UNITED STATES
                      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, 2005

                        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


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

 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 - 86,841,791 shares outstanding as of November 14, 2005.

<PAGE>

                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements


                      INDEX TO FINANCIAL STATEMENTS

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

 Consolidated Balance Sheets at September 30, 2005
 (unaudited) and December 31, 2004                               3

 Consolidated Statements of Operations (unaudited)
 for the three months and nine months ended September 30,
 2005 and September 30, 2004                                     4

 Consolidated Statements of Stockholders' Equity and
 Comprehensive Income (unaudited) for the three months
 and nine months ended September 30, 2005 and
 September 30, 2004                                              5

 Consolidated Statements of Cash Flows (unaudited) for
 the nine months ended September 30, 2005 and
 September 30, 2004                                              6

 Notes to Consolidated Financial Statements (unaudited)          7

<PAGE>

                       Hallmark Financial Services, Inc.
                          Consolidated Balance Sheets
                               ($ in thousands)


                                                    September 30  December 31
                    ASSETS                              2005          2004
                    ------                           ----------    ----------
                                                     (unaudited)    (audited)

 Investments:
   Debt securities, available-for-sale,
     at market value                                $    82,414   $    28,206
   Equity securities, available-for-sale,
     at market value                                      4,259         3,580
   Short-term investments, available-for-sale,
     at market value                                     12,171           335
                                                     ----------    ----------
            Total investments                            98,844        32,121

 Cash and cash equivalents                               34,650        12,901
 Restricted cash and investments                          8,589         6,509
 Premiums receivable                                     34,296         4,103
 Accounts receivable                                      2,241         3,494
 Prepaid reinsurance premium                                297             -
 Reinsurance recoverable                                  1,046         3,083
 Deferred policy acquisition costs                       13,605         7,475
 Excess of cost over fair value
   of net assets acquired                                 4,836         4,836
 Intangible assets                                          466           486
 Current federal income tax recoverable                     779             -
 Deferred federal income taxes                            3,672         5,173
 Other assets                                             5,848         2,330
                                                     ----------    ----------
            Total assets                            $   209,169   $    82,511
                                                     ==========    ==========
     LIABILITIES AND STOCKHOLDERS' EQUITY
     ------------------------------------
 Liabilities:
   Unpaid losses and loss adjustment expenses       $    22,185   $    19,648
   Unearned premiums                                     30,195         6,192
   Unearned revenue                                       9,598        11,283
   Note payable                                          30,928             -
   Accrued agent profit sharing                           1,379         1,875
   Accrued ceding commission payable                     11,373         1,695
   Pension liability                                      2,112         2,180
   Current federal income tax payable                         -         1,343
   Payable for securities                                11,835             -
   Accounts payable and other accrued expenses            6,489         5,639
                                                     ----------    ----------
            Total liabilities                           126,094        49,855

 Commitments and Contingencies

 Stockholders' equity:
   Common stock, $.03 par value (authorized
     100,000,000 shares; issued 86,856,610
     shares in 2005 and 36,856,610 shares
     in 2004)                                             2,606         1,106
   Additional paid in capital                            62,887        19,647
   Retained earnings                                     19,395        13,103
   Accumulated other comprehensive income (loss)         (1,796)         (759)
   Treasury stock, at cost (14,819 shares in
     2005 and 379,319 in 2004)                              (17)         (441)
                                                     ----------    ----------
            Total stockholders' equity                   83,075        32,656
                                                     ----------    ----------
                                                    $   209,169   $    82,511
                                                     ==========    ==========

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

<PAGE>
<TABLE>

                       Hallmark Financial Services, Inc.
                     Consolidated Statements of Operations
                                 (Unaudited)
                   ($ in thousands, except per share amounts)


                                         Three Months Ended           Nine Months Ended
                                            September 30                September 30
                                        ---------------------       ---------------------
                                          2005         2004           2005         2004
                                        --------     --------       --------     --------
 <S>                                   <C>          <C>            <C>          <C>
 Gross premiums written                $  43,512    $   7,410      $  62,985    $  23,174
 Ceded premiums written                     (552)           -           (552)          25
                                        --------     --------       --------     --------
   Net premiums written                   42,960        7,410         62,433       23,199
   Change in unearned premiums           (23,936)          54        (23,706)         473
                                        --------     --------       --------     --------
   Net premiums earned                    19,024        7,464         38,727       23,672

 Investment income, net of expenses        1,412          371          2,274          994
 Realized gain (loss)                         93          (57)            52          (57)
 Finance charges                             487          561          1,536        1,644
 Commission and fees                       3,094        5,745         13,534       16,235
 Processing and service fees               1,048        1,556          4,252        4,560
 Other income                                  9            6             22           21
                                        --------     --------       --------     --------
   Total revenues                         25,167       15,646         60,397       47,069

 Losses and loss adjustment expenses      11,043        4,451         22,584       14,100
 Other operating costs and expenses        9,897        8,903         27,752       26,346
 Interest expense                            559           16            664           61
 Amortization of intangible asset             17            7             31           21
                                        --------     --------       --------     --------
   Total expenses                         21,516       13,377         51,031       40,528

 Income before tax                         3,651        2,269          9,366        6,541

 Income tax expense                        1,178          726          3,074        2,093
                                        --------     --------       --------     --------
 Net income                             $  2,473    $   1,543      $   6,292    $   4,448
                                        ========     ========       ========     ========

 Net income per share:
       Basic                           $    0.03    $    0.04      $    0.10    $    0.10
                                        ========     ========       ========     ========

       Diluted                         $    0.03    $    0.04      $    0.10    $    0.10
                                        ========     ========       ========     ========


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

</TABLE>
<PAGE>
<TABLE>

                       Hallmark Financial Services, Inc.
   Consolidated Statements of Stockholders' Equity and Comprehensive Income
                                 (Unaudited)
                               ($ in thousands)


                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
                                          2005         2004           2005         2004
                                        --------     --------       --------     --------
 <S>                                   <C>          <C>            <C>          <C>
 Common Stock
 Balance, beginning of period          $   2,606    $   1,106      $   1,106    $   1,106
 Issuance of common stock in
   rights offering (50,000,000
   shares in 2005)                             -            -          1,500            -
                                        --------     --------       --------     --------
 Balance, end of period                    2,606        1,106          2,606        1,106

