including any such provision, in any other  jurisdiction,
 it being intended that all rights  and obligations of the parties  hereunder
 shall be enforceable to the fullest extent permitted by law.

    10.6 Titles and Subtitles.  The titles of the sections and subsections of
 this Agreement  are for  convenience of  reference only  and are  not to  be
 considered in construing this Agreement.

    10.7 Counterparts.   This  Agreement  may be  executed  in any  number of
 counterparts, each of which shall be an original, but all of which  together
 constitute one instrument.

    10.8 Amendment and Modification.  This Agreement may be amended, modified
 or supplemented in any respect only by written agreement by the Company  and
 Holders representing  at least  a majority  of the  Registrable  Securities,
 voting together as a single class;   provided, that no such amendment  shall
 unfairly discriminate  against a  particular Holder  relative to  the  other
 Holders.  Any action taken by the Holders, as provided in this Section 10.8,
 shall bind all Holders.

 IN WITNESS WHEREOF, the undersigned have hereunto affixed their signatures.

                                         Newcastle Special Opportunity
                                         Fund [I] [II], L.P.

 Hallmark Financial Services, Inc.       By: Newcastle Capital Management,
                                             L.P., its general partner


 By                                      By
     _____________________________           _____________________________
 Its                                     Its
     _____________________________           _____________________________

<PAGE>
                                    ANNEX A

                             PLAN OF DISTRIBUTION

      We are registering the shares offered  by this prospectus on behalf  of
 the selling shareholders.  The selling  shareholders, which  as used  herein
 includes  donees,  pledgees,  transferees  or  other  successors-in-interest
 selling shares  of common  stock  or interests  in  shares of  common  stock
 received after the date of this  prospectus from a selling shareholder as  a
 gift, pledge, partnership distribution or other transfer, may, from time  to
 time, sell, transfer or otherwise dispose of  any or all of their shares  of
 common stock or interests in shares  of common stock on any stock  exchange,
 market or trading  facility on  which the shares  are traded  or in  private
 transactions.   These dispositions  may be  at fixed  prices, at  prevailing
 market prices  at the  time of  sale, at  prices related  to the  prevailing
 market price,  at  varying prices  determined  at the  time  of sale  or  at
 negotiated prices.

      The selling  shareholders may  use any  one or  more of  the  following
 methods when disposing of shares or interests therein:

        *  ordinary brokerage  transactions  and transactions  in  which  the
           broker-dealer solicits purchasers;

        *  block trades in which the broker-dealer  will attempt to sell  the
           shares as agent,  but may  position and  resell a  portion of  the
           block as principal to facilitate the transaction;

        *  purchases by  a  broker-dealer  as principal  and  resale  by  the
           broker-dealer for its account;

        *  an exchange  distribution  in accordance  with  the rules  of  the
           applicable exchange;

        *  privately negotiated transactions;

        *  short sales;

        *  through the  writing or  settlement of  options or  other  hedging
           transactions, whether through an options exchange or otherwise;

        *  broker-dealers may agree with the  selling shareholders to sell  a
           specified number of such shares at a stipulated price per share;

        *  a combination of any such methods of sale; and

        *  any other method permitted pursuant to applicable law.

      The selling shareholders  may, from  time to  time, pledge  or grant  a
 security interest in some or all of the shares of common stock owned by them
 and, if they default  in the performance of  their secured obligations,  the
 pledgees or secured parties may offer  and sell the shares of common  stock,
 from time to  time, under  this prospectus, or  under an  amendment to  this
 prospectus under  Rule  424(b)(3)  or  other  applicable  provision  of  the
 Securities Act  amending the  list of  selling shareholders  to include  the
 pledgee, transferee or other successors in interest as selling  shareholders
 under this  prospectus.   The selling  shareholders  also may  transfer  the
 shares  of  common  stock  in  other   circumstances,  in  which  case   the
 transferees, pledgees or other  successors in interest  will be the  selling
 beneficial owners for purposes of this prospectus.

      In connection with the sale of  our common stock or interests  therein,
 the selling shareholders  may enter into  hedging transactions with  broker-
 dealers or other financial institutions, which  may in turn engage in  short
 sales of  the common  stock in  the  course of  hedging the  positions  they
 assume.  The selling shareholders may  also sell shares of our common  stock
 short and deliver these  securities to close out  their short positions,  or
 loan or pledge  the common  stock to broker-dealers  that in  turn may  sell
 these securities.  The  selling shareholders may also  enter into option  or
 other transactions with  broker-dealers or other  financial institutions  or
 the creation of one or more derivative securities which require the delivery
 to such broker-dealer or  other financial institution  of shares offered  by
 this  prospectus,  which  shares  such  broker-dealer  or  other   financial
 institution may  resell  pursuant to  this  prospectus (as  supplemented  or
 amended to reflect such transaction).

      The aggregate proceeds to the selling shareholders from the sale of the
 common stock offered by them will be the purchase price of the common  stock
 less discounts or  commissions, if any.   Each of  the selling  shareholders
 reserves the right to  accept and, together with  their agents from time  to
 time, to reject, in whole or in part, any proposed purchase of common  stock
 to be made  directly or  through agents.   We will  not receive  any of  the
 proceeds from this offering.

      The selling shareholders also may resell all or a portion of the shares
 in open market transactions in reliance  upon Rule 144 under the  Securities
 Act of  1933,  provided that  they  meet the  criteria  and conform  to  the
 requirements of that rule.

      The selling shareholders and any broker-dealers that act in  connection
 with the sale of securities might be deemed to be "underwriters" within  the
 meaning of Section 2(11) of the Securities Act, and any commissions received
 by such broker-dealers and any profit  on the resale of the securities  sold
 by them  while acting  as  principals might  be  deemed to  be  underwriting
 discounts or commissions under the Securities Act.

      To the extent required, the shares of our common stock to be sold,  the
 names of the selling shareholders, the respective purchase prices and public
 offering prices, the  names of  any agent,  dealer or  underwriter, and  any
 applicable commissions or discounts with respect to a particular offer  will
 be set forth in an accompanying prospectus supplement or, if appropriate,  a
 post-effective amendment to  the registration statement  that includes  this
 prospectus.

      In order  to  comply  with  the securities  laws  of  some  states,  if
 applicable, the common stock may be sold in these jurisdictions only through
 registered or licensed brokers or dealers.  In addition, in some states  the
 common stock may not be sold unless it has been registered or qualified  for
 sale or  an exemption  from registration  or qualification  requirements  is
 available and is complied with.

      We have  advised the  selling shareholders  that the  anti-manipulation
 rules of Regulation M under the Exchange Act may apply to sales of shares in
 the market  and to  the activities  of the  selling shareholders  and  their
 affiliates.  In addition, we will make copies of this prospectus (as it  may
 be supplemented  or amended  from time  to time)  available to  the  selling
 shareholders  for  the  purpose   of  satisfying  the  prospectus   delivery
 requirements of the Securities Act.  The selling shareholders may  indemnify
 any broker-dealer that  participates in transactions  involving the sale  of
 the shares against certain liabilities, including liabilities arising  under
 the Securities Act.

      We  have  agreed   to  indemnify  the   selling  shareholders   against
 liabilities, including  liabilities  under  the  Securities  Act  and  state
 securities laws, relating to the registration of the shares offered by  this
 prospectus.

      We have agreed with the selling  shareholders to keep the  registration
 statement that includes this prospectus effective  until the earlier of  (1)
 two years following the effective date of the registration statement and (2)
 such time as all shares of common stock covered by this prospectus have been
 sold pursuant to this prospectus.