CONFORMED COPY


                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549


                                 FORM 10-QSB

              Quarterly report under Section 13 or 15(d) of the

                       Securities Exchange Act of 1934

              For the quarterly period ended September 30, 2003

                        Commission file number 0-16090

                      Hallmark Financial Services, Inc.
                      ---------------------------------
      (Exact name of small business issuer as specified in its charter)


                Nevada                                 87-0447375
     -------------------------------               -------------------
     (State or other jurisdiction of                (I.R.S. Employer
     Incorporation or organization)                Identification No.)

       777 Main Street, Suite 1000
           Fort Worth, Texas                             76102
 ----------------------------------------              ----------
 (Address of principal executive offices)              (Zip Code)

       Issuer's telephone number, including area code:  (817) 348-1600

       Check whether the issuer (1) has  filed all reports required to
       be filed by Section 13 or 15(d)  of the Securities Exchange Act
       during the past 12 months (or for  such shorter period that the
       registrant was required to file such reports), and (2) has been
       subject to such filing requirements for the past 90 days.

                            Yes   X       No

                     APPLICABLE ONLY TO CORPORATE ISSUERS

       State the number of shares outstanding  of each of the issuer's
       classes of  common equity, as  of the latest  practicable date:
       Common Stock,  par  value $.03  per share  -  36,366,059 shares
       outstanding as of  September 30, 2003.

<PAGE>

                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements


                     INDEX TO FINANCIAL STATEMENTS

                                                             Page Number
                                                             -----------

 Consolidated Balance Sheets at September 30, 2003                3
 (unaudited) and December 31, 2002

 Consolidated Statements of Operations (unaudited)                4
 for the three and nine months ended September 30, 2003
 and September 30, 2002

 Consolidated Statements of Cash Flows (unaudited)                5
 for the nine months ended September 30, 2003 and
 September 30, 2002

 Notes to Consolidated Financial Statements (unaudited)           6


<PAGE>

            HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED BALANCE SHEETS
                              (In thousands)


                                                   September 30   December 31
                     ASSETS                            2003          2002
                     ------                         -----------   -----------
                                                    (unaudited)    (audited)
 Investments:
    Debt securities, available-for-sale, at
      market value in 2003 and held-to-maturity,
      at amortized cost in 2002                    $     24,822  $      7,679
    Equity securities, available-for-sale,
      at market value                                     4,193           122
    Short-term investments, available-for-sale,
      at market value                                       335         8,927
                                                    -----------   -----------
             Total investments                           29,350        16,728

 Cash and cash equivalents                                9,209         8,453
 Restricted cash                                          6,124         1,072
 Prepaid reinsurance premiums                             1,324         8,956
 Premiums receivable encumbered by premium
   financing activity (net of allowance for
   doubtful accounts of $84 in 2003 and of
   $115 in 2002)                                          2,117        11,593
 Premiums receivable                                      3,980         1,012
 Accounts receivable                                      2,903         2,129
 Reinsurance recoverable                                 14,821        12,929
 Deferred policy acquisition costs                        7,578         5,266
 Excess of cost over fair value
   of net assets acquired                                 5,195         5,171
 Intangible assets                                          520           540
 Note receivable                                              -         6,500
 Current federal income tax recoverable                       -            33
 Deferred federal income taxes                            3,673         1,021
 Other assets                                             2,520         2,358
                                                    -----------   -----------
                                                   $     89,314  $     83,761
                                                    ===========   ===========
     LIABILITIES AND STOCKHOLDERS' EQUITY
     ------------------------------------
 Liabilities:
   Notes payable                                   $      1,173  $      1,803
   Note payable to related party                              -         8,600
   Net advances from lender for financed premiums         1,401        10,905
   Unpaid losses and loss adjustment expenses            28,837        17,667
   Unearned premiums                                      8,446        15,957
   Reinsurance balances payable                              53         3,764
   Unearned revenue                                      10,078         6,872
   Accrued agent profit sharing                             885           450
   Accrued ceding commission payable                        942         2,536
   Pension liability                                        604           604
   Current federal income tax payable                        47             -
   Accounts payable and other accrued expenses            8,692         6,068
                                                    -----------   -----------
                                                         61,158        75,226

 Stockholders' equity:
     Common stock, $.03 par value, authorized
       100,000,000 shares issued 36,856,610
       shares in 2003 and 11,855,610 in 2002              1,106           356
    Capital in excess of par value                       19,698        10,875
    Retained earnings (deficit)                           7,683        (1,491)
    Accumulated other comprehensive income                  244          (162)
    Treasury stock, 490,551 shares in 2003
      and 806,477 in 2002, at cost                         (575)       (1,043)
                                                    -----------   -----------
             Total stockholders' equity                  28,156         8,535
                                                    -----------   -----------
                                                   $     89,314  $     83,761
                                                    ===========   ===========

              The accompanying notes are an integral part
                of the consolidated financial statements

<PAGE>
<TABLE>

           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                               (Unaudited)
                              (In thousands)

                                                  Three Months Ended           Nine Months Ended
                                                     September 30                September 30
                                                ---------------------       ----------------------
                                                  2003         2002           2003          2002
                                                --------     --------       --------      --------
 <S>                                           <C>          <C>            <C>           <C>
 Gross premiums written                        $   6,640    $  12,122      $  36,404     $  37,541
 Ceded premiums written                              246       (7,001)        (6,934)      (22,130)
                                                --------     --------       --------      --------
    Net premiums written                           6,886        5,121         29,470        15,411

    Change in unearned premiums                    2,509           87          3,855        (1,118)
                                                --------     --------       --------      --------
    Net premiums earned                            9,395        5,208         33,325        14,293

 Investment income, net of expenses                  360          144            822           414
 Realized gain (loss)                               (305)           2           (313)            2
 Finance charges                                     856          514          2,936         1,804
 Commission and fees                               4,709            -         12,406             -
 Processing and service fees                       1,224          121          3,509           336
 Other income                                        127           91            446           257
                                                --------     --------       --------      --------
     Total revenues                               16,366        6,080         53,131        17,106

 Losses and loss adjustment expenses               6,155        3,636         22,596        10,630
 Other operating costs and expenses                9,559        2,128         27,724         5,223
 Interest expense                                    359          205          1,234           631
 Amortization of intangible asset                      7            -             21             -
                                                --------     --------       --------      --------
    Total expenses                                16,080        5,969         51,575        16,484

 Income before income tax, cumulative
   effect of change in accounting
   principle and extraordinary gain (loss)           286          111          1,556           622

 Income tax expense                                   66           38            498           212
                                                --------     --------       --------      --------
 Income before cumulative effect of
   change in accounting principle
   and extraordinary gain (loss)               $     220    $      73      $   1,058     $     410

