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 June 30, 2003

                       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.)

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

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

    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  -  11,318,245 shares outstanding as of June 30,
    2003.

<PAGE>

                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements


                     INDEX TO FINANCIAL STATEMENTS

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

 Consolidated Balance Sheets at June 30, 2003                     3
 (unaudited) and December 31, 2002

 Consolidated Statements of Operations (unaudited) for the        4
 three and six months ended June 30, 2003 and June 30, 2002

 Consolidated Statements of Cash Flows (unaudited) for            5
 the six months ended June 30, 2003 and June 30, 2002

 Notes to Consolidated Financial Statements (unaudited)           6


<PAGE>

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


                                                     June 30      December 31
                     ASSETS                            2003          2002
                     ------                         -----------   -----------
                                                    (unaudited)    (audited)
 Investments:
    Debt securities, available-for-sale, at
      market value in 2003 and held-to-maturity,
      at amortized cost in 2002                    $     11,688  $      7,679
    Equity securities, available-for-sale,
      at market value                                     2,508           122
    Short-term investments, available-for-sale,
      at market value                                     1,836         8,927
                                                    -----------   -----------
             Total investments                           16,032        16,728

 Cash and cash equivalents                               30,784         8,453
 Restricted cash                                          1,104         1,072
 Prepaid reinsurance premiums                             3,887         8,550
 Receivable from lender for financed premiums
   (net of allowance for doubtful accounts of
   $96 in 2003 and of $115 in 2002)                       7,983        11,593
 Premiums receivable                                      3,165         1,012
 Accounts receivable                                      2,976         2,129
 Prepaid agent commission                                 5,437         3,899
 Reinsurance recoverable                                 17,973        12,929
 Deferred policy acquisition costs                        2,030         1,367
 Excess of cost over fair value
   of net assets acquired                                 5,188         5,171
 Intangible assets                                          527           540
 Note receivable                                              -         6,500
 Current federal income tax recoverable                       -            33
 Deferred federal income taxes                            4,386         1,021
 Other assets                                             2,489         2,358
                                                    -----------   -----------
                                                   $    103,961  $     83,355
                                                    ===========   ===========
      LIABILITIES AND STOCKHOLDERS' EQUITY
      ------------------------------------
 Liabilities:
   Notes payable                                   $      1,383  $      1,803
   Note payable to related party                          8,600         8,600
   Net advances from lender for financed premiums         7,877        10,905
   Unpaid losses and loss adjustment expenses            30,866        17,667
   Unearned premiums                                     13,474        15,551
   Reinsurance balances payable                             378         3,764
   Unearned revenue                                       9,851         6,872
   Accrued agent profit sharing                             337           450
   Accrued ceding commission payable                      2,472         2,536
   Pension liability                                        604           604
   Current federal income tax payable                       416           -
   Accounts payable and other accrued expenses           10,126         6,068
                                                    -----------   -----------
                                                         86,384        74,820

 Stockholders' equity:
     Common stock, $.03 par value, authorized
       100,000,000 shares issued 11,856,610
       shares in 2003 and 11,855,610 in 2002                356           356
    Capital in excess of par value                       10,494        10,875
    Retained earnings (deficit)                           7,464        (1,491)
    Accumulated other comprehensive income                 (103)         (162)
    Treasury stock, 538,365 shares in 2003
      and 806,477 in 2002, at cost                         (634)       (1,043)
                                                    -----------   -----------
             Total stockholders' equity                  17,577         8,535
                                                    -----------   -----------
                                                   $    103,961  $     83,355
                                                    ===========   ===========

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

<PAGE>
<TABLE>
           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                               (Unaudited)
                              (In thousands)

                                                 Three Months Ended             Six Months Ended
                                                      June 30                      June 30
                                                ---------------------       ----------------------
                                                  2003         2002           2003          2002
                                                --------     --------       --------      --------
 <S>                                           <C>          <C>            <C>           <C>
 Gross premiums written                        $   7,849    $  11,468      $  29,764     $  25,419
 Ceded premiums written                            1,218       (6,583)        (7,180)      (15,129)
                                                --------     --------       --------      --------
    Net premiums written                           9,067        4,885         22,584        10,290

 Change in unearned premiums                       2,361           52          1,346        (1,205)
                                                --------     --------       --------      --------
   Net premiums earned                            11,428        4,937         23,930         9,085

 Investment income, net of expenses                  260          144            454           270
 Finance charges                                     991          635          2,080         1,290
 Commission and fees                               4,347            -          7,697             -
 Processing and service fees                         977           72          2,285           215
 Other income                                         42           90            319           166
                                                --------     --------       --------      --------
     Total revenues                               18,045        5,878         36,765        11,026

 Losses and loss adjustment expenses               7,551        3,745         16,441         6,994
 Other operating costs and expenses                9,395        1,700         18,165         3,095
 Interest expense                                    432          221            875           426
 Amortization of intangible asset                      7            -             14             -
                                                --------     --------       --------      --------
    Total expenses                                17,385        5,666         35,495        10,515

 Income before income tax, cumulative
   effect of change in accounting
   principle and extraordinary gain (loss)           660          212          1,270           511

 Income tax expense                                  225           70            432           174
                                                --------     --------       --------      --------
 Income before cumulative effect
   of change in accounting principle
   and extraordinary gain (loss)               $     435    $     142      $     838     $     337

    Cumulative effect of change
      in accounting principle                          -            -              -        (1,694)
    Extraordinary gain (loss)                        (36)           -          8,116             -
                                                --------     --------       --------      --------
 Net income (loss)                             $     399    $     142      $   8,954     $  (1,357)
                                                ========     ========       ========      ========
 Basic earnings (loss) per share:
    Income before cumulative effect
      of change in accounting principle
      and extraordinary gain                   $    0.04    $    0.01      $    0.07     $    0.03
        Cumulative effect of change
          in accounting principle                      -            -              -         (0.15)
        Extraordinary gain                             -            -           0.73             -
                                                --------     --------       --------      --------
        Net income (loss)                      $    0.04    $    0.01      $    0.80     $   (0.12)
                                                ========     ========       ========      ========
 Diluted earnings (loss) per share:
    Income before cumulative effect
      of change in accounting principle
      and extraordinary gain                   $    0.04    $    0.01      $    0.07     $    0.03
        Cumulative effect of change
          in accounting principle                      -            -              -         (0.15)
        Extraordinary gain                         (0.01)           -           0.70             -
                                                --------     --------       --------      --------
           Net income (loss)                   $    0.03    $    0.01      $    0.77     $   (0.12)
                                                ========     ========       ========      ========

