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, 1996


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)


Issuer's telephone number, including area code:  (972) 404-1637

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 - 10,662,277 shares outstanding as of  November 11, 1996.
<PAGE>
               HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>                                                                        
<CAPTION>
                                           September 30  December 31
ASSETS                                        1996           1995   
                                          (unaudited)  
<S>                                        <C>          <C>   
Investments:
  Debt securities, held-to-maturity        $ 5,714,627  $ 6,409,544 
  Equity securities, available-for-sale        169,827      171,727 
  Short-term investments, at cost which 
   approximates market value                 3,776,160    3,615,327 
 
     Total investments                       9,660,614   10,196,598 

  Cash and cash equivalents                  6,010,299    4,257,755 
  Prepaid reinsurance premiums               9,232,164   11,726,968 
  Premium notes receivable                   3,110,099    5,342,507 
  Reinsurance recoverable                   23,292,663   19,335,746 
  Deferred policy acquisition costs          2,535,751    2,999,541 
  Excess of cost over net assets 
   acquired, net of accumulated  
   amortization                              5,257,286    5,373,983 
  Other intangible assets                        3,333       10,000 
  Deferred federal income taxes                453,194      567,969 
  Accrued investment income                     60,284       55,765 
  Other assets                                 903,472      788,216 
 
     Total assets                          $60,519,159  $60,655,048 

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities: 
  Notes payable                              $ 603,376    $ 639,162 
  Unpaid losses and loss 
   adjustment expenses                      25,324,727   22,323,090 
  Unearned premiums                         12,314,807   15,659,897 
  Reinsurance balances payable               3,693,452    3,489,357 
  Deferred ceding commissions                2,632,015    3,518,227 
  Drafts outstanding                         1,057,052      684,430 
  Accounts payable and 
   other accrued expenses                    3,814,902    3,969,288 

      Total liabilities                     49,440,331   50,283,451 

Stockholders' equity:
  Common stock, $.03 par value, 
   authorized 100,000,000 shares; 
  (issued 10,962,277 shares in 
   1996 and 1995)                              328,868      328,868 
  Capital in excess of par value            10,349,665   10,349,665 
  Retained Earnings                          1,000,295      293,064 
  Treasury stock                              (600,000)    (600,000)
Total stockholders' equity                  11,078,828   10,371,597 

</TABLE>                                   $60,519,159  $60,655,048 
<PAGE> 
               HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>                                Unaudited
<CAPTION>                                        
                                Three Months Ended           Nine Months Ended
                                    September 30                September 30  
                                1996         1995          1996          1995   
<S>                         <C>           <C>           <C>         <C>
Gross premiums written     $10,880,687   $14,755,421   $33,135,617  $37,713,656 
Ceded premiums written      (7,716,384)  (11,057,747)  (24,404,903) (28,249,846)
    Net premiums written   $ 3,164,303   $ 3,697,674   $ 8,730,714  $ 9,463,810 

 Revenues:
  Premiums earned          $11,898,965   $11,788,841   $36,480,706  $31,077,131 
  Premiums ceded            (8,479,588)   (8,811,801)  (26,899,707) (23,175,509)
    Net premiums earned      3,419,377     2,977,040     9,580,999    7,901,622 

  Investment income, 
   net of expenses             224,912       148,778       671,996      363,662 
  Finance service charges        1,194       136,047        25,509      560,975 
  Processing fees              423,584       626,598     1,477,779      842,031 
  Service fees                  28,419         8,003        73,714       70,173 
  Other income                  15,954        20,581        41,242       71,360 

    Total revenues           4,113,440     3,917,047    11,871,239    9,809,823 

Benefits, losses and expenses:
  Losses and loss 
   adjustment expenses       8,492,819     6,845,301    24,909,437   23,297,876 
  Reinsurance recoveries    (6,393,702)   (4,727,172)  (18,759,990) (17,160,101)
  Net losses and loss 
   adjustment expenses       2,099,117     2,118,129     6,149,447    6,137,775 
  Amortization of 
   acquisition costs          (278,921)      178,950      (422,422)     407,552 
  Other acquisition, underwriting 
   and operating expenses    2,063,189       855,863     4,904,955    2,058,979 
  Interest expense              10,449         9,026        32,308       31,636 
  Amortization expense          40,566        46,328       123,364      144,383 

    Total benefits, losses 
   and expenses              3,934,400     3,208,296    10,787,652    8,780,325 