 Additional Paid-In Capital
 Balance, beginning of period             62,898       19,648         19,647       19,693
 Issuance of common stock in
   rights offering (50,000,000
   shares in 2005), net of $109
   in expenses                               (31)           -         43,391            -
 Equity based compensation                    20            6             43           20
 Exercise of stock options                     -          (15)          (194)         (74)
                                        --------     --------       --------     --------
 Balance, end of period                   62,887       19,639         62,887       19,639

 Retained Earnings
 Balance, beginning of period             16,922       10,159         13,103        7,254
 Net income                                2,473        1,543          6,292        4,448
                                        --------     --------       --------     --------
 Balance, end of period                   19,395       11,702         19,395       11,702

 Accumulated Other Comprehensive
   Income (Loss)
 Balance, beginning of period               (964)        (471)          (759)        (93)
 Additional minimum pension liability,
   net of tax                                  -            -             30           -
 Unrealized gains (losses) on
   securities, net of tax                   (832)         460         (1,067)          82
                                        --------     --------       --------     --------
 Balance, end of period                   (1,796)         (11)        (1,796)         (11)

 Treasury Stock
 Balance, beginning of period                (17)        (476)          (441)        (563)
 Exercise of stock options                     -           35            424          122
                                        --------     --------       --------     --------
 Balance, end of period                      (17)        (441)           (17)        (441)

                                        -------------------------------------------------
 Stockholders' Equity                  $  83,075    $  31,995      $  83,075    $  31,995
                                        =================================================

 Net income                            $   2,473    $   1,543      $   6,292    $   4,448
 Additional minimum pension
   liability, net of tax                       -            -             30            -
 Unrealized gains (losses)
   on securities, net of tax                (832)         460         (1,067)          82
                                        -------------------------------------------------
 Comprehensive Income                  $   1,641    $   2,003      $   5,255    $   4,530
                                        =================================================

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

</TABLE>
<PAGE>

                       Hallmark Financial Services, Inc.
                      Consolidated Statement of Cash Flows
                                  (Unaudited)
                                ($ in thousands)

                                                        Nine Months Ended
                                                          September 30
                                                     ------------------------
                                                        2005          2004
                                                     ----------    ----------

 Cash flows from operating activities:
   Net income                                       $     6,292   $     4,448

 Adjustments to reconcile net income to cash
   provided by (used in) operating activities:
    Depreciation and amortization expense                   289           341
    Deferred federal income tax expense                   2,051          (124)
    Realized (gain) loss on investments                     (52)           57
    Change in prepaid reinsurance premiums                 (297)          281
    Change in premiums receivable                       (30,193)          664
    Change in accounts receivable                         1,253         1,324
    Change in deferred policy acquisition costs          (6,130)         (493)
    Change in unpaid losses and loss adjustment
      expenses                                            2,537        (7,486)
    Change in unearned premiums                          24,003          (754)
    Change in unearned revenue                           (1,685)        1,482
    Change in accrued agent profit sharing                 (496)         (512)
    Change in reinsurance recoverable                     2,037         5,541
    Change in current federal income tax
      payable/recoverable                                (2,121)        1,717
    Change in accrued ceding commission payable           9,678          (142)
    Change in all other liabilities                         812          (989)
    Change in all other assets                           (2,354)         (394)
                                                     ----------    ----------
      Net cash provided by operating activities           5,624         4,961
                                                     ----------    ----------
 Cash flows from investing activities:
   Purchases of property and equipment                     (275)         (364)
   Premium finance notes repaid,
     net of finance notes originated                          -            52
   Change in restricted cash and investments             (2,080)       (3,467)
   Purchases of debt and equity securities              (57,901)       (2,506)
   Maturities and redemptions of investment
     securities                                           1,237         3,411
   Net purchases of short-term investments                    2        (2,376)
                                                     ----------    ----------
      Net cash used in investing activities             (59,017)       (5,250)
                                                     ----------    ----------
 Cash flows from financing activities:
   Proceeds from exercise of employee stock options         230            48
   Proceeds from stockholder rights offering             44,891             -
   Proceeds of borrowings                                30,928             -
   Debt issuance costs                                     (907)         (991)
                                                     ----------    ----------
      Net cash provided by (used in)
        financing activities                             75,142          (943)
                                                     ----------    ----------
 Increase (decrease) in cash and cash equivalents        21,749        (1,232)
 Cash and cash equivalents at beginning of period        12,901        10,520
                                                     ----------    ----------
 Cash and cash equivalents at end of period         $    34,650   $     9,288
                                                     ==========    ==========
 Supplemental Cash Flow Information:
   Interest paid                                    $       567   $        61
                                                     ----------    ----------
   Taxes paid                                       $     3,144   $       500
                                                     ----------    ----------

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

<PAGE>

                      Hallmark Financial Services, Inc.
            Notes to Consolidated Financial Statements (Unaudited)


 1. General

     Hallmark  Financial  Services,  Inc.,  ("Hallmark"  and,  together  with
 subsidiaries, "we", "us", "our") is an insurance holding company engaged  in
 the sale of property and casualty insurance products.  Our business involves
 marketing and  underwriting non-standard  personal automobile  insurance  in
 Texas,  New  Mexico  and  Arizona;  marketing  and  underwriting  commercial
 insurance in  Texas,  New Mexico,  Idaho,  Oregon, Montana  and  Washington;
 affiliate and third party claims administration; and other insurance related
 services.  We  pursue our business  activities through integrated  insurance
 groups handling non-standard  personal automobile  insurance (the  "Personal
 Lines Group") and commercial insurance  (the "Commercial Lines Group").  The
 members  of  the  Personal  Lines  Group  are  currently  American  Hallmark
 Insurance Company  of  Texas  ("AHIC"), an  authorized  Texas  property  and
 casualty insurance company; Phoenix Indemnity Insurance Company ("PIIC"), an
 authorized  Arizona  property  and  casualty  insurance  company;   American
 Hallmark General  Agency,  Inc. ("AHGA"),  a  managing general  agency;  and
 Hallmark Claims Services, Inc. ("HCS"), an affiliate and third party  claims
 administrator. The members of the Commercial Lines Group are AHIC,  Hallmark
 General Agency,  Inc.  ("HGA"), a  managing  general agency,  and  Effective
 Claims Management, Inc. ("ECM"), a third  party  claims administrator.  AHIC
 began transitioning to the Commercial Lines  Group during the third  quarter
 of 2005.