                The accompanying notes are an integral part
                 of the consolidated financial statements
</TABLE>
<PAGE>

                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (Unaudited)
                                (In thousands)

                                                         Six Months Ended
                                                             June 30
                                                    -------------------------
                                                        2003          2002
                                                    -----------   -----------
 Cash flows from operating activities:
    Net income (loss)                              $      8,954  $     (1,357)

    Adjustments to reconcile net income (loss) to
    cash provided by (used in) operating activities:
       Cumulative effect of change
         in accounting principle                              -         1,694
       Depreciation and amortization expense                322            83
       Change in deferred federal income taxes                -           157
       Change in prepaid reinsurance premiums             4,700         1,373
       Change in premiums receivable                       (408)         (466)
       Change in accounts receivable                       (847)            -
       Change in deferred policy acquisition costs         (663)         (450)
       Change in unpaid losses and loss
         adjustment expenses                             (2,687)       (2,285)
       Change in unearned premiums                       (5,173)         (168)
       Change in unearned revenue                         2,932             -
       Change in accrued agent profit sharing              (231)            -
       Change in reinsurance recoverable                  5,360         3,093
       Change in reinsurance balances payable            (2,704)         (785)
       Change in current federal income
         tax payable/recoverable                            754            18
       Change in accrued ceding commission refund           (64)       (2,876)
       Gain on acquisition of subsidiary                 (8,116)            -
       Change in all other liabilities                    2,868          (126)
       Change in all other assets                        (1,087)          451
                                                    -----------   -----------
           Net cash provided by (used in)
             operating activities                         3,910        (1,644)
                                                    -----------   -----------
 Cash flows from investing activities:
    Purchases of property and equipment                    (231)          (95)
    Acquisition of subsidiary                             6,945             -
    Premium finance notes originated                    (15,172)      (22,502)
    Premium finance notes repaid                         18,782        23,122
    Change in restricted cash                               (32)          406
    Purchases of debt securities                              -        (5,105)
    Purchases of equity securities                          (80)            -
    Maturities and redemptions
      of investment securities                            4,214         2,105
    Net redemptions of short-term investments             7,443         4,743
                                                    -----------   -----------
       Net cash provided by investing activities         21,869         2,674
                                                    -----------   -----------
 Cash flows from financing activities:
     Net advances from lender                            (3,028)         (662)
     Repayment of borrowings                               (420)            -
                                                    -----------   -----------
         Net cash used in financing activities           (3,448)         (662)
                                                    -----------   -----------
 Increase in cash and cash equivalents                   22,331           368
 Cash and cash equivalents at beginning of period         8,453         5,533
                                                    -----------   -----------
 Cash and cash equivalents at end of period        $     30,784  $      5,901
                                                    ===========   ===========


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



 Item 1.  Notes to Consolidated Financial Statements (Unaudited)

 Note 1 - Summary of Accounting Policies

     In the  opinion of management,  the accompanying consolidated  financial
 statements contain  all adjustments,  consisting  only of  normal  recurring
 adjustments, necessary for  a fair statement  of the  financial position  of
 Hallmark Financial Services,  Inc. ("HFS")  and subsidiaries  (collectively,
 the "Company")  as  of  June  30,  2003  and  the  consolidated  results  of
 operations and cash  flows for the  periods presented.  The  preparation  of
 financial  statements  requires  the  use  of  management's  estimates.  The
 accompanying financial statements have been prepared by the Company  without
 audit.

     Certain  information  and disclosures  normally  included  in  financial
 statements prepared  in  accordance  with  accounting  principles  generally
 accepted in the  United States of  America ("GAAP") have  been condensed  or
 omitted.  Reference is made to  the Company's annual consolidated  financial
 statements for  the  year ended  December  31,  2002 for  a  description  of
 accounting policies and  certain other disclosures.   Certain  items in  the
 2002  financial  statements  have been  reclassified to conform to  the 2003
 presentation.

     The results  of operations for the  period ended June  30, 2003 are  not
 necessarily indicative of the operating results to be expected for the  full
 year.

     On  January 27,  2003,  the Company  received  final approval  from  the
 Arizona Department of  Insurance ("AZDOI")  for the  acquisition of  Phoenix
 Indemnity Insurance Company  ("Phoenix") from Millers  American Group,  Inc.
 ("Millers"), effective as of January 1, 2003.  In consideration for Phoenix,
 the Company retired $7.0  million of a $14.85  million note receivable  from
 Millers.  The Company had valued the note receivable on its balance sheet at
 $6.5 million. The acquisition of  Phoenix expanded the Company's  geographic
 reach in  non-standard automobile  insurance from  its traditional  base  in
 Texas to the states of New Mexico and Arizona.

     The results  of operations of Phoenix  are included in the  Consolidated
 Statement of Operations from the effective date of the acquisition  (January
 1, 2003).  The pro forma results as  if the Company had acquired Phoenix  at
 January 1, 2002 are as follows ($ in thousands, except per share amounts):


                                              Three Months       Six Months
                                                 Ended             Ended
                                             June 30, 2002     June 30, 2002
                                             -------------     -------------

        Revenues                              $   10,214        $   19,698

        Loss before cumulative effect
          of change in accounting principle   $     (213)       $     (373)

        Net Loss                              $     (213)       $   (2,067)

        Basic loss per share                  $    (0.02)       $    (0.19)

        Diluted loss per share                $    (0.02)       $    (0.19)

     The  acquisition  of  Phoenix  was  accounted  for  in  accordance  with
 Statement of Financial Accounting Standards No. 141, "Business Combinations"
 ("SFAS 141").  This  statement requires that the  Company estimate the  fair
 value of assets acquired  and liabilities assumed by  the Company as of  the
 date of the acquisition.  In accordance  with  the application of SFAS  141,
 the Company  recognized  an extraordinary  gain  of $8.1  million  from  the
 acquisition of Phoenix in its Consolidated  Statement of Operations for  the
 six months ending  June 30, 2003.  The gain is calculated as the  difference
 between the fair value of the net assets of Phoenix of $14.6 million and the
 $6.5  million  of  the  note  receivable  from  Millers  exchanged  in   the
 transaction.