Income from operations before 
  federal income taxes         179,040       708,751     1,083,587    1,029,498 
Federal income tax (Note 3)     61,014       201,351       376,356      125,207 

    Net income               $ 118,026     $ 507,400     $ 707,231    $ 904,291 
Net income per share 
   of common stock              $  .01       $   .05       $   .06       $  .08 
Weighted average shares 
   outstanding              12,167,846    10,662,277    12,167,846   10,662,277 
</TABLE>
<PAGE>
               HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
<TABLE>                CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>                                                             
                                                             Nine Months Ended  
                                                                September 30    
                                                            1996          1995 
<S>                                                        <C>         <C>
Cash flows from operating activities:
  Net income                                              $707,231     $904,291 
  Adjustments to reconcile net income to
    cash provided by operating activities:
    Depreciation and amortization expense                  208,447      221,393 
    Change in deferred federal income taxes                114,775     (506,512)
    Change in prepaid reinsurance premiums               2,494,804   (5,074,336)
    Change in premium notes receivable                   2,232,408   (5,043,386)
    Change in installment premiums receivable                  -      6,452,737 
    Change in deferred policy acquisition costs            463,790   (1,105,408)
    Change in ceding income                               (886,212)   1,512,960 
    Change in unpaid losses and loss 
     adjustment expenses                                 3,001,637    5,905,988 
    Change in unearned premiums                         (3,345,090)   6,317,875 
    Change in reinsurance recoverable                   (3,956,917)  (5,540,281)
    Change in reinsurance balances payable                 204,095    2,560,058 
    Change in all other liabilities                        218,236    1,897,884 
    Change in all other assets                             118,952     (372,338)
                                                                     
     Net cash provided by operating activities           1,576,156    8,130,925 

Cash flows from investing activities:
  Purchases of property and equipment                     (320,839)    (151,880)
  Loss on sale of assets                                    (2,970)        -    
  Purchases of debt securities                            (526,020)  (2,932,347)
  Maturities and redemptions of debt securities          1,224,737    1,906,982 
  Maturities and redemptions of common stock                (1,900)       2,501 
  Purchase of short-term investments                    (3,300,389)  (7,879,803)
  Maturities of short-term investments                   3,139,555    2,420,000 

     Net cash used in investing activities                 212,174   (6,634,547)

Cash flows from financing activities:
  Repayment of short-term borrowings                       (35,786)    (182,363)
  Cash used in financing activities                        (35,786)    (182,363)

Increase (decrease) in cash and cash equivalents         1,752,544    1,314,015 
Cash and cash equivalents at beginning of period         4,257,755    1,800,762 

Cash and cash equivalents at end of period              $6,010,299   $3,114,777 

Supplemental cash flow information:
  Cash paid during the period for interest                $ 21,859   $   31,637 
</TABLE>
<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  only  of  normal  recurring
adjustments,  necessary  to  present  fairly  the financial position of Hallmark
Financial  Services,  Inc.  and subsidiaries (the "Company") as of September 30,
1996  and  the consolidated results of operations and cash flows for all 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 generally accepted accounting principles
have  been  condensed  or  omitted.    Reference is made to the Company's annual
consolidated  financial  statements  for  the year ended December 31, 1995 for a
description of all other accounting policies.  Certain items in the 1995 interim
financial statements have been reclassified to conform to the 1996 presentation.

     The  results  of operations for the period ended September 30, 1996 are not
necessarily  indicative  of  the  operating  results to be expected for the full
year.

NOTE 2 - INVESTMENTS

     Debt   securities,  held-to-maturity,  for  the  reporting  period  include
investments  in  U.S.  Government securities totaling $5,714,627, which includes
special  revenue  bonds of $326,692.  Net proceeds received are included in cash
and  cash  equivalents  at  September  30, 1996.  Short-term investments include
certificates  of  deposits and federal discount notes of $3,776,160.  Short-term
investments mature within one year.

