EXHIBIT 4.2


      THIS NOTE  AND  THE  SECURITIES UNDERLYING  THIS  NOTE  HAVE  NOT  BEEN
 REGISTERED UNDER THE  SECURITIES ACT  OF 1933,  AS AMENDED  (THE "ACT"),  OR
 QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE
 SOLD OR  OTHERWISE  TRANSFERRED IN  THE  ABSENCE OF  SUCH  REGISTRATION  AND
 QUALIFICATION WITHOUT,  EXCEPT AS  OTHERWISE  AGREED BY  HALLMARK  FINANCIAL
 SERVICES, INC., AN  OPINION OF COUNSEL  REASONABLY SATISFACTORY TO  HALLMARK
 FINANCIAL SERVICES, INC.  THAT SUCH REGISTRATION  AND QUALIFICATION ARE  NOT
 REQUIRED.

                         CONVERTIBLE PROMISSORY NOTE

 [$12,550,000] [$12,450,000]                                 January 27, 2006

      FOR VALUE RECEIVED, the undersigned, HALLMARK FINANCIAL SERVICES, INC.,
 a Nevada corporation (the "Maker"), hereby  promises to pay to the order  of
 Newcastle Special  Opportunity  Fund  [I] [II],  L.P.,  a  Delaware  limited
 partnership, or its assigns  (the "Payee"), at such  place as the Payee  may
 designate in  writing, the  principal sum  of Twelve  Million [Five]  [Four]
 Hundred Fifty Thousand Dollars ([$12,550,000] [$12,450,000]), or such lesser
 amount as shall  equal the outstanding  principal amount  hereof, under  the
 terms set forth herein.  Capitalized terms used but not defined herein shall
 have the respective meanings given to such terms in the Purchase  Agreement,
 dated as of the  date hereof (the "Purchase  Agreement"), between the  Maker
 and the Payer.

      1. Interest.  Except as otherwise provided herein, the unpaid principal
 balance hereof from time  to time outstanding shall  bear interest from  the
 date hereof at the rate of  four percent (4%) per  annum.  Interest on  this
 Note shall be computed on the basis of a 365-day year.

      2. Payment of Interest  and Principal.  Except  as  otherwise  provided
 herein (including, without limitation, Sections 5 and 6 hereof), and subject
 to any default hereunder,  the principal and interest  hereof is payable  as
 follows:

           (a) Interest  is payable in cash  quarterly in arrears on December
 31, March 31, June  30 and September  30 of each  year, beginning March  31,
 2006.

           (b) The entire outstanding principal amount  of the Note  together
 with all accrued but unpaid interest shall be  due in cash on July 27,  2007
 (the "Maturity Date").

           (c) The Maker will have no right of early prepayment on this Note.

      3. Conversion at the Option of Payee.

           (a) At any time while any portion of the principal or interest  of
 this Note is outstanding, the Payee may give the Maker written notice of its
 intention to convert all or any portion of the outstanding principal  and/or
 accrued but unpaid interest on this Note  into such number of shares of  the
 Maker's common stock, par value $0.03 per share (the "Common Stock"),  equal
 to the amount to be converted divided  by the Conversion Price in effect  at
 such  time.  Upon receipt  of the Payee's  written notice,  the Maker  shall
 cause certificates representing those shares to be delivered to Payee within
 three  business  days of  Maker's receipt  of  such notice.  The  person  or
 persons entitled  to receive  the shares  of Common  Stock issuable  upon  a
 conversion of this  Note shall  be treated for  all purposes  as the  record
 holder or holders of such shares of Common Stock on the date the  applicable
 conversion notice is given.

           (b) The "Conversion Price" initially shall  be $1.28 and shall  be
 subject  to  adjustment  as  set  forth  below.  The  Conversion Price shall
 be  adjusted  proportionally for  any  subsequent  stock  dividend or split,
 stock combination  or  other  similar recapitalization, reclassification  or
 reorganization of or affecting Maker's Common Stock.