     During  the  second  quarter of  2005,  we  completed  a  $45.0  million
 shareholder rights offering and a $30.0  million private placement of  trust
 preferred securities.  As a result of these capital enhancements, A.M.  Best
 announced on June 21, 2005 the upgrades of the financial strength ratings of
 AHIC to A-  (excellent) from B  (fair) and PIIC  to B+ (very  good) from  B-
 (fair).

     During the  third quarter  of 2005,  we began  underwriting and  issuing
 AHIC policies  for the  commercial insurance  business produced  by HGA,  in
 order  to  capture  the underwriting margin that had previously been paid to
 a  third party  insurer.  After we  have  obtained  all required  regulatory
 approvals, we intend  to consolidate  the underwriting  of our  non-standard
 personal automobile insurance business  into PIIC, at  which time AHIC  will
 solely be a member of the Commercial Lines Group.


 2. Basis of Presentation

     Our  unaudited consolidated  financial statements  included herein  have
 been prepared in accordance with accounting principles generally accepted in
 the United  States of  America ("GAAP")  and include  our accounts  and  the
 accounts of our  subsidiaries.  All  significant  intercompany accounts  and
 transactions have been eliminated in consolidation.  Certain information and
 footnote  disclosures  normally  included  in  financial statements prepared
 in  accordance  with GAAP have  been condensed or omitted  pursuant to rules
 and  regulations  of  the  Securities  and  Exchange  Commission ("SEC") for
 interim financial reporting.  These financial statements should  be  read in
 conjunction with  our  audited  financial  statements  for  the  year  ended
 December 31, 2004 included in our Annual Report on Form 10-K filed with  the
 SEC.

     The  interim  financial data  as  of  September 30,  2005  and  2004  is
 unaudited.  However, in the opinion of management, the interim data includes
 all adjustments, consisting only of normal recurring adjustments,  necessary
 for a fair statement of the results for the interim periods.  The results of
 operations for  the period  ended September  30,  2005 are  not  necessarily
 indicative of the operating results to be expected for the full year.

     Reclassification

     Certain previously reported  amounts have been reclassified in order  to
 conform to current year presentation.  Such reclassification had  no  effect
 on net income or stockholders' equity.

     Use of Estimates in the Preparation of the Financial Statements

     Our  preparation  of  financial  statements  in  conformity  with  GAAP
 requires us  to make  estimates and  assumptions  that affect  our  reported
 amounts of assets and  liabilities and our  disclosure of contingent  assets
 and liabilities at  the date  of our financial  statements, as  well as  our
 reported amounts  of revenues  and expenses  during the  reporting period.
 Actual results could differ materially from those estimates.

     Recently Issued Accounting Standards

     In  December 2004,  the Financial  Accounting Standards  Board  ("FASB")
 issued Statement No. 123R "Share-Based Payment" ("SFAS 123R"), which revises
 FASB Statement No.  123 ("SFAS  123")  and  supersedes  APB  25.  SFAS  123R
 eliminates an entity's ability to account for share-based payments using APB
 25 and requires  that all such  transactions be accounted  for using a  fair
 value based method.  In April 2005,  the SEC deferred the effective date  of
 SFAS 123R from the first interim  or annual period beginning after June  15,
 2005 to the next fiscal year  beginning after June 15,  2005.  SFAS 123R  is
 not expected  to have  a material  impact on  our results  of operations  or
 financial position.


 3. Equity Compensation Plans

     We have stock  options outstanding under stock-based compensation  plans
 for key employees and non-employee directors.  Effective January 1, 2003, we
 adopted  the  fair  value  recognition  provisions  of  SFAS  123,  and  the
 prospective method  of  adoption  provided under  FASB  Statement  No.  148,
 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
 148").  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)                 2005          2004       2005          2004
                                -------      -------     -------      -------
  Net income as reported       $  2,473     $  1,543    $  6,292     $  4,448

  Add:  Stock-based employee
  compensation expenses
  included in reported net
  income, net of related
  tax effects                        13            5          28           15

  Deduct:  Total stock-based
  employee compensation expense
  determined under fair value
  based method for all awards,
  net of related tax effect         (16)          (8)        (37)         (25)
                                -------      -------     -------      -------
  Pro forma net income         $  2,470     $  1,540    $  6,283     $  4,438
                                =======      =======     =======      =======

  Earnings per share:
    Basic-as reported          $   0.03     $   0.04    $   0.10     $   0.10
                                =======      =======     =======      =======
    Basic-pro forma            $   0.03     $   0.04    $   0.10     $   0.10
                                =======      =======     =======      =======
    Diluted-as reported        $   0.03     $   0.04    $   0.10     $   0.10
                                =======      =======     =======      =======
    Diluted-pro forma          $   0.03     $   0.04    $   0.10     $   0.10
                                =======      =======     =======      =======


 4. Segment Information

     The following  is business segment  information for the  three and  nine
 months ended September 30, 2005 and 2004 (in thousands):

                                 Three Months Ended        Nine Months Ended
                                    September 30,            September 30,
                                --------------------     --------------------
                                 2005          2004       2005          2004
                                -------      -------     -------      -------
 Revenues
 --------
   Personal Lines Group        $ 10,814     $  9,321    $ 33,169     $ 29,538
   Commercial Lines Group        14,339        6,325      27,194       17,529
   Corporate                         14            -          34            2
                                -------      -------     -------      -------
   Consolidated                $ 25,167     $ 15,646    $ 60,397     $ 47,069
                                =======      =======     =======      =======

 Pre-tax income (loss)
 ---------------------
   Personal Lines Group        $  2,790     $  1,873    $  7,666     $  5,759
   Commercial Lines Group         2,196        1,167       4,761        2,719
   Corporate                     (1,335)        (771)     (3,061)      (1,937)
                                -------      -------     -------      -------
   Consolidated                $  3,651     $  2,269    $  9,366     $  6,541
                                =======      =======     =======      =======

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

                                       Sept. 30, 2005      Dec. 31, 2004
                                       -------------       -------------
                  Assets
                  ------
        Personal Lines Group             $   80,050          $   63,136
        Commercial Lines Group              126,202              18,557
        Corporate                             2,917                 818
                                          ---------           ---------
             Consolidated                $  209,169          $   82,511
                                          =========           =========


 5. Reinsurance

     Prior  to  April 1, 2003,  AHIC ceded  reinsurance  to  other companies.
 These reinsurance arrangements  are more fully  described in Note  5 to  the
 Company's Form 10-K  for the  year  ended  December 31, 2004.  In the  third
 quarter of  2005,  AHIC began  ceding  reinsurance to  other  companies  for
 coverage on  AHIC  policies issued  by  HGA.  We  remain  obligated  to  our
 policyholders in the event that the reinsurers do not meet their obligations
 under the reinsurance agreements.