     Realized  investment  gains  and losses are recognized in operations on the
specific  identification method.  The Company has the ability and intent to hold
all  investments  to maturity.  Provisions for possible losses are recorded only
on other-than-temporary declines in the value of an investment.
<PAGE>
NOTE 3 - FEDERAL INCOME TAXES

     The  composition of deferred tax assets and liabilities and the related tax
effects as of September 30, 1996 and 1995 is as follows:
<TABLE>
DEFERRED TAX LIABILITIES:                                   1996         1995   
     <S>                                                 <C>         <C>
     Deferred acquisition costs, deductible for tax     ($ 862,155) ($1,094,518)
     Other                                                   -              (58)

          Total deferred tax liabilities                 ( 862,155) ($1,094,576)

DEFERRED TAX ASSETS:
     Property and equipment basis                         $ 27,680      $ 7,117 
     Unearned premiums                                     209,620      283,503 
     Loss reserve discounting                              131,243      127,924 
     Deferred ceding commissions, non-deductible for tax   895,062    1,259,641 
     Net operating loss carryforward                        33,171       49,655 
     AMT credit                                               -           6,200 
     Other                                                   8,696       61,183 

          Total deferred tax assets                    $ 1,305,471   $1,795,223 

     Net deferred tax assets                             $ 443,316   $  700,647 
     Valuation allowance                                   ( 9,878)     194,135 

     Net deferred tax asset                              $ 453,194     $506,512 
</TABLE>
     A  reconciliation  of  the  income  tax  provisions based on the prevailing
corporate  tax rate of 34 percent to the provision reflected in the consolidated
financial  statements  for  the  period  ended September 30, 1996 and 1995 is as
follows:
<TABLE>
                                                            1996         1995   
     <S>                                                  <C>         <C>
     Computed expected income tax expense at 
      statutory regulatory tax rate                      $ 368,420    $ 350,029 
     Amortization of excess cost                            39,837       41,440 
     Tax-exempt interest                                    (1,477)      (2,954)
     Change in valuation allowance                         (48,288)    (273,065)
     Other                                                  17,864        9,757 
     Deferred tax liability                               $376,356     $125,207 
</TABLE>
     The  Company  has  available,  for  federal income tax purposes, unused net
operating  losses of $97,562 at September 30, 1996 and $146,044 at September 30,
1995  which  may  be  used  to  offset future taxable income.  The net operating
losses will expire, if unused, as follows:
<TABLE>
                                                            1996          1995  
          <S>                                               <C>           <C>
          Year
          2002                                             $  1,325    $   1,325
          2003                                               96,237       96,237
          2004                                                -           48,482
     
                                                           $ 97,562    $ 146,044
</TABLE>
<PAGE>
NOTE 4 - WARRANTS OUTSTANDING

     In  October 1992, the Company issued warrants to purchase 981,333 shares of
its  Common  Stock  ("Guaranty Warrants") to executive officers and directors in
consideration  for the recipients' agreement to pledge outstanding shares of the
Company's  common  stock  they  owned  as security for a working capital line of
credit  the  Company  proposed  to  obtain  from a commercial bank.  The Company
subsequently abandoned its efforts to obtain the working capital line of credit.
Each  Guaranty Warrant covered the same number of shares the recipient agreed to
pledge.    No  value has been assigned to these warrants.  The Guaranty Warrants
were initially exercisable between October 2, 1992 and October 1, 1994, but have
been  extended  to October 1, 1998, at which time they will expire to the extent
not  exercised.    The  exercise price is $.50 per share, an amount equal to the
last  reported  sale  price of the Common Stock on the American Stock Exchange's
Emerging  Company  Marketplace  prior to October 2, 1992.  The Guaranty Warrants
are  not  transferrable,  but may be exercised only by their recipients (or by a
recipient's estate in the event of his/her death).

NOTE 5 - REINSURANCE
       
     American  Hallmark  Insurance  Company of Texas ("Hallmark") is involved in
the cession of reinsurance 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, Hallmark entered into a reinsurance arrangement
with  State  and  County  Mutual  Fire  Insurance Company ("State & County"), an
unaffiliated  company,  to assume 100% of the nonstandard auto business produced
by American Hallmark General Agency, Inc. ("AHGA") and written on State & County
policies.   The arrangement is supplemented by a separate retrocession agreement
between  Hallmark  and Vesta Fire Insurance Corporation ("Vesta").  Hallmark and
Vesta share the risk on the State & County policies with Hallmark retaining 25%.
This  retrocession  agreement  with  Vesta  was  terminated  on  a run-off basis
effective June 30, 1996.

