SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                  FORM 10-Q

           Quarterly report pursuant to Section 13 or 15(d) of the

                       Securities Exchange Act of 1934


              For the quarterly period ended September 30, 2004


                        Commission file number 0-16090


                      HALLMARK FINANCIAL SERVICES, INC.
                      ---------------------------------
            (Exact name of registrant as specified in its charter)



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


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


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

 Indicate  by check mark  whether the registrant  (1) has filed all  reports
 required to be filed by Section 13 or  15(d) of the Securities Exchange Act
 of 1934 during the preceding 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 ___

 Indicate by check mark whether the registrant is an accelerated  filer  (as
 defined in Rule 12b-2 of the Exchange Act).  Yes ___  No   X


                     APPLICABLE ONLY TO CORPORATE ISSUERS


 Indicate the number of shares outstanding of each of the issuer's classes of
 common stock,  as of the latest practicable date:  Common Stock,  par  value
 $.03 per share - 36,477,291 shares outstanding as of November 12, 2004.

<PAGE>
                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements


                       INDEX TO FINANCIAL STATEMENTS

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

 Consolidated Balance Sheets at September 30, 2004
 (unaudited) and December 31, 2003                               3

 Consolidated Statements of Operations (unaudited)
 for the three months and nine months ended
 September 30, 2004 and September 30, 2003                       4

 Consolidated Statements of Cash Flows (unaudited)
 for the nine months ended September 30, 2004 and
 September 30, 2003                                              5

 Notes to Consolidated Financial Statements (unaudited)          6

<PAGE>

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


                                                    September 30   December 31
                    ASSETS                              2004          2003
                    ------                           ----------    ----------
                                                     (unaudited)    (audited)
 Investments:
   Debt securities, available-for-sale,
     at market value                                $    26,672   $    25,947
   Equity securities, available-for-sale,
     at market value                                      3,771         3,573
   Short-term investments, available-for-sale,
     at market value                                      3,055           335
                                                     ----------    ----------
            Total investments                            33,498        29,855

 Cash and cash equivalents                                9,288        10,520
 Restricted cash and investments                          6,518         5,366
 Prepaid reinsurance premiums                                10           291
 Premiums receivable                                      3,360         4,076
 Accounts receivable                                      2,071         3,395
 Reinsurance recoverable                                  4,975        10,516
 Deferred policy acquisition costs                        7,639         7,146
 Excess of cost over fair value
   of net assets acquired                                 4,836         4,836
 Intangible assets                                          493           513
 Current federal income tax recoverable                       -           625
 Deferred federal income taxes                            4,032         3,961
 Other assets                                             3,431         2,753
                                                     ----------    ----------
                                                    $    80,151   $    83,853
                                                     ==========    ==========
     LIABILITIES AND STOCKHOLDERS' EQUITY
     ------------------------------------
 Liabilities:
   Notes payable                                    $         -   $       991
   Unpaid losses and loss adjustment expenses            20,970        28,456
   Unearned premiums                                      5,108         5,862
   Unearned revenue                                      11,672        10,190
   Accrued agent profit sharing                             999         1,511
   Accrued ceding commission payable                      1,022         1,164
   Pension liability                                      1,022         1,237
   Current federal income tax payable                     1,092             -
   Accounts payable and other accrued expenses            6,271         7,045
                                                     ----------    ----------
                                                         48,156        56,456
 Commitments and Contingencies

 Stockholders' equity:
   Common stock, $.03 par value, authorized
     100,000,000 shares Issued 36,856,610
     shares in 2004 and 2003                              1,106         1,106
   Capital in excess of par value                        19,639        19,693
   Retained earnings                                     11,702         7,254
   Accumulated other comprehensive income                   (11)          (93)
   Treasury stock, 379,319 shares in 2004 and
     484,319 in 2003, at cost                              (441)         (563)
                                                     ----------    ----------
            Total stockholders' equity                   31,995        27,397
                                                     ----------    ----------
                                                    $    80,151   $    83,853
                                                     ==========    ==========

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

<PAGE>
<TABLE>

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


                                                 Three Months Ended           Nine Months Ended
                                                    September 30                September 30
                                                ---------------------       ----------------------
                                                  2004         2003           2004         2003
                                                --------     --------       --------     --------
 <S>                                           <C>          <C>            <C>          <C>
 Gross premiums written                        $   7,410    $   6,640      $  23,174    $   36,404
 Ceded premiums written                                -          246             25        (6,934)
                                                --------     --------       --------      --------
   Net premiums written                            7,410        6,886         23,199        29,470