 Recently Adopted Accounting Pronouncements

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

     At June 30, 2003, the Company had two stock-based employee  compensation
 plans for employees  and a  non-qualified plan  for non-employee  directors,
 which are described more fully  in Note 11 to  the Form 10-KSB for  December
 31, 2002.   Prior to 2003, the  Company accounted for those plans under  the
 recognition and measurement  provisions of APB  Opinion No. 25,  "Accounting
 for Stock Issued to Employees", and related Interpretations.  No stock-based
 employee compensation  cost was  reflected in  2002 net  income.   Effective
 January 1, 2003, the Company adopted  the fair value recognition  provisions
 of FASB Statement No. 123, "Accounting for Stock-Based Compensation"  ("SFAS
 123").  Under  the prospective method  of adoption selected  by the  Company
 under the provisions of  SFAS 148, compensation cost  is recognized for  all
 employee awards granted,  modified, or settled  after the  beginning of  the
 fiscal year in which the recognition  provisions are first applied.  Results
 for prior years have not been restated.

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

                                                         Six Months Ended
                                                              June 30
        (in thousands)                                   2003         2002
                                                        --------     --------
        Net income (loss) as reported                  $   8,954    $  (1,357)

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

        Deduct:  Total stock-based employee
        compensation expense determined under fair
        value based method for all awards, net of
        related tax effects                                  (26)         (16)
                                                        --------     --------
        Pro forma net income (loss)                    $   8,936    $  (1,373)
                                                        ========     ========
        Earnings (loss) per share:
          Basic-as reported                            $    0.80    $   (0.12)
                                                        ========     ========
          Basic-pro forma                              $    0.80    $   (0.12)
                                                        ========     ========
          Diluted-as reported                          $    0.77    $   (0.12)
                                                        ========     ========
          Diluted-pro forma                            $    0.77    $   (0.12)
                                                        ========     ========


 Note 2 - Reinsurance

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

     Effective  March   1,  1992,   Hallmark  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  American   Hallmark  General  Agency  ("AHGA")   and
 underwritten  by State  &  County.  Under a separate retrocession  agreement
 effective July  1, 2000  between Hallmark  and Dorinco  Reinsurance  Company
 ("Dorinco"), Hallmark may, with the consent of Dorinco, elect on a quarterly
 basis to retain 30% to 45% of the underwriting risk.  Hallmark  historically
 retained 30% to 45% of the premium and losses assumed from State and County,
 retroceding 55% to  70% of  the premium and  losses to  Dorinco, under  this
 agreement.  In   addition,  Dorinco   unconditionally  guaranteed   Hallmark
 obligations to State &  County for all insurance  policies written prior  to
 April 1, 2003.

     Effective  April  1, 2001,  the  Company's  reinsurance  agreement  with
 Dorinco was amended to include a provision whereby the Company retains  100%
 of losses in a loss ratio corridor of a threshold of 65% to a ceiling of 77%
 on policies effective after April 1, 2001.  As of July 1, 2001, the  ceiling
 of the loss ratio corridor was increased to 80% on policies effective on  or
 after that  date.  Dorinco and the Company  executed an agreement  effective
 July 1, 2001,  that among other  things, imposes on  the Company  additional
 financial and operational covenants under the Dorinco reinsurance agreements
 (including additional surplus requirements, rate increases and  cancellation
 provisions), provides remedies for the breach  of such covenants and  grants
 to Dorinco  certain  options  to  maintain or  increase  the  level  of  its
 reinsurance of  Hallmark  policies.   Effective  October  1,  2002,  Dorinco
 modified the reinsurance agreement with improved terms, including increasing
 the threshold of  the loss  corridor to 65.5%  and lowering  the ceiling  to
 75.5%.

     Effective April 1,  2003, the Company  assumes a 45%  share of the  non-
 standard auto business produced by AHGA  and underwritten by State &  County
 instead of the 100% share  it assumed prior to  that date.  Also,  effective
 April 1, 2003, Dorinco assumes its 55% share of this business directly  from
 State & County, where prior to this date, the Company retroceded 55% of  the
 business to Dorinco.

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

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

                                Three Months         Six Months
                                   Ended               Ended
                                  June 30,            June 30,
                               2003      2002      2003      2002
                               -----     -----    ------    ------
      Ceded earned premiums   $4,073    $8,239   $12,088   $16,403
      Reinsurance recoveries  $2,602    $5,491   $ 7,772   $10,275


 Note 3 - Intangible Assets

      When Hallmark, AHGA, Hallmark Finance Corporation ("HFC") and  Hallmark
 Claim Service, Inc. ("HCS") were purchased by HFS, the excess cost over  the
 fair value of the net  assets acquired was recorded  as goodwill.  Prior  to
 2002, this goodwill was amortized on a straight-line basis over forty years.
  Other intangible  assets consisted  of a  trade  name, a  managing  general
 agent's  license  and  non-compete  agreements,  all  of  which  were  fully
 amortized.

     On  January  1,  2002,  the  Company  adopted  Statement  of   Financial
 Accounting Standards No.  142 ("SFAS 142"),  "Goodwill and Other  Intangible
 Assets".  SFAS  142 supersedes APB  17, "Intangible  Assets", and  primarily
 addresses the accounting  for goodwill and  intangible assets subsequent  to
 their initial  recognition.   SFAS 142  (1)  prohibits the  amortization  of
 goodwill and  indefinite-lived intangible  assets, (2)  requires testing  of
 goodwill and  indefinite-lived  intangible assets  on  an annual  basis  for
 impairment  (and  more  frequently  if  the   occurrence  of  an  event   or
 circumstance indicates an impairment), (3) requires that reporting units  be
 identified for  the purpose  of assessing  potential future  impairments  of
 goodwill and  (4)  removes the  forty-year  limitation on  the  amortization
 period of intangible assets that have finite lives.

     Pursuant to SFAS 142, the Company identified two components of goodwill
 and assigned  the carrying  value of  these components  into two  reporting
 units:   the  insurance company  reporting  unit  and the  finance  company
 reporting unit.  During  2002, the Company  completed the two  step process
 prescribed by  SFAS 142  for  testing for  impairment  and determining  the
 amount of impairment  loss related  to goodwill associated  with these  two
 reporting units.  Accordingly, during  2002, the Company recorded  a charge
 to earnings  that is  reported as  a  cumulative effect  of  the change  in
 accounting principle of $1.7 million to reflect the adjustment to goodwill.

  Since goodwill is a  permanent difference, the  charge to earnings  has no
 tax impact.  This goodwill adjustment was made during the fourth quarter of
 2002, but is  required to  be reported  in the  first quarter  of 2002  for
 comparative purposes.