     Effective  July  1, 1996, Hallmark renewed its reinsurance arrangement with
State  &  County  and  entered  into  new  retrocession  agreements  with Kemper
Reinsurance  Company  ("Kemper"),  Dorinco  Reinsurance  Company ("Dorinco") and
Skandia America Reinsurance Corporation ("Skandia").  Under the new retrocession
agreements, Hallmark continues to retain 25%.  
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

INTRODUCTION

     Hallmark  Financial  Services,  Inc.  (HFS) engages in the sale of consumer
products  and  services  on  credit  terms, primarily to lower and middle income
customers.    Its  target market encompasses the substantial number of Americans
who  either  are  denied  credit  from  banks,  credit  card companies and other
conventional  credit sources, or have never established a bank account or credit
history.    Currently,  the  Company's  business  primarily  involves marketing,
underwriting   and  premium  financing  of  non-standard  automobile  insurance.
Secondarily,  the  Company  provides  fee-based  claims  adjusting  and  related
services  for  affiliates  and  third  parties.    (HFS  and  its  wholly  owned
subsidiaries are collectively referred to herein as the "Company").

     The  Company  conducts  these  activities  through  an integrated insurance
group,  the  dominant  members  of  which  are a property and casualty insurance
company,  American  Hallmark Insurance Company of Texas ("Hallmark"); a managing
general  agent,  American  Hallmark  General Agency, Inc. ("AHGA"); a network of
affiliated insurance agencies known as the American Hallmark Agencies ("Hallmark
Agencies");  a  commercial  excess and surplus lines affiliated managing general
agency, Hallmark Underwriters, Inc. ("HUI"); 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
q u alify  for  standard-rate  insurance.    Under    supplementary  quota-share
reinsurance  agreements,  Hallmark  cedes a substantial portion of its risks and
retains the balance.  From March 1, 1992 through June 30, 1996, Hallmark ceded a
portion  of  its risk to Vesta Fire Insurance Corporation ("Vesta") (60% between
March  1,  1992  and  July  31, 1993 and 75% between August 1, 1993 and June 30,
1996).    Effective July 1, 1996, Hallmark entered into new reinsurance treaties
w i th  Kemper  Reinsurance  Company  ("Kemper"),  Dorinco  Reinsurance  Company
("Dorinco")  and  Skandia  America Reinsurance Corporation ("Skandia"), ceding a
total  of  75%  of its risk.  HFC, through a financing and servicing arrangement
with  an  unaffiliated  premium  finance  company,  offers  premium financing to
Hallmark  policyholders.      AHGA  manages  the  marketing of Hallmark policies
through a network of retail insurance agencies which operates under the American
Hallmark Agencies name, and through independent agents operating under their own
respective names.

     HUI,  formed  to  market  and  produce  commercial excess and surplus lines
("E&S")  insurance  on  behalf of unaffiliated E&S insurers, began operations in
late April 1996.  HUI is expected to generate commission income by producing E&S
insurance  business  through  the  network  of  the  Company's  thirteen  retail
agencies, certain agents from the Company's current independent agent group, and
other selected independent agents not currently representing the Company. 

FINANCIAL CONDITION AND LIQUIDITY

     The  Company's  sources  of  funds  are  principally derived from insurance
related  operations.  Major sources of funds are from premiums collected (net of
policy  cancellations  and  premiums  ceded), external funding of premium notes,
ceding  commissions,  processing  fees,  premium  finance  service  charges  and
investment  activities.   On a consolidated basis, the Company reported net cash
<PAGE>
from  operations  of  $1,576,156  for  the nine months ended September 30, 1996,
representing  an  81%  decrease  in  relation  to  the same period in 1995.  The
decrease in cash flow is primarily due to (1) lower premium volumes for the nine
months  ended  September  30,  1996  as  compared  to  the same 1995 period (the
significantly  higher  premium  volumes  for the nine months ended September 30,
1995  is principally a result of the Texas Automobile Insurance Plan Association
(TAIPA) increasing its rates substantially, which in turn, directed business
into  the  voluntary  market  as compared to the same period in 1994); and (2) a
change in policy mix resulting in an increase in monthly policy production and a
decrease  in  annual policy production during the 1996 period and to an increase
in annual policy production and a decrease in monthly production during the same
period in 1995 compared to the comparable period in 1994.   

     On  a consolidated basis, the Company's liquidity increased during the nine
months  ended  September  30, 1996, with bonds, equities, short-term investments
and  cash totaling $15,670,913 at September 30, 1996, compared to $14,454,353 at
December  31,  1995.  The Company's increased liquidity during 1996 is primarily
due to more timely funding of annual policy premiums under HFC's premium finance
program  started  in 1995 and expanded during 1996 than under Hallmark's direct-
bill  program  (which  has  been phased out), partially offset by the absence of
unusually high premium volumes which occurred in the third quarter of 1995.  

