CONFORMED COPY


                    SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C. 20549

                               FORM 10-QSB

            Quarterly report under Section 13 or 15(d) of the
                    Securities Exchange Act of 1934

            For the quarterly period ended September 30, 1998



Commission file number 0-16090


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


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

     14651 Dallas Parkway, Suite 900
           Dallas, Texas                              75240
(Address of principal executive offices)            (Zip Code)


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

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

                       Yes  X       No

                  APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:  Common Stock, par value
$.03 per share - 10,668,277 shares outstanding as of November 1, 1998.
<PAGE>
                                   PART I
                            FINANCIAL INFORMATION

Item 1.     Financial Statements


                           INDEX TO FINANCIAL STATEMENTS


                                                            Page Number


Consolidated Balance Sheets at September 30, 1998
      (unaudited) and December 31, 1997                           3


Consolidated Statements of Income (unaudited)      
      for the three and nine months ended
      September 30, 1998 and September 30, 1997                   4


Consolidated Statements of Cash Flows (unaudited)
      for the nine months ended September 30, 1998 
      and September 30, 1997                                      5


Notes to Consolidated Financial Statements (unaudited)            6
<PAGE>
          HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS
<TABLE>
                                     September 30       December 31
                ASSETS                  1998                1997
                                     (Unaudited)
                <S>                      <C>                <C>
Investments:
  Debt securities, held-to-
    maturity, at amortized cost     $   4,155,004      $   4,966,141
  Equity securities, available-
    for-sale, at market value             153,130            152,359
  Short-term investments, at cost
    which approximates market value     4,468,220          2,970,838

          Total investments             8,776,354          8,089,338

Cash and cash equivalents               6,107,737          5,814,127
Restricted cash                         1,387,737          1,340,937
Prepaid reinsurance premiums            5,938,939          8,414,250
Premium finance notes receivable        6,287,142          7,878,758
 (net of allowance for doubtful
  accounts of $103,265 in 1998
  $83,788 in 1997)
Premiums receivable                       972,122            844,140
Note receivable                              -             1,149,280
Reinsurance recoverable                14,576,935         16,549,352
Deferred policy acquisition costs       2,340,228          3,143,378
Excess of cost over net assets
  acquired (net of accumulated
  amortization of $1,288,811 in 1998
  and $1,171,050 in 1997)               4,941,403          5,059,164
Current federal income tax recoverable      3,296            639,216
Deferred federal income taxes               2,615             67,539
Accrued investment income                  33,834             42,780
Other assets                              940,594            788,232
                                     $ 52,308,936       $ 59,820,491

 LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Notes payable                     $   8,863,666      $   8,157,297
  Unpaid losses and loss
   adjustment expenses                 16,113,511         17,732,289
  Unearned premiums                     8,717,602         11,603,482
  Reinsurance balances payable          1,688,499          2,960,040
  Deferred ceding commissions           1,433,029          2,256,669
  Drafts outstanding                      945,286            721,413
  Accrued ceding commission refund        229,410          1,623,395
  Accounts payable and other accrued
   expenses                             2,403,877          2,934,793
  Accrued litigation costs                950,000            950,000

        Total liabilities              41,344,880         48,939,378

Commitments and contingencies (Note 4)
<PAGE>
Stockholders' equity:
<PAGE>  
  Common stock, $.03 par value,
   authorized 100,000,000 shares;
   issued 10,968,277 shares in 1998
   and 10,962,277 shares in 1997          329,048            328,868
  Capital in excess of par value       10,351,635         10,349,665
  Retained earnings                       883,373            802,580
  Treasury stock, 300,000 shares,
    at cost                              (600,000)          (600,000)
      Total stockholders' equity       10,964,056         10,881,113
                                     $ 52,308,936       $ 59,820,491
 </TABLE>

                 The accompanying notes are an integral part
                  of the consolidated financial statements.
<PAGE>
            HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Unaudited)
<TABLE>
                      Three Months Ended               Nine Months Ended
                         September 30                     September 30
                      1998          1997               1998         1997
   <S>                <C>           <C>                <C>          <C>