    Cumulative effect of change
      in accounting principle                          -            -              -        (1,694)
    Extraordinary gain (loss)                          -            -          8,116             -
                                                --------     --------       --------      --------
 Net income (loss)                             $     220    $      73      $   9,174     $  (1,284)
                                                ========     ========       ========      ========
 Basic earnings (loss) per share:
    Income before cumulative effect
     of change in accounting principle
     and extraordinary gain                    $    0.01    $    0.01      $    0.08     $    0.03
        Cumulative effect of change
          in accounting principle                      -            -              -         (0.15)
        Extraordinary gain                             -            -           0.65             -
                                                --------     --------       --------      --------
        Net income (loss)                      $    0.01    $    0.01      $    0.73     $   (0.12)
                                                ========     ========       ========      ========
 Diluted earnings (loss) per share:
    Income before cumulative effect
      of change in accounting principle
      and extraordinary gain                   $    0.01    $    0.01      $    0.08     $    0.03
        Cumulative effect of change
          in accounting principle                      -            -              -         (0.15)
        Extraordinary gain                             -            -           0.63             -
                                                --------     --------       --------      --------
        Net income (loss)                      $    0.01    $    0.01      $    0.71     $   (0.12)
                                                ========     ========       ========      ========

                The accompanying notes are an integral part
                 of the consolidated financial statements

</TABLE>
<PAGE>

              HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (Unaudited)
                                (In thousands)
                                                        Nine Months Ended
                                                           September 30
                                                    -------------------------
                                                        2003          2002
                                                    -----------   -----------
 Cash flows from operating activities:
    Net income (loss)                              $      9,174  $     (1,284)

    Adjustments to reconcile net income (loss) to
    cash provided by (used in) operating activities:
       Cumulative effect of change
         in accounting principle                              -         1,694
       Depreciation and amortization expense                485           120
       Change in deferred federal income taxes              166           146
       Change in prepaid reinsurance premiums             7,264         2,543
       Change in premiums receivable                     (1,223)         (477)
       Change in accounts receivable                       (774)            -
       Change in deferred policy acquisition costs       (1,772)         (485)
       Change in unpaid losses and loss
         adjustment expenses                             (4,716)       (2,887)
       Change in unearned premiums                      (10,201)       (1,426)
       Change in unearned revenue                         3,159             -
       Change in accrued agent profit sharing               318             -
       Change in reinsurance recoverable                  8,512         3,599
       Change in reinsurance balances payable            (3,029)       (1,209)
       Change in current federal income
         tax payable/recoverable                            385           763
       Change in accrued ceding commission refund        (1,594)       (2,381)
       Gain on acquisition of subsidiary                 (8,116)            -
       Change in all other liabilities                    1,429          (282)
       Change in all other assets                           513           139
                                                    -----------   -----------
           Net cash used in operating activities            (20)       (1,427)
                                                    -----------   -----------
 Cash flows from investing activities:
    Purchases of property and equipment                    (293)         (150)
    Acquisition of subsidiary                             6,945             -
    Premium finance notes originated                    (15,772)      (31,243)
    Premium finance notes repaid                         25,248        33,473
    Change in restricted cash                            (5,052)          383
    Purchases of debt securities                              -       (10,638)
    Purchases of equity securities                      (16,854)            -
    Maturities and redemptions
      of investment securities                            6,384         3,285
    Net redemptions of short-term investments             8,904         8,761
                                                    -----------   -----------
       Net cash provided by investing activities          9,510         3,871
                                                    -----------   -----------
 Cash flows from financing activities:
     Proceeds from rights offering                       10,000             -
     Net advances from lender                            (9,504)       (1,616)
     Repayment of borrowings                             (9,230)            -
                                                    -----------   -----------
         Net cash used in financing activities           (8,734)       (1,616)
                                                    -----------   -----------
 Increase in cash and cash equivalents                      756           828
 Cash and cash equivalents at beginning of period         8,453         5,533
                                                    -----------   -----------
 Cash and cash equivalents at end of period        $      9,209    $    6,361
                                                    ===========   ===========

             The accompanying notes are an integral part
              of the consolidated financial statements
<PAGE>



 Item 1.  Notes to Consolidated Financial Statements (Unaudited)

 Note 1 - Summary of Accounting Policies

     In the  opinion of management,  the accompanying consolidated  financial
 statements contain  all adjustments,  consisting  only of  normal  recurring
 adjustments, necessary for  a fair statement  of the  financial position  of
 Hallmark Financial Services,  Inc. ("HFS")  and subsidiaries  (collectively,
 the "Company") as  of September  30, 2003  and the  consolidated results  of
 operations and cash  flows for the  periods presented.   The preparation  of
 financial  statements  requires  the  use  of  management's  estimates.  The
 accompanying financial statements have been prepared by the Company  without
 audit.

     Certain  information  and disclosures  normally  included  in  financial
 statements prepared  in  accordance  with  accounting  principles  generally
 accepted in the  United States of  America ("GAAP") have  been condensed  or
 omitted.  Reference is made to  the Company's annual consolidated  financial
 statements for  the  year ended  December  31,  2002 for  a  description  of
 accounting policies and  certain other disclosures.   Certain  items in  the
 2002 financial  statements have  been reclassified  to conform  to the  2003
 presentation.

     The results of  operations for the period  ended September 30, 2003  are
 not necessarily indicative of the operating  results to be expected for  the
 full year.

     On  January 27,  2003,  the Company  received  final approval  from  the
 Arizona Department of  Insurance ("AZDOI")  for the  acquisition of  Phoenix
 Indemnity Insurance Company  ("Phoenix") from Millers  American Group,  Inc.
 ("Millers"), effective as of January 1, 2003.  In consideration for Phoenix,
 the Company  retired $7.0  million of  a $14.85  million balance  on a  note
 receivable from Millers.  The Company had valued the note receivable on  its
 balance sheet  at its  cost  of $6.5  million.  The acquisition  of  Phoenix
 expanded the Company's geographic reach in non-standard automobile insurance
 from its traditional base in Texas to the states of New Mexico and Arizona.

     The results  of operations of Phoenix  are included in the  Consolidated
 Statement of Operations from the effective date of the acquisition  (January
 1, 2003).  The pro forma results as  if the Company had acquired Phoenix  at
 January 1, 2002 are as follows ($ in thousands, except per share amounts):

                                          Three Months        Nine Months
                                             Ended               Ended
                                       September 30, 2002  September 30, 2002
                                       ------------------  ------------------

    Revenues                               $   10,417          $   30,115

    Loss before cumulative effect
      of change in accounting principle    $     (282)         $     (655)

    Net Loss                               $     (282)         $   (2,349)

    Basic loss per share                   $    (0.03)         $    (0.21)

    Diluted loss per share                 $    (0.03)         $    (0.21)


     The  acquisition  of  Phoenix  was  accounted  for  in  accordance  with
 Statement of Financial Accounting Standards No. 141, "Business Combinations"
 ("SFAS 141").  This  statement requires that the  Company estimate the  fair
 value of assets acquired  and liabilities assumed by  the Company as of  the
 date of the acquisition.  In accordance  with  the application of SFAS  141,
 the Company  recognized  an extraordinary  gain  of $8.1  million  from  the
 acquisition of Phoenix in its Consolidated  Statement of Operations for  the
 nine months  ending September  30, 2003.  The  gain  is  calculated  as  the
 difference between the  fair value  of the net  assets of  Phoenix of  $14.6
 million and the  $6.5 million cost of the note receivable from Millers.  The
 allocation of values acquired in the acquisition of Phoenix was  preliminary
 as  of the date  of acquisition.  Estimates  involved in the application  of
 purchase accounting to the transaction may change over the next quarter.