 Note 4 - Segment Information

     The  Company   pursues  its  business   activities  through   integrated
 insurance groups managing  non-standard personal  automobile insurance  (the
 "Personal Lines  Group") and  commercial  insurance (the  "Commercial  Lines
 Group").  The members  of the Personal Lines  Group are an authorized  Texas
 property and  casualty insurance  company, Hallmark;  an authorized  Arizona
 property and casualty insurance company, Phoenix; a managing general agency,
 AHGA; a premium  finance company,  HFC; and  a claims  administrator, HCS.
 Effective December  1,  2002, the  Company  purchased the  Commercial  Lines
 Group.  The  members of the  Commercial Lines Group  are a managing  general
 agency, Millers  General  Agency,  Inc. ("MGA");  a  discontinued  financial
 administrative service  company,  Financial and  Actuarial  Resources,  Inc.
 ("FAR");  and  a   third  party  claims   administrator,  Effective   Claims
 Management, Inc. ("ECM"), formerly known as Effective Litigation Management.


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

                                Three Months Ended      Six Months Ended
                                    June 30,               June 30,
                                 2003       2002        2003       2002
                                -------    -------     -------    -------
     Revenues
     --------
       Personal Lines Group    $ 13,414   $  5,878    $ 27,447   $ 11,026
       Commercial Lines Group     4,631          -       9,318          -
                                -------    -------     -------    -------
         Consolidated          $ 18,045   $  5,878    $ 36,765   $ 11,026
                                =======    =======     =======    =======
     Pre-tax income
     --------------
       Personal Lines Group    $  1,135   $     11    $  2,083   $    285
       Commercial Lines Group       189          -         489          -
       Corporate                   (664)       201      (1,302)       226
                                -------    -------     -------    -------
         Consolidate           $    660   $    212    $  1,270   $    511
                                =======    =======     =======    =======

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


                                      June 30,               Dec. 31,
                                        2003                  2002
                                      ---------             ---------
             Assets
             ------
      Personal Lines Group           $   89,513            $   64,102
      Commercial Lines Group             13,918                11,839
      Corporate                             530                 7,414
                                      ---------             ---------
          Consolidated               $  103,961            $   83,355
                                      =========             =========

     The reduction in corporate assets as  of June 30, 2003 is due  primarily
 to the  exchange  of  the  $6.5 million  note  receivable  from  Millers  in
 connection  with  the Phoenix  acquisition  (as  discussed in  Note 1).  The
 increase in personal lines assets is due primarily to assets acquired in the
 Phoenix acquisition.


 Note 5 - Acquisition Costs

 Total amortized acquisition costs for the three months ending June 30,  2003
 and 2002 (in thousands)  was $429 and  ($31), respectively. Total  amortized
 acquisition costs  for the  six months  ending June  30, 2003  and 2002  (in
 thousands) was $178 and ($450), respectively.


 Note 6 - Earnings per Share

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

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


                                    Three Months Ended      Six Months Ended
                                        June 30,               June 30,
                                     2003       2002        2003       2002
                                    ------------------     ------------------

 Weighted average shares - basic     11,238     11,049      11,147     11,049
 Effect of dilutive securities          342        203         402        203
                                    ------------------     ------------------
 Weighted average shares -
   assuming dilution                 11,580     11,252      11,549     11,252


 Note 7 - Comprehensive Income

 Total other comprehensive income for the  three months ending June 30,  2003
 and 2002 (in thousands) was $24 and $-0-, respectively.  Total comprehensive
 income for the three months ending June 30, 2003 and 2002 (in thousands) was
 $423 and $142, respectively.  Total  other comprehensive income for the  six
 months ending  June 30,  2003 and  2002  (in thousands)  was $59  and  $-0-,
 respectively.  Total comprehensive income/(loss)  for the six months  ending
 June 30, 2003 and 2002 (in thousands) was $9,013 and ($1,357), respectively.


 Note 8 - Contingencies

 On May  30, 2003,  Phoenix Indemnity  Insurance Company  ("PIIC"), a  wholly
 owned subsidiary of the  Company, was served with  a suit from the  Superior
 Court of the State of Arizona in and for the County of Pima, alleging breach
 of contract and bad faith in connection with PIIC's denial of coverage in an
 automobile accident. The plaintiffs have filed  an offer of judgment in  the
 amount of $15 million. PIIC believes the suit is without merit and has filed
 an answer denying each and every allegation  in the case. The suit is  still
 in pre-trial discovery stage. Unless a favorable settlement can be  reached,
 the Company intends to vigorously defend PIIC against all claims asserted by
 the plaintiffs in the case.


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

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

     On January 27, 2003, the Company received final approval from the  AZDOI
 for  the  acquisition  of  Phoenix, effective  as  of January  1, 2003.  The
 acquisition of  Phoenix  expanded the  Company's  geographic reach  in  non-
 standard automobile  insurance from  its traditional  base in  Texas to  the
 states of New Mexico and Arizona.

     The  Company   pursues  its  business   activities  through   integrated
 insurance groups managing  non-standard personal  automobile insurance  (the
 "Personal Lines  Group") and  commercial  insurance (the  "Commercial  Lines
 Group").

     The Personal Lines Group provides non-standard automobile liability  and
 physical damage insurance through  Hallmark and Phoenix  for drivers who  do
 not qualify for or cannot obtain standard-rate insurance. Prior to April  1,
 2003, Hallmark assumed 100% of the  premium and losses on business  produced
 by its  affiliated  managing general  agency,  AHGA, through  a  reinsurance
 arrangement with an unaffiliated company, State & County.  Under a  separate
 retrocession agreement, Hallmark retroceded 55% of the premium and losses to
 its principal  reinsurer,  Dorinco.   Effective  April,  1,  2003,  Hallmark
 assumes and retains 45%  of the premium and  losses on business produced  by
 AHGA and underwritten by State & County.   Dorinco assumes its 55% share  of
 the premiums and losses directly from  State & County.  HFC finances  annual
 and six-month policy premiums produced by  AHGA through its premium  finance
 program.   AHGA  manages  the  marketing  of  policies  through  independent
 agents. HCS provides  claims adjustment, salvage,  subrogation recovery  and
 litigation  services  to Hallmark.  Phoenix  underwrites  non-standard  auto
 insurance produced  by  independent  agents appointed  by  the  company  and
 retains 100% of the premium and losses for the business it writes.