Gross premiums
 written        $  5,833,905  $  9,830,845      $  25,991,543  $ 30,639,244
Ceded premiums
 written          (3,656,419)  ( 6,720,261)       (16,934,207)  (21,314,811)

 Net premiums 
  written       $  2,177,486  $  3,110,584      $   9,057,336  $  9,324,433 

Revenues:
 Gross premiums 
  earned        $  8,465,140  $  9,827,280      $  28,809,541  $ 30,098,572
 Earned 
  premiums 
  ceded           (5,602,549)  ( 6,849,751)       (19,341,634)  (21,076,427)

  Net premiums 
   earned          2,862,591     2,977,529          9,467,907     9,022,145

 Investment
  income, net
  of expenses        203,614       164,602            593,212       563,882
 Finance
   charges           266,504       312,084          1,390,560       312,084
 Interest
  income - note
  receivable            -          130,098             14,047       320,343
 Processing and
  service fees       442,288       237,953          1,186,030     1,134,220
 Other income        129,484       136,404            344,294       321,374

 Total revenues    3,904,481     3,958,670         12,996,050    11,674,048

Benefits, losses
 and expenses:

 Losses and loss
  adjustment
  expenses         6,349,007     6,420,718         19,863,677    20,149,936
 Reinsurance
  recoveries      (4,208,418)   (4,672,376)       (13,611,002)  (14,859,824)

  Net losses
    and loss
    adjustment
    expenses       2,140,589     1,748,342          6,252,675     5,290,112

 Acquisition 
  costs, net         (18,801)     ( 11,549)           (20,585)     (504,552)
<PAGE>
 Other acquis-
  ition and
  underwriting
  expenses         1,285,739     1,206,908          3,925,461     4,024,188
 Operating
  expenses           717,819       363,298          1,910,307     1,227,426
 Interest
  expense            198,092       170,781            579,427       388,589
 Amortization
  of intangible
  assets              39,254        59,318            144,511       164,576

  Total benefits,
   losses and
   expenses        4,362,692     3,537,098         12,791,796    10,590,339
<PAGE>
Income (loss)
 from operations
 before federal
 income taxes       (458,211)      421,572            204,254     1,083,709

Federal income
 tax expense
 (benefit)          (136,979)      136,488            123,461       369,143

  Net income
   (loss)           (321,232)      285,084             80,793       714,566

Other comprehen-
 sive income, net
 of tax:
  Unrealized gains
   on debt and
   equity securi-
   ties                  814         2,371              2,913         1,289

Comprehensive
 income (loss)   $  (320,418)  $   287,455        $    83,706    $  715,855

Basic and
 diluted
 earnings per
 share           $     (0.03)  $      0.02        $      0.01    $     0.06
 </TABLE>
 
                The accompanying notes are an integral part
                 of the consolidated financial statements.
<PAGE>
           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Unaudited)
<TABLE>
                                                   Nine Months Ended
                                                      September 30
                                                1998               1997
              <S>                                <C>               <C>
Cash flows from operating activities:
  Net income                                 $   80,793         $  714,566  
  Adjustments to reconcile net income to
    cash provided by (used in)
    operating activities:

    Depreciation and amortization expense       287,547            299,035
    Change in deferred federal income taxes      64,924            162,393
    Change in prepaid reinsurance premiums    2,475,311             69,855
    Change in premiums receivable              (127,982)        (4,178,841)
    Change in deferred policy acquisition
     costs                                      803,150         (  711,025)
    Change in deferred ceding commissions      (823,640)           206,473
    Change in unpaid losses and loss
     adjustment expenses                     (1,618,778)        (3,510,354)
    Change in unearned premiums              (2,885,880)           232,433
    Change in reinsurance recoverable         1,972,417          3,928,296
    Change in reinsurance balances payable   (1,271,541)           158,800
    Change in current federal income tax
     recoverable                                635,920               -
    Change in accrued ceding commission
     refund                                  (1,393,985)           286,854
    Change in all other liabilities            (307,042)           (69,072)
    Change in all other assets                 (243,954)           233,947

      Net cash used in operating activities ( 2,352,740)        (2,176,640)