 Recently Adopted Accounting Pronouncements

     In  December 2002,  the Financial  Accounting Standards  Board  ("FASB")
 issued Statement of Financial Accounting Standards No. 148, "Accounting  for
 Stock-Based Compensation - Transition  and  Disclosure" ("SFAS  148").   The
 Statement amends SFAS 123 to provide  alternative methods of transition  for
 voluntary change to  the fair value  based method of  accounting for  stock-
 based employee compensation.  In addition,  SFAS 148  amends the  disclosure
 requirements of SFAS 123 to require prominent disclosures in both annual and
 interim financial statements about the method of accounting for  stock-based
 employee compensation and the effect of the method used on reported results.
 SFAS 148  is  effective  for financial  statements for  fiscal years  ending
 after December 15, 2002.  Effective January 1, 2003, the Company adopted the
 prospective method provisions of SFAS 148.

     At  September  30,  2003,  the  Company  had  two  stock-based  employee
 compensation plans for employees and  a non-qualified plan for  non-employee
 directors, which are described more fully in Note 11 to the Form 10-KSB  for
 December 31, 2002.  Prior  to  2003, the  Company accounted for those  plans
 under the  recognition and  measurement provisions  of APB  Opinion No.  25,
 "Accounting for Stock Issued to Employees", and related Interpretations.  No
 stock-based employee compensation  cost  was  reflected in  2002 net income.
 Effective January 1, 2003,  the Company adopted  the fair value  recognition
 provisions  of  FASB   Statement  No.  123,   "Accounting  for   Stock-Based
 Compensation"  ("SFAS  123").  Under  the  prospective  method  of  adoption
 selected by the Company under the provisions of SFAS 148, compensation  cost
 is recognized for all  employee awards granted,  modified, or settled  after
 the beginning of  the fiscal year  in which the  recognition provisions  are
 first applied. Results for prior years have not been restated.

 The following table illustrates  the effect on net  income and earnings  per
 share if the fair value based method had been applied to all outstanding and
 unvested awards in each period.

                                                          Nine Months Ended
                                                            September 30
        (in thousands)                                    2003         2002
                                                        --------     --------
        Net income (loss) as reported                  $   9,174    $  (1,284)

        Add: Stock-based employee compensation
        expenses included in reported net income,
        net of related tax effects                            16            -

        Deduct:  Total stock-based employee
        compensation expense determined under fair
        value based method for all awards, net of
        related tax effects                                  (43)         (24)
                                                        --------     --------
        Pro forma net income (loss)                    $   9,147    $  (1,308)
                                                        ========     ========
        Earnings (loss) per share:
          Basic-as reported                            $    0.73    $   (0.12)
                                                        ========     ========
          Basic-pro forma                              $    0.73    $   (0.12)
                                                        ========     ========
          Diluted-as reported                          $    0.71    $   (0.12)
                                                        ========     ========
          Diluted-pro forma                            $    0.71    $   (0.12)
                                                        ========     ========

 Note 2 - Reinsurance

     American  Hallmark Insurance  Company of  Texas ("Hallmark"),  a  wholly
 owned subsidiary  of HFS,  is  involved in  the  assumption and  cession  of
 reinsurance from/to other companies.  The  Company remains obligated to  its
 policyholders in the event that the reinsurers do not meet their obligations
 under the reinsurance agreements.

     Under   its  reinsurance   arrangements,   the  Company   earns   ceding
 commissions based  on loss ratio experience  on the portion  of policies  it
 cedes.  The  Company  receives  a  provisional commission  as  policies  are
 produced as an  advance against the  later determination  of the  commission
 actually earned.  The provisional commission  is adjusted periodically on  a
 sliding scale based on expected loss ratios.

     The following  table shows earned  premiums ceded  and reinsurance  loss
 recoveries by period (in thousands):

                                     Three Months            Nine Months
                                         Ended                  Ended
                                     September 30,          September 30,
                                    2003       2002        2003        2002
                                   ------     ------      ------      ------
        Ceded earned premiums     $ 2,515    $ 7,986     $14,603     $ 24,388
        Reinsurance recoveries    $ 2,574    $ 5,634     $10,346     $ 15,909


 Note 3 - Intangible Assets

      When Hallmark,  American  Hallmark General  Agency  ("AHGA"),  Hallmark
 Finance Corporation ("HFC")  and Hallmark Claim  Service, Inc. ("HCS")  were
 purchased by HFS,  the excess cost  over the fair  value of  the net  assets
 acquired  was  recorded  as  goodwill.  Prior  to 2002,  this  goodwill  was
 amortized on  a straight-line  basis over  forty  years.   Other  intangible
 assets consisted of  a trade name,  a managing general  agent's license  and
 non-compete agreements, all of which were fully amortized.

     On  January  1,  2002,  the  Company  adopted  Statement  of   Financial
 Accounting Standards No.  142 ("SFAS 142"),  "Goodwill and Other  Intangible
 Assets".  SFAS  142 supersedes APB  17, "Intangible  Assets", and  primarily
 addresses the accounting  for goodwill and  intangible assets subsequent  to
 their initial  recognition.   SFAS 142  (1)  prohibits the  amortization  of
 goodwill and  indefinite-lived intangible  assets, (2)  requires testing  of
 goodwill and  indefinite-lived  intangible assets  on  an annual  basis  for
 impairment  (and  more  frequently  if  the   occurrence  of  an  event   or
 circumstance indicates an impairment), (3) requires that reporting units  be
 identified for  the purpose  of assessing  potential future  impairments  of
 goodwill and  (4)  removes the  forty-year  limitation on  the  amortization
 period of intangible assets that have finite lives.

     Pursuant to SFAS 142, the Company identified two components of goodwill
 and assigned  the carrying  value of  these components  into two  reporting
 units:   the  insurance company  reporting  unit  and the  finance  company
 reporting unit.  During  2002, the Company  completed the two  step process
 prescribed by  SFAS 142  for  testing for  impairment  and determining  the
 amount of impairment  loss related  to goodwill associated  with these  two
 reporting units.  Accordingly, during  2002, the Company recorded  a charge
 to earnings  that is  reported as  a  cumulative effect  of  the change  in
 accounting principle of $1.7 million to reflect the adjustment to goodwill.
 Since  goodwill is a  permanent difference, the  charge to earnings  has no
 tax impact.  This goodwill adjustment was made during the fourth quarter of
 2002, but is  required to  be reported  in the  first quarter  of 2002  for
 comparative purposes.


 Note 4 - Segment Information

     The  Company   pursues  its  business   activities  through   integrated
 insurance groups managing  non-standard personal  automobile insurance  (the
 "Personal Lines  Group") and  commercial  insurance (the  "Commercial  Lines
 Group").   The  members  of  the  Personal  Lines  Group  are  Hallmark,  an
 authorized Texas  property  and  casualty  insurance  company;  Phoenix,  an
 authorized Arizona property and casualty insurance company; AHGA, a managing
 general  agency;  HFC,  a  premium  finance  company;  and  HCS,  a   claims
 administrator.   Effective  December  1, 2002,  the  Company  purchased  the
 Commercial Lines Group.  The members  of the  Commercial Lines  Group are  a
 managing general  agency, Hallmark  General Agency,  Inc. ("HGA"),  formerly
 known as Millers  General Agency, and  a third  party claims  administrator,
 Effective Claims  Management,  Inc.  ("ECM"), formerly  known  as  Effective
 Litigation Management.