           (c) In case of a Change of Control, instead of receiving shares of
 Maker's Common Stock  upon conversion  of this  Note, Payee  shall have  the
 right thereafter to receive the kind and amount of shares of stock and other
 securities, cash and property which the Payee would have owned or have  been
 entitled to receive immediately  after such Change of  Control had the  same
 portion of this Note been converted immediately prior to the effective  date
 of such Change of Control and,  in any such case, if necessary,  appropriate
 adjustment shall be made in the  application of the provisions set forth  in
 this Section with  respect to  the rights  and interests  thereafter of  the
 Payee, to  the end  that the  provisions  set forth  in this  Section  shall
 thereafter correspondingly be made applicable,  as nearly as may  reasonably
 be, in  relation to  any shares  of  stock and  other securities,  cash  and
 property  thereafter  deliverable  in  connection  with  this  Note.     The
 provisions of this subsection shall similarly apply to successive Changes of
 Control.

           (d) "Change of Control"  means that the Maker shall,  directly  or
 indirectly, in one or  more related transactions,  (i) consolidate or  merge
 with or into (whether or not the Maker is the surviving corporation) another
 person, (ii) sell, assign, transfer, convey  or otherwise dispose of all  or
 substantially all  of the  properties  or assets  of  the Maker  to  another
 person, (iii) allow another  person to make a  purchase, tender or  exchange
 offer that is accepted by  the holders of more  than 50% of the  outstanding
 shares of Common Stock (not including any shares of Common Stock held by the
 person or persons making or party  to, or associated or affiliated with  the
 persons making or  party to, such  purchase, tender or  exchange offer),  or
 (iv) consummate a  stock purchase  agreement or  other business  combination
 (including, without limitation, a reorganization, recapitalization or  spin-
 off) with another person whereby such other person acquires more than 50% of
 the outstanding shares of Common Stock  (not including any shares of  Common
 Stock held by  the other  person or  other persons  making or  party to,  or
 associated or affiliated  with the other  persons making or  party to,  such
 stock purchase agreement or other business combination); provided,  however,
 that a  transaction  in  which  Newcastle  Partners,  L.P.  or  any  of  its
 affiliates is the acquiring party shall not be deemed to constitute a Change
 of Control.

           (e) In the event that the Maker consummates an offering of  rights
 to purchase Common Stock  or Convertible Securities on  or before the  nine-
 month anniversary of the Closing Date and the price to acquire one share  of
 Common Stock (or the  equivalent thereof) pursuant  to such rights  offering
 (the "Rights Offering Price")  is less than the  Conversion Price in  effect
 immediately  prior  to  the  consummation  of  such  rights  offering,  then
 immediately after the consummation of  such rights offering, the  Conversion
 Price then in  effect shall  be reduced  to an  amount equal  to the  Rights
 Offering Price.

           (f) No fractional shares of Maker's  Common Stock shall be  issued
 upon conversion  of  the Note.  In lieu of  any fractional  shares to  which
 Payee would otherwise  be entitled, the  Maker shall pay  cash equal to  the
 product of such fraction multiplied by the average of the closing prices  of
 the Common Stock  on the American  Stock Exchange for  the five  consecutive
 trading days immediately preceding the date of the conversion.

           (g) In the event  of an adjustment  to the  Conversion Price,  the
 Maker shall promptly deliver to the Payee a certificate, signed by its Chief
 Financial Officer, setting forth the new Conversion Price and a  calculation
 in reasonable detail of the adjustment to the Conversion Price.

           (h) The Maker shall pay any and all taxes that may be payable with
 respect to the issuance and delivery of Common Stock upon conversion of this
 Note; provided that the Maker shall not be required to pay any tax that  may
 be payable in respect of  any issuance of Common  Stock to any person  other
 than the Payee  or with  respect to any  income tax  due by  the Payee  with
 respect to such Common Stock.