Cash flows from investing activities:
  Purchases of property and equipment           (65,849)        (   48,603)
  Premium finance notes originated          (20,018,621)              -
  Premium finance notes repaid               21,606,838               -
  Purchase of note receivable                      -            (6,513,156)
  Repayment of note receivable                1,149,280          2,994,448
  Purchase of debt securities                      -            (1,022,229)
  Change in restricted cash                 (    46,800)              -
  Maturities and redemptions of
   investment securities                        810,366          1,339,155
  Purchase of short-term investments        ( 9,509,061)        (6,517,834)
  Maturities of short-term investments        8,011,679          6,406,025

    Net cash provided by (used in)
     investing activities                     1,937,832         (3,362,194)
Cash flows from financing activities:
    Proceeds from common stock issued             2,150               -
    Proceeds from notes payable/bank
     credit line                                750,000          7,000,000
    Repayment of short-term borrowings       (   43,632)        (   39,533)
    Payment of borrowing cost                      -            (   93,395)
<PAGE>
      Cash provided by financing activities     708,518          6,867,072
Increase in cash and cash equivalents           293,610          1,328,238
Cash and cash equivalents at beginning of
  period                                      5,814,127          4,749,388
Cash and cash equivalents at end of period  $ 6,107,737       $  6,077,626
</TABLE>

                  The accompanying notes are an integral part
                   of the consolidated financial statements.
<PAGE>
              HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES


Item 1.  Notes to Consolidated Financial Statements (Unaudited).

Note 1 - Summary of Accounting Policies

      In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting primarily of normal recurring
adjustments, necessary to present fairly the financial position of Hallmark
Financial Services, Inc. and subsidiaries (the "Company") as of September
30, 1998 and the consolidated results of operations and cash flows for the
periods presented.  The accompanying financial statements have been prepared
by the Company without audit.

      Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted.  Reference is made to
the Company's annual consolidated financial statements for the year ended
December 31, 1997 for a description of accounting policies and certain other
disclosures.  Certain items in the 1997 interim financial statements have
been reclassified to conform to the 1998 presentation.

      The results of operations for the period ended September 30, 1998 are
not necessarily indicative of the operating results to be expected for the
full year.

Recently Adopted Accounting Pronouncement

      The Company has adopted SFAS No. 130, Reporting Comprehensive Income. 
SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.

New Accounting Pronouncement

      In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information.  SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders.  It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers.  SFAS No. 131 is effective
for financial statement periods  beginning after December 15, 1997. 
However, the requirements of SFAS No. 131 are not applicable in interim
financial statements in the initial year of adoption. Management does not
anticipate that this pronouncement will have a material effect on the
Company s consolidated financial condition or results of operations.

Note 2 - Note Receivable 

      During 1997, approximately $6,500,000  in proceeds from a $7,000,000
loan from Dorinco Reinsurance Company  ("Dorinco") was used to repay
external borrowing by Peregrine Premium Finance L.C. ("Peregrine") incurred
to fund premium finance notes pursuant to the financing and servicing
arrangement between the Company and Peregrine.  This note receivable was
repaid during the second quarter of 1998.
<PAGE>
Note 3 - Reinsurance

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

      Effective March 1, 1992, the Company entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company ("State &
County"), an unaffiliated company, to assume 100% of the nonstandard auto
business produced by the Company and underwritten by State & County.  The
arrangement is supplemented by a separate retrocession agreement effective
July 1, 1997 between the Company, Kemper Reinsurance Company ("Kemper") and
Dorinco. From July 1, 1996 to June 30, 1997, the Company supplemented this
arrangement with a separate retrocession agreement with Kemper, Dorinco and
Odyssey Reinsurance Corporation.  Prior to July 1, 1996, the Company had a
separate retrocession agreement with Vesta Fire Insurance Corporation. 
Under each of the agreements, the Company retains 25% and cedes 75% of the
risk to the reinsurers.