   Change in net unearned premiums                    54        2,509            473         3,855
                                                --------     --------       --------      --------
   Net premiums earned                             7,464        9,395         23,672        33,325

 Investment income, net of expenses                  371          360            994           822
 Realized gain (loss)                                (57)        (305)           (57)         (313)
 Finance charges                                     561          856          1,644         2,936
 Commission and fees                               5,745        4,709         16,235        12,406
 Processing and service fees                       1,556        1,224          4,560         3,509
 Other income                                          6          127             21           446
                                                --------     --------       --------      --------
   Total revenues                                 15,646       16,366         47,069        53,131

 Losses and loss adjustment expenses               4,451        6,155         14,100        22,596
 Other operating costs and expenses                8,903        9,559         26,346        27,724
 Interest expense                                     16          359             61         1,234
 Amortization of intangible asset                      7            7             21            21
                                                --------     --------       --------      --------
   Total expenses                                 13,377       16,080         40,528        51,575
                                                --------     --------       --------      --------
 Income before income tax and
   extraordinary gain                              2,269          286          6,541         1,556

 Income tax expense                                  726           66          2,093           498
                                                --------     --------       --------      --------
 Income before extraordinary gain              $   1,543    $     220      $   4,448     $   1,058
 Extraordinary gain                                    -            -             -          8,116
                                                --------     --------       --------      --------
 Net income                                    $   1,543    $     220      $   4,448     $   9,174
                                                ========     ========       ========      ========
 Basic earnings per share:
   Income before extraordinary gain            $    0.04    $    0.01      $    0.12     $    0.08
     Extraordinary gain                                -            -              -          0.65
                                                --------     --------       --------      --------
     Net income                                $    0.04    $    0.01      $    0.12     $    0.73
                                                ========     ========       ========      ========
 Diluted earnings per share:
   Income before extraordinary gain            $    0.04    $    0.01      $    0.12     $    0.08
     Extraordinary gain                                -            -              -          0.63
                                                --------     --------       --------      --------
      Net income                               $    0.04    $    0.01      $    0.12     $    0.71
                                                ========     ========       ========      ========

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

</TABLE>
<PAGE>

               HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
                                  (In thousands)
                                                           Nine Months
                                                           September 30
                                                     ------------------------
                                                        2004          2003
                                                     ----------    ----------
 Cash flows from operating activities:
   Net income                                       $     4,448   $     9,174

 Adjustments to reconcile net income to cash
   provided by (used in) operating activities:
    Extraordinary gain on acquisition of subsidiary           -        (8,116)
    Depreciation and amortization expense                   341           485
    Change in deferred federal income taxes                (124)          166
    Change in prepaid reinsurance premiums                  281         7,264
    Change in premiums receivable                           664        (1,223)
    Change in accounts receivable                         1,324          (774)
    Change in deferred policy acquisition costs            (493)       (1,772)
    Change in unpaid losses and loss
      adjustment expenses                                (7,486)       (4,716)
    Change in unearned premiums                            (754)      (10,201)
    Change in unearned revenue                            1,482         3,159
    Change in accrued agent profit sharing                 (512)          318
    Change in reinsurance recoverable                     5,541         8,512
    Change in reinsurance balances payable                    -        (3,029)
    Change in current federal income tax
      payable/recoverable                                 1,717           385
    Change in accrued ceding commission payable            (142)       (1,594)
    Change in all other liabilities                        (989)        1,429
    Change in all other assets                             (289)          513
                                                     ----------    ----------
      Net cash provided by (used in)
        operating activities                              5,009           (20)
                                                     ----------    ----------
 Cash flows from investing activities:
   Purchases of property and equipment                     (364)         (293)
   Acquisition of subsidiary                                  -         6,945
   Premium finance notes collected,
     net of finance notes originated                         52         9,476
   Change in restricted cash and investments             (3,467)       (5,052)
   Purchase of fixed maturity and equity securities      (2,506)      (16,854)
   Maturities and redemptions of investment
     securities                                           3,411         6,384
   Net redemptions (purchases) of short-term
     investments                                         (2,376)        8,904
                                                     ----------    ----------
      Net cash (used in) provided by
        investing activities                             (5,250)        9,510
                                                     ----------    ----------
 Cash flows from financing activities:
    Proceeds from rights offering                             -        10,000
    Net advances from lender                                  -        (9,504)
    Repayment of borrowings                                (991)       (9,230)
                                                     ----------    ----------
      Net cash used in financing activities                (991)       (8,734)