     Under some of our  reinsurance arrangements, we continue to earn  ceding
 commissions based on incurred loss experience on the portion of the policies
 ceded.  We received a provisional commission as policies were produced as an
 advance against the later determination of the commission actually earned.

     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,
                                --------------------     --------------------
                                 2005          2004       2005          2004
                                -------      -------     -------      -------

  Ceded earned premiums        $    255     $     (2)   $    255     $    256
  Reinsurance recoveries       $   (118)    $    563    $   (499)    $    774


 6. Note Payable

      On June 21, 2005, our newly formed trust subsidiary completed a private
 placement  of  $30.0  million  of  30-year  floating  rate  trust  preferred
 securities.  Simultaneously,  we  borrowed  $30.9  million  from  the  trust
 subsidiary and  contributed  $30.0 million to  AHIC  in  order  to  increase
 policyholder  surplus.  The note bears  an initial interest  rate of  7.725%
 until June 15,  2015, at which  time interest will  adjust quarterly to  the
 three month LIBOR  rate plus 3.25  percentage  points.  As of September  30,
 2005, the note balance was $30.9 million.


 7. Credit Facility

      On June 29, 2005,  we  entered into a  credit facility  with The  Frost
 National Bank.  The credit facility was amended on July 15, 2005, to  reduce
 the interest rate.  Under this credit facility, the maximum amount available
 to us  from time  to time  is $7.5  million, which  may include  up to  $2.0
 million under a revolving  line of credit, up  to $3.5 million in  five-year
 term loans  and  up to $7.5 million in five-year stand-by letters of credit.
 The borrowings under our credit facility  will accrue interest at an  annual
 rate of three month LIBOR plus 2.00% and  we will pay letter of credit  fees
 at  the rate of 1.00% per annum.  Our obligations under the credit  facility
 are secured  by a  security interest  in the  capital stock  of all  of  our
 subsidiaries, guaranties  of  all of  our  subsidiaries and  the  pledge  of
 substantially all of  our assets.  The  credit  facility contains  covenants
 which, among  other things,  require us  to maintain  certain financial  and
 operating  ratios  and  restrict  certain  distributions,  transactions  and
 organizational changes.  As of September 30, 2005, there were no outstanding
 amounts due under our credit facility, and we were in compliance with or had
 obtained waivers of all of our covenants.  In the third quarter of 2005,  we
 issued a $4.0 million letter of credit under this facility to  collateralize
 certain obligations under  the agency  agreement between  HGA and  Clarendon
 National Insurance Company ("Clarendon") effective July 1, 2004.


 8. Deferred Policy Acquisition Costs

     The  following   table  shows  total   deferred  and  amortized   policy
 acquisition costs by period (in thousands):

                                 Three Months Ended        Nine Months Ended
                                    September 30,            September 30,
                                --------------------     --------------------
                                 2005          2004       2005          2004
                                -------      -------     -------      -------
        Deferred               $(14,252)    $ (5,940)   $(25,877)    $(17,277)
        Amortized                 8,751        6,044      19,747       16,784
                                -------      -------     -------      -------
        Net Deferred           $ (5,501)    $    104    $ (6,130)    $   (493)
                                =======      =======     =======      =======


 9. 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,
                                 --------------------    --------------------
                                  2005          2004      2005          2004
                                 -------      -------    -------      -------
 Weighted average shares - basic  86,842       42,430     65,045       42,407
 Effect of dilutive securities       624          283        602          193
                                 -------      -------    -------      -------
 Weighted average shares -
   assuming dilution              87,466       42,713     65,647       42,600
                                 =======      =======    =======      =======

      For the three and nine months ended September 30, 2004, 100,000  shares
 and 125,000 shares, respectively, attributable to outstanding stock  options
 were excluded from the calculation of diluted earnings per share because the
 exercise prices  of the  stock options  were greater  than or  equal to  the
 average price of  the common shares  and, therefore,  their inclusion  would
 have been anti-dilutive.  There were no outstanding stock options that  were
 excluded from the calculation  of diluted earnings per  share for the  three
 and nine months ended September 30, 2005.

      In accordance with FASB Statement No.  128 "Earnings Per Share"  ("SFAS
 128"), we  have  restated the  basic  and diluted  weighted  average  shares
 outstanding for the three  months and nine months  ended  September 30, 2004
 for the effect of a bonus element from our stockholder rights offering  that
 was successfully completed in the second quarter of 2005.  According to SFAS
 128, there is  an assumed  bonus element in  a rights  issue whose  exercise
 price is less than the market value of the stock at the close of the  rights
 offering period.  This  bonus  element is treated  as a  stock dividend  for
 reporting earnings per share.


 10. Net Periodic Pension Cost

      We have recognized $49 thousand in net periodic pension cost during the
 first nine months of 2005.  The components of this cost are interest cost of
 $544 thousand, amortization of net loss of $57 thousand and expected return
 on plan assets of ($552) thousand.


 11.  Subsequent Event

      On November 9, 2005 we executed a definitive agreement to acquire Texas
 General Agency, Inc.  ("TGA")  and  certain affiliates.  TGA  is a  managing
 general agency  involved in  the marketing  and  servicing of  property  and
 casualty insurance  products,  with  a  particular  emphasis  on  commercial
 automobile and general liability risks.  The acquisition will  also  include
 TGA's wholly-owned  insurance  subsidiary, Gulf  States  Insurance  Company,
 which reinsures a portion  of the business  written by TGA,  as well as  TGA
 Special Risk, Inc., which brokers mobile home insurance.  Closing conditions
 include, among other things,  execution  of  employment  agreements  between
 TGA  and  the three individual sellers, obtaining consent to the transaction
 from  the Oklahoma  Commissioner  of  Insurance,  and  Hallmark's  prior  or
 contemporaneous acquisition of an affiliated entity, Pan American Acceptance
 Corporation.  The transaction is expected  to be effective as of January  1,
 2006.