Note 4 - Commitments and Contingencies

      In March 1997, a jury returned a verdict against the Company and in
favor of a former director and officer of the Company in the amount of
approximately $517,000 on the basis of contractual and statutory
indemnification claims.  The court subsequently granted the plaintiff's
motion for attorneys  fees of approximately $271,000, court costs of
approximately $39,000 and pre-judgment and post-judgment interest, and
rendered final judgment on the verdict.  The Company believes the outcome in
this case was both legally and factually incorrect and has appealed the
judgment.  During the fourth quarter of 1997, the Company deposited
$1,248,758 into the registry of the court in order to stay execution on the
judgment pending the result of such appeal.  The amount on deposit with the
court of $1,310,758 as of September 30, 1998 has been included as restricted
cash in the accompanying balance sheet.

      Although the Company intends to aggressively pursue its appeal, the
Company is presently unable to determine the likelihood of a favorable
result.  Further, a favorable ruling on some portions of the appeal could
entail the necessity for a new trial.  Therefore, the Company established a
reserve of $950,000 during the fourth quarter of 1997 for loss contingencies
related to this case.  This reserve remains unchanged as of September 30,
1998.  The possible range of loss in the event of an ultimately unfavorable
outcome to this case exceeds the amount presently reserved.  Conversely, in
the event of a favorable resolution of the case, the expenses incurred could
be less than the reserve amount.  Therefore, future adjustments to the
reserve may be required.

Note 5 - Subsequent Events

      On October 1, 1998, warrants previously issued in October 1992 were
exercised to purchase an aggregate of 886,333 shares of the Company's common
stock.  In payment of the exercise price of $0.50 per share, 506,476
outstanding shares were surrendered at a price of $0.875 per share, and
subsequently recorded as treasury stock by the Company.

      Subsequent to September 30, 1998, Hallmark Finance Corporation ("HFC")
has repaid the outstanding balance of approximately $1.8 million on the bank
<PAGE>
credit line.  HFC s bank credit line has been amended to reduce the maximum
amount available to $1.0 million, to eliminate any usage fee and to extend
the expiration date until December 15, 1998.  The Company anticipates
renegotiating and renewing the bank credit line during the fourth quarter of
1998.


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

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

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

      Hallmark provides non-standard automobile liability and physical
damage insurance through reinsurance arrangements with several unaffiliated
companies.  Through arrangements with State & County Mutual Fire Insurance
Company ("State & County"), Hallmark provides insurance primarily for high
risk drivers who do not qualify for standard-rate insurance. Under
supplementary quota-share reinsurance agreements, Hallmark cedes a
substantial portion of its risk and retains the balance.  Effective July 1,
1996, Hallmark entered into a new reinsurance treaty with Kemper Reinsurance
Company ("Kemper"), Dorinco Reinsurance Company ("Dorinco"), and Odyssey
Reinsurance Corporation ("Odyssey"), ceding a total of 75% of its risk. 
Effective July 1, 1997, the treaty was renewed with Kemper and Dorinco
assuming a total of 75% of the risk under substantially the same terms and
conditions, except that Hallmark was allowed to retain 100% of the policy
fees on a six-month program commenced during late-July 1997 (versus 62.5%
for monthly and annual programs).  Previously, HFC offered premium financing
to Hallmark policyholders through a financing and servicing arrangement with
an unaffiliated premium finance company.  Beginning late-June 1997, HFC
began issuing its own premium finance notes funded by the proceeds of loan
agreements executed in March 1997.  AHGA manages the marketing of Hallmark
policies through a network of retail insurance agencies which operate under
the American Hallmark Agencies name, and through independent agents
operating under their own respective names.

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
<PAGE>
commissions, finance charges and third party processing and service fees. 
Other sources of funds are from financing and investment activities.

      Net cash used in the Company s consolidated operating activities
remained relatively constant during the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997.  Cash generated from
1998 financing activities was considerably lower than 1997 due to a $7
million financing transaction with Dorinco in 1997 with no comparable
financing activity in 1998.  The Company used approximately $6.5 million of
the Dorinco loan proceeds to repay external borrowing by Peregrine Premium
Finance L.C. ("Peregrine"), an unaffiliated premium finance company (See
Note 2 to the Consolidated Financial Statements).  This note receivable
resulted in a decrease in cash from investing activities during 1997.  Prior
to June 1997, the Company offered premium financing to policyholders through
a financing and servicing arrangement with Peregrine.  Effective late-June
1997, the Company began issuing its own premium finance notes through HFC.