     Under  HFC's  premium  finance  program,  premiums  for annual policies due
Hallmark  are  funded-in-full in approximately 30 days and immediately invested.
Premium  notes  receivable  decreased at September 30, 1996 compared to December
31,  1995 principally due to an increase in monthly policy mix in 1996 and to an
increase  in  first  quarter  premium  cancellations  related to annual policies
written  in  high-volume  months  of  1995.  As expected, balances due under the
direct  bill program (which are included in premium notes receivable at December
31,  1995)  have decreased from $299,182 at December 31, 1995 to $0 at September
30,  1996.   During the first nine months of 1996 and 1995, the Company received
e x t ernal  funds,  net  of  cancellations,  of  $23,666,926  and  $11,731,626,
respectively, from its premium finance program to fund premiums generated by the
Company. 

     At  September  30,  1996,  the  Company reported $603,376 in notes payable,
$392,710 of which is due before December 31, 1996.  The Company expects to repay
these  notes  with cash from operations.  However, the amount to be paid in 1996
may  be less than the $392,710 reflected in the notes payable balance.  Included
in  this  amount  is  a  disputed  obligation  of  $380,000 in connection with a
financing  transaction  which occurred prior to the Company's acquisition of the
insurance  group.    Further,  if  any  portion of the approximately $380,000 is
ultimately  deemed  owing,  the Company believes that it has the right of offset
against a related receivable in the sum of $240,000.

     A  substantial  portion of the Company's liquid assets are held by Hallmark
and  are  not  available  for  general  corporate  purposes.    Of the Company's
consolidated  liquid  assets  at  September 30, 1996, $1,486,016 represents non-
restricted  cash  (compared  to  $2,131,582  at December 31, 1995).  Since state
insurance  regulations limit financial transactions between an insurance company
and  its affiliates, the Company is limited in its ability to use Hallmark funds
for  its  own  working  capital  purposes.   Furthermore, dividends and loans by
Hallmark  to  the  Company  are  restricted  and  subject to Texas Department of
Insurance  ("TDI")  approval.    However,  TDI  has  sanctioned  the  payment of
management fees, commissions and claims handling fees by Hallmark to the Company
and  affiliates.  During the latter part of 1993, the Company initiated measures
to  strengthen  Hallmark's  surplus  in  order  to  insure  its  compliance with
regulatory  guidelines  and to provide surplus balances necessary to accommodate
<PAGE>
premium  growth.    Some  of  the  measures  taken were a temporary abatement or
reduction  of  the  management  fee  and  a  reduction of commissions payable by
Hallmark  to  the Company and AHGA, respectively.  These measures have continued
into  subsequent years.   During the first nine months of 1996, Hallmark paid or
accrued  $675,000  in  management  fees as compared to $350,000 during the first
nine  months  of  1995.    While  management fees for 1996 are anticipated to be
higher  than  the  fees  paid  or  accrued in 1995, they should be less than the
amounts  authorized by TDI.  While management fees from Hallmark should continue
to  be  a  moderate  source  of  unrestricted  liquidity,  management intends to
continue  to  restrict  payment  of  management  fees as necessary to insure the
surplus strength of Hallmark.

     Commissions  from  annual  policy  production  by  independent  agents also
represent  a  source of unrestricted liquidity.  Under this program, AHGA offers
independent  agents  the  ability  to  write annual policies, but generally pays
commissions  to  independent  agents  monthly  on  an  "earned" basis.  However,
consistent with customary industry practice, Hallmark pays total commissions up-
front  to  AHGA  based on the entire annual premiums written.  Independent agent
production of annual policies was approximately $9.7 million for the nine months
ended  September  30, 1996.  During the first nine months of 1996, AHGA received
$4.9  million in commissions related to this program from Hallmark, and will pay
$1.3  million to independent agents.  During 1995, AHGA received $7.6 million in
commissions  related  to  this  annual  policy  program  from Hallmark, of which
approximately  $1.9  million  is being paid to independent agents during 1996 as
earned.