     On June 10, 2003, the  Governor of Texas signed legislation Senate  Bill
 14, which has  been described  as comprehensive  insurance reform  effecting
 homeowners  and  personal  automobile  business.  With respect  to  personal
 automobile insurance, the most significant provisions provide for additional
 rate regulation and limitations on the use of credit scoring.  With the  new
 law, broadened rulemaking authority  has been given  to the Commissioner  of
 Insurance.

     The  Company currently  writes  all  of its  Texas  personal  automobile
 business pursuant to a fronting arrangement with State and County, which  is
 a Texas  county mutual  insurance company.   Although  the new  reforms  are
 significant, the primary rating regulation provisions do not apply  directly
 to the Company  due to an  exemption that applies  to certain county  mutual
 insurance companies, including State and County.  Additionally, the  Company
 does not currently  use credit  or insurance  scoring models.   Although  we
 currently do not believe the changes outlined in Senate Bill 14 will have  a
 material adverse affect on our operations,  the Commissioner has been  given
 broad rulemaking authority and we cannot determine the ultimate outcome  and
 the impact it will have on our business until certain rules are developed by
 the Commissioner.  Any rule changes that would affect our ability to  charge
 adequate rates for the non-standard automobile line of business in the State
 of Texas would have a material adverse effect on our operations.

     A.M. Best is a rating agency which offers insurance company ratings  and
 information.   Its  Best's  Ratings  are  the  industry's  standard  measure
 of insurer  financial  performance.  In  April 2003,  A.  M.  Best  upgraded
 Hallmark's rating from C+ to B- and upgraded Phoenix from D to B-.

     The Commercial  Lines Group, through  MGA, markets commercial  insurance
 policies through independent  agents.  MGA  produces policies  on behalf  of
 Clarendon  National  Insurance  Company  ("CNIC")  under  a  general  agency
 agreement where it receives a commission  based on the premium written  with
 CNIC.  FAR  provided financial  and administrative  services to  MGA and  an
 unaffiliated third party.  FAR's business activity ceased in April 2003  and
 effective July 7, 2003, FAR was  legally dissolved.  ECM provides  fee-based
 claims adjustment, salvage and subrogation recovery, and litigation services
 on behalf of CNIC and another unaffiliated third party.


 Financial Condition and Liquidity

     The Company's  sources of funds are  principally derived from  insurance
 related operations.  Major sources of funds from operations include premiums
 collected  (net  of  policy   cancellations  and  premiums  ceded),   ceding
 commissions,  premium  finance  service  charges  and  service  fees.  Other
 sources of funds are from financing and investment activities.

     On a consolidated basis, the Company's total cash, cash equivalents  and
 investments (excluding restricted cash)  at June 30,  2003 and December  31,
 2002 were  $46.8  million and  $25.2  million, respectively.  The  Company's
 liquidity increased  during the  first six  months of  2003 as  compared  to
 December 31, 2002  principally as a  result of the  acquisition of  Phoenix,
 which increased cash and investments by $22.3 million.

     Net cash  provided by  the Company's  consolidated operating  activities
 was $3.9 million for the first six months of 2003 compared to net cash  used
 by operating activities of  $1.6 million for the  first six months of  2002.
 The acquisition of Phoenix effective January 1, 2003 and the acquisition  of
 the Commercial Lines Group effective December  1, 2002 played a  significant
 role in the Company's  increased cash flow  from operations.   Additionally,
 improved underwriting results have further contributed to the Company's cash
 flow from operations.

     Cash provided  by investing activities  during the first  six months  of
 2003 increased $19.2 million as compared to  the first six months of 2002.
 The acquisition of Phoenix  produced a net cash  increase of $6.9 million.
 The remaining  increase  was primarily  attributable  to purchases  of  debt
 securities during the first six months of 2002 of $5.1 million, an  increase
 in premium finance notes repaid over originated notes of $3.0 million in the
 first half  of  2003 compared  to  the same  period  of 2002  and  increased
 maturities and  redemptions  of short-term  investments  and bonds  of  $4.8
 million in the first half of 2003 compared to the same period of 2002.

     Cash  used in  financing activities  increased by  $2.8 million  in  the
 first six months of  2003 as compared to  the same period of  2002 due to  a
 decrease in net advances from the  Company's premium finance lender and  the
 repayment of notes payable to Dorinco during the first six months of 2003.

     HFS  is dependent  on dividend  payments and  management fees  from  its
 insurance companies and  free cash flow  of its  non-insurance companies  to
 meet operating expenses and debt obligations.  As of June 30, 2003, cash and
 invested assets of HFS were $0.2 million.  Cash and invested assets of  non-
 insurance subsidiaries were $1.6 million as  of June 30, 2003. 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 Commission of  Insurance, to  the
 greater of statutory net income  for the prior calendar  year or 10% of  its
 statutory policyholders' surplus as  of the prior year  end.  Dividends  may
 only  be  paid  from  unassigned  surplus  funds.  During  2003,  Hallmark's
 ordinary dividend capacity is $0.8 million.   Hallmark paid $0.2 million  of
 dividends to HFS during the first six months of 2003.  Phoenix, domiciled in
 Arizona, is limited  in the payment  of dividends to  the lesser  of 10%  of
 prior year policyholder's  surplus or  prior year's  net investment  income,
 without  prior  written approval  from the  AZDOI.  During  2003,  Phoenix's
 ordinary dividend capacity is  $0.6 million.  Phoenix  paid $0.3 million  of
 dividends to HFS during the first six months of 2003.

     The   Texas  Department   of  Insurance   ("TDI")  regulates   financial
 transactions between  Hallmark, HFS  and affiliated  companies.   Applicable
 regulations  require  TDI's  approval  of  management  and  expense  sharing
 contracts and similar  transactions.  Although  TDI has approved  Hallmark's
 payment of management fees to HFS and commissions to AHGA, since the  second
 half of  2000  management  has  elected  not to  pay  all  of  the  approved
 commissions or management fees.  Hallmark paid only nominal management  fees
 to HFS during the first six  months of 2002 and  did not pay any  management
 fees to HFS  during the  first six  months of  2003 in  order to  strengthen
 Hallmark's statutory surplus.  During the third quarter of 2003, the Company
 expects to  draft  new  management  agreements  whereby  Hallmark  will  pay
 management fees and ceding commissions to AHGA.