 Item 2.   Management's Discussion and Analysis of Financial Condition and
           Results of Operations.

 Introduction

     Hallmark  Financial  Services,  Inc.,  ("Hallmark"  and,  together  with
 subsidiaries, "we", "us", "our") is an insurance holding company engaged  in
 the sale of property and casualty insurance products.  Our business involves
 marketing and  underwriting non-standard  personal automobile  insurance  in
 Texas,  New  Mexico  and  Arizona;  marketing  and  underwriting  commercial
 insurance in  Texas,  New Mexico,  Idaho,  Oregon, Montana  and  Washington;
 affiliate and third party claims administration; and other insurance related
 services.  We  pursue our business  activities through integrated  insurance
 groups handling non-standard  personal automobile  insurance (the  "Personal
 Lines Group") and commercial insurance  (the "Commercial Lines Group").  The
 members  of  the  Personal  Lines  Group  are  currently  American  Hallmark
 Insurance Company  of  Texas  ("AHIC"), an  authorized  Texas  property  and
 casualty insurance company; Phoenix Indemnity Insurance Company ("PIIC"), an
 authorized  Arizona  property  and  casualty  insurance  company;   American
 Hallmark General  Agency,  Inc. ("AHGA"),  a  managing general  agency;  and
 Hallmark Claims Services, Inc. ("HCS"), an affiliate and third party  claims
 administrator. The members of the Commercial Lines Group are AHIC,  Hallmark
 General Agency,  Inc.  ("HGA"), a  managing  general agency,  and  Effective
 Claims Management, Inc. ("ECM"), a third  party claims administrator.   AHIC
 began transitioning to the Commercial Lines  Group during the third  quarter
 of 2005.

     During  the  second  quarter of  2005,  we  completed  a  $45.0  million
 shareholder rights offering and a $30.0  million private placement of  trust
 preferred securities.  As a result of these capital enhancements, A.M.  Best
 announced on June 21, 2005 the upgrades of the financial strength ratings of
 AHIC to A-  (excellent) from B  (fair) and PIIC  to B+ (very  good) from  B-
 (fair).

     During the  third quarter  of 2005,  we began  underwriting and  issuing
 AHIC policies  for the  commercial insurance  business produced  by HGA,  in
 order to capture the underwriting margin that had previously been paid to  a
 third  party  insurer.  After  we  have  obtained  all  required  regulatory
 approvals, we intend  to consolidate  the underwriting  of our  non-standard
 personal automobile insurance business  into PIIC, at  which time AHIC  will
 solely be a member of the Commercial Lines Group.


 Financial Condition and Liquidity

     Sources and  uses of funds.   Our sources  of funds  are from  insurance
 related operations,  financing  activities and investing  activities.  Major
 sources of funds from operations include  premiums collected (net of  policy
 cancellations and premiums ceded),  commissions, and processing and  service
 fees.   On  a  consolidated  basis,  our  cash  and  investments  (excluding
 restricted cash and investments) at September  30, 2005 were $133.5  million
 compared  to $45.0 million at  December 31, 2004.  Most of this increase  is
 attributable to  net proceeds  of $44.9  million from  a stockholder  rights
 offering and $29.1 million from the  issuance of trust preferred  securities
 during the second quarter of 2005.

     Net  cash provided  by our  consolidated operating  activities was  $5.6
 million for the first nine months of  2005 compared to $5.0 million for  the
 first nine months of  2004.  The increase  in operating cash flow  primarily
 resulted from  increased  premiums collected  of  $8.4 million  due  to  the
 assumption from Clarendon of  business produced by HGA  and the issuance  of
 AHIC  policies  for  business produced  by  HGA  since  July  1, 2005.  Also
 contributing to the increase in collected  premium is the 100% retention  of
 the Texas non-standard auto premium produced  by AHGA.  Prior to  October 1,
 2004, we  retained only  45%  of  this business.  Partially  offsetting  the
 increased operating cash flow is a  $5.5 million increase in paid  operating
 expenses due mostly to additional ceding  commissions paid to Clarendon  for
 the assumed  premium,  paid incentive  compensation  and paid  retail  agent
 profit   sharing  commissions.   Also  partially  offsetting  the  increased
 operating cash  flow  is a  $2.2  million increase  in  paid loss  and  loss
 adjustment expenses  due mostly  to the  AHIC  direct and  assumed  business
 produced by HGA in the third quarter of 2005.

     Cash used by investing activities  during the first nine months of  2005
 was  $59.0  million as compared to $5.3 million for the same period in 2004.
 The increase in cash used in investing activities is mainly due to increased
 purchases of debt and equity securities  of $55.4 million and a decrease  in
 net maturities and redemptions of securities of $2.2 million.  These uses of
 cash were partially offset  by a $2.4 million  decrease in net purchases  of
 short-term investments and a $1.4 million  decrease in cash and  investments
 transferred to restricted accounts.

     Cash provided  by financing activities during  the first nine months  of
 2005 was $75.1 million as compared  to cash used in financing activities  of
 $0.9  million for the  same period of 2004.  The cash  provided in 2005  was
 from net proceeds  of $44.9 million  from the  stockholder rights  offering,
 $30.0 million from the  issuance of trust preferred  securities net  of debt
 issuance costs and  $0.2 million from  the exercise of  stock  options.  The
 cash used in 2004 was from  $1.0 million repaid on  a note payable that  was
 partially offset by  $48 thousand  in proceeds  from the  exercise of  stock
 options.

     As a  holding company, Hallmark  is dependent on  dividend payments  and
 management fees from its  subsidiaries to meet  operating expenses and  debt
 obligations.  As of  September 30, 2005, Hallmark  had $1.4 million in  cash
 and  invested  assets.   Cash  and  invested  assets  of  our  non-insurance
 subsidiaries were $3.6 million as of September 30, 2005.