      On a consolidated basis, the Company's liquidity increased
approximately $1.0 million during the first nine months of 1998.  The
Company s total cash, cash equivalents and investments (excluding restricted
cash of approximately $1.4 million) at September 30, 1998 and December 31,
1997 were $14.9 million and $13.9 million respectively.  This increased
liquidity is primarily due to increased cash inflows from premium finance
operations as premium finance note repayments have exceeded premium finance
note originations during 1998.

      A substantial portion of the Company's liquid assets are held by
Hallmark and are not available for general corporate purposes.  Of the
Company's consolidated liquid assets of $14.9 million at September 30, 1998,
$3.6 million  (as compared to $1.5 million at December 31, 1997) represents
non-restricted cash.  Since state insurance regulations restrict financial
transactions between an insurance company and its affiliates, HFS is limited
in its ability to use Hallmark funds for its own working capital purposes. 
Furthermore, dividends and loans by Hallmark to the Company are restricted
and subject to Texas Department of Insurance ("TDI") approval.  However, TDI
has sanctioned the payment of management fees, commissions and claims
handling fees by Hallmark to HFS and affiliates.   During the first nine
months of 1998 and 1997, Hallmark paid or accrued $475,000 and $770,000,
respectively, in management fees.  Management anticipates that Hallmark will
continue to pay management fees periodically during the remainder of 1998,
and this should continue to be a moderate source of unrestricted liquidity. 
While the Company has never received a dividend from Hallmark and there is
no immediate plan to pay a dividend, management is re-examining its current
dividend policy.

      Commissions from the Company's annual policy program for independent
agents represent a source of unrestricted liquidity when annual policy
production is level or increasing.  Under this program, AHGA offers
independent agents the ability to write annual policies and, since mid-1997,
six-month policies, but commissions to substantially all independent agents
are paid monthly on an "earned" basis.  However, consistent with customary
industry practice, Hallmark pays total commissions up-front to AHGA based on
the entire annual/six-months premiums written.  Independent agent production
of annual policies was approximately $9.1 million during the first nine
months of 1998 as compared to $11.4 million during the first nine months of
1997.  During the first nine months of 1998, AHGA received $2.1 million in
commissions related to this program from Hallmark, and paid earned
commissions of $2.2 million to independent agents.  The occurrence of AHGA
<PAGE>
paying more in earned commissions to agents than received from Hallmark is
primarily a result of decreased premium volumes during the second and third
quarters of 1998. During 1997, AHGA received approximately $3.0 million in
commissions related to this annual policy program from Hallmark, of which
$1.1 million is being paid to independent agents during 1998 as earned.

      Ceding commission income represents a significant source of funds to
the Company.  A portion of ceding commission income and policy acquisition
costs is deferred and recognized as income and expense, respectively, as
related net premiums are earned.  Deferred ceding commission income
decreased to approximately $1.4 million at September 30, 1998 from
approximately $2.3 million at December 31, 1997.  Deferred policy
acquisition costs as of September 30, 1998 decreased approximately $0.8
million as compared to December 31, 1997.  The decrease in deferred ceding
commission income and deferred policy acquisition costs is primarily due to
the decrease in Hallmark s core premium volume during the second and third
quarters of 1998.

      During the second quarter of 1998, HFC received funds of approximately
$0.8 million from a bank credit line available for funding premium notes.  
As of September 30, 1998, the Company was in compliance with all debt
covenants of HFC s bank credit line and the Dorinco loan.  Subsequent to the
third quarter, HFC has repaid the outstanding balance of approximately $1.8
million on the bank credit line.  HFC s bank credit line has been amended to
reduce the maximum amount available to $1.0 million and to extend the
expiration date.  The Company anticipates renegotiating and renewing the
bank credit line during the fourth quarter.

      Unpaid losses and loss adjustment expenses ("LAE") decreased
approximately 9% primarily due to a continuation of a trend begun in 1996 of
settling more claims than received, thus reducing the number of claims
included in unpaid losses and LAE, as well as a decrease in the number of
claims due to decreased premium volumes.  Accordingly, reinsurance
recoverables decreased proportionately.