     The following is additional  business segment information for the  three
 and nine months ended September 30 (in thousands):

                                   Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
                                    2003        2002      2003        2002
                                   -------    -------    -------    -------
   Revenues
   --------
     Personal Lines Group         $ 11,320   $  6,061   $ 38,767   $ 17,087
     Commercial Lines Group          5,046          -     14,364          -
     Corporate                           -         19          -         19
                                   -------    -------    -------    -------
         Consolidated             $ 16,366   $  6,080   $ 53,131   $ 17,106
                                   =======    =======    =======    =======
   Pre-tax income
   --------------
     Personal Lines Group         $    526   $     66   $  2,609   $    351
     Commercial Lines Group            358          -        847          -
     Corporate                        (598)        45     (1,900)       271
                                   -------    -------    -------    -------
         Consolidated             $    286   $    111   $  1,556   $    622
                                   =======    =======    =======    =======

     The following is additional business segment information as of the
 following dates (in thousands):

                                   Sept. 30, 2003        Dec. 31, 2002
                                   --------------        -------------
               Assets
               ------
        Personal Lines Group         $   74,331            $   64,508
        Commercial Lines Group           13,823                11,839
        Corporate                         1,160                 7,414
                                      ---------             ---------
             Consolidated            $   89,314            $   83,761
                                      =========             =========


 Note 5 - Acquisition Costs

 Total amortized acquisition costs for the three months ending September  30,
 2003 and 2002  (in thousands) was  ($1,065) and  ($36), respectively.  Total
 amortized acquisition costs for  the nine months  ending September 30,  2003
 and 2002 (in thousands) was ($854) and ($486), respectively.


 Note 6 - Earnings per Share

 The Company has adopted the provisions of Statement of Financial  Accounting
 Standards No.  128   ("  SFAS No.  128"),  "Earnings Per  Share,"  requiring
 presentation of both basic and diluted earnings per share.

 The following table  sets forth basic  and diluted  weighted average  shares
 outstanding for the periods indicated (in thousands):

                                   Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
                                    2003        2002      2003        2002
                                   ------------------    ------------------

 Weighted average shares - basic    15,166     11,049     12,501     11,049
 Effect of dilutive securities         206         61        310         99
                                   ------------------    ------------------
 Weighted average shares -
   assuming dilution                15,372     11,110     12,811     11,148


 Note 7 - Comprehensive Income

 The  following  table  sets  forth  comprehensive  income  for  the  periods
 indicated (in thousands):

                                   Three Months Ended     Nine Months Ended
                                      September 30,         September 30,
                                    2003        2002      2003        2002
                                   -------    -------    -------    -------

 Net Income                       $    220   $     73   $  9,174   $ (1,284)

 Additional pension liability,
   net of tax                           (8)         -         (8)         -
 Unrealized gain/(loss) on
   available for sale securities,
   net of tax                          355          -        414          -
                                   -------    -------    -------    -------
 Other comprehensive income            347          -        406          -

                                   -------    -------    -------    -------
 Comprehensive income             $    567   $     73   $  9,580   $ (1,284)
                                   =======    =======    =======    =======


 Note 8 - Contingencies

 On May 30, 2003, Phoenix was served with  a suit from the Superior Court  of
 the State of  Arizona in  and for  the County  of Pima,  alleging breach  of
 contract and bad faith in connection with Phoenix's denial of coverage in an
 automobile accident. The plaintiffs have filed  an offer of judgment in  the
 amount of $15 million.  Phoenix believes the suit  is without merit and  has
 filed an answer denying each and every  allegation in the case. The suit  is
 still in pre-trial discovery stage. The Company intends to vigorously defend
 Phoenix against all claims asserted by the plaintiffs in the case.


 Note 9 - Treasury Stock

 Shares issued under employee benefit plans  reduced  treasury stock  by $0.5
 million  and reduced capital in excess  of par value by  the same amount  in
 2003.


 Item 2.  Management's Discussion and Analysis or Plan of Operation.

     Introduction.  HFS and its wholly owned subsidiaries (collectively,  the
 "Company")  engage  in the sale of property and casualty insurance products.
 The  Company's  business  involves  marketing,  underwriting   and   premium
 financing of non-standard automobile insurance primarily in Texas,  Arizona,
 and New  Mexico, marketing  of commercial  insurance in  Texas,  New Mexico,
 Idaho,  Oregon   and   Washington,   and  providing   third   party   claims
 administration and other insurance related services.

     On January 27, 2003, the Company received final approval from the  AZDOI
 for  the  acquisition  of  Phoenix, effective  as  of January  1, 2003.  The
 acquisition of  Phoenix  expanded the  Company's  geographic reach  in  non-
 standard automobile  insurance from  its traditional  base in  Texas to  the
 states of New Mexico and Arizona.

     The  Company   pursues  its  business   activities  through   integrated
 insurance groups managing  non-standard personal  automobile insurance  (the
 "Personal Lines  Group") and  commercial  insurance (the  "Commercial  Lines
 Group").

     The Personal Lines Group provides non-standard automobile liability  and
 physical damage insurance through  Hallmark and Phoenix  for drivers who  do
 not qualify for or cannot obtain standard-rate insurance. Prior to April  1,
 2003, Hallmark assumed 100% of the  premium and losses on business  produced
 by its  affiliated  managing general  agency,  AHGA, through  a  reinsurance
 arrangement with  an  unaffiliated  company,  State  &  County  Mutual  Fire
 Insurance  Company  ("State  &  County").   Under  a  separate  retrocession
 agreement,  Hallmark  retroceded  55%  of  the  premium  and  losses  to its
 principal reinsurer,  Dorinco  Reinsurance  Company  ("Dorinco").  Effective
 April, 1, 2003, Hallmark assumes and  retains 45% of the premium and  losses
 on business produced  by AHGA and  underwritten by State  & County.  Dorinco
 assumes its  55% share  of the  premiums and  losses directly  from State  &
 County.  AHGA manages the marketing of policies through independent  agents.
 HFC finances annual and six-month policy  premiums produced by AHGA  through
 its   premium  finance  program.   Effective  July  1,  2003,  the   Company
 discontinued  the  premium  finance  program  and  shifted  the focus  to  a
 six month direct  bill  program.  HCS  provides  claims adjustment, salvage,
 subrogation   recovery  and   litigation   services  to  Hallmark.   Phoenix
 underwrites non-standard auto insurance  produced by independent agents  and
 retains 100% of the premium and losses for the business it writes.

     On June 10, 2003, the  Governor of Texas signed legislation Senate  Bill
 14, which has  been described  as comprehensive  insurance reform  affecting
 homeowners and  personal  automobile  business.  With  respect  to  personal
 automobile insurance, the most significant provisions provide for additional
 rate regulation and limitations on the use of credit scoring.  With the  new
 law, broadened rulemaking authority  has been given  to the Commissioner  of
 Insurance.