      4. Redemption Upon Change of Control.  No sooner than 15 days nor later
 than 10  days prior  to the  consummation of  a Change  of Control,  if  the
 Shareholder Approval has  not then been  obtained, the  Maker shall  deliver
 written notice of such Change of Control to the Payee (a "Change of  Control
 Notice").  At any time during the period beginning after the Payee's receipt
 of a Change of Control Notice and ending on the date of the consummation  of
 such Change of Control, the Payee may require the Maker to redeem all or any
 portion of this  Note by  delivering written  notice thereof  (a "Change  of
 Control Redemption Notice") to the Maker, which Change of Control Redemption
 Notice shall indicate  the portion of  the outstanding  principal amount  of
 this Note that the  Payee is electing  to redeem. The  portion of this  Note
 subject to redemption pursuant  to this Section 4  shall be redeemed by  the
 Maker at a price equal to 110% of the principal amount being redeemed,  plus
 accrued but unpaid interest on such principal amount (the "Change of Control
 Redemption Price"). Redemptions required by this Section 4 shall be made  on
 the date  of  the consummation  of  the Change  of  Control and  shall  have
 priority to payments to  shareholders of the Maker  in connection with  such
 Change of Control. Notwithstanding anything to the contrary in this  Section
 4, until  the  Change of  Control  Redemption Price  is  paid in  full,  the
 principal amount submitted  for redemption  under this  Section 4  (together
 with any accrued but unpaid interest thereon) may be converted, in whole  or
 in part, by the Payee into Common Stock pursuant to Section 3.

      5. Required Conversion On Maturity Date.  On the Maturity Date, in lieu
 of making the payment required by Section 2(b), the Maker shall issue to the
 Payee a certificate representing such number of shares of Common Stock as is
 equal to the quotient  obtained by dividing the  entire principal amount  of
 this Note then outstanding, plus all accrued but unpaid interest thereon, by
 the Conversion Price in  effect at such time,  in full satisfaction of  this
 Note (the "Maturity Date Conversion").  The applicable provisions of Section
 3 shall apply with equal force to the Maturity Date Conversion.

      6. Condition  to Issuance of  Shares Upon  Conversion.  Notwithstanding
 anything to the contrary contained in Section  3 or Section 5 of this  Note,
 it shall be a  condition precedent to Maker's  issuance of shares of  Common
 Stock upon  conversion  of  this  Note, whether  on  the  Maturity  Date  or
 otherwise, that the Stockholder Approval shall  have been obtained prior  to
 such issuance.

      7. Dividends.   If, at any  time while any portion  of the principal or
 interest on the Note is outstanding, Maker declares a distribution in  cash,
 property (including securities) or a combination thereof, whether by way  of
 dividend or otherwise,  with respect to  its Common Stock,  the Payee  shall
 participate pro  rata in  such distribution  on an  as-converted basis  with
 holders of Maker's Common Stock.

      8. Ranking.   The Note  is subordinate and  junior to  all existing and
 future secured indebtedness of Maker.  This  Note will rank pari passu  with
 all existing and future unsecured indebtedness  of Maker, unless such  other
 unsecured indebtedness is, by its terms or by operation of law,  subordinate
 and junior to the unsecured indebtedness represented by this Note, and  will
 rank senior to the indebtedness and obligations evidenced by the  Indenture,
 dated as of June 21, 2005 (the "Indenture"), between the Maker and  JPMorgan
 Chase Bank, National Association, as trustee (the "Trustee"), the  Guarantee
 Agreement, dated as of June 21, 2005, between the Maker and the Trustee  and
 the Trust Securities  (as defined in  the Indenture)  of Hallmark  Statutory
 Trust I.

      9. Covenants.   From the date hereof and  until payment in full of this
 Note, the Maker will, and will cause each of its Subsidiaries to:

           (a) Maintenance of Existence.  Do all things necessary to preserve
 and keep in full force and effect its existence as a corporation.

           (b) Compliance  with  Applicable  Laws.  Comply  in  all  material
 respects with  the requirements  of all  applicable statutes,  laws,  rules,
 regulations and orders of any governmental authority, except where contested
 in good faith and by proper proceedings.

           (c) Licenses.  Obtain and maintain all material licenses, permits,
 franchises or other governmental  authorizations necessary to the  ownership
 of its properties or to the conduct of its business.

      10.  Default.  The occurrence of any one or more of the following events
 shall constitute  an event  of default,  upon which  Payee may  declare  the
 entire principal amount of this Note,  together with all accrued but  unpaid
 interest, to be immediately due and payable in cash:

           (a) The Maker shall fail to make any payment of principal (whether
 in cash or by  conversion pursuant to Section  5 hereof) and/or accrued  but
 unpaid interest (at  the applicable  rate) when  due and  payable, and  such
 failure, in the case of any interest payment, shall continue for a period of
 at least five business days.