      Reinsurance balances payable represents premiums written which are due
to reinsurers.  These balances are paid on a 60 day lag in accordance with
reinsurance treaties.  The decrease in the reinsurance balances payable is
due to decreased premium volume during the third quarter of 1998 as compared
to the fourth quarter of 1997.      

      At September 30, 1998, Hallmark reported statutory capital and surplus
of approximately $5.4 million which reflects an approximately 2% increase
over the balance reported at December 31, 1997.  On an annualized-premium
basis, Hallmark s premium-to-surplus ratio at September 30, 1998 was 2.24 to
1 as compared to 2.35 to 1 at December 31, 1997 and 2.19 to 1 at September
30, 1997.  Management does not presently expect Hallmark to require
additional capital during 1998 to fund existing operations.  However, while
programs currently in place should provide sufficient capital for near-term
growth, additional capital or strategic alliances may be required to fund
future expansion of the Company.

      The positive impact on liquidity by increased core State & County
volumes during the first quarter of 1998 has been more than offset by
intense competition among an increased number of non-standard programs in
the marketplace during the second and third quarters of 1998.  Effective
late-July 1998, the Company rolled out a new annual program which, among
other things, offered a lower down payment.  The lower down payment is
<PAGE>
primarily due to a change in treatment of the policy fee.  The new program
provides for financing of a higher policy fee with collection over the
policy term while the previous annual program provided for the collection of 
the entire, although lower, policy fee up-front along with the down payment. 
In the near-term, earnings and liquidity could be negatively affected due to
the proration and collection of the policy fee over the policy term as
compared to the collection of a fully earned policy fee under the previous
annual program.  This annual program change significantly improved the
Company's competitive ranking with respect to down payment structure. 
However, additional rate reductions by competitors undermined the impact of
this change.  Management continues to evaluate and adapt to the changing
market environment.

      Other factors favorably impacting liquidity include the receipt of a
tax refund of approximately $500,000 during the third quarter of 1998,
continued emphasis on cost containment, and reduced borrowing costs for the
Company s premium finance program.  As of September 30, 1998, the Company
had $6.25 million available under the bank credit line to fund premium
notes.  The Company has subsequently repaid the full amount outstanding on
the bank credit line and reduced the maximum availability to $1.0 million.

      The Company continues to pursue third party claims handling and
administrative contracts.  The Company also continues to provide its program
administration and claims handling services under a contract effective
January 1, 1997 with an unaffiliated managing general agency (the
"unaffiliated MGA").  Under this three-year contract, the Company, as
program administrator, performs certain administrative functions, including
but not limited to, cash management, underwriting and rate-setting reviews,
and claims handling.  Hallmark is assuming a 20% pro-rata share in the
business produced under this unaffiliated MGA program with the remaining 80%
of the business assumed by Hallmark s principal reinsurers.  Additionally,
two agreements with other unaffiliated MGAs began April 1, 1998 and
September 1, 1998, respectively, with the Company providing not only program
administration and claims handling, but also, underwriting and policy
processing.  Hallmark assumes a respective 25% and 15% pro-rata share in the
business produced, with Hallmark s principal reinsurers assuming the
remainder.  The premium volume ceded from these three programs is considered
a part of Hallmark s premium volume commitment to one of its principal
reinsurers.

      Management intends to continue to investigate opportunities for future
growth and expansion.  Although the Company currently has no plans which
would require significant additional external funding during the remainder
of 1998, additional capital or strategic alliances may be required to fund
future expansion of the Company.


Results of Operations      

      Gross premiums written (prior to reinsurance) for the three and nine
months ended September 30, 1998 decreased 41% and 15%, respectively, in
relation to gross premiums written during the same periods in 1997.  The
respective decreases in gross premiums written were primarily due to
changing market conditions in the non-standard auto industry which have
adversely impacted premium volumes during the second and third quarters of
1998.  Net premiums written (after reinsurance) for the three and nine
months ended September 30, 1998 decreased approximately 30% and 3%,
respectively, during the same periods in 1997.  While Hallmark has increased
<PAGE>
its assumption of business produced by third party unaffiliated MGAs, the
increase did not offset the decrease in the core State and County premium
volume.  The disproportionate change in gross and net premiums written
results from the fact that the assumed unaffiliated MGA business included in
gross written premiums is fully retained by the Company, thus intensifying
the effect on net written premiums.