     The  Company currently  writes  all  of its  Texas  personal  automobile
 business pursuant to a fronting arrangement with State & County, which is  a
 Texas county  mutual  insurance  company.   Although  the  new  reforms  are
 significant, the primary rating regulation provisions do not apply  directly
 to the Company  due to an  exemption that applies  to certain county  mutual
 insurance companies, including  State & County.   Additionally, the  Company
 does not currently  use credit  or insurance  scoring models.   Although  we
 currently do not believe the changes outlined in Senate Bill 14 will have  a
 material adverse affect on our operations,  the Commissioner has been  given
 broad rulemaking authority and we cannot determine the ultimate outcome  and
 the impact it will have on our business until certain rules are developed by
 the Commissioner.  Any rule changes that would affect our ability to  charge
 adequate rates for the non-standard automobile line of business in the State
 of Texas would have a material adverse effect on our operations.

     The Commercial  Lines Group, through  HGA, markets commercial  insurance
 policies through independent  agents.  HGA  produces policies  on behalf  of
 Clarendon  National  Insurance  Company  ("CNIC")  under  a  general  agency
 agreement where it receives a commission  based on the premium written  with
 CNIC. ECM  provides fee-based  claims  adjustment, salvage  and  subrogation
 recovery, and litigation services on behalf of CNIC and another unaffiliated
 third party.


 Financial Condition and Liquidity

     The Company's  sources of funds are  principally derived from  insurance
 related operations.  Major sources of funds from operations include premiums
 collected  (net  of  policy   cancellations  and  premiums  ceded),   ceding
 commissions,  premium  finance  service  charges  and  service  fees.  Other
 sources of funds are from financing and investment activities.

     On a consolidated basis, the Company's total cash, cash equivalents  and
 investments (excluding restricted cash) at  September 30, 2003 and  December
 31, 2002 were $38.6 million and  $25.2 million, respectively. The  Company's
 liquidity increased during  the first  nine months  of 2003  as compared  to
 December 31, 2002  principally as a  result of the  acquisition of  Phoenix,
 which increased cash and  investments by $24.0 million.   This is  partially
 offset by the deposit of $5.0 million  in cash and investments into a  trust
 account to secure  State &  County's credit  exposure from  the quota  share
 reinsurance treaty with Hallmark effective April 1, 2003.  The reduction  in
 Hallmark's net premium  volume this year  has also  adversely impacted  cash
 flow.

     Net cash  used by the  Company's consolidated  operating activities  was
 $20,000 for the  first nine  months of  2003 compared  to net  cash used  by
 operating activities of $1.4 million for the first nine months of 2002.  The
 acquisition of Phoenix effective January 1, 2003 and the acquisition of  the
 Commercial Lines Group effective December 1, 2002 played a significant  role
 in the Company's improved cash flow from operations.  Additionally, improved
 underwriting results have further contributed to the Company's improved cash
 flow from operations.

     Cash provided  by investing activities during  the first nine months  of
 2003  increased  $5.6 million as compared to  the first nine months of 2002.
 The acquisition of Phoenix  produced  a net cash  increase  of $6.9 million.
 The increase was additionally attributable  to purchases of debt  securities
 during the  first nine  months of  2002  of $10.6  million, an  increase  in
 premium finance notes repaid  over originated notes of  $7.2 million in  the
 first nine months of 2003 compared to the same period of 2002 and  increased
 maturities and  redemptions  of short-term  investments  and bonds  of  $3.2
 million in the  first nine months  of 2003 compared  to the  same period  of
 2002.  These  increases  were  partially offset  by the  purchase of  equity
 securities of $16.9 million in the first nine months of 2003 and an increase
 in restricted  cash  of  $5.4  million due  to  the  trust  account  deposit
 discussed above.

     Cash  used in  financing activities  increased by  $7.1 million  in  the
 first nine months of 2003 as  compared to the same period  of 2002 due to  a
 decrease in net advances from the  Company's premium finance lender and  the
 repayment of notes payable to Dorinco during the first nine months of  2003.
 The  Company also used part of the $10.0 million of proceeds from its rights
 offering to retire the $8.6 million note payable to Newcastle Partners, L.P.
 ("Newcastle") in September 2003.

     HFS  is dependent  on dividend  payments and  management fees  from  its
 insurance companies and  free cash flow  of its  non-insurance companies  to
 meet operating expenses  and debt obligations.   As of  September 30,  2003,
 cash and invested assets of HFS were $0.7 million.  Cash and invested assets
 of non-insurance subsidiaries were  $1.7 million as  of September 30,  2003.
 Property and casualty insurance  companies domiciled in  the State of  Texas
 are limited in the payment of dividends to their shareholders in any twelve-
 month period,  without  the  prior written  consent  of  the  Commission  of
 Insurance, to the  greater of statutory  net income for  the prior  calendar
 year or 10%  of its statutory  policyholders' surplus as  of the prior  year
 end. Dividends may only be paid from unassigned surplus funds.  During 2003,
 Hallmark's ordinary dividend capacity is $0.8  million.  Hallmark paid  $0.2
 million of dividends to HFS during the first nine months of 2003.   Phoenix,
 domiciled in Arizona, is limited in  the payment of dividends to the  lesser
 of 10% of prior year policyholder's  surplus or prior year's net  investment
 income,  without  prior  written  approval  from  the  AZDOI.  During  2003,
 Phoenix's ordinary dividend  capacity is $0.6  million.   Phoenix paid  $0.3
 million of dividends to HFS during the first nine months of 2003.

     The   Texas  Department   of  Insurance   ("TDI")  regulates   financial
 transactions between  Hallmark, HFS  and affiliated  companies.   Applicable
 regulations  require  TDI's  approval  of  management  and  expense  sharing
 contracts and similar  transactions.  Although  TDI has approved  Hallmark's
 payment of management fees to HFS and commissions to AHGA, since the  second
 half of  2000  management  has  elected  not to  pay  all  of  the  approved
 commissions or management fees.  Hallmark paid only nominal management  fees
 to HFS during the first nine months  of 2002 and $0.5 million in  management
 fees to HFS during the first nine months of 2003.

     The  AZDOI   regulates  financial  transactions   between  Phoenix   and
 affiliated companies.   Applicable regulations require  AZDOI's approval  of
 management and expense sharing contracts and similar transactions.  Although
 the AZDOI has approved  payments of management fees  to HFS, management  has
 elected to not pay a management fee to HFS in the first nine months of  2003
 in order to strengthen Phoenix's statutory surplus.

     At September 30,  2003, Hallmark reported statutory capital and  surplus
 (calculated  as  statutory  assets  less  statutory  liabilities)  of   $9.5
 million,  as  compared  to $8.4  million  at  December 31,  2002.   Hallmark
 reported statutory net income of $1.5  million during the first nine  months
 of 2003, paid  dividends of $0.2  million to HFS  and reported  a change  in
 deferred income taxes of ($0.2) million during the same period.   Hallmark's
 premium-to-surplus ratio as of September 30, 2003 was 2.01 to 1, as compared
 to 2.63 to 1  for the twelve months  ended December 31,  2002.  The  minimum
 statutory capital  and surplus  required for  Hallmark by  the TDI  is  $2.0
 million.  Hallmark's statutory capital and surplus as of September 30,  2003
 exceeded the minimum requirements by 373%.

