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, 2001

                         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.)

                        14651 Dallas Parkway, Suite 900

                  Dallas, Texas                            75240
     ---------------------------------------------       ---------
       (Address of principal executive offices)          (Zip Code)


 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
 (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 - 11,049,133 shares outstanding as of November 10, 2001.

<PAGE>

                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements


                   INDEX TO FINANCIAL STATEMENTS

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


 Consolidated Balance Sheets at September 30,                3
 2001 (unaudited) and December 31, 2000

 Consolidated Statements of Income (unaudited)               4
 for the three and nine months ended September

 Consolidated Statements of Cash Flows                       5
 (unaudited) for the nine months ended

 Notes to Consolidated Financial Statements                  6
 (unaudited)


<PAGE>

              HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                                   --------

                                                   September 30     December 31
                    ASSETS                             2001            2000
                                                    -----------     -----------
                                                    (Unaudited)
 Investments:
    Debt securities, held-to-maturity,
      at amortized cost                            $  2,292,806    $  7,243,373
    Equity securities, available-for-sale,
      at market value                                   143,901         145,302
    Short-term investments, at cost which
      approximates market value                      11,409,936       6,188,764
                                                    -----------     -----------
             Total investments                       13,846,643      13,577,439

 Cash and cash equivalents                            6,270,295       6,830,712
 Restricted cash                                      2,220,370       4,276,397
 Prepaid reinsurance premiums                        12,381,681      10,943,902
 Premium receivable from lender (net of
   allowance for doubtful accounts of
   $234,358 in 2001 and $168,648 in 2000)            14,648,446      13,544,985
 Premiums receivable                                    817,213         799,140
 Reinsurance recoverable                             19,311,091      19,212,172
 Deferred policy acquisition costs                    4,245,872       3,867,033
 Excess of cost over net assets acquired (net
   of accumulated amortization of $1,759,853
   in 2001 and $1,642,093 in 2000)                    4,470,361       4,588,121
 Current federal income taxes recoverable               514,172          95,232
 Deferred federal income taxes                          515,582         572,112
 Accrued investment income                               25,648         108,364
 Other assets                                         1,097,470         642,205
                                                    -----------     -----------
                                                   $ 80,364,844    $ 79,057,814
                                                     ==========      ==========
      LIABILITIES AND STOCKHOLDERS' EQUITY
 Liabilities:
    Notes payable                                  $ 12,941,560 $    13,032,999
    Unpaid losses and loss adjustment expenses       21,817,148      22,297,816
    Unearned premiums                                18,050,030      16,710,581
     Reinsurance balances payable                     4,289,231       3,341,437
     Deferred ceding commissions                      3,533,345       3,505,421
     Drafts outstanding                                 918,237       1,534,721
     Accrued ceding commission refund                 4,296,343       2,503,128
     Accounts payable and other accrued expenses      3,934,096       3,258,475
     Accrued litigation costs                                 -       1,385,840
                                                    -----------     -----------
          Total liabilities                          69,779,990      67,570,418
                                                    -----------     -----------
 Stockholders' equity
     Common stock, $.03 par value, authorized
       100,000,000 shares issued 11,855,610
       in 2001 and 2000                                 355,668         355,668
     Capital in excess of par value                  10,875,432      10,875,432
     Retained earnings                                  396,921       1,309,934
     Accumulated other comprehensive income                   -         (10,471)
     Treasury stock, 806,477 shares at cost          (1,043,167)     (1,043,167)
                                                    -----------     -----------
          Total stockholders' equity                 10,584,854      11,487,396
                                                    -----------     -----------
                                                   $ 80,364,844    $ 79,057,814
                                                    ===========     ===========

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

<PAGE>
<TABLE>

            HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS


                                                     Three Months Ended                    Nine Months Ended
                                                         September 30                        September 30
                                                -----------------------------    ---------------------------------
                                                    2001             2000               2001              2000
                                                ------------     ------------       ------------      ------------
 <S>                                           <C>              <C>                <C>               <C>
 Gross premiums written                        $   9,085,179    $  12,352,363      $  38,919,448     $  38,450,952
 Ceded premiums written                           (6,146,413)      (8,235,564)       (26,409,333)      (23,636,960)
                                                ------------     ------------       ------------      ------------
       Net premiums written                    $   2,938,766    $   4,116,799      $  12,510,115     $  14,813,992
                                                ============     ============       ============      ============
 Revenues:
    Gross premiums earned                         12,086,975       11,202,560         37,579,999        33,713,742
    Ceded premiums earned                         (8,184,806)      (7,390,701)       (24,971,554)      (20,323,870)
                                                ------------     ------------       ------------      ------------
       Net premiums earned                         3,902,169        3,811,859         12,608,445        13,389,872

    Investment income, net of expenses               274,514          293,178            816,954           811,525
    Finance charges                                  762,531          739,000          2,456,781         2,290,386
    Processing and service fees                      246,307          453,147            974,903         1,592,091
    Other income                                     184,330           76,579            290,617           243,338
                                                ------------     ------------       ------------      ------------
       Total revenues                              5,369,851        5,373,763         17,147,700        18,327,212
                                                ------------     ------------       ------------      ------------