 Increase (decrease) in cash and cash equivalents        (1,232)          756
 Cash and cash equivalents at beginning of period        10,520         8,453
                                                     ----------    ----------
 Cash and cash equivalents at end of period         $     9,288   $     9,209
                                                     ==========    ==========

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

<PAGE>

 Item 1.  Notes to Consolidated Financial Statements (Unaudited)


 Note 1 - Summary of Accounting Policies

     In the  opinion of management,  the accompanying consolidated  financial
 statements contain  all adjustments,  consisting  only of  normal  recurring
 adjustments, necessary for  a fair statement  of the  financial position  of
 Hallmark Financial Services,  Inc. ("HFS")  and subsidiaries  (collectively,
 the "Company") as  of September  30, 2004  and the  consolidated results  of
 operations and cash  flows for the  periods presented.   The preparation  of
 financial  statements  requires  the  use  of  management's  estimates.  The
 accompanying financial statements have been prepared by the Company  without
 audit.

     Certain  information  and disclosures  normally  included  in  financial
 statements prepared  in  accordance  with  accounting  principles  generally
 accepted in the  United States of  America ("GAAP") have  been condensed  or
 omitted.  Reference is made to  the Company's annual consolidated  financial
 statements for  the  year ended  December  31,  2003 for  a  description  of
 accounting  policies and  certain other disclosures.  Certain  items in  the
 2003 financial  statements have  been reclassified  to conform  to the  2004
 presentation.

     The results of  operations for the period  ended September 30, 2004  are
 not necessarily indicative of the operating  results to be expected for  the
 full year.

 Recently Adopted Accounting Pronouncements

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

     At  September  30,   2004,  the  Company  had  a  stock-based   employee
 compensation plan  for  key employees  and  a non-qualified  plan  for  non-
 employee directors,  which  are described  more  fully  in Note  13  to  the
 Company's Form 10-KSB  for December  31, 2003.  Prior to 2003,  the  Company
 accounted for those plans under  the recognition and measurement  provisions
 of APB  Opinion No.  25, "Accounting  for Stock  Issued to  Employees",  and
 related Interpretations.  Effective January 1, 2003, the Company adopted the
 fair value recognition provisions of FASB Statement No. 123, "Accounting for
 Stock-Based Compensation" ("SFAS  123").   Under the  prospective method  of
 adoption  selected  by  the  Company  under  the  provisions  of  SFAS  148,
 compensation cost is recognized for  all employee awards granted,  modified,
 or settled after the beginning of  the fiscal year in which the  recognition
 provisions are  first  applied.  Results  for  prior  years  have  not  been
 restated.

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

                                 Three Months Ended       Nine Months Ended
                                    September 30             September 30
  (in thousands)                 2004          2003       2004          2003
                                -------      -------     -------      -------
  Net income as reported       $  1,543     $    220    $  4,448     $  9,174

  Add:  Stock-based employee
  compensation expenses
  included in reported net
  income, net of related
  tax effects                         5            8          15           16

  Deduct:  Total stock-based
  employee compensation expense
  determined under fair value
  based method for all awards,
  net of related tax effect          (8)         (17)        (25)         (43)
                                -------      -------     -------      -------
  Pro forma net income         $  1,540     $    211    $  4,438     $  9,147
                                =======      =======     =======      =======
  Earnings per share:
  Basic-as reported            $   0.04     $   0.01    $   0.12     $   0.73
                                =======      =======     =======      =======
  Basic-pro forma              $   0.04     $   0.01    $   0.12     $   0.73
                                =======      =======     =======      =======
  Diluted-as reported          $   0.04     $   0.01    $   0.12     $   0.71
                                =======      =======     =======      =======
  Diluted-pro forma            $   0.04     $   0.01    $   0.12     $   0.71
                                =======      =======     =======      =======


 Note 2 - Supplemental Cash Flow Information

     The Company transferred $2.4 million of fixed maturity investments  from
 restricted investments to  debt securities,  available-for-sale, during  the
 first nine months of 2004.  The Company paid $500 thousand in taxes and  $61
 thousand in interest during the first nine months of 2004.