     At September  30, 2003, Phoenix reported  statutory capital and  surplus
 of $11.0  million, up  from $10.1  million at  December 31,  2002.   Phoenix
 reported statutory net income of $0.6  million during the first nine  months
 of 2003, paid $0.3 million in dividends to HFS and reported other  statutory
 surplus adjustments of $0.6 million during the same period.  The adjustments
 to surplus consist of changes in  unrealized capital gains and losses,  non-
 admitted assets and provision for reinsurance.  Phoenix's premium-to-surplus
 ratio as of September 30, 2003 was 2.07 to 1.  The minimum statutory capital
 and surplus required for  Phoenix by the AZDOI  is $1.5 million.   Phoenix's
 statutory capital and surplus as of  September 30, 2003 exceeds the  minimum
 requirements by 633%.

     The  acquisitions  of  the  Commercial  Lines  Group  and  Phoenix  were
 financed by a  bridge loan  from Newcastle,  an affiliate  of the  Company's
 Chairman of the  Board of  Directors and  Chief Executive  Officer, Mark  E.
 Schwarz. The Company has retired this  debt with the proceeds from a  rights
 offering of its  common stock to  its shareholders in  the third quarter  of
 2003.


 Results of Operations

 Three Months Ending September 30, 2003 as compared to Three Months Ending
 September 30, 2002

     Income before tax, cumulative  effect of change in accounting  principle
 and extraordinary gain was $0.3 million for the quarter ended September  30,
 2003, compared to $0.1 million for the  same period in 2002.  The  effective
 tax  rate for the  current year  was reduced  this quarter to  32% from 34%,
 due primarily  to tax exempt interest  from municipal bonds held in Phoenix.
 This true up reduced the effective tax rate for the quarter ended  September
 30, 2003 to 27% as compared to 34% for the same period in 2002.  Net  income
 before cumulative effect of change in accounting principle and extraordinary
 gain was $0.2 million for the quarter ended September 30, 2003, compared  to
 $0.1 million for the quarter ended  September 30, 2002.  The improvement  in
 operating earnings  for the  third quarter  of 2003  compared to  the  third
 quarter of 2002 reflects  improved loss ratios of  the Personal Lines  Group
 (including the acquisition of Phoenix) and the acquisition of the Commercial
 Lines Group.

     The following is additional  business segment information for the  three
 months ended September 30 (in thousands):

                                      2003          2002
                                    --------      --------
           Revenues
           --------
    Personal Lines Group           $  11,320     $   6,061
    Commercial Lines Group             5,046             -
    Corporate                              -            19
                                    --------      --------
         Consolidated              $  16,366     $   6,080
                                    ========      ========


        Pre-tax Income
        --------------
    Personal Lines Group           $     526     $      66
    Commercial Lines Group               358             -
    Corporate                           (598)           45
                                    --------      --------
         Consolidated              $     286     $     111
                                    ========      ========


 Personal Lines Group

     Gross premiums written (prior  to reinsurance) for the third quarter  of
 2003 decreased 45%, and net  premiums written (after reinsurance)  increased
 34%, in relation to the same period in 2002.  The decrease in gross premiums
 written is principally due to the  change in the reinsurance structure  with
 State & County and Dorinco.  Effective April 1, 2003, the Company assumes  a
 45%  share  of  the  non-standard  auto   business  produced  by  AHGA   and
 underwritten by State & County instead of the 100% share it assumed prior to
 that date.  Also, effective April 1, 2003, Dorinco assumes its 55% share  of
 this business directly  from State &  County, where prior  to this date  the
 Company retroceded 55% of  the business to Dorinco.   The decrease in  gross
 premiums written  is  also  impacted by  the  cancellation  of  unprofitable
 agents, a  shift  in  marketing focus  from  annual  term  premium  financed
 policies to six  month term  direct bill  policies and  reduction in  policy
 counts caused  by increased  rates.   Partially offsetting  the decrease  in
 gross premiums written is  the acquisition of  Phoenix effective January  1,
 2003,  which   contributed  $5.4   million   of  gross   premiums   written.
 The increase in net premiums written is due primarily to the acquisition  of
 Phoenix in 2003, which contributed $4.8 million for the quarter.   Partially
 offsetting the net premium  written generated by Phoenix  is a $3.0  million
 decrease in net premium written by Hallmark for the third quarter of 2003 as
 compared to the same period in 2002, as discussed above.

     Revenue  for  the Personal  Lines  Group  increased 87%  for  the  third
 quarter of 2003 to $11.3  million from $6.1 million  for the same period  in
 2002.  The increase is primarily due to the acquisition of Phoenix effective
 January 1, 2003  which contributed  $5.3 million  in revenue  for the  third
 quarter of 2003.   Revenue from Phoenix includes  a $0.3 million  impairment
 charge of a  portion of its  investment portfolio.   These investments  were
 purchased prior to Phoenix being acquired by the Company.  Also contributing
 to the increase  is AHGA  commission revenue of  $0.9 million  from State  &
 County on business ceded to Dorinco  for policies effective after March  31,
 2003 due to the  new reinsurance structure.   Prior to  April 1, 2003,  this
 commission was  classified  as  a  ceding  commission  and  a  reduction  to
 commission expense.  Partially offsetting these increases was a $0.8 million
 decrease in net earned  premium for Hallmark for  the third quarter of  2003
 over the same period  in 2002, a $0.1  million decrease in Hallmark  premium
 finance charges and a $0.1 million decrease  in other income as a result  of
 the absence of agency fees following the sale of all four captive  insurance
 offices of the Company in the first quarter of 2003.

     Pre-tax income for the  Personal Lines Group increased $0.5 million  for
 the  third  quarter  of  2003 from $0.1 million for the same period in 2002.
 The  increase  is  derived  partially  from  the  acquisition   of  Phoenix,
 which contributed  $0.1  million  in  pre-tax  income for the quarter.  Also
 contributing is  an  improvement  in  Hallmark's  ratio  of  loss  and  loss
 adjustment expenses over net premiums earned ("loss ratio") to 57.1% for the
 third quarter of 2003  as compared to 69.8%  for the same  period  in  2002.
 Improved pricing in 2003 and the  termination of unprofitable agents in  the
 first  quarter  of  2003  caused the  loss  ratio improvement.  Underwriting
 income  (net  premiums  earned  less  loss  and  loss  adjustment  expenses)
 increased by $0.3 million for the third  quarter of 2003 as compared to  the
 same period in 2002.


 Commercial Lines Group

     Total revenue  for the Commercial  Lines Group of  $5.0 million for  the
 third quarter of 2003 is primarily comprised of $3.8 million of  commissions
 earned on policies produced by HGA  for CNIC and $1.1 million of  processing
 and service fees earned by ECM for  claims processing for CNIC.  These  were
 new sources of income for the Company in 2003 as a result of the acquisition
 of the Commercial Lines Group in December 2002.