     Ceding  commission  income  represents a significant source of funds to the
Company.    During  the  first  nine  months  of  1996,  and during 1995, ceding
c o mmission  income  exceeded  agent  commissions  and  other  direct  expenses
associated  with  the  cost  of producing new business (i.e., policy acquisition
costs).    Ceding commission income for the nine months ended September 30, 1996
decreased  $1,520,325 to $6,954,629 representing an 18% decrease compared to the
first  nine  months  of 1995.  Although ceding commission income exceeded policy
acquisition  costs  for  the  nine  months  ended  September  30,  1996,  ceding
commission  income  was less than policy acquisition costs for the quarter ended
September  30,  1996.    This  was due primarily to the combined effect of lower
premium  volumes  in  the  third quarter of 1996 compared to the same quarter in
1995  and  lower  ceding  commission income recognized under the new reinsurance
treaties effective July 1, 1996.    

     In  accordance  with GAAP, 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  also  decreased  to  $2,632,015 at September 30, 1996 from $3,518,227 at
December  31,  1995.   This decrease is principally due to lower annual premiums
written  during  the  first  nine  months  of 1996 compared to 1995.  Similarly,
deferred  policy  acquisition  costs of $2,535,751 as of September 30, 1996 were
$463,790 less than at December 31, 1995.  Deferred policy acquisition costs were
$96,264 less than deferred ceding commission income at September 30, 1996. 

     At  September  30, 1996, Hallmark reported statutory capital and surplus of
$5,080,984,  which shows an increase of $306,540 over the $4,774,444 reported at
December  31,  1995.      On an annualized-premium basis, Hallmark's premium-to-
surplus  ratio  at  September 30, 1996 was 2.29 to 1 as compared to 2.58 to 1 at
December  31, 1995.  It is management's opinion that Hallmark should not require
additional  capital  during  1996.    Management  anticipates  that  Hallmark is
positioned  to  maintain  and  strengthen  statutory  surplus  through increased
earnings  from  insurance  operations.  Management believes that loss ratios for
<PAGE>
the first nine months of 1996 are beginning to reflect results of steps taken to
address  an  unfavorable  loss  trend reported during 1995.  For the nine months
ended  September  30,  1996,  the  statutory  loss ratio was approximately 70.6%
compared  to  81.8%  and 82.5% for the twelve and nine months ended December 31,
1995  and September 30, 1995, respectively.  Hallmark implemented rate increases
for  business  written  in  certain  territories  effective  September 15, 1995,
January  1,  1996  and  August  15, 1996, respectively.  These rate changes were
designed   to  further  reduce  loss  ratios  while  maintaining  the  Company's
competitive status.

     As  previously mentioned, effective July 1, 1996, Hallmark entered into new
reinsurance  treaties  (the  "New  Treaties") with Kemper, Dorinco, and Skandia.
Certain  provisions  of  the  New Treaties could impact the Company's liquidity.
Under  the  New  Treaties, Hallmark retains 50% and cedes only 50% of the policy
origination fees (vs. ceding 100% of the policy origination fees under the Vesta
treaty),  pays  premiums  taxes  and front fees on 100% of the business produced
(vs.  premium taxes and front fees on only its retained business under the Vesta
treaty),  and receives a 30% provisional ceding commission (vs. a guaranteed 30%
ceding  commission  under  the  Vesta  treaty).  Policy origination fees are up-
front,  fully  earned  fees  that  the  Company is permitted by law to charge in
addition  to premiums to cover or defray certain costs associated with producing
policies.    The  provisional  commission  paid  under  the New Treaties will be
adjusted  annually  over  a three year rating period on a sliding scale based on
annual loss ratios.  Based upon its loss experience, Hallmark can earn a maximum
commission  of 33.5% and is guaranteed a minimum commission of 26% regardless of
loss  experience.  Currently, the company is recognizing the minimum commission.
Management  has  focused  on  premium  rate-setting and enhanced claims handling
procedures  designed to strengthen the performance of the Company's core State &
County  business.    If  loss  ratios  improve  and  ceding commissions increase
accordingly,  there  could  be a positive impact on liquidity.  However, if loss
ratios  do  not  improve, related ceding commissions will remain at the minimum,
and could adversely affect liquidity in future periods.

     Unearned  premiums  decreased  approximately  21%  as of September 30, 1996
compared  to  December  31,  1995.   This decrease was principally due to higher
first quarter cancellations associated with annual premiums written during high-
volume  months  of  1995,  a  decrease  at  September  30, 1996 in the remaining
unearned  portion  of annual premiums written during high-volume months of 1995,
and  to  an  increase  in  monthly  policy  production.    As  expected, prepaid
reinsurance premiums decreased proportionately.
     