 Benefits, losses and expenses:
    Losses and loss adjustment expenses           10,223,098       10,616,960         34,391,745        31,735,103
    Reinsurance recoveries                        (6,485,890)      (7,038,221)       (22,016,718)      (21,082,332)
                                                ------------     ------------       ------------      ------------
       Net losses and loss adjustment expenses     3,737,208        3,578,739         12,375,027        10,652,771

 Acquisition costs, net                             (260,861)         146,195           (350,914)          163,727
 Other acquisition and underwriting
  expenses (net of ceding commission of
  $7,175,891 in 2001 and $7,012,256 in 2000)         901,800          416,187          2,724,004         2,539,582
 Operating expenses                                  821,661          998,525          2,832,121         3,280,700
 Interest expense                                    265,998          300,225            815,519           804,972
 Amortization of intangible assets                    39,253           39,253            117,760           117,760
                                                ------------     ------------       ------------      ------------
         Total benefits, losses and expenses       5,505,059        5,479,124         18,513,517        17,559,512
                                                ------------     ------------       ------------      ------------
 Income (loss) from operations before
   federal income taxes                             (135,208)        (105,361)        (1,365,817)          767,700
 Federal income tax expense (benefit)                (31,225)         (23,154)          (452,804)          300,934
                                                ------------     ------------       ------------      ------------
 Net income (loss)                             $    (103,983)   $     (82,207)     $    (913,013)    $     466,766
                                                ============     ============       ============      ============

 Basic and diluted earnings (loss) per share   $       (0.01)   $       (0.01)     $       (0.08)    $        0.04
                                                ============     ============       ============      ============
 Common stock shares outstanding                  11,049,133       11,049,133         11,049,133        11,049,133
                                                ============     ============       ============      ============

                       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)
                                                          Nine Months Ended
                                                            September 30
                                                     -------------------------
                                                        2001           2000
                                                     ----------     ----------
 Cash flows from operating activities:
    Net income (loss)                               $  (913,013)   $   466,766

 Adjustments to reconcile net income (loss) to cash
    (used in) provided by operating activities:
       Depreciation and amortization expense            216,163        234,517
       Change in deferred federal income taxes           56,530       (149,331)
       Change in prepaid reinsurance premiums        (1,437,779)    (2,608,617)
       Change in premiums receivable                    (18,073)      (205,693)
       Change in deferred policy acquisition costs     (378,839)    (1,089,610)
       Change in deferred ceding commissions             27,924      1,253,337
       Change in unpaid losses and loss
         adjustment expenses                           (480,668)     3,162,014
       Change in unearned premiums                    1,339,449      4,032,735
       Change in reinsurance recoverable                (98,919)    (4,079,985)
       Change in reinsurance balances payable           947,794      1,820,648
       Change in current federal income
         tax payable/recoverable                       (418,940)       (17,406)
       Change in accrued ceding commission refund     1,793,215        402,198
       Change in litigation cost                     (1,385,840)             -
       Change in all other liabilities                   59,137      1,733,482
       Change in all other assets                      (265,482)      (141,229)
                                                     ----------     ----------
           Net cash (used in) provided
             by operating activities                   (957,341)     4,813,826
                                                     ----------     ----------
 Cash flows from investing activities:
    Purchases of property and equipment                (205,196)      (169,662)
    Premium finance notes originated                (39,337,287)   (29,426,827)
    Premium finance notes repaid                     38,233,826     25,103,207
    Change in restricted cash                         2,056,027        (27,000)
    Purchase of debt securities                               -     (3,601,030)
    Maturities and redemptions
     of investment securities                         4,962,165      1,503,624
    Purchase of short-term investments              (17,972,172)   (14,779,428)
    Maturities of short-term investments             12,751,000     14,500,000
                                                     ----------     ----------
       Net cash provided by (used in)
         investing activities                           488,363     (6,897,116)
                                                     ----------     ----------
 Cash flows from financing activities:
     Net advances from lender                           454,560      3,621,469
     Repayment of borrowings                           (545,999)      (397,299)
     Proceeds from common stock issued                        -            250
                                                     ----------     ----------
 Net cash (used in) provided by financing activities    (91,439)     3,224,420
                                                     ----------     ----------
 Increase (decrease) in cash and cash equivalents      (560,417)     1,141,130
 Cash and cash equivalents at beginning of period     6,830,712      5,786,069
                                                     ----------     ----------
 Cash and cash equivalents at end of period         $ 6,270,295    $ 6,927,199
                                                     ==========     ==========

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

<PAGE>

              HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES



 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 primarily of normal recurring
 adjustments, necessary to present fairly the financial position of  Hallmark
 Financial Services, Inc.  and subsidiaries (the  "Company") as of  September
 30, 2001 and the consolidated results  of operations and cash flows for  the
 periods presented.  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  ("GAAP") have  been condensed  or omitted.
 Reference is made to the Company's annual consolidated financial  statements
 for the  year  ended December  31,  2000  for a  description  of  accounting
 policies and certain other disclosures.   Certain items in the 2000  interim
 financial  statements  have  been  reclassified  to  conform  to  the   2001
 presentation.

     The results of  operations for the period  ended September 30, 2001  are
 not necessarily indicative of the operating  results to be expected  for the
 full year.