     Pre-tax income for  the Commercial Lines Group  of $0.4 million for  the
 third quarter of 2003 is primarily  comprised of $5.0 million in revenue  as
 discussed  above  and  $4.6 million in  other operating costs  and expenses.
 These costs represent expenses associated with the production and  servicing
 of  insurance  policies  for  CNIC,  the  largest  component  of  which   is
 independent retail agent commissions.


 Corporate

      Corporate pre-tax loss was $0.6 million  for the third quarter of  2003
 as  compared  to  a nominal  amount  for the  same  period in  2002.   Other
 operating costs and expenses increased $0.4 million as a result of the shift
 in management structure from 2002 to 2003 that has increased salary  related
 expenses and other  overhead during the  third quarter of  2003, as well  as
 lower  management fees charged to Hallmark than in the same period in  2002.
 Interest expense increased  by $0.3 million  for the third  quarter 2003  as
 compared to  the same  period in  2002.   The  increase  is related  to  the
 interest expense on the  note payable to Newcastle,  which was retired  from
 the proceeds of the Company's rights  offering in September 2003.   Proceeds
 from this note payable were used  to acquire the Commercial Lines Group  and
 Phoenix.


 Nine Months Ending September 30, 2003 as compared to Nine Months Ending
 September 30, 2002

     Income before tax, cumulative  effect of change in accounting  principle
 and extraordinary gain was $1.6 million for the nine months ended  September
 30, 2003,  compared  to  $0.6 million  for  the  same period  in  2002.  The
 effective tax rate  for the current  year was reduced  to 32%  from the  34%
 reported  last  year, due primarily  to  tax exempt interest  from municipal
 bonds held in Phoenix.  Net income before  cumulative  effect of  change  in
 accounting principle and extraordinary  gain was $1.1 million  for the  nine
 months ended  September 30,  2003, compared  to $0.4  million for  the  same
 period in 2002.  The improvement in  operating earnings for  the first  nine
 months of  2003  compared to  2002  reflects  improved loss  ratios  of  the
 Personal  Lines  Group  (including  the  acquisition  of  Phoenix)  and  the
 acquisition of the Commercial Lines Group.

     The following is  additional business segment  information for the  nine
 months ended September 30 (in thousands):

                                      2003          2002
                                    --------      --------
           Revenues
           --------
     Personal Lines Group          $  38,767     $  17,087
     Commercial Lines Group           14,364             -
     Corporate                             -            19
                                    --------      --------
          Consolidated             $  53,131     $  17,106
                                    ========      ========

          Pre-tax Income
          --------------
     Personal Lines Group          $   2,609     $     351
     Commercial Lines Group              847             -
     Corporate                        (1,900)          271
                                    --------      --------
          Consolidated             $   1,556     $     622
                                    ========      ========


 Personal Lines Group

     Gross premiums written (prior to reinsurance) for the first nine  months
 of 2003 decreased 3%, and net premiums written (after reinsurance) increased
 91%, in relation to the same period in 2002.  The decrease in gross premiums
 written is principally due to the  change in the reinsurance structure  with
 State  &  County and Dorinco.  Effective April 1, 2003, the Company  assumes
 a  45% share  of  the  non-standard  auto  business  produced  by  AHGA  and
 underwritten by State & County instead of the 100% share it assumed prior to
 that date.  Also, effective April 1, 2003, Dorinco assumes its 55% share  of
 this business directly  from  State & County, where prior  to this date  the
 Company retroceded 55%  of the business  to Dorinco. The  decrease in  gross
 premiums written  is  also  impacted by  the  cancellation  of  unprofitable
 agents, a  shift  in  marketing focus  from  annual  term  premium  financed
 policies to six  month term  direct bill  policies and  reduction in  policy
 counts caused  by increased  rates.   Partially offsetting  the decrease  in
 gross premiums written is  the acquisition of  Phoenix effective January  1,
 2003,  which  contributed  $17.8 million  of  gross  premiums  written.  The
 increase in net  premiums written  is due  primarily to  the acquisition  of
 Phoenix in 2003, which contributed $17.0  million for the first nine  months
 of 2003. Partially offsetting the net  premium written generated by  Phoenix
 is a $3.0 million decrease in net premium written by Hallmark for the  first
 nine months of 2003  as compared to  the same period  in 2002, as  discussed
 above.

     Total revenue for the Personal Lines Group increased 127% for the  first
 nine months of 2003 to $38.8 million from $17.1 million for the same  period
 in 2002.   The  increase is  due  primarily to  the acquisition  of  Phoenix
 effective January 1, 2003,  which contributed $18.4  million in revenue  for
 the  first  nine  months  of  2003.  Revenue from  Phoenix  includes a  $0.3
 million impairment charge  of a portion  of its investment portfolio.  These
 investments were  purchased  prior to Phoenix being acquired by the Company.
 Also contributing to the increase is AHGA commission revenue of $1.6 million
 from State &  County on  business ceded  to Dorinco  for policies  effective
 after March 31, 2003 due to the  new reinsurance structure.  Prior to  April
 1, 2003, this commission was classified as ceding commission and a reduction
 to commission expense.  Also contributing is a $1.9 million increase in  net
 earned premium for Hallmark for the first nine months of 2003 over the  same
 period in 2002.  The  increase in net earned  premiums is due to  Hallmark's
 net written premium trending  upwards in 2002 through  the first quarter  of
 2003. The  increase in  net earned  premium is  partially offset  by a  $0.2
 million  decrease  in processing and service fees  for the first nine months
 of 2003 as  compared  to  the  same  period in  2002.  This is  due  to  the
 discontinuation of  an  unaffiliated  managing  general  agency  program  in
 January 2003.

     Pre-tax income for the  Personal Lines Group increased $2.2 million  for
 the first nine months of  2003 to $2.6 million  as compared to $0.4  million
 for the same period  in 2002.   The increase is  derived partially from  the
 acquisition of Phoenix, which  contributed $0.9 million  for the first  nine
 months of 2003.   Also  contributing is  an improvement  in Hallmark's  loss
 ratio to 66.5% for the first  nine months of 2003  as compared to 74.4%  the
 same period  in 2002.   Improved  pricing  in 2003  and the  termination  of
 unprofitable agents  in the  first quarter  of 2003  caused the  loss  ratio
 improvement.  Underwriting income  increased by $1.8  million for the  first
 nine months  of 2003  as compared  to  the same  period in  2002.  Partially
 offsetting these increases  to pre-tax income  is increased other  operating
 costs and expenses  of $1.9 million  for the first  nine months  of 2003  as
 compared to the same period in 2002.  This is due to $1.6 million of  ceding
 commission classified  as  revenue  due to  the  new  reinsurance  structure
 effective April 1, 2003 where this commission was classified as a  reduction
 to commission expense under prior agreements.


 Commercial Lines Group

     Total revenue for  the Commercial Lines Group  of $14.3 million for  the
 first  nine  months  of  2003  is  mostly  comprised  of  $10.8  million  of
 commissions earned on policies serviced by HGA for CNIC and $3.2 million  of
 processing and service fees earned by  ECM  for  claims processing for CNIC.
 These were new sources of income for the Company in 2003 as a result of  the
 acquisition of the Commercial Lines Group in December 2002.