 Note 3 - Reinsurance

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

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

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

                              Three Months Ended   Nine Months Ended
                                 September 30,        September 30,
                                2004      2003       2004      2003
                               ------    ------     ------    ------
     Ceded earned premiums    $    (2)  $ 2,515    $   256   $14,603
     Reinsurance recoveries   $   563   $ 2,574    $   774   $10,346


 Note 4 - Segment Information

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

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

                                 Three Months Ended       Nine Months Ended
                                   September 30,            September 30,
                                 2004          2003       2004          2003
                                -------      -------     -------      -------
 Revenues
 --------
   Personal Lines Group        $  9,321     $ 11,321    $ 29,538     $ 38,768
   Commercial Lines Group         6,325        5,045      17,529       14,363
   Corporate                          -            -           2            -
                                -------      -------     -------      -------
   Consolidated                $ 15,646     $ 16,366    $ 47,069     $ 53,131
                                =======      =======     =======      =======
 Income before tax and
 ---------------------
 extraordinary gain
 ------------------
   Personal Lines Group        $  1,873     $    683    $  5,759     $  3,091
   Commercial Lines Group         1,167          351       2,719          814
   Corporate                       (771)        (748)     (1,937)      (2,349)
                                -------      -------     -------      -------
   Consolidated                $  2,269     $    286    $  6,541     $  1,556
                                =======      =======     =======      =======

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

                                        Sept. 30,          Dec. 31,
                                          2004               2003
                                        --------           --------
               Assets
               ------
        Personal Lines Group           $  63,599          $  68,247
        Commercial Lines Group            15,921             13,365
        Corporate                            631              2,241
                                        --------           --------
             Consolidated              $  80,151          $  83,853
                                        ========           ========


 Note 5 - Deferred Policy Acquisition Costs

 Total deferred and amortized policy acquisition costs for the three and nine
 months ending September 30, 2004 and 2003 (in thousands) were as follows:


                                 Three Months Ended       Nine Months Ended
                                   September 30,            September 30,
                                 2004          2003       2004          2003
                                -------      -------     -------      -------
        Deferred               $ (5,940)    $(15,271)   $(17,277)    $(19,634)
        Amortized                 6,044       14,206      16,784       18,780
                                -------      -------     -------      -------
        Net Deferred           $    104     $ (1,065)   $   (493)    $   (854)
                                =======      =======     =======      =======


 Note 6 - Earnings per Share

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

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

                                  Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
                                  2004          2003      2004          2003
                                 -------      -------    -------      -------
 Weighted average shares - basic  36,458       15,166     36,438       12,501
 Effect of dilutive securities       283          206        193          310
                                 -------      -------    -------      -------
 Weighted average shares -
   assuming dilution              36,741       15,372     36,631       12,811
                                 =======      =======    =======      =======

 Options to purchase  100,000 shares  and 76,000  shares  of common stock  at
 prices ranging  from $0.75 to $1.00 were outstanding during the three months
 ending  September 30, 2004  and  2003, respectively, and options to purchase
 125,000 shares  and  76,000 shares  of common stock  at  prices ranging from
 $0.75 to $1.00 were outstanding during the nine months ending  September 30,
 2004  and  2003,  respectively,  but  in each case were  not included in the
 computation  of  diluted  earnings  per  share  because  the inclusion would
 result in an anti-dilutive effect in periods where the option exercise price
 exceeded the average market price per share for the period.


 Note 7 - Comprehensive Income

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

                                  Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
                                  2004          2003      2004          2003
                                 -------      -------    -------      -------
  Net income                    $  1,543     $    220   $  4,448     $  9,174

  Pension liability, net of tax        -           (8)         -           (8)
  Unrealized gain on available
    for sale securities,
    net of tax                       460          355         82          414
                                 -------      -------    -------      -------
 Other comprehensive income          460          347         82          406
                                 -------      -------    -------      -------
 Comprehensive income           $  2,003     $    567   $  4,530     $  9,580
                                 =======      =======    =======      =======