     In March 2000, the Financial Accounting Standards Board ("FASB")  issued
 FASB Interpretation No. 44,  "Accounting for Certain Transactions  Involving
 Stock Compensation - an  interpretation  of  APB Opinion No. 25" ("FIN 44").
 The Company adopted FIN 44 on a  prospective basis  effective  July 1, 2000.
 The adoption of  FIN 44  did not  have a  material impact  on the  Company's
 results of operations, liquidity or financial position.

     In September  2000, the FASB  issued Statement  of Financial  Accounting
 Standards ("SFAS")  No.  140, "Accounting  for  Transfers and  Servicing  of
 Financial Assets and  Extinguishments of Liabilities,"  which replaced  SFAS
 No. 125 of the same name.   The Statement provides consistent standards  for
 distinguishing transfers of financial assets  that are sales from  transfers
 that are secured borrowings.  The  Statement is effective for transfers  and
 servicing of financial assets  and extinguishments of liabilities  occurring
 after March 31, 2001.  The  Statement is also effective for recognition  and
 reclassification   of   collateral   and   for   disclosures   relating   to
 securitization transactions  and collateral  for fiscal  years ending  after
 December 15,  2000.   Disclosures  for  prior years'  comparative  financial
 statements are not required.  The statement's requirements had no impact  on
 the Company's results of operation and financial position.

     In June  2001, the  FASB issued  SFAS No.  141, "Business  Combinations"
 ("SFAS 141").   This  statement supercedes  APB  Opinion No.  16,  "Business
 Combinations" and  FASB Statement  No.  38, "Accounting  for  Preacquisition
 Contingencies of  Purchased  Enterprises"  and  establishes  accounting  and
 reporting standards for  business  combinations.  Under  the statement,  all
 business combinations in the scope of the statement are to be accounted  for
 using one method,  the purchase  method.  The  provisions  of the  statement
 apply to all business  combinations initiated after June  30, 2001.  As  the
 Company has not been a part of any business combination initiated after  the
 effective date, the Company's financial statements are not affected by  SFAS
 141.

     In  June  2001, the  FASB  issued  SFAS No.  142,  "Goodwill  and  Other
 Intangible Assets".    SFAS No.  142  will  be effective  for  fiscal  years
 beginning after December 15, 2001 and will require 1) intangible assets  (as
 defined in SFAS No. 141) to be reclassified into goodwill, 2) the ceasing of
 amortization of goodwill, and 3) the  testing of goodwill for impairment  at
 transition and on an annual basis  (or more frequently if the occurrence  of
 an event or circumstance indicates an  impairment).  The Company will  adopt
 SFAS No. 142 on January 1,  2002.  The Company  has not yet determined  what
 the impact of SFAS No.  142 will be on  the Company's results of  operations
 and financial position.

     On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for  Asset
 Retirement Obligations".   SFAS No. 143  requires that the  fair value of  a
 liability for an asset retirement obligation be recognized in the period  in
 which  it  is incurred if a  reasonable estimate of fair  value can be made.
 The associated  asset  retirement  costs are  capitalized  as  part  of  the
 carrying amount of the long-lived asset.  SFAS No. 143 will be effective for
 financial statements issued for fiscal years beginning after June 15,  2002.
  An entity shall recognize the cumulative effect of adoption of SFAS No. 143
 as a change in accounting principle.  The Company has not determined whether
 SFAS No. 1432 will have an impact on the Company's results of operations and
 financial position.

     On October 3,  2001, the FASB issued SFAS  No. 144, "Accounting for  the
 Impairment or Disposal of Long-Lived Assets".  SFAS No. 144 supersedes  SFAS
 No. 121 by  removing goodwill  from its  scope, by  defining a  probability-
 weighted cash  flow estimation  approach and  establishes a  "primary-asset"
 approach to determine the cash flow estimation period for a group of assets.
 SFAS  No. 144 will be effective for fiscal years beginning after 2001.   The
 Company has not determined whether SFAS No.  143 will have an impact on  the
 Company's results of operations and financial position.


 Note 2 - Reinsurance

     The Company  is involved in  the assumption and  cession of  reinsurance
 from/to other companies.  The Company remains obligated to its policyholders
 in the  event  that reinsurers  do  not  meet their  obligations  under  the
 reinsurance agreements.

     Effective  March  1,  1992,  the  Company  entered  into  a  reinsurance
 arrangement with  State &  County Mutual  Fire Insurance  Company ("State  &
 County"), an unaffiliated company,  to assume 100%  of the nonstandard  auto
 business produced by the  Company and underwritten by  State & County.   The
 arrangement is supplemented by  a separate retrocession agreement  effective
 July  1,  2000   between  the  Company   and  Dorinco  Reinsurance   Company
 ("Dorinco"). Under  the agreement,  the Company  currently retains  30%  and
 cedes 70% of the risk to Dorinco.