     Pre-tax income for  the Commercial Lines Group  of $0.8 million for  the
 first nine  months of  2003 is  comprised  of $14.3 million  in  revenue  as
 discussed above  and $13.5  million  in other operating  costs and expenses.
 These costs represent expenses associated with the production and  servicing
 of  insurance  policies  for  CNIC,  the  largest  component  of  which   is
 independent retail agent commissions.


 Corporate

      Corporate pre-tax loss was  $1.9 million for the  first nine months  of
 2003 as compared to pre-tax  income of $0.3 million  for the same period  in
 2002.  Other operating costs and  expenses increased $1.6 million  primarily
 as a result of  legal and consulting fees  associated with acquisitions  and
 other corporate matters.   Additionally, the  shift in management  structure
 from 2002  to 2003  increased salary  related  expenses and  other  overhead
 during the first nine  months of 2003.   Interest expense increased by  $0.8
 million for the first nine months of 2003 as compared to the same period  in
 2002.  This increase is related to the interest expense on the note  payable
 to Newcastle, which was  retired from the proceeds  of the Company's  rights
 offering in September 2003.   Proceeds from this  note payable were used  to
 acquire the Commercial Lines Group and Phoenix.


 Item 3.  Controls and Procedures.

     The Chief Executive Officer  and Chief Financial Officer of the  Company
 have evaluated the  Company's disclosure  controls and  procedures and  have
 concluded that such controls and procedures  are effective as of the end  of
 the period covered by this report.   During the most recent fiscal  quarter,
 there have been no changes in the Company's internal controls over financial
 reporting that  have  materially  affected,  or  are  reasonably  likely  to
 materially affect, the Company's internal control over financial reporting.

 Risks Associated with Forward-Looking Statements Included in this Form
 10-QSB

     This Form 10-QSB contains certain forward-looking statements within  the
 meaning of Section 27A of the Securities Act of 1933 and Section 21E  of the
 Securities Exchange Act  of 1934, which  are intended to  be covered by  the
 safe  harbors  created  thereby.   These  statements include  the  plans and
 objectives  of  management  for  future  operations,  including  plans   and
 objectives relating to  future growth of  the Company's business  activities
 and availability of funds.   The forward-looking statements included  herein
 are  based  on  current  expectations   that  involve  numerous  risks   and
 uncertainties.  Assumptions relating to the foregoing involve judgments with
 respect to,  among other  things, future  economic, competitive  and  market
 conditions, regulatory framework, weather-related events and future business
 decisions, all of which  are difficult or  impossible to predict  accurately
 and many of  which are  beyond the  control of  the Company.   Although  the
 Company  believes  that  the  assumptions  underlying  the   forward-looking
 statements are reasonable, any of the  assumptions could be inaccurate  and,
 therefore, there can  be no  assurance that  the forward-looking  statements
 included in this Form  10-QSB will prove to  be accurate.   In light of  the
 significant  uncertainties  inherent   in  the  forward-looking   statements
 included herein, the inclusion of such information should not be regarded as
 a representation by the Company or any other person that the objectives  and
 plans of the Company will be achieved.


                                   PART II
                              OTHER INFORMATION

  Item 1.   Legal Proceedings.

             The  Company  is  engaged  in  legal  proceedings  in  the
             ordinary  course  of   business,  none  of  which,  either
             individually or  in the aggregate, are  believed likely to
             have  a  material   adverse  effect  on  the  consolidated
             financial  position  of  the  Company  or  the results  of
             operations,  in the  opinion of  management.   The various
             legal  proceedings to  which the  Company  is a  party are
             routine  in   nature  and  incidental   to  the  Company's
             business, with the exception of the following:

             On May 30,  2003, Phoenix was served with  a suit from the
             Superior  Court of  the State  of Arizona  in and  for the
             County of Pima, alleging  breach of contract and bad faith
             in  connection with  Phoenix's  denial of  coverage  in an
             automobile accident. The plaintiffs have filed an offer of
             judgment in  the amount  of $15  million. Phoenix believes
             the suit is without merit  and has filed an answer denying
             each and every  allegation in the case.  The suit is still
             in  pre-trial  discovery  stage.  The  Company intends  to
             vigorously defend Phoenix   against all claims asserted by
             the plaintiffs in the case.


  Item 2.    Changes in Securities.

             None.


  Item 3.    Defaults on Senior Securities.

             None.


  Item 4.    Submission of Matters to a Vote of Security-Holders.

             None.


  Item 5.    Other Information.

             None.


  Item 6.    Exhibits and Reports on Form 8-K.

    (a)      The exhibit listed in the Exhibit Index appearing on page 21 is
             filed herewith.


    (b)      The Company filed the following 8-K reports during the third
             quarter of 2003:

             Form  8-K filed  August  8,  2003  containing  a  press  release
             announcing financial results for the  second quarter ended  June
             30, 2003.

             Form  8-K filed September  5, 2003  containing a  press  release
             announcing the completion of the Company's rights offering.

<PAGE>

                                Exhibit Index
                                -------------

   Exhibit
   Number                        Description
   -------                       -----------
    10(a)        Technology Processing Services Agreement, effective
                 December 1, 2003 between Phoenix Indemnity Insurance
                 Company and CGI Information Systems & Management
                 Consultants, Inc.

    10(b)        Policy and Claims Processing Services Agreement,
                 effective September 1, 2003 between Phoenix Indemnity
                 Insurance Company and CGI Information Systems &
                 Management Consultants, Inc.

    10(c)        Processing Services Agreement, effective July 1, 2003
                 between Hallmark General Agency, Inc., Effective Claims
                 Management, Inc. and CGI Information Systems &
                 Management Consultants, Inc.

    31(a)        Certification of Chief Executive Officer required by
                 Rule 13a-14(a) or Rule 15d-14(a).

    31(b)        Certification of Chief Financial Officer required by
                 Rule 13a-14(a) or Rule 15d-14(a).

    32(a)        Certification of Chief Executive Officer Pursuant to 18
                 U.S.C. 1350 Enacted by Section 906 of the Sarbanes-Oxley
                 Act of 2002.

    32(b)        Certification of Chief Financial Officer Pursuant to 18
                 U.S.C. 1350 Enacted by Section 906 of the Sarbanes-Oxley
                 Act of 2002.



                                  SIGNATURES

 In accordance with the requirements of the Exchange Act, the registrant  has
 caused this report to be signed on its behalf by the undersigned,  thereunto
 duly authorized.

                      HALLMARK FINANCIAL SERVICES, INC.
                                 (Registrant)



 Date: November 14, 2003     /s/ Mark E. Schwarz
                             ---------------------------------------------
                             Mark E. Schwarz, Chairman (Chief
                             Executive Officer)


 Date: November 14, 2003     /s/ Scott K. Billings
                             ---------------------------------------------
                             Scott K. Billings, Executive Vice President
                             (Chief Financial Officer/Principal
                             Accounting Officer)