     The  AZDOI   regulates  financial  transactions   between  Phoenix   and
 affiliated companies.   Applicable regulations require  AZDOI's approval  of
 management and expense sharing contracts and similar transactions.  Although
 the AZDOI has approved  payments of management fees  to HFS, management  has
 elected to not pay a management fee to HFS  in the first six months of  2003
 in order to strengthen  Phoenix's statutory surplus and  does not expect  to
 pay management fees during the remainder of 2003.

     At  June 30,  2003,  Hallmark  reported statutory  capital  and  surplus
 (calculated  as  statutory  assets  less  statutory  liabilities)  of   $8.9
 million,  as  compared  to  $8.4  million  at  December 31,  2002.  Hallmark
 reported statutory net income of $0.8 million during the first six months of
 2003 and paid  dividends of $0.2  million to HFS  during the  same period.
 Hallmark's premium-to-surplus ratio as  of June 30, 2003  was 2.48 to 1,  as
 compared to 2.63 to 1 for  the twelve months ended  December 31, 2002.   The
 minimum statutory capital and  surplus required for Hallmark  by the TDI  is
 $2.0 million.  Hallmark's statutory capital and surplus as of June 30,  2003
 exceeded the minimum requirements by 344%.

     At June  30, 2003,  Phoenix reported  statutory capital  and surplus  of
 $10.8 million, up from $10.1 million at December 31, 2002.  Phoenix reported
 statutory net income of $0.4 million during the first six months of 2003 and
 paid $0.3 million in dividends to HFS during the first six months of 2003.
 Phoenix's premium-to-surplus ratio as of June 30,  2003 was 2.28 to 1.   The
 minimum statutory capital and surplus required  for Phoenix by the AZDOI  is
 $1.5 million.  Phoenix's statutory capital  and surplus as of June 30,  2003
 exceeds the minimum requirements by 617%.

     Based upon year-to-date and budgeted cash flow information, the  Company
 believes that it  has sufficient liquidity  to meet  its ongoing  insurance,
 operational and capital  expenditure needs through  the remainder of  fiscal
 2003.  However,  management is continuing  to investigate opportunities  for
 future growth and additional  capital may be required  to fund expansion  of
 the Company.  Further,  the acquisitions of the  Commercial Lines Group  and
 Phoenix were  financed  by  a bridge  loan  from  Newcastle  Partners,  L.P.
 ("Newcastle"), an  affiliate  of the  Company's  Chairman of  the  Board  of
 Directors and  Chief Executive  Officer, Mark  E. Schwarz.  The Company  has
 announced  it will retire this debt with the proceeds from a rights offering
 of its common stock to its shareholders of record  as of June 27, 2003.  The
 Company plans to complete the offering on August 29, 2003.


 Results of Operations

 Three Months Ending June 30, 2003 as compared to Three Months Ending June
 30, 2002

     Net income before  cumulative effect of  change in accounting  principle
 and extraordinary gain was $0.4 million for the quarter ended June 30, 2003,
 compared  to  $0.1  million  for  the  quarter  ended  June  30,  2002.  The
 improvement in operating earnings for the second quarter of 2003 compared to
 the second quarter  of 2002 reflects  improved loss ratios  of the  Personal
 Lines Group (including the  acquisition of Phoenix)  and the acquisition  of
 the Commercial Lines Group.

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

                                      2003         2002
                                     -------      -------
                Revenues
                --------
        Personal Lines Group        $ 13,414     $  5,878
        Commercial Lines Group         4,631         -
                                     -------      -------
             Consolidated           $ 18,045     $  5,878
                                     =======      =======

            Pre-tax Income
            --------------
        Personal Lines Group        $  1,135     $     11
        Commercial Lines Group           189            -
        Corporate                       (664)         201
                                     -------      -------
             Consolidated           $    660     $    212
                                     =======      =======


 Personal Lines Group

     Gross premiums written (prior to reinsurance) for the second quarter  of
 2003 decreased 32%, and net  premiums written (after reinsurance)  increased
 86%, in relation to the same period in 2002.  The decrease in gross premiums
 written is principally due to the  change in the reinsurance structure  with
 State & County and Dorinco.  Effective April 1, 2003, the Company assumes  a
 45%  share  of  the  non-standard  auto   business  produced  by  AHGA   and
 underwritten by State & County instead of the 100% share it assumed prior to
 that date.  Also, effective April 1, 2003, Dorinco assumes its 55% share  of
 this business directly from  State & County, where  prior  to  this date the
 Company retroceded 55% of  the business to Dorinco.   The decrease in  gross
 premiums written is also impacted by an approximate 25% reduction in  agency
 locations and a shift in marketing  focus from annual term premium  financed
 policies to six month term direct  bill policies.  Partially offsetting  the
 decrease in gross premiums written is  the acquisition of Phoenix  effective
 January 1, 2003,  which contributed  $5.7 million of gross premiums written.
 The increase in net premiums written is due primarily to the acquisition  of
 Phoenix in 2003, which contributed $5.6 million for the quarter.   Partially
 offsetting the net premium  written generated by Phoenix  is a $1.4  million
 decrease in net premium written by  Hallmark for the second quarter of  2003
 as compared to the same period in 2002, as discussed above.

     Revenue  for the  Personal Lines  Group increased  128% for  the  second
 quarter of 2003 to $13.4  million from $5.9 million  for the same period  in
 2002.  The increase is primarily due to the acquisition of Phoenix effective
 January 1, 2003  which contributed $6.5  million in revenue  for the  second
 quarter of 2003, as well as AHGA commission  revenue of  $0.7  million  from
 State  &  County  on business ceded to Dorinco  for policies effective after
 March 31, 2003 due  to  the  new reinsurance structure.  Prior  to  April 1,
 2003, this commission was classified as a ceding commission and a  reduction
 to commission expense.  Also contributing was a $0.5 million increase in net
 earned premium for  Hallmark for the  second quarter of  2003 over the  same
 period in 2002,  which was partially  offset by a  $0.1 million decrease  in
 Hallmark  processing  and  service  fees   due  to  discontinuation  of   an
 unaffiliated managing  general agency  in January  2003 and  a $0.1  million
 decrease in other income as a  result of lost agency  fees from the sale  of
 all four captive insurance  offices of the Company  in the first quarter  of
 2003.