     Effective  April 1,  2001,  the Company's  reinsurance  agreements  with
 Dorinco were  amended  to include  a  loss corridor  provision  whereby  the
 Company retains 100% of losses between a  loss ratio corridor of 65% to  77%
 on policies effective April 1, 2001.  This corridor increased to 65% to  80%
 effective July  1,  2001  on  policies  effective  after  that  date.    The
 provisional ceding commission rate was decreased from 41% to 34% on April 1,
 2001 and further decreased to 31% on July 1, 2001.  Further, Dorinco and the
 Company have executed  a letter of  agreement effective July  1, 2001,  that
 among  other  things,  imposes  on  the  Company  additional  financial  and
 operational covenants  under the  Dorinco reinsurance  agreements,  provides
 remedies for  the  breach of  such  covenants (including  additional surplus
 requirements, rate  increases  and  cancellation  provisions) and  grants to
 Dorinco certain options to maintain or increase the level of its reinsurance
 of Hallmark policies.  Effective October 1, 2001, Dorinco extended the  term
 of the existing reinsurance agreement from June, 2001 to September 30, 2002.


 Note 3 - Commitments and Contingencies

     In March  1997, a jury  returned a verdict  against the  Company and  in
 favor of a  former director  and officer  of the  Company in  the amount  of
 approximately  $517,000   on  the   basis  of   contractual  and   statutory
 indemnification claims.   The  court  subsequently granted  the  plaintiff's
 motion for  attorneys'  fees  of  approximately  $271,000,  court  costs  of
 approximately $39,000  and  pre-judgment  and  post-judgment  interest,  and
 rendered final judgment on the verdict.  The Company believed the outcome in
 this case  was  both  legally  and  factually  incorrect  and  appealed  the
 judgment.   During  the  fourth  quarter  of  1997,  the  Company  deposited
 $1,248,758 into the registry of the court in order to stay execution on  the
 judgment pending  the  result  of  such appeals.    The  amount  on  deposit
 (including interest) with the  court of $1,457,311 as  of December 31,  2000
 was included as restricted cash in  the accompanying balance sheet.   During
 February 2001,  the court  ruled  against the  Company  in its  appeal,  and
 $1,388,627 of  the funds  on deposit  with the  court was  disbursed to  the
 plaintiff during March 2001.  The remaining funds on deposit with the  court
 were refunded  to  the  Company.   There  was  no financial  impact  on  the
 Company's earnings in 2001.

<PAGE>


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

     Introduction.  Hallmark Financial Services, Inc. ("HFS") and its  wholly
 owned subsidiaries (collectively referred to herein as the "Company") engage
 in  the  sale  of property and  casualty insurance products.  The  Company's
 business primarily involves marketing, underwriting and premium financing of
 non-standard automobile insurance,  as well  as claims  adjusting and  other
 insurance related services.

     The  Company  pursues its  business  activities  through  an  integrated
 insurance group (collectively, the "Insurance  Group") the members of  which
 are an authorized  Texas property and  casualty insurance company,  American
 Hallmark Insurance Company of Texas ("Hallmark"); a managing general agency,
 American Hallmark General  Agency, Inc.  ("AHGA"); a  network of  affiliated
 insurance agencies  known  as  the  American  Hallmark  Agencies  ("Hallmark
 Agencies"); a premium finance company, Hallmark Finance Corporation ("HFC");
 and a claims  handling and adjustment  firm, Hallmark  Claims Service,  Inc.
 ("HCS").  The Company operates only in Texas.

     Hallmark provides non-standard automobile liability and physical  damage
 insurance  through  reinsurance   arrangements  with  several   unaffiliated
 companies.  Through arrangements with State  & County Mutual Fire  Insurance
 Company ("State & County"), Hallmark provides insurance primarily for  high-
 risk  drivers  who  do  not  qualify  for  standard-rate  insurance.   Under
 supplementary  quota-share  reinsurance  agreement,  Hallmark,  upon  mutual
 agreement with its  current reinsurer,  may elect  on a  quarterly basis  to
 retain 30% to 45% of the risk  while ceding the remaining percentage to  its
 reinsurer.  The Company's  principal reinsurer, Dorinco Reinsurance  Company
 ("Dorinco"), currently assumes 70% of  Hallmark's risk. HFC finances  annual
 and  six-month  policy premiums  through its premium finance  program.  AHGA
 manages the  marketing of  Hallmark policies  through  a network  of  retail
 insurance agencies which operate under the American Hallmark Agencies  name,
 and through independent agents operating under their own  respective  names.
 Additionally, AHGA  provides premium  processing, underwriting,  reinsurance
 accounting and cash  management for unaffiliated  managing general  agencies
 ("MGAs").  HCS  provides fee-based claims  adjustment, salvage,  subrogation
 recovery and litigation services to Hallmark and unaffiliated MGAs.

 Reinsurance Term Changes

     Effective  April 1,  2001,  the Company's  reinsurance  agreements  with
 Dorinco were  amended  to include  a  loss corridor  provision  whereby  the
 Company retains 100% of losses between a  loss ratio corridor of 65% to  77%
 on policies effective April 1, 2001.  This corridor increased to 65% to  80%
 effective July  1,  2001  on  policies  effective  after  that  date.    The
 provisional ceding commission rate was decreased from 41% to 34% on April 1,
 2001 and further decreased to 31% on July 1, 2001.  Further, Dorinco and the
 Company have executed  a letter of  agreement effective July  1, 2001,  that
 among  other  things,  imposes  on  the  Company  additional  financial  and
 operational covenants  under the  Dorinco reinsurance  agreements,  provides
 remedies for  the  breach of  such  covenants (including  additional surplus
 requirements, rate  increases  and  cancellation  provisions)  and grants to
 Dorinco certain options to maintain or increase the level of its reinsurance
 of Hallmark policies.  Effective October 1, 2001, Dorinco extended the  term
 of  the  existing  reinsurance agreement from June 30, 2002 to September 30,
 2002.