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

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

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

     The Personal Lines Group provides non-standard automobile liability  and
 physical damage insurance through  Hallmark and Phoenix  for drivers who  do
 not qualify for or cannot obtain standard-rate insurance. Prior to April  1,
 2003, Hallmark assumed  the reinsurance of  100% of  the Texas  non-standard
 automobile policies  produced by  AHGA and  underwritten by  State &  County
 Mutual  Fire  Insurance  Company  ("State  &  County")  and  retroceded  55%
 of the business  to  Dorinco  Reinsurance  Company  ("Dorinco").  Under this
 arrangement, Hallmark  remained  obligated  to policyholders  in  the  event
 Dorinco  did  not  meet  its obligations  under the  retrocession agreement.
 Effective  April 1, 2003, Hallmark  assumed the  reinsurance of  45% of  the
 Texas non-standard  automobile policies  produced by  AHGA and  underwritten
 either by State  &  County (for policies written from April 1, 2003  through
 September 30, 2003)  or Old American  County Mutual  Fire Insurance  Company
 ("OACM") (for policies written after September 30, 2003).  The remaining 55%
 of each policy  was directly assumed  by Dorinco.   Under these  reinsurance
 arrangements, Hallmark is obligated to policyholders only for the portion of
 risk assumed by Hallmark.  Effective October 1, 2004, Hallmark entered  into
 a new quota share reinsurance agreement with OACM pursuant to which Hallmark
 will assume the  reinsurance of 100%  of the  Texas non-standard  automobile
 policies  produced  by  AHGA  after  September  30,  2004.   This  agreement
 supersedes  the  quota  share  reinsurance  agreement  between  the  parties
 effective October 1, 2003.  Phoenix underwrites non-standard auto  insurance
 produced  by  independent  agents  and  retains  100%  of  the  premium  and
 losses for  the  business it  writes.  Effective July 1, 2003,  the  Company
 discontinued HFC's premium finance program and shifted focus to a six  month
 direct bill program.  HCS  provides claims adjustment, salvage,  subrogation
 recovery and litigation services to Hallmark, Phoenix and Dorinco.

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


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

     On a consolidated  basis, the Company's cash and investments  (excluding
 restricted cash and investments)  at September 30,  2004 were $42.8  million
 compared to $40.4 million at December 31, 2003.

     The Company's  consolidated operating activities  provided cash of  $5.0
 million for the  first nine  months of  2004 compared  to cash  used of  $20
 thousand for the first  nine months  of 2003.  The increased operating  cash
 flow was primarily the result of a $5.0 million reduction in claims payments
 attributable to  improved  loss  experience and  the  planned  reduction  in
 personal lines premium volume; a $4.7 million increase in ceding commissions
 collected; and a $1.4 million reduction in interest payments resulting  from
 the  retirement  of a related  party debt during the  third quarter of 2003.
 The improved operating  cash flow  was partially  offset by  a $3.7  million
 decrease in collected personal lines premiums and a $2.3 million  settlement
 of a Phoenix bad faith claim in the first quarter of 2004.

     Cash used by investing activities  during the first nine months of  2004
 was  $5.3  million as compared  to  cash  provided  of  $9.5 million for the
 same period in  2003.  During the first nine  months  of  2004,  the Company
 transferred $3.5  million  into  a restricted  investment  account  for  the
 benefit  of OACM  and  State  &  County, purchased $2.5 million of available
 for  sale securities  and  had net purchases of $2.4 million  of short  term
 investments.   These  cash  outlays  were partially offset  by  $3.4 million
 collected from the redemption of available for sale securities.

     Cash  used in  financing activities  decreased by  $7.7 million  in  the
 first nine months of 2004 as compared  to the same period of 2003  primarily
 due to the  discontinuation of  the premium finance  program in  2003. As  a
 result, the Company  did not  repay any  advances from  the premium  finance
 lender in 2004.  During  the first  nine months of  2003 the Company  repaid
 $9.5 million in  premium finance  advances.  Also, in  the third quarter  of
 2003, the Company received $10.0 million in proceeds from a rights offering,
 of which  the Company  used $9.2  million to  pay off  a note  payable to  a
 related party.  During the third quarter 2004, the Company used $1.0 million
 to pay off a note payable to Dorinco.