     Unpaid losses and loss adjustment expenses at September 30, 1996, increased
a p proximately  13%  as  compared  to  December  31,  1995,  primarily  due  to
implementation  of a more conservative case reserving methodology.  Accordingly,
reinsurance  recoverable  at  September 30, 1996, increased approximately 20% as
compared to December 31, 1995.  

     Effective  January  1,  1995,  the  Company  began  financing annual policy
premiums  produced  by  the  Hallmark Agencies through a premium finance program
offered by its formerly dormant premium finance subsidiary, HFC, and independent
agents  began financing premiums through HFC's premium finance program in May of
1995.    Financing  of  the premium notes is provided by an unaffiliated premium
finance  company,  Peregrine  Premium  Finance  L.C. ("Peregrine"), on a secured
basis.    Peregrine  has obtained an external credit facility of $13,500,000 for
the purpose of financing State & County policies produced by AHGA (the "Notes").
At  September  30,  1996,  $2,630,032  was  available  under  Peregrine's credit
facility  to fund the Notes which should be sufficient to fund projected State &
County  activity  of  this  premium  finance program during 1996.  HFC's premium
<PAGE>
financing  program is expected to continue to positively impact liquidity during
1996.

     During  1996, management expects that Company liquidity will continue to be
favorably  impacted by a continued focus on strengthening the performance of the
Company's  core  State & County business with particular emphasis on enhancement
of  HCS's  procedures  and staffing.  The Company has increased its claims staff
and  hired  additional,  experienced  claims adjusters and supervisory personnel
that,  in  turn, should lower loss and LAE payments.  This focus, along with the
Company's  ongoing ability to identify and retain quality independent agents and
to  respond  on a timely basis to rate-change indications arising from both loss
experience  and  competitive  market  considerations,  is  expected  to  enhance
earnings  and  liquidity  during  1996.   Management further anticipates that an
integrated  cash  management  system  implemented  in late-1995 will continue to
positively impact 1996 liquidity.

     The   Company  continues  to  pursue  third  party  claims  handling  and
administrative  contracts.    HCS  entered  into  a  small  claims-handling  and
consulting  contract  with  an  unaffiliated  independent  agent  in  1995.  The
unaffiliated agent is revising and expanding its program during 1996, which will
favorably impact fees.  However, it is still not anticipated that fees from this
contract will have a significant impact on 1996 earnings.  The Company continues
to  earn  fees  for handling claims-related litigation of an unaffiliated agency
under  a  1993  contract  with Vesta.  Although the Company is actively pursuing
additional  third  party  claims  handling  business, it does not have any other
definitive agreements at this time.

     Beginning  late-April  1996,  the  Company  began  marketing  E&S insurance
produced  by  HUI through the Company's marketing arm, AHGA.  This business will
be  produced  by the Hallmark Agencies and a select group of independent agents,
and  some portion of the premiums will be financed by HFC.  No entity within the
Company  will  bear  any underwriting risk.  The E&S policies will be written on
behalf  of  A-rated  (A.M.  Best  rating)  unaffiliated  insurance  companies.
Management  anticipates  that  the  growth of this business will be gradual, and
does  not  expect  a significant liquidity contribution in 1996.  HFC will offer
premium  financing  for  E&S  business produced by HUI.  The Company anticipates
financing  E&S  premium  notes  with internally generated funds through at least
mid-1997.

     Management  intends  to  continue  to  investigate opportunities for future
growth  and expansion.  However, the Company currently has no growth plans which
would require significant external funding during the remainder of 1996.