 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, processing  fees,  and  premium  finance  service  fees.  Other
 sources of funds are from financing and investment activities.

     On a  consolidated basis,  the Company's  liquidity remained  relatively
 the same during the first nine months of 2001 as compared to the same period
 of  2000.  The  Company's  total  cash,  cash  equivalents  and  investments
 (excluding restricted  cash  of $2.2  million)  at September  30,  2001  and
 December 31, 2000 were $20.1 million and $20.4 million, respectively.

     Net cash  used by operating  activities was  approximately $1.0  million
 for the nine months ended September  30, 2001 compared to net cash  provided
 by operating activities of $4.8 million for the nine months ended  September
 30, 2000.   This  net  change of  approximately  $5.8 million  is  primarily
 attributable to several  factors.   During the  first quarter  of 2001,  the
 Company exhausted  its  appeals of  a  1997 lawsuit  and  subsequently  paid
 approximately $1.4 million of  restricted funds which had  been held by  the
 court  for  several  years  (See  Note  3  to  the  Consolidated   Financial
 Statements).  The  addition of a  loss corridor provision  in the  Company's
 reinsurance  agreement  effective  April  1,  2001,  increased  the  adverse
 financial impact of the weather-related losses as well as a portion of other
 second and third  quarter losses.   Further,  during the  second quarter  of
 2001, weather-related claims significantly impacted losses.

      Cash provided by investing activities during  the first nine months  of
 2001 increased  approximately $7.4  million as  compared to  the first  nine
 months of  2000.   Repayments of  premium finance  notes have  exceeded  the
 origination of new premium  finance notes by  $3.2 million, thus  increasing
 cash available  from investing  activities.   Additionally, the  release  of
 funds during the first quarter of 2001 previously deposited in the  registry
 of the court and  higher proceeds from maturities  and calls of  investments
 account for  the remainder  of the  increased funds  generated by  investing
 activities.

     Cash provided by  financing activities decreased by $3.3 million  during
 the first nine months of 2001 as compared  to the first nine months of  2000
 primarily due  to a  decrease in  net advances  from the  Company's  premium
 finance lender.   As repayment of  premium finance notes  have exceeded  new
 premium finance  note originations,  the Company  has not  required as  much
 financing from the lender in 2001.   Additionally, during 2001, the  Company
 began funding a portion of the premium finance notes internally.

     A  substantial  portion  of the  Company's  liquid  assets  is  held  by
 Hallmark and  is not  available  for general  corporate  purposes.   Of  the
 Company's consolidated liquid assets of $20.1 million at September 30, 2001,
 $1.6 million  (as compared to $1.4 million at December 31, 2000)  represents
 non-restricted cash.  Since  state insurance regulations restrict  financial
 transactions between an insurance company and its affiliates, HFS is limited
 in its ability to use Hallmark  funds for its own working capital  purposes.
 Furthermore, dividends  and loans  by Hallmark  to  HFS are  restricted  and
 subject to Texas Department of Insurance ("TDI") approval.  Although TDI has
 sanctioned the payment of management  fees, commissions and claims  handling
 fees by  Hallmark to  HFS and  affiliates, since  the second  half of  2000,
 Hallmark has  chosen not  to pay  all of  the commissions  allowed to  AHGA.
 Additionally, during the first  nine months of 2001,  Hallmark has not  paid
 any  management fees to HFS.  These steps were taken to preserve  Hallmark's
 surplus principally to accommodate increased premium volume during the first
 half of 2001.  During the first nine months of  2000, Hallmark paid $150,000
 of  management  fees  to  HFS.  Management anticipates that Hallmark may pay
 nominal management fees during the  fourth quarter of 2001.  The Company has
 never received a dividend from  Hallmark,  and there is no immediate plan to
 pay a dividend.

      During the first nine months of  2001, the amount of funding  available
 to fund premium finance notes under  the secured financing arrangement  with
 the unaffiliated  third party  was increased  to  $12.5 million  from  $11.0
 million.   As of  September 30,  2001,  HFC had  an outstanding  balance  on
 advances under the  financing arrangement of  $12.1 million  at an  interest
 rate of  6.5%.   Under the  financing  arrangement, the  maximum  additional
 advances available to HFC at September 30, 2001 were $0.4 million.

      As of September 30, 2001, the  Company had $1.9 million outstanding  on
 notes payable under a loan agreement  with Dorinco.  For the fiscal  quarter
 ended September 30, 2001, Dorinco  waived compliance with certain  financial
 covenants  of  the  loan  agreement which were adversely impacted by changes
 to  the  Dorinco reinsurance  treaties  and other factors affecting the loss
 ratio of the  Company.  (See "Reinsurance  Term  Changes"  and "Results   of
 Operations".)