     HFS  is dependent  on dividend  payments and  management fees  from  its
 insurance subsidiaries and free cash flow of its non-insurance  subsidiaries
 to meet operating expenses and debt obligations.  As of September 30,  2004,
 cash and invested assets of HFS were $0.3 million.  Cash and invested assets
 of  non-insurance subsidiaries were  $6.8 million  as of September 30, 2004.
 As a property and casualty insurance company domiciled in Texas, Hallmark is
 limited in the payment of dividends to its shareholders in any  twelve-month
 period, without  the  prior  written consent  of  the  Texas  Department  of
 Insurance ("TDI"), to  the greater  of statutory  net income  for the  prior
 calendar year or  10% of statutory  policyholders' surplus as  of the  prior
 year end. Dividends may only be paid from unassigned  surplus funds.  During
 2004, Hallmark's  ordinary  dividend  capacity  is  $2.2  million.  Phoenix,
 domiciled in Arizona, is limited in  the payment of dividends to the  lesser
 of 10% of prior year policyholder's  surplus or prior year's net  investment
 income, without  prior  written  approval from  the  Arizona  Department  of
 Insurance ("AZDOI").  During 2004,  Phoenix's ordinary dividend capacity  is
 $0.6  million.  Neither  Hallmark nor  Phoenix declared  a dividend  to  HFS
 during the first nine months of 2004.  Hallmark paid a $0.2 million dividend
 to HFS in 2004 that was declared in 2003.

     TDI  regulates   financial  transactions  between   Hallmark,  HFS   and
 affiliated companies.   Applicable  regulations  require TDI's  approval  of
 management  and  expense sharing contracts  and similar  transactions.  AHGA
 paid $0.5  million in  management fees  in 2004  to HFS  and HFC  paid  $0.5
 million in management fees to HFS in 2003.

     The  AZDOI regulates  financial transactions  between Phoenix,  HFS  and
 affiliated companies.   Applicable regulations require  AZDOI's approval  of
 management and expense sharing contracts and similar transactions.   Phoenix
 has paid $0.9 million in management fees to AHGA during 2004.


 Results of Operations

 Three Months Ending September 30, 2004 as compared to Three Months Ending
 September 30, 2003

     Total revenues for the quarter ended September 30, 2004, decreased  $0.7
 million, or 4%,  as compared  to the  same period  of 2003,  primarily as  a
 result of a $2.0 million reduction in total revenues from the Personal Lines
 Group partially offset by a $1.3 million increase in total revenues from the
 Commercial Lines Group.  However,  income before tax and extraordinary  gain
 for the quarter ended September 30,  2004, increased $2.0 million, or  693%,
 as compared  to the  same period  in  2003.   The improvement  in  operating
 earnings for the third quarter of 2004 compared to the third quarter of 2003
 reflects  improved  underwriting  results  in  the  Personal  Lines   Group,
 additional commission revenue in the Commercial  Lines Group and an  overall
 reduction in interest  expense as  a result of  the repayment  of a  related
 party note in September 2003.

     The following is additional  business segment information for the  three
 months ended September 30, 2004 and 2003 (in thousands):

                                                2004          2003
                                              --------      --------
                  Revenues
                  --------
    Personal Lines Group                     $   9,321     $  11,321
    Commercial Lines Group                       6,325         5,045
    Corporate                                        -             -
                                              --------      --------
         Consolidated                        $  15,646     $  16,366
                                              ========      ========

    Income before tax and
    ---------------------
    extraordinary gain
    ------------------
    Personal Lines Group                     $   1,873     $     683
    Commercial Lines Group                       1,167           351
    Corporate                                     (771)         (748)
                                              --------      --------
         Consolidated                        $   2,269     $     286
                                              ========      ========


 Personal Lines Group

     Net premiums written increased $0.5 million during the third quarter  of
 2004 to $7.4 million compared to $6.9 million in the third quarter of  2003.
 Net  premiums earned decreased $1.9 million to $7.5 million for the  quarter
 ended September 30, 2004, as compared to $9.4 million in the same period  of
 2003.  Primarily  as a result of  the decline in net premiums earned,  total
 revenue for the Personal Lines Group decreased $2.0 million or 18%, to  $9.3
 million for the third quarter of 2004 from $11.3 million for the same period
 in 2003.

     Although  revenue for  the Personal  Lines Group  declined, its  pre-tax
 income increased  $1.2 million,  or  174%, for  the  third quarter  of  2004
 compared to the third quarter of 2003.   The increase in pre-tax income  was
 due largely to improved  underwriting results as evidenced  by a loss  ratio
 (defined as  loss  and loss  adjustment  expenses divided  by  net  premiums
 earned) of 60.0% for the third quarter of 2004 as compared to 66.3% for  the
 same period  of 2003.   Other  operating costs  and expenses  declined  $0.6
 million for  the  Personal Lines  Group  due  primarily to  a  $0.4  million
 reduction  in Phoenix policy  service  fees  that were paid to a third party
 in 2003.  In 2004,  the Company performed  these  services  internally  with
 existing staff.  Also  contributing to the  reduction in operating  expenses
 was a  $0.2 million  reduction in  salary and  related expenses  due to  the
 successful integration  of  the Phoenix  operations  in late  2003  and  the
 overall reduction in premium volume.  Interest expense was $0.1 million less
 for the third quarter of 2004 as compared to the same period in 2003 due  to
 the discontinuation of the premium finance program in July, 2003.