      Premiums earned (prior to reinsurance) for the three and nine months
ended September 30, 1998 decreased approximately 14% and 4%, respectively,
as compared to the same periods of 1997.  For the three  months ended
September 30, 1998, net premiums earned (after reinsurance) decreased
approximately 4% while net premiums earned (after reinsurance) for the nine
months ended in 1998 increased approximately 5% in relation to the same
periods of 1997.  The disparate change in premiums earned (prior to and
after reinsurance) is due to the assumption of premiums produced by the
unaffiliated MGAs which are fully retained by the Company, and thus have a
greater impact on net premiums earned.

      Net incurred loss ratios (computed on net premiums earned after
reinsurance) for the three and nine months ended September 30, 1998 were 75%
and 66%, respectively, compared to 59% for the same respective periods of
1997.  The increase in the loss ratio between 1998 and 1997, is attributable
to changes in the estimate of Incurred But Not Reported reserves during the
fourth quarter of 1997.  Additionally, two other factors have contributed to
the increased loss ratio, particularly during the third quarter of 1998. 
During 1998 Hallmark has increased its assumption of unaffiliated MGA
business by adding two additional contracts, one effective April 1998 and
the other effective September 1998.   The overall loss ratio on the assumed
business produced by the unaffiliated MGAs is higher than the loss ratio on
the core State and County business.  Also during the third quarter of 1998,
the Company introduced a new annual program whereby the policy fee is
prorated over the life of the policy instead of fully earned as under the
previous annual program.  This change in recognition of policy fees has
lowered earned premium thus contributing to an increase in loss ratio.

      Acquisition costs, net represents the amortization of acquisition
costs (and credits) deferred over the past twelve months and the deferral of
acquisition costs (and credits) incurred in the current period.  Acquisition
costs, net for the three months ended September 30, 1998 is relatively
constant with the same period of 1997.  Acquisition costs, net increased
during the nine months ended September 30, 1998 primarily due to the lower
deferral of acquisition costs in 1998 than in 1997, which is partially
offset by lower ceding commission income in 1998 than in 1997.

      Other acquisition and underwriting expenses increased approximately 7%
during the three months ended September 30, 1998 and decreased approximately
2% during the nine months ended September 30, 1998 as compared to the same
respective periods of 1997.  The increase in expenses during the third
quarter is the result of decreased ceding commission attributable to the
combined effect of lower premium volumes and a lower ceding commission rate
as well as an increase in commission expense related to assumed business
produced by unaffiliated MGAs.  The increase in other acquisition and
underwriting expenses for the three months is partially offset by decreases
in salaries and related benefit expenses, agent commission expense due to
lower volumes, and management resources spent on non-insurance operations. 
These management resources have been used to develop third party processing
and program administration business and are reallocated to operating
expenses (as discussed in the following paragraph).  These same expense
<PAGE>
categories also decreased during the nine months ended September 30, 1998. 
These nine month decreases are partially offset by an increase in commission
expenses related to the assumption of business written by third party MGAs. 
Additionally, ceding commission income decreased during the first three
quarters of 1998 as a result of a lower ceding commission rate and a
decrease in the core State & County premium volume.

      Operating expenses include non-insurance operations expenses related
to premium finance operations, general corporate overhead, and third party
administrative and claims handling contracts.  Related revenues are derived
from finance charges and service/consulting fees.  Operating expenses
increased 98% and 56%, respectively, for the three and nine months ended
September 30, 1998 as compared to the same periods of 1997, while income
from finance charges and processing/service fees increased 29% and 78% for
the same respective periods.  The majority of this increase in operating
expenses is attributable to the deployment of management and staff resources
devoted to the development, administration and/or processing of third party
contracts.  In addition, during the third quarter of 1998, management
reevaluated a previous accrual for restructuring costs and decreased the
reserve by $95,000.  This decrease was netted against operating expenses for
the quarter and nine months.