      Accrued ceding commission refund represents the difference between  the
 provisional commission allowed  by the reinsurer  and the actual  commission
 earned by Hallmark  based upon contractually  agreed upon  loss ratios.  The
 $1.8 million increase in the balance since year-end 2000 is a result of  the
 provisional commission  rate being  significantly greater  than  the  actual
 commission rate currently earned by Hallmark.  A substantial portion of this
 refund will be  paid during the first  quarter of 2002 from  Hallmark's cash
 and/or cash equivalents.

     Commissions from  the Company's  annual policy  program for  independent
 agents represent  a  source of  unrestricted  liquidity when  annual  policy
 production is level or increasing  from  the most  recent previous quarters.
 Under this  program, AHGA  offers independent  agents the  ability to  write
 annual policies and six-month policies, but commissions to substantially all
 independent agents  are  paid  monthly  on  an  "earned"  basis.    However,
 consistent with customary industry practice, Hallmark pays total commissions
 up-front  to AHGA  based  on the entire  annual/six-months premiums written.
 Independent agent production of annual policies was $22.1 million during the
 first nine months of 2001 as compared to $18.7 million during the first nine
 months of 2000.  During  the first nine months  of 2001, AHGA received  $3.3
 million in  commissions related  to this  program  from Hallmark,  and  paid
 earned  commissions  of  approximately $3.2  million to  independent agents.
 During the  first  nine  months  of 2000,  AHGA  received  $3.6  million  in
 commissions  related  to  this  program  from  Hallmark,  and  paid   earned
 commissions of $2.4 million to independent agents.  As noted above, Hallmark
 did  not  pay  all of the  commissions allowed to  AHGA as evidenced  by the
 decreased commissions paid to  AHGA by Hallmark during  2001 as compared  to
 commissions paid to  AHGA during  2000 despite  a $3.4  million increase  in
 annual policies during 2001.  This was done to preserve Hallmark's surplus.

     Ceding commission  income represents a  significant source  of funds  to
 the Company.  A portion of  ceding commission income and policy  acquisition
 costs is deferred  and recognized as  income and  expense, respectively,  as
 related  net  premiums  are  earned.    Deferred  ceding  commission  income
 increased slightly from December 31, 2000 to September 30, 2001.    Deferred
 policy acquisition costs  as of September  30, 2001 increased  approximately
 $0.4 million as compared to December  31, 2000.  The increase in  Hallmark's
 core State &  County annual premium  volume contributed to  the increase  in
 both deferred  ceding  commission  income and  deferred  policy  acquisition
 costs. However, the decrease  in the minimum ceding  commission rate to  26%
 from 31% more than offset the  impact of increased annual premium volume  in
 relation to the deferred ceding commission income.

     Premium receivable from lender  increased $1.1 million during 2001 as  a
 result of increased annual policy production during the first nine months of
 2001 as  compared to  the last  nine months  of 2000.   Prepaid  reinsurance
 premiums  and  unearned  premiums  increased  as  expected  in  relation  to
 increased premium writings.   Accounts  payable and  other accrued  expenses
 increased as a  result of increased  commissions due  to independent  agents
 under the earned commission program.

     At  September  30, 2001,  Hallmark's  statutory capital and  surplus was
 $6.2 million, which reflects a slight decrease from the balance reported  at
 December 31, 2000.   While Hallmark experienced a statutory net loss of $0.7
 million during  the first  nine months  of 2001,  surplus did  not  decrease
 accordingly.  Effective  January 1, 2001,  TDI adopted  the Codification  of
 Statutory Accounting  Principles ("Codification")  guidance, which  replaces
 the National  Association of  Insurance  Commissioners primary  guidance  on
 statutory accounting.  As  a result of  the implementation of  Codification,
 Hallmark recognized  a deferred  tax asset  in the  amount of  $0.5  million
 during the first nine months of 2001.  In accordance with Codification,  the
 deferred tax asset was established and  a corresponding increase to  surplus
 was   made.   The  deferred  tax  adjustment  required  by  Codification  is
 recognized by  TDI  as  an increase  to  surplus;  however,  certain  rating
 agencies, such as A.M. Best, do not recognize the adjustment as an  increase
 to surplus.  Under Codification, Hallmark's premium to surplus ratio for the
 twelve months ended September 30, 2001 was 2.71 to 1 as compared to 2.98  to
 1 at  December 31,  2000.   Hallmark's  premium  to surplus  ratio,  without
 Codification, for the twelve months ended September 30, 2001 was 2.93 to  1.
 Management  does not presently expect Hallmark to require additional capital
 during 2001 to fund existing operations.

     The  Company  provides   on-going  program  administration  and   claims
 handling services for one unaffiliated MGA  and has three similar  contracts
 in run-off. The Company will continue to perform functions as defined in the
 respective contracts during the run-off periods.   For the one  unaffiliated
 MGA program which continues to produce new business, the Company, as program
 administrator, performs  certain  administrative functions,  including  cash
 management, underwriting  and rate-setting  reviews, underwriting,    policy
 processing and claims handling.   Hallmark assumes a  20% pro-rata share  of
 the business  produced  under this  unaffiliated  MGA program,  and  Dorinco
 assumes the remainder.