     Property  and casualty  insurance companies  domiciled in  the State  of
 Texas are limited in the payment  of dividends to their shareholders in  any
 twelve-month  period,  without  the  prior  written  consent  of  the  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 2005,  AHIC's  ordinary  dividend capacity  is  $1.5  million.  PIIC,
 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 2005, PIIC's ordinary dividend capacity is $0.8
 million.  Neither AHIC nor PIIC paid a dividend to Hallmark during the first
 nine months of 2005.

     TDI  regulates  financial  transactions  between  AHIC  and   affiliated
 companies.  Applicable  regulations  require  TDI's approval  of  management
 fees, expense sharing contracts  and  similar transactions.  AHGA paid  $1.2
 million and $0.5  million in management  fees to Hallmark  during the  first
 nine months of 2005 and 2004, respectively.

     AZDOI  regulates  financial transactions  between  PIIC  and  affiliated
 companies.  Applicable  regulations require AZDOI's  approval of  management
 fees, expense sharing contracts  and  similar transactions.  PIIC paid  $0.9
 million in management fees to AHGA during the first nine months of 2005  and
 2004, respectively.

     Credit facility.  On June 29, 2005,  we  entered into a credit  facility
 with The Frost National Bank.  The  credit facility was amended on July  15,
 2005, to reduce the interest rate.  Under this credit facility, the  maximum
 amount available to us from time to time is $7.5 million, which may  include
 up to $2.0 million under a revolving line  of credit, up to $3.5 million  in
 five-year term loans and up to $7.5 million in five-year stand-by letters of
 credit.  The borrowings under our credit facility will accrue interest at an
 annual rate of three month LIBOR plus 2.00% and we will pay letter of credit
 fees at the  rate of  1.00%  per  annum.  Our obligations  under the  credit
 facility are secured by a security interest  in the capital stock of all  of
 our subsidiaries, guaranties of  all of our subsidiaries  and the pledge  of
 substantially all of  our  assets.  The credit  facility contains  covenants
 which, among  other things,  require us  to maintain  certain financial  and
 operating  ratios  and  restrict  certain  distributions,  transactions  and
 organizational changes.  As of September 30, 2005, there were no outstanding
 amounts due under our credit facility, and we were in compliance with or had
 obtained waivers  all of  our covenants.  In the third  quarter of 2005,  we
 issued a $4.0 million letter of credit under this facility to  collateralize
 certain obligations under  the agency  agreement between  HGA and  Clarendon
 effective July 1, 2004.

     Trust preferred securities.  On June 21, 2005,  our newly  formed  trust
 subsidiary completed  a  private  placement  of  $30.0  million  of  30-year
 floating rate trust preferred securities.  Simultaneously, we borrowed $30.9
 million from the trust subsidiary and  contributed $30.0 million to AHIC  in
 order to increase policyholder surplus.  The note bears an initial  interest
 rate of  7.725% until  June 15,  2015, at  which time  interest will  adjust
 quarterly to the three month LIBOR rate plus 3.25 percentage points.  As  of
 September 30, 2005, the note balance was $30.9 million.

 Results of Operations

     Management  Overview.   During the  third quarter  of fiscal  2005,  our
 total revenues were $25.2  million, representing a  60.9% increase over  the
 $15.6  million in total revenues for  the comparable period of fiscal 2004.
 For the first  nine months  of fiscal 2005,  our total  revenues were  $60.4
 million, which was 28.3% more than  the $47.1 million in total revenues  for
 the  comparable  period in  fiscal 2004.  We  reported  net income  of  $2.5
 million and $6.3 million for the  three and nine months ended September  30,
 2005, respectively.  This represents a 60.3% and 41.5% increase over our net
 income for the three and nine months ended September 30, 2004, respectively.
  On a diluted per share basis, net income was $0.03 and $0.10 for the  three
 and nine months ended September 30, 2005, respectively, as compared to $0.04
 and $0.10 for the same periods in the prior year.  During the second quarter
 of 2005, we  issued 50.0 million  shares in a  stockholder rights  offering,
 resulting in a decrease in the per share results between periods.

     The increase in total revenues for the first nine months of fiscal  2005
 as  compared  to  the  first  nine  months  of  fiscal  2004  was  primarily
 attributable to the issuance of AHIC  policies for the commercial  insurance
 business produced by HGA  and the assumption of  premium from Clarendon  for
 business produced by HGA .  Also contributing to the increase in revenues is
 increased premium assumed by the Personal Lines Group as a result of changes
 in Hallmark's reinsurance arrangements.  The increase in net income for  the
 first nine months of  2005 versus the same  period in 2004 reflects  ongoing
 initiatives to  improve underwriting  performance in  both operating  units,
 increased premium  assumption by  the Personal  Lines Group,  and  increased
 investment income.

     The following is additional  business segment information for the  three
 and nine months ended September 30, 2005 and 2004 (in thousands):

                                 Three Months Ended        Nine Months Ended
                                    September 30,            September 30,
                                --------------------     --------------------
                                 2005          2004       2005          2004
                                -------      -------     -------      -------
 Revenues
 --------
   Personal Lines Group        $ 10,814     $  9,321    $ 33,169     $ 29,538
   Commercial Lines Group        14,339        6,325      27,194       17,529
   Corporate                         14            -          34            2
                                -------      -------     -------      -------
   Consolidated                $ 25,167     $ 15,646    $ 60,397     $ 47,069
                                =======      =======     =======      =======

 Pre-tax income (loss)
 ---------------------
   Personal Lines Group        $  2,790     $  1,873    $  7,666     $  5,759
   Commercial Lines Group         2,196        1,167       4,761        2,719
   Corporate                     (1,335)        (771)     (3,061)      (1,937)
                                -------      -------     -------      -------
   Consolidated                $  3,651     $  2,269    $  9,366     $  6,541
                                =======      =======     =======      =======


 Third Quarter 2005 as compared to the Third Quarter 2004

 Personal Lines Group

     Net premium written increased  $1.2 million during the third quarter  of
 2005 to $8.6 million compared to $7.4 million in the third quarter of  2004.
 The  increase was due mainly to AHIC assuming 100% of the Texas non-standard
 automobile business  produced by  AHGA and  underwritten by  a third  party,
 effective October 1, 2004.  Prior to October 1, 2004, AHIC assumed only  45%
 of this business.  Total premium production for  the third quarter  of  2005
 declined $1.8 million, or  17.1%,  from the  $10.5 million  produced in  the
 third quarter of 2004.  The decline  in  produced premium was reflective  of
 increased competition.