 Commercial Lines Group

     Total revenue  for the Commercial  Lines Group of  $6.3 million for  the
 third quarter of 2004 was $1.3  million more than the $5.0 million  reported
 in  the  third  quarter  of 2003.   The  improvement was  primarily  due  to
 additional  commission  revenue  of $1.1 million  and  claim  servicing  fee
 revenue  of  $0.2  million  in the third quarter of 2004  as compared to the
 same  period in 2003.  Increased  commercial  premium  volume  and  improved
 underwriting  results were the cause  of the increased commission and  claim
 fee  revenue for the quarter.  Earned  premium generated  by  the Commercial
 Lines Group for the  third quarter  of 2004 was $18.3 million as compared to
 $16.2  million  in the third quarter of 2003.  The Company does not bear the
 primary underwriting  risk for  this business and, therefore,  the resulting
 premiums and claims are not reflected in the Company's reported results.

     Pre-tax income for  the Commercial Lines Group  of $1.2 million for  the
 third quarter of 2004 increased $0.8 million, or 232%, over the $0.4 million
 reported for the  third quarter of  2003.  Increased  revenue, as  discussed
 above, was the primary reason for the increase in pre-tax income,  partially
 offset by additional agent commissions of $0.3 million due to the  increased
 premium volume and increased salary and related expenses of $0.2 million.

 Corporate

      Corporate pre-tax  loss increased  nominally to  $0.8 million  for  the
 third quarter  of 2004  as compared  to the  same period  in 2003.   A  $0.3
 million increase in salary and related expenses was offset by a $0.3 million
 reduction in interest expense for the  third quarter of 2004 as compared  to
 the  same period  in 2003  due  to the repayment  of a related party note in
 September 2003.


 Nine Months Ending September 30, 2004 as compared to Nine Months Ending
 September 30, 2003

     Total revenues for the  nine months ended September 30, 2004,  decreased
 $6.1 million, or 11%, as compared to  the same period of 2003, primarily  as
 the result of a $9.2  million  decline in  total revenues from the  Personal
 Lines   Group   partially  offset  by  a  $3.1  million  increase  in  total
 revenues from the  Commercial Lines Group.  However,  income before tax  and
 extraordinary gain for the nine months  ended September 30, 2004,  increased
 $5.0  million,  or  320%, as  compared  to the  same  period  in  2003.  The
 improvement in operating  earnings in 2004  compared to 2003  for the  first
 nine months reflects  improved underwriting  results in  the Personal  Lines
 Group, additional commission revenue  in the Commercial  Lines Group and  an
 overall reduction in  interest expense  as a result  of the  repayment of  a
 related party note in September 2003.

     The following is  additional business segment  information for the  nine
 months ended September 30, 2004 and 2003 (in thousands):

                                                2004          2003
                                              --------      --------
                  Revenues
                  --------
         Personal Lines Group                $  29,538     $  38,768
         Commercial Lines Group                 17,529        14,363
         Corporate                                   2             -
                                              --------      --------
              Consolidated                   $  47,069     $  53,131
                                              ========      ========

    Income before tax and
    ---------------------
    extraordinary gain
    ------------------
         Personal Lines Group                $   5,759     $   3,091
         Commercial Lines Group                  2,719           814
         Corporate                              (1,937)       (2,349)
                                              --------      --------
              Consolidated                   $   6,541     $   1,556
                                              ========      ========


 Personal Lines Group

     Net  premiums written  decreased  $6.3  million during  the  first  nine
 months of 2004 to  $23.2 million compared to  $29.5 million during the  same
 period  of  2003.  The  decrease  in  net  premiums  written  was  primarily
 attributable to  the cancellation  of unprofitable  agents and  programs,  a
 shift in marketing focus from annual  term premium financed policies to  six
 month term direct bill policies and  a reduction in policy counts caused  by
 increased  rates.  Net  premiums  earned  decreased $9.6  million  to  $23.7
 million for the nine months ended  September 30, 2004, as compared to  $33.3
 million in the same period of 2003.  Primarily as a result of the decline in
 net premiums earned, total  revenue for the  Personal Lines Group  decreased
 $9.2 million, or 24%,  to $29.5 million  for the first  nine months of  2004
 from $38.7 million for the same period in 2003.