      Management is continuing  to investigate opportunities  to enhance  and
 expand its operations.  While additional capital or strategic alliances  may
 be required  to  fund  future company  expansion,  operational  enhancements
 through increased information technology capabilities are in progress.   The
 first phase  is designed  to enhance  Company  and agency  relationships  by
 improving content  and  timeliness  of  information  to  support  agents  in
 servicing  their  customers.     Full  implementation   of  this   web-based
 information system  (named e-Integrity  and referred  to as  the  "Integrity
 System")  was  initiated  and completed during  the second quarter  of 2001.
 Additional enhancements not in  the scope of the  original first phase  have
 been developed and fully implemented during the second and third quarters of
 2001.  The  second phase of the Integrity  System  is composed of two parts.
 Part One  relates  to  electronic  reporting  capabilities  for  agents  and
 enhanced endorsement  processing,  and Part  Two  encompasses  point-of-sale
 technology to support agents in more promptly and efficiently producing  new
 business, as well  as to  improve the  quality and  timeliness of  servicing
 existing policyholders. Part One will alleviate certain manual processes and
 result in  daily e-mailing  of time-sensitive  information to  agents,  thus
 decreasing labor,  supplies and  postage costs  and increasing  the  agent's
 opportunity to increase policyholder retention.   This phase is expected  to
 be completed during  the first  quarter of  2002.   Part Two  (point-of-sale
 technology) is targeted to commence in Spring 2002 with full roll-out to  be
 completed by year-end 2002.

 Results of Operations

      Gross premiums  written (prior  to reinsurance)  for the  three  months
 ended September 30,  2001 decreased 26%  as compared to  the same period  of
 2000, while gross premium  written for the nine  months ended September  30,
 2001 increased slightly over the same period of 2000.  Net premiums  written
 (after reinsurance) for the three and  nine months ended September 30,  2001
 decreased approximately 29% and 16%, respectively, over the same periods  in
 2000. While gross core State & County premium volume increased approximately
 7% for the nine  months ended September 30,  2001, this volume increase  was
 offset by a  decrease in premium  volume from assumed  business produced  by
 unaffiliated MGAs as compared to the prior year.  Premium volume during  the
 third quarter of  2001 decreased as  compared to the  first two  quarters of
 2001 as well as the third quarter of 2000.  This third quarter decrease  was
 principally due to (1)  a one-third reduction in  the agent base  during the
 last  12 months a significant portion  of which ran-off  early in the  third
 quarter  of 2001  (2)  successive rate  increases in June and July 2001, and
 (3) temporary disruption of insurance purchasing patterns as a result of the
 terrorist attacks of September  11th.  The disparity between gross  premiums
 written and net premiums written is due to the combined effect of a decrease
 in policy fees retained by  the Company  (30%  during  the first nine months
 of  2001  as compared to 100%  during  the first six months of 2000) and the
 decrease in assumed business produced by the unaffiliated MGAs.

     Premiums earned  (prior to reinsurance)  for the three  and nine  months
 ended September 30, 2001 increased  approximately 8% and 12%,  respectively,
 as compared  to the  same periods  of 2000.   For  the three   months  ended
 September 30, 2001,  net premiums earned  (after reinsurance) increased  2%,
 while net  premiums earned  for the  nine months  ended September  30,  2001
 decreased approximately 6% as compared to the same periods of 2000. Premiums
 earned during the third  quarter of 2001 increased  despite the decrease  in
 premiums written for the same  period  as  a result of the continued earning
 of  annual  premiums  written  during previous  higher volume quarters.  The
 disparate change in  premiums earned prior to  and after reinsurance  is due
 to the change in retention  of policy fees and the decreased  assumption  of
 premiums produced by the unaffiliated MGAs.

      Net incurred  loss  ratios  (computed  on  net  premiums  earned  after
 reinsurance) for the  three and nine  months ended September  30, 2001  were
 approximately 96% and  98%, respectively, compared  to 94% and  80% for  the
 same periods of 2000.  The  most significant factor impacting the 2001  loss
 ratio was various amendments to Hallmark's reinsurance treaties.  During the
 second half of 2000, the reinsurance  treaties were changed to include  100%
 of policy fees in the reinsurance treaty base (i.e. Hallmark retained 30% of
 policy fees during 2001 and 100% during the first six months of 2000),  thus
 reducing net earned premium in 2001.  Reinsurance terms were further amended
 effective  April  1,  2001  to  include  a  loss  corridor  provision,  thus
 increasing losses retained by the Company.  If these changes to  reinsurance
 treaties had not  occurred, the loss  ratios for the  three and nine  months
 ended September 30, 2001  would have been 70.5%  and 76.6%, respectively  as
 compared to 85.4% and 77.4% for the respective periods of 2000.

      Net incurred  loss  ratios  (computed  on  net  premiums  earned  after
 reinsurance) for the  three and nine  months ended September  30, 2001  were
 also adversely impacted by extraordinary weather-related losses  principally
 in connection with a catastrophic storm and flooding in the Houston area  of
 Texas in June 2001.  These  weather-related losses impacted both the  number
 and amount of claims filed  which in turn magnified  the impact of the  loss
 corridor.  If  neither the  changes to  the reinsurance  treaties nor  these
 extraordinary weather-related losses had occurred,  the loss ratios for  the
 three and nine  months ended September  30, 2001 would  have been 68.9%  and
 73.9%, respectively. Additionally,  depressed premiums from  2000 (which  do
 not reflect the full  impact of increasing rates)  being earned in 2001  and
 increasing claim costs (principally due to rising medical, labor and  repair
 costs) continue to adversely impact the 2001 loss ratio.