     Pre-tax income for the  Personal Lines Group increased $1.1 million  for
 the second quarter  of 2003  from  a nominal amount  for the  same period in
 2002.  The increase is  derived partially  from  the acquisition of Phoenix,
 which contributed $0.4 million  in  pre-tax  income  for  the quarter.  Also
 contributing is  an  improvement  in  Hallmark's  ratio  of  loss  and  loss
 adjustment expenses over net premiums earned ("loss ratio") to 63.6% for the
 second quarter of 2003 as compared  to  75.9%  for the  same period in 2002.
 Improved pricing in 2003 and the  termination of unprofitable agents in  the
 first  quarter  of  2003  caused the  loss  ratio improvement.  Underwriting
 income  (net  premiums  earned  less  loss  and  loss  adjustment  expenses)
 increased by $0.8 million for the second quarter of 2003 as compared to  the
 same period in 2002.  Loss and loss adjustment expense includes $0.6 million
 of losses caused by hail storms in Texas in April and May of 2003.


 Commercial Lines Group

     Total revenue  for  the  Commercial Lines Group of  $4.6 million for the
 second quarter of 2003 is comprised of $3.6 million of commissions earned on
 policies produced by MGA for CNIC and $1.0 million of processing and service
 fees earned by ECM for claims processing for CNIC and by FAR for  accounting
 administration for an unaffiliated third party, the contract for which ended
 in April 2003.  These were new sources of income for the Company in 2003  as
 a result of the acquisition of the Commercial Lines Group in December 2002.

     Pre-tax income for  the Commercial Lines Group  of $0.2 million for  the
 second quarter of 2003 is comprised of $4.6 million in revenue as  discussed
 above and $4.4 million in other  operating costs and expenses.  These  costs
 represent expenses associated with the production and servicing of insurance
 policies for  CNIC, the  largest component  of which  is independent  retail
 agent commissions.


 Corporate

      Corporate pre-tax loss of $0.7 million  for the second quarter of  2003
 declined $0.9 million as compared to pre-tax income of $0.2 million for  the
 same period in  2002.   Other operating  costs and  expenses increased  $0.7
 million  as  a  result  of  legal   and  consulting  fees  associated   with
 acquisitions and  other  corporate  matters.   Additionally,  the  shift  in
 management structure from 2002 to 2003 has increased salary related expenses
 and other overhead  during the  second quarter  of 2003.   Interest  expense
 increased by $0.2  million for the  second quarter 2003  as compared to  the
 same period in 2002.  The increase is related to the interest expense on the
 note payable to  Newcastle.  Proceeds  from this note  payable were used  to
 acquire the Commercial Lines Group and Phoenix.


 Six Months Ending June 30, 2003 as compared to Six Months Ending June 30,
 2002

     Net income before  cumulative effect of  change in accounting  principle
 and extraordinary gain was  $0.8 million for the  six months ended June  30,
 2003, compared to $0.3 million for the same period in 2002.  The improvement
 in operating earnings  for the  first six months  of 2003  compared to  2002
 reflects improved loss  ratios of the  Personal Lines  Group (including  the
 acquisition of Phoenix) and the acquisition of the Commercial Lines Group.

     The following  is additional business  segment information  for the  six
 months ended June 30 (in thousands):

                                      2003         2002
                                     -------      -------
                Revenues
                --------
        Personal Lines Group        $ 27,447     $ 11,026
        Commercial Lines Group         9,318            -
                                     -------      -------
             Consolidated           $ 36,765     $ 11,026
                                     =======      =======

            Pre-tax Income
            --------------
        Personal Lines Group        $  2,083     $    285
        Commercial Lines Group           489            -
        Corporate                    (1,302)          226
                                     -------      -------
             Consolidated           $  1,270     $    511
                                     =======      =======


 Personal Lines Group

     Gross premiums written (prior  to reinsurance) for the first six  months
 of  2003  increased  17%,  and  net  premiums  written  (after  reinsurance)
 increased 119%, in relation  to the same  period in 2002.   The increase  in
 gross premiums written  is principally due  to the  acquisition of  Phoenix,
 which  contributed  $12.4  million.  Offsetting  this increase is the change
 in the reinsurance structure  with State  &  County and  Dorinco.  Effective
 April 1, 2003,  the Company  assumes a 45%  share of  the non-standard  auto
 business produced by AHGA and underwritten by State & County instead of  the
 100% share it assumed prior  to that date.   Also, effective April 1,  2003,
 Dorinco assumes its 55% share of this business directly from State & County,
 where prior  to this  date the  Company retroceded  55% of  the business  to
 Dorinco.   The increase  in net  premiums written  is due  primarily to  the
 acquisition of  Phoenix in  2003, which  contributed $12.3  million for  the
 first six months of 2003.

     Total revenue for the Personal Lines Group increased  149% for the first
 six months of 2003 to $27.4  million from $11.0 million  for the same period
 in 2002.  The  increase  is  due  primarily  to  the  acquisition of Phoenix
 effective January 1, 2003,  which  contributed $13.1 million in  revenue for
 the  first  six  months  of 2003 and AHGA commission revenue of $0.7 million
 from State  &  County  on  business ceded to Dorinco  for policies effective
 after March 31, 2003 due to the  new reinsurance structure.   Prior to April
 1, 2003, this commission was classified as ceding commission and a reduction
 to commission  expense.  Also contributing is a $2.7 million increase in net
 earned premium for Hallmark  for the first six months of 2003  over the same
 period in  2002.  The increase in net earned premiums is  due to  Hallmark's
 net written premium trending upwards  in 2002 and  for the first  quarter of
 2003. When comparing Hallmark's net written premium for the first six months
 of 2003 to the same period in 2002,  the amount is constant for both periods
 at $10.3 million.  This is due to the fact that  second quarter 2003 premium
 volume  dropped  as  discussed in the second  quarter discussion above.  The
 increase  in  net  earned  premium  is  partially offset by  a $0.2  million
 decrease  in processing and service fees for the first six months of 2003 as
 compared to the same period in  2002.  This is due to the discontinuation of
 an unaffiliated managing general agency program in January 2003.

     Pre-tax income for the  Personal Lines Group increased $1.8 million  for
 the first six months of 2003 to $2.1 million as compared to $0.3 million for
 the  same  period  in 2002.  The  increase  is  derived partially  from  the
 acquisition of Phoenix,  which contributed $0.8  million for  the first  six
 months of 2003.   Also  contributing is  an improvement  in Hallmark's  loss
 ratio  to  70.1%  for  the  first  six  months  of  2003 as compared  to the
 same period  in 2002.  Improved  pricing  in  2003  and the  termination  of
 unprofitable agents  in the  first quarter  of 2003  caused the  loss  ratio
 improvement.  Underwriting income  increased by $1.4  million for the  first
 six months of 2003 as compared  to the same period in  2002.  Loss and  loss
 adjustment expense for the first six months of 2003 includes $0.6 million of
 losses caused by hail storms in Texas in  April and May of 2003.   Partially
 offsetting these increases  to pre-tax income  is increased other  operating
 costs and expenses  of $0.3  million for  the first  six months  of 2003  as
 compared to the same period in 2002.