RESULTS OF OPERATIONS

        As expected, gross premiums written (prior to reinsurance) for the three
and  nine  months  ended September 30, 1996 were 26% and 12% lower than the same
periods  in  1995.    Net written premiums (after reinsurance) for the three and
nine  months  ended  September  30,  1996  were  approximately 14% and 8% lower,
respectively,  than the same periods in 1995.  The comparison of the three month
period  indicates  a  decrease  in  gross  and  net written premium due to lower
premium  volumes  during  1996  compared  to  1995.  However, third quarter 1995
premium volumes were unusually high due to increased production of the Company's
core  State  &  County  business  by  independent  agents during 1995.  The high
volumes  of  1995,  particularly in the third quarter, began to level off toward
the end of 1995 and have remained relatively constant during 1996.  
<PAGE>
     Gross  premiums earned (prior to reinsurance) for the three and nine months
ended  September  30,  1996,  respectively,  were  1%  and  17%  higher than the
comparable  periods  in 1995.  For the three and nine months ended September 30,
1996,  net  earned  premiums  (after  reinsurance)  increased  15%  and  21%,
respectively,  in  relation  to  the same periods of 1995.  The disproportionate
increase in premiums earned before and after reinsurance is primarily the result
of Hallmark's New Treaties whereby the Company retains 50% of policy origination
fees  which  are  fully  earned thus increasing earned premiums during the third
quarter  of  1996.  This is partially offset by the TAIPA premium allocations to
the  company being insignificant in 1996 as compared to 1995.  Thus, 1995 earned
premiums reflect a higher proportion of TAIPA business which is retained 100% by
the Company and is not subject to reinsurance.

     Net incurred  loss  ratios  (computed  on  net  premiums  earned  after
reinsurance)  for the three and nine months ended September 30, 1996 was 61% and
64%,  respectively,  as  compared  to  71%  and 78% for the same respective 1995
periods.   The decrease in the loss ratios between 1996 and 1995 is the combined
result  of  improved  loss  experience  on  the  Company's  core  State & County
business,  retention  of 50% of the policy origination fees, insignificant TAIPA
premium  allocations during 1996, and more favorable loss development in 1996 of
the  TAIPA  business written in prior years.  It should be noted that the impact
of  any  change in TAIPA loss experience is intensified because TAIPA losses are
100%  retained  by  Hallmark  and  are  not  included  in Hallmark's quota-share
reinsurance agreements.

     Other  acquisition,  underwriting  and operating expenses for the three and
nine  months  ended  September  30,  1996,  increased $1,207,327 and $2,845,976,
respectively,  as  compared to the prior year.  This increase is principally due
to  an  almost  18%  decrease  in  ceding commission income (as discussed in the
Financial  Condition  and  Liquidity section), as well as higher operating costs
related  to  expanded  premium  finance operations in 1996 (which was a start-up
operation  beginning  January  1995),  start-up  costs of E&S operations, higher
operating  costs  related  to increased staffing and professional development of
claims personnel, along with increases in consulting and professional fees. 

     Investment  income  for  the three and nine months ended September 30, 1996
increased  by  approximately 51% and 85% respectively over the comparable period
in  1995  as  a  result  of an increase in funds available for investment and an
increase  in  the  percentage  of funds invested.  Invested funds have increased
principally due to increased premium volumes during 1995, more timely funding of
premiums  under  HFC's premium finance program and enhanced utilization of funds
due to an improved cash management system implemented late-1995.

     Processing fees for the three and nine months ended September 30, 1996 were
$423,584  and  $1,477,779,  respectively.    While processing fees for the third
quarter  of 1996 decreased by $203,014 over the comparable period of 1995, year-
to-date  processing  fees  increased $635,748 over the same comparable period of
1995.    The decrease in the third quarter processing  fees is primarily related
to  the  decreased  premium  volume of Hallmark during the third quarter of 1996
compared to 1995.  These processing fees represent income earned by HFC pursuant
to  its premium finance program commenced January 1, 1995.  The overall increase
in  1996  is  due  to  the  program currently including financing of independent
agency business, as well as Hallmark Agencies' premium production.
<PAGE>
                                     PART II
                                OTHER INFORMATION

Item 1.   Legal Proceedings.

     Except  for  routine  litigation incidental to the business 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 Security 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 which appears on sequential
          page 17 is filed herewith.

     (b)  The  Company  did  not file a Current Report on Form 8-K to report any
          events which occurred during the quarter ended September 30, 1996.
<PAGE>
                                  EXHIBIT INDEX


EXHIBIT   DESCRIPTION

10(a)     Automobile  Physical  Damage  Catastrophe  Excess  of Loss Reinsurance
          Agreement  effective  July 1, 1996 between American Hallmark Insurance
          Company of Texas and Kemper Reinsurance Company.

<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, 1996      /s/ Ramon D. Phillips                            
                              Ramon  D.  Phillips,  President  (Chief Executive
                              Officer)




Date:  November 13, 1996      /s/ John J. DePuma
                              John J. DePuma, Chief Financial Officer