      Finance charges, which increased approximately $0.2 million (7%) during
 the first  nine months  of 2001  as compared  to the  same period  of  2000,
 represent interest earned on premium notes issued by HFC.  This increase  is
 directly correlated to the increase in annual premium volume.

      Processing and  service  fees  represent fees  earned  on  third  party
 processing and servicing contracts with  unaffiliated MGAs.  Processing  and
 service fees for the first nine months of 2001 decreased $0.6 million  (39%)
 as a result of cancellation of the service contracts with three unaffiliated
 MGAs (which are currently in run-off).

      During the  third  quarter  of 2001,  Hallmark  received  a  refund  of
 approximately $0.1 million  from the Texas  Property and Casualty  Insurance
 Guaranty Association for assessments paid prior  to 1991 which is  reflected
 in other income.  No  such refund was received  during the third quarter  of
 2000.

     Acquisition  costs,  net, represents  the  amortization  of  acquisition
 costs (and credits) deferred over the past twelve months and the deferral of
 acquisition  costs  (and  credits)  incurred  in  the  current  period.  The
 decrease in acquisition costs,  net, is primarily due  to the deferral of  a
 larger  increase  in  acquisition costs than ceding commission  income.  The
 increase in acquisition costs, net is primarily due to an increase in annual
 premium volume which in turn increased the deferral rate.  The  decrease  in
 ceding commission income is principally due to the decrease  in the  minimum
 ceding  commission  rate to 26% from 31% and to a lesser extent the decrease
 in core State and County premium volume for the third quarter of 2001.

     Other  acquisition and  underwriting expenses  for  the three  and  nine
 months ended September 30, 2001 increased approximately 117% ($0.5  million)
 and 7%,  respectively,  as  compared  to  the  same  periods  of  2000.  The
 significant increase noted in the third quarter of 2001 is attributable to a
 $1.0 million decrease in ceding commission income as a result of 5% decrease
 in the minimum ceding commission rate  and a third quarter decrease in  core
 State & County premium volume.  Partially offsetting the decrease in  ceding
 commission are decreases in commission  expenses, front fees, premium  taxes
 and other variable expenses associated with the decreased premium volume.

     Operating  expenses   include  expenses  related   to  premium   finance
 operations, general corporate overhead,  and third party administrative  and
 claims handling  contracts.    Related revenues  are  derived  from  finance
 charges and processing and service fees.   Operating expenses decreased  18%
 and 14%, respectively, during the three and nine months ended September  30,
 2001 as compared to the same periods of 2000.  The majority of this decrease
 is attributable to the variable expenses related to the processing of  third
 party contracts.  As three of the unaffiliated MGA programs are in  run-off,
 staffing and operational costs related to the run-off of this business  have
 decreased, particularly in  the second and  third quarters of  2001.   These
 decreases are partially offset by increased costs related to premium finance
 operations, corporate office space and health-care.

 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, 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.

                 Except for routine litigation incidental to the
                 business of the Company and as described in Note 3
                 to the Consolidated Financial Statements of the
                 Company, neither the Company, nor any of the
                 properties of the Company was subject to any
                 material pending or threatened legal proceedings
                 as of the date of this report.


      Item 2.     Changes in Securities.

                  None.


      Item 3.     Defaults upon 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 exhibits listed in the Exhibit Index following
                  the signature page are filed herewith.

              (b) The Company did not file any Form 8-K Current Reports
                  during the third quarter of 2001.

<PAGE>

                                  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 13, 2001          /s/ Linda H. Sleeper
                                  ---------------------------
                                  Linda H. Sleeper, President
                                  (Chief Executive Officer

 Date: November 13, 2001          /s/ John J. DePuma
                                  ---------------------------
                                  John J. DePuma,
                                  Chief Financial Officer


<PAGE>


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


  Exhibit                       Description
  -------                       -----------
  10 ( a )     Addendum No.  1 to  the Quota Share  Retrocession Agreement,
               effective July 1, 2000,  between American Hallmark Insurance
               Company of Texas and  Dorinco Reinsurance Company, effective
               January 1, 2001.

  10 ( b )     Addendum No.  2 to  the Quota Share  Retrocession Agreement,
               effective July 1, 2000,  between American Hallmark Insurance
               Company of Texas and  Dorinco Reinsurance Company, effective
               July 1, 2000.

  10 ( c )     Endorsement No.  1 to the  Guaranty of Performance  and Hold
               Harmless Agreement, effective July  1, 1996 between Hallmark
               Financial Services,  Inc. and  Dorinco  Reinsurance Company,
               effective July 1, 2000.

  10 ( d )     Letter of Agreement, dated November 7, 2001 between Hallmark
               Financial Services, Inc. and Dorinco Reinsurance Company.

  10 ( e )     Second Amendment to Hallmark Financial Services, Inc. 1994
               Non-Employee Director Stock Option Plan.