           (b) The  Maker  shall  be  in  material  default  of  any term  or
 provision of this Note,  the Purchase Agreement  or the Registration  Rights
 Agreement, and such failure shall continue through 15 days after Payee gives
 written notice of such default to Maker.

           (c) Any  representation or warranty of  the Maker contained in the
 Purchase Agreement  or the  Registration Rights  Agreement shall  have  been
 false in any material respect on the Closing Date.

           (d) The Maker or any  of its Subsidiaries,  pursuant to or  within
 the meaning of Title 11, U.S. Code, or any similar federal, foreign or state
 law  for  the  relief  of  debtors  (collectively,  "Bankruptcy  Law"),  (i)
 commences a  voluntary case,  (ii) consents  to the  entry of  an order  for
 relief against it in an involuntary case, (iii) consents to the  appointment
 of  a  receiver,  trustee,  assignee,  liquidator  or  similar  official  (a
 "Custodian"), (iv)  makes  a  general assignment  for  the  benefit  of  its
 creditors or (v) admits in  writing that it is  generally unable to pay  its
 debts as they become due.

           (e) A court of competent  jurisdiction enters an  order or  decree
 under any Bankruptcy Law that (i) is for relief against the Maker or any  of
 its Subsidiaries in an  involuntary case, (ii) appoints  a Custodian of  the
 Maker or any  of its  Subsidiaries or (iii)  orders the  liquidation of  the
 Maker or any of its Subsidiaries.

      Without limiting the  above, the  Maker acknowledges  that payments  in
 cash or by the issuance of stock on  the various scheduled due dates are  of
 essence and that any failure to timely pay the principal or interest (within
 any permitted grace period) permits Payee  to declare this Note  immediately
 due in cash in its entirety without any  prior notice of any kind to  Maker,
 except for the  specific notices provided  above.  Upon  the occurrence  and
 during the continuance of an event of default, the interest rate under  this
 Note shall be increased to 10%.  In the event that such event of default  is
 subsequently cured, the  adjustment referred  to in  the preceding  sentence
 shall cease to be effective as of the  date of such cure; provided that  the
 interest as  calculated  and  unpaid  at  such  increased  rate  during  the
 continuance of such event of default  shall continue to apply to the  extent
 relating to the days after the  occurrence of such event of default  through
 and including the date of cure of such event of default.

      11. Applicable Law.  THE VALIDITY,  CONSTRUCTION AND ENFORCEABILITY  OF
 THE NOTE SHALL  BE GOVERNED  BY THE  INTERNAL LAWS  OF THE  STATE OF  TEXAS,
 WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.

      12. Waivers.  The Maker hereby  waives presentment for payment,  notice
 of dishonor, protest and notice of payment and all other demands and notices
 of any kind in connection with the enforcement of this Note.  Any  provision
 of this Note may be amended, waived or modified upon the written consent  of
 Maker and Payee.  No  failure  or  delay on  the part  of the  Payee in  the
 exercise of  any power,  right or  privilege hereunder  shall operate  as  a
 waiver thereof, nor shall any single or partial exercise of any such  power,
 right or privilege  preclude other  or further  exercise thereof  or of  any
 other power, right or privilege.

      13. No  Setoffs.  The Maker shall pay  principal and interest under the
 Note without any deduction for any setoff or counterclaim.

      14. Costs of Collection.  If this Note is not paid when due, the  Maker
 shall pay  Payee's  reasonable  costs of  collection,  including  reasonable
 attorneys' fees.

      15. Notices.   Whenever notice is required to be given under this Note,
 such notice shall be  given in accordance with  Section 7.7 of the  Purchase
 Agreement.

                         [SIGNATURE PAGE FOLLOWS]

<PAGE>

      IN WITNESS WHEREOF, the undersigned has hereunto affixed its signature.



             HALLMARK FINANCIAL SERVICES, INC.


             By______________________________

             Its_____________________________