      Finance charges represent interest earned on premium notes issued by
HFC.  Prior to June 1997, HFC only directly financed premium notes for the
Company s excess and surplus lines subsidiary (the operations of which were
discontinued as of December 31, 1997).  Beginning late-June 1997, HFC began
financing premiums for Hallmark which has resulted in increased finance
interest income during 1998.

      Processing and service fees for the nine months ended September 30,
1998 represents primarily income earned on third party processing and
servicing contracts.  Processing and service fees for the nine months ended
September 30, 1997 represents primarily income earned by HFC pursuant to its
financing and servicing arrangement with Peregrine.  This arrangement was
terminated in June 1997 as HFC began issuing its own premium finance notes. 
As expected, these fees have significantly decreased during 1998 as the
premium notes of Peregrine were paid in full during the second quarter of
1998, and thus no processing fees will be received in the future.  Service
fees in 1998 increased significantly over the same period of 1997 primarily
as a result of the Company's contracts with third party unaffiliated MGAs. 

      Interest income on the note receivable represents interest received
from Peregrine on funds loaned to Peregrine to extinguish its premium
finance bank debt.  This note receivable was paid in full during the second
quarter of 1998.  Interest expense on the Dorinco loan and the bank credit
line accounts for the increase in interest expense during 1998.

      Other income for the nine months of 1998 increased slightly over the
same period of 1997.  The increase is primarily attributable to the
collection of agency fees by the Hallmark Agencies.  The Hallmark Agencies
began collecting this fee during the third quarter 1997 as a result of a
regulatory change.  This increase is partially offset by decreased outside
commissions of the Hallmark Agencies due to scheduled office closures in May
and June 1998.
<PAGE>
Year 2000 Compliance

      The Year 2000 problem concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000.

      The Company has made significant strides in its efforts to be Year
2000 compliant.  The premiums and claims systems are internally processed
and maintained.  The Company has utilized internal management information
systems resources as well as a contract programmer to make modifications and
enhancements to these systems.  These modifications and enhancements are in
the final testing and implementation phase and will be in place and
operational by November 30, 1998.  The Company's premium finance system was
purchased from an outside vendor and has been compliant since the last
software upgrade earlier this year.  The Company utilizes a proprietary
general ledger software system.  The Year 2000 upgrade is currently being
distributed by the vendor and will be installed by the end of 1998.  All
other proprietary software utilized by the Company is Year 2000 compliant. 
The financial impact to the Company has not been material to its financial
position or results of operations in any given year.

      With regards to the Company's equipment and facilities with embedded
computer chips, all have been tested, and most are currently Year 2000
compliant.  The remaining equipment will be compliant by the end of 1998. 
The Company has corresponded with all major third party business partners to
ensure their Year 2000 readiness.  The Company anticipates all parties will
be compliant by the end of 1998.  As all of the significant areas affecting
the conduct of business are compliant, a contingency plan for worst case
scenarios is not deemed necessary.


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

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

Item 1.     Legal Proceedings.

      Except for routine litigation incidental to the business of the
Company and as described in Note 4 to the Consolidated Financial Statements
of the Company, neither the Company, nor any of the properties of the
Company was subject to any material pending or threatened legal proceedings
as of the date of this report.

Item 2.     Changes in Securities.

      None.

Item 3.     Defaults upon Security Securities.

      None.<PAGE>
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 which appears on
sequential page __ are filed herewith.

      (b)   The Company did not file a Current Report on Form 8-K to report
any events which occurred during the quarter ended September 30, 1998.

<PAGE>
Exhibit           Description                         Sequential Page No.


10(a)             Form of Third Amendment to Loan
                  Agreement between Hallmark Finance
                  Corporation and NationsBank of
                  Texas, N.A., dated March 17,1997.

10(b)             Form of Fourth Amendment to Loan
                  Agreement between Hallmark Finance
                  Corporation and NationsBank of
                  Texas, N.A., dated March 17, 1997.
<PAGE>
                               SIGNATURES

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

                  HALLMARK FINANCIAL SERVICES, INC.
                            (Registrant)


Date: November 12, 1998                   /s/ Ramon D. Phillips
                                          Ramon D. Phillips, President
                                          (Chief Executive Officer)

Date: November 12, 1998                   /s/ John J. DePuma
                                          John J. DePuma, Chief Financial
                                          Officer