     Although  revenue for  the Personal  Lines Group  declined, its  pre-tax
 income increased $2.7  million, or 86%,  for the first  nine months of  2004
 compared to the same  period of 2003.   The increase  in pre-tax income  was
 partially due to improved underwriting results as evidenced by a loss  ratio
 of 59.9% for the first nine months of 2004 as compared to 68.4% for the same
 period of 2003.  Also contributing to  the increase in pre-tax income was  a
 $1.3 million reduction in  Phoenix policy service fees  that were paid to  a
 third  party  in  2003.  In  2004,  the  Company  performed  these  services
 internally with existing staff.  Reduced salary and related expenses due  to
 the successful integration of  the Phoenix operations in  late 2003 and  the
 overall reduction in premium volume contributed $0.6 million to the increase
 in pre-tax income.  Partially offsetting  these increases to pre-tax  income
 was the discontinuation of  the premium finance program  in July 2003  which
 reduced finance charge revenue by $1.4  million as well as interest  expense
 by $0.4 million.

 Commercial Lines Group

     Total revenue for  the Commercial Lines Group  of $17.5 million for  the
 first nine  months of  2004 was  $3.1 million  more than  the $14.4  million
 reported for the same period in 2003.  The improvement was primarily due  to
 a $2.6 million increase in commission revenue and a $0.5 million increase in
 claim servicing  fee revenue.   Commercial  premium  volume growth  was  the
 primary cause of  the increased  commission and  claim fee  revenue for  the
 first nine months of 2004.  Earned premium generated by the Commercial Lines
 Group for the first nine months of 2004 was $53.9 million compared to  $45.9
 million for the same period in 2003.  The Company does not bear the  primary
 underwriting risk for this business  and, therefore, the resulting  premiums
 and claims are not reflected in the Company's reported results.

     Pre-tax income for  the Commercial Lines Group  of $2.7 million for  the
 first nine months  of 2004 increased  $1.9 million, or  234%, over the  $0.8
 million reported  for  the same  period  of  2003.   Increased  revenue,  as
 discussed above, was the primary reason for the increase in pre-tax  income,
 partially offset by additional production related costs of $1.3 million  due
 to the increased premium volume.

 Corporate

      Corporate pre-tax loss was  $1.9 million for the  first nine months  of
 2004 as compared to $2.3 million for the  same period in 2003.  The  Company
 saved $0.8 million in interest expense for the first nine months of 2004  as
 compared to the same period in 2003 due to the repayment of a related  party
 note in September 2003. This was partially offset by a $0.4 million increase
 in salary and related expenses for the first nine months of 2004 as compared
 to the same period in 2003.


 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

      Information required under Item 305 of  Regulation S-K is not  required
 in this Form 10-Q.


 Item 4.  Controls and Procedures.

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

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

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


                                   PART II
                              OTHER INFORMATION


   Item 1.   Legal Proceedings.

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


  Item 2.    Changes in Securities.

             None.


  Item 3.    Defaults on Senior Securities.

             None.


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

             None.


  Item 5.    Other Information.

             None.


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

        (a)  The exhibits listed in the Exhibit Index appearing on page 19

        (b)  The Company filed the following reports on Form 8-K during the
             third quarter of 2004.

               Form 8-K filed August 13, 2004 containing a press release
               announcing the financial results for the second quarter ended
               June 30, 2004.

<PAGE>
                                Exhibit Index
                                -------------


    Exhibit
    Number                       Description
    ------                       -----------
    10           Quota Share  Reinsurance  Agreement dated  September 30,
                 2004 between  Old American County  Mutual Fire Insurance
                 Company  and  American  Hallmark  Insurance  Company  of
                 Texas.

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

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

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

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


                                  SIGNATURES

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

                      HALLMARK FINANCIAL SERVICES, INC.
                                 (Registrant)


 Date: November 12, 2004     /s/ Mark E. Schwarz
                             ---------------------------------------------
                             Mark E. Schwarz, Chairman (Chief
                             Executive Officer)


 Date: November 12, 2004     /s/ Mark J. Morrison
                             ---------------------------------------------
                             Mark J. Morrison, Executive Vice President
                             (Chief Financial Officer)