     Revenue for  the Personal Lines Group  increased 16.0% to $10.8  million
 for the third quarter of 2005 from $9.3 million for the same period in 2004.
 Increased  net premium earned of $1.5 million due to higher assumed  premium
 volume was the primary cause of  this increase.  Also driving the  increased
 revenue was a $0.4 million increase in investment income due to an  increase
 in the investment portfolio from the completion  of our capital plan.  These
 increases were  partially  offset  by a  $0.4  million  decrease  in  ceding
 commission income  due  to AHIC  assuming  100% of  the  Texas  non-standard
 automobile business effective October 1, 2004.

     Pre-tax income for the  Personal Lines Group increased $0.9 million,  or
 49.0%, for the third quarter of 2005 compared to the third quarter of  2004.
 Net  investment  income  and  realized gains  and  losses  contributed  $0.6
 million to the  increase in  pre-tax income for  the  quarter.  Taking  into
 consideration the effect  on ceding  commissions, loss  and loss  adjustment
 expenses and  premium  production  costs,  the  changes  in  premium  volume
 produced and assumed  contributed $0.2 million  to the  increase in  pre-tax
 income.  Lower salary  and  related  expenses contributed  $0.1 million  and
 lower technical service  costs from integrating  PIIC's back office  systems
 that were previously outsourced contributed  $0.1 million.  These  increases
 were partially offset by a loss  ratio (defined as loss and loss  adjustment
 expenses divided by net premiums earned)  of 60.6% for the third quarter  of
 2005 as compared to 60.0% for the same period in 2004, which decreased  pre-
 tax income by $0.1 million.

 Commercial Lines Group

     Beginning  in the  third quarter  of 2005, the  Commercial  Lines  Group
 began retaining written premium  through  AHIC.  The Commercial Lines  Group
 written premium was accomplished through the assumption of in-force policies
 from Clarendon at July 1, 2005, the assumption of Clarendon policies  issued
 subsequent to  July  1, 2005,  and  the  issuance  of  AHIC  policies.  This
 resulted in net  written premium  for the  Commercial Lines  Group of  $34.3
 million for the quarter ended September 30, 2005.

     Total revenue for  the Commercial Lines Group  of $14.3 million for  the
 third quarter of 2005 was $8.0  million more than the $6.3 million  reported
 in the third quarter  of 2004.  This 126.7% increase  in  total revenue  was
 primarily due to net premiums earned  of $10.1 million for the quarter  from
 the issuance of AHIC policies and  the assumption of premium from  Clarendon
 for business produced by HGA.  Increased  net investment income  contributed
 $0.6 million to the increase in revenue for the quarter.  These increases in
 revenue were partially  offset by lower  ceding commission  revenue of  $2.3
 million and lower processing and service fees of $0.4 million, in both cases
 due to  the  shift from  a  third party  agency  structure to  an  insurance
 underwriting structure.  Total earned premium  generated  by the  Commercial
 Lines Group (including premium retained by Clarendon) for the third  quarter
 of 2005 was $19.8 million as compared to $18.3 million in the third  quarter
 of 2004.

     Pre-tax income for  the Commercial Lines Group  of $2.2 million for  the
 third quarter  of 2005  increased  $1.0 million,  or  88.2%, over  the  $1.2
 million reported  for the  third quarter  of  2004.  Increased  revenue,  as
 discussed above, was the primary reason for the increase in pre-tax  income,
 partially offset by loss  and loss adjustment expenses  of $5.6 million  and
 additional production expenses of $1.3 million.

 Corporate

      Corporate pre-tax loss was $1.3 million  for the third quarter of  2005
 as compared to $0.8 million for the same  period in 2004.  The increase  was
 primarily  due  to  additional  interest  expense  on  the  trust  preferred
 securities issued in June 2005.

 Year-to-Date 2005 as compared to Year-to-Date 2004

 Personal Lines Group

     Net premium written increased $4.9 million during the first nine  months
 of 2005 to $28.1  million compared to  $23.2 million in  the same period  of
 2004.  The increase was due mainly to  AHIC assuming 100% of the Texas  non-
 standard automobile business produced  by AHGA and  underwritten by a  third
 party, effective  October 1, 2004.  Prior to  October 1, 2004, AHIC  assumed
 only  45% of  this business.  Total premium  production for  the first  nine
 months of  2005 declined  $5.6 million,  or 16.6%,  from the  $33.7  million
 produced in the first nine months of 2004.  The decline in produced  premium
 was reflective of increased competition.

     Revenue for  the Personal Lines Group  increased 12.3% to $33.2  million
 for the first nine months of 2005 from $29.5 million for the same period  in
 2004.  Increased net  premium earned of $5.0  million due to higher  assumed
 premium volume was  the primary cause  of this increase.  Also  driving  the
 increased revenue was a $0.6 million increase in investment income due to an
 increase in  the investment  portfolio from  the completion  of our  capital
 plan. These increases were  partially offset by a  $1.7 million decrease  in
 ceding commission income due to AHIC assuming 100% of the Texas non-standard
 automobile business effective October 1, 2004.

     Pre-tax income for the  Personal Lines Group increased $1.9 million,  or
 33.1%, for the  first nine months  of 2005 compared  to the  same period  of
 2004.  Net investment income and realized gains and losses contributed  $0.7
 million to the increase in pre-tax income for the first nine months of 2005.
 Taking  into consideration the effect on  ceding commissions, loss and  loss
 adjustment expenses and  premium production  costs, the  changes in  premium
 volume produced and  assumed contributed approximately  $0.5 million to  the
 increase in pre-tax income.  Lower technical service costs from  integrating
 PIIC's back office systems that were previously outsourced contributed  $0.3
 million, lower salary and related expenses  contributed $0.3 million, and  a
 loss ratio of 59.3% for the first nine  months of 2005 as compared to  59.9%
 for the same period in 2004 contributed $0.2 million to the increase in pre-
 tax income.

 Commercial Lines Group

     Beginning  in the  third quarter  of 2005,  the Commercial  Lines  Group
 began retaining written premium  through  AHIC.  The Commercial Lines  Group
 written premium was accomplished through the assumption of in-force policies
 from Clarendon at July 1, 2005, the assumption of Clarendon policies  issued
 subsequent  to  July 1, 2005,  and  the  issuance  of  AHIC  policies.  This
 resulted in net  written premium  for the  Commercial Lines  Group  of $34.3
 million for the year ended September 30, 2005.

     Total revenue for  the Commercial Lines Group  of $27.2 million for  the
 first nine  months of  2005 was  $9.7 million  more than  the $17.5  million
 reported in the first  nine months of  2004.  This  55.1% increase in  total
 revenue was primarily due  to net premiums earned  of $10.1 million for  the
 first nine  months  of 2005  from  the issuance  of  AHIC policies  and  the
 assumption  of  premium  from  Clarendon   for  business  produced  by  HGA.
 Increased net investment income contributed $0.7 million to the increase  in
 revenue.  These increases in revenue  were partially offset by lower  ceding
 commission revenue of $1.0 million and lower processing and service fees  of
 $0.1 million, in  both cases  due to  the shift  from a  third party  agency
 structure to  an insurance  underwriting  structure.  Total  earned  premium
 generated by  the  Commercial Lines  Group  (including premium  retained  by
 Clarendon) for the first nine months  of 2005 was $57.9 million as  compared
 to $53.9 million for the first nine months of 2004.

     Pre-tax income for  the Commercial Lines Group  of $4.8 million for  the
 first nine months of  2005 increased $2.0 million,  or 75.1%, over the  $2.7
 million  reported  for  the same  period  of  2004.  Increased  revenue,  as
 discussed above, was the primary reason for the increase in pre-tax  income,
 partially offset by loss  and loss adjustment expenses  of $5.6 million  and
 additional production expenses of $1.9 million.

 Corporate

      Corporate pre-tax loss was  $3.1 million for the  first nine months  of
 2005 as compared to $1.9 million for the same period in 2004.  The  increase
 was due to additional interest expense of $0.6 million from the issuance  of
 trust preferred  securities  in  June  2005, as  well  as  the  transfer  of
 accounting positions from both the Personal Lines Group and Commercial Lines
 Group to Corporate.


 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

      As  of September 30, 2005, there  had been no  material changes in  the
 market risks  described  in the  Company's  Form  10-K for  the  year  ended
 December 31, 2004.


 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, as of  the end of  the period covered  by this report,  such
 disclosure  controls  and  procedures   were  effective  in  ensuring   that
 information required to be disclosed by  the Company in the reports that  it
 files or  submits  under the  Securities  Exchange  Act of  1934  is  timely
 recorded, processed, summarized  and reported. The  Chief Executive  Officer
 and Chief Financial Officer also concluded that such disclosure controls and
 procedures were  effective  in  ensuring that  information  required  to  be
 disclosed by the Company in the reports that it files or submits under  such
 Act is accumulated and communicated  to the Company's management,  including
 its Chief Executive Officer and Chief Financial Officer, as appropriate,  to
 allow timely  decisions  regarding  required  disclosure.  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. Unregistered Sales of Equity Securities and Use of Proceeds.

          None.


  Item 3. Defaults Upon Senior Securities.

          None.


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

          None.


  Item 5. Other Information.

          None.


  Item 6. Exhibits.

          The following exhibits are filed herewith or incorporated
          herein by reference:

    Exhibit
    Number                       Description
    ------                       -----------
     3(a)     Articles of Incorporation of the registrant, as
              amended (incorporated by reference to Exhibit 3(a) to
              the registrant's Annual Report on Form 10-KSB for the
              fiscal year ended December 31, 1993).

     3(b)     By-Laws of the registrant, as amended (incorporated
              by reference to Exhibit 3(b) to the registrant's Form
              10-Q for the quarter ended June 30, 2005).

     4(a)     Specimen certificate for Common Stock, $0.03 par
              value per share, of the registrant (incorporated by
              reference to Exhibit 4 to the registrant's Annual
              Report on Form 10-KSB for the fiscal year ended
              December 31, 1991).

     4(b)     Indenture dated as of June 21, 2005, between Hallmark
              Financial Services, Inc. and JPMorgan Chase Bank,
              National Association (incorporated by reference to
              Exhibit 4.1 to the registrant's Form 8-K filed June 27,
              2005).

     4(c)     Amended and Restated Declaration of Trust of Hallmark
              Statutory Trust I dated as of June 21, 2005, among
              Hallmark Financial Services, Inc., as sponsor, Chase
              Bank USA, National Association, as Delaware trustee,
              and JPMorgan Chase Bank, National Association, as
              institutional trustee, and Mark Schwarz and Mark
              Morrison, as administrators (incorporated by reference
              to Exhibit 4.2 to the registrant's Form 8-K filed June
              27, 2005).

     4(d)     Form of Junior Subordinated Debt Security Due 2035
              (incorporated by reference to Exhibit 4.1 to the
              registrant's Form 8-K filed June 27, 2005).

     4(e)     Form of Capital Security Certificate (incorporated by
              reference to Exhibit 4.2 to the registrant's Form 8-K
              filed June 27, 2005).

     4(f)     Credit Agreement dated June 29, 2005, between
              Hallmark Financial Services, Inc. and The Frost
              National Bank (incorporated by reference to Exhibit
              4.1 to the registrant's Form 8-K filed July 6, 2005).

     4(g)     First Amendment to Credit Agreement dated July 15,
              2005, between Hallmark Financial Services, Inc. and
              The Frost National Bank (incorporated by reference to
              Exhibit 4(g) to the registrant's Form 10-Q filed
              August 5, 2005).


    Exhibit
    Number                       Description
    ------                       -----------
    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.

    32(b)     Certification of Chief Financial Officer Pursuant to
              18 U.S.C. 1350.


                                  SIGNATURES

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

                      HALLMARK FINANCIAL SERVICES, INC.
                                 (Registrant)


 Date: November 14, 2005     /s/ Mark E. Schwarz
                             ---------------------------------------------
                             Mark E. Schwarz, Chairman
                             (Chief Executive Officer)


 Date: November 14, 2005     /s/ Mark J. Morrison
                             ---------------------------------------------
                             Mark J. Morrison, Executive Vice President
                             (Chief Operating Officer and Chief Financial
                             Officer)