 Commercial Lines Group

     Total revenue  for  the Commercial Lines  Group of $9.3  million for the
 first  six months of 2003 is mostly comprised of $6.9 million of commissions
 earned on policies serviced by MGA for CNIC and  $2.2 million  of processing
 and service fees earned by ECM for claims processing for CNIC and by FAR for
 accounting administration for an unaffiliated third party, the contract  for
 which ended April 2003.  These were new sources of income for the Company in
 2003 as  a  result of  the  acquisition of  the  Commercial Lines  Group  in
 December 2002.

     Pre-tax income for  the Commercial Lines Group  of $0.5 million for  the
 first six  months  of  2003 is  comprised  of  $9.3 million  in  revenue  as
 discussed above and  $8.8 million in  other operating costs  and expenses.
 These costs represent expenses associated with the production and  servicing
 of  insurance  policies  for  CNIC,  the  largest  component  of  which   is
 independent retail agent commissions.


 Corporate

      Corporate pre-tax loss of $1.3 million for the first six months of 2003
 declined $1.5 million as compared to pre-tax income of $0.2 million for  the
 same period in  2002.   Other operating  costs and  expenses increased  $1.2
 million  as  a  result  of  legal   and  consulting  fees  associated   with
 acquisitions and  other  corporate  matters.   Additionally,  the  shift  in
 management structure from 2002 to 2003 has increased salary related expenses
 and other overhead during  the first six months  of 2003.  Interest  expense
 increased by $0.5 million for  the first six months  of 2003 as compared  to
 the same period in 2002.  This  increase is related to the interest  expense
 on the note payable to Newcastle.  Proceeds from this note payable were used
 to acquire the  Commercial Lines Group  and Phoenix.   Partially  offsetting
 these increased expenses is $0.2 million  of amortization of a $0.5  million
 reserve discount  established  in 2003  for  Phoenix unpaid  loss  and  loss
 adjustment expenses.  This discount will  be amortized into income over  the
 next five years.


 Item 3.  Controls and Procedures.

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


 Risks Associated with Forward-Looking Statements Included in this Form
 10-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, 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-QSB will prove to  be accurate.   In light of  the
 significant  uncertainties  inherent   in  the  forward-looking   statements
 included herein, the inclusion of such information should not be regarded as
 a representation by the Company or any other person that the objectives  and
 plans of the Company will be achieved.


                                   PART II
                              OTHER INFORMATION


  Item 1.    Legal Proceedings.


             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, with the exception of the following:

             On  May 30,  2003,  Phoenix  Indemnity  Insurance  Company
             ("PIIC"), a wholly  owned subsidiary of  the Company,  was
             served with a suit  from the Superior  Court of the  State
             of Arizona in and for the County of Pima, alleging  breach
             of  contract and  bad  faith  in  connection  with  PIIC's
             denial  of  coverage  in   an  automobile  accident.   The
             plaintiffs have filed an offer  of judgment in the  amount
             of $15 million.  PIIC believes the  suit is without  merit
             and has filed an answer denying each and every  allegation
             in the  case. The  suit is  still in  pre-trial  discovery
             stage. Unless a favorable  settlement can be reached,  the
             Company intends  to  vigorously defend  PIIC  against  all
             claims asserted by the plaintiffs in the case.


  Item 2.    Changes in Securities.

             None.


  Item 3.    Defaults on Senior Securities.

             None.


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

    (a)      The Company's Annual Meeting of Shareholders was held on May 19,
             2003.  Of the  11,166,800 shares of  common stock of the Company
             entitled to vote at the meeting,  10,226,520 shares were present
             in person or by proxy.

    (b)      The following individuals were elected to serve  as directors of
             the Company  and received the number of votes set forth opposite
             their respective names:

                    Director                       Shares Voted For

               Mark E. Schwarz                         6,410,479

               Timothy A. Bienek                       6,410,479

               James H. Graves                         6,410,479

               George R. Manser                        6,410,479

               Scott T. Berlin                         6,410,479

               James C. Epstein                        6,410,479


    (c)      There was no other business to come before the Annual Meeting.


  Item 5.  Other Information.

             None.


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

    (a)      The exhibit listed in the Exhibit Index appearing on page 22 is
             filed herewith.


    (b)      The Company filed the following 8-K reports during the second
             quarter of 2003:

              Form 8-K/A filed April 14, 2003 amending Form 8-K filed January
              29, 2003 for purpose of providing financial statements required
              in connection with the Company's acquisition of Phoenix.

              Form 8-K filed May 7, 2003 containing a press release
              announcing financial results for the first quarter ended
              March 31, 2003.

              Form 8-K/A filed May 13, 2003 amending Item 7(a) and Item
              7(b) of Current Report on Form 8-K filed January 29, 2003
              and Current Report 8-K/A filed April 14, 2003 for the purpose
              of correctly reporting Rule 11-02(b)(5) of Regulation S-X,
              regarding pro forma financial statements required in
              connection with the Company's acquisition of Phoenix.

              Form 8-K filed June 17, 2003 containing a press release
              announcing June 27, 2003 as the record date for the Company's
              rights offering.

<PAGE>

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

  Exhibit
  Number                         Description
  -------                        -----------
  10 (a)     Lease Agreement for 777 Main Street, Suite 1000, Fort Worth,
             Texas 76102, dated June 12, 2003 between Hallmark Financial
             Services, Inc. and Crescent Real Estate Funding I, L.P.

  10 (b)     Termination Addendum to the Quota Share Retrocession
             Agreement, effective March 31, 2003 between American
             Hallmark Insurance Company of Texas and Dorinco Reinsurance
             Company.

  10 (c)     General Agency Agreement by and among American Hallmark
             General Agency, Inc., State and County Mutual Fire Insurance
             Company, American Hallmark Insurance Company of Texas and
             Dorinco Reinsurance Company, effective April 1, 2003.

  10 (d)     Security Fund Agreement between American Hallmark Insurance
             Company of Texas and State and County Mutual Fire Insurance
             Company, effective April 1, 2003.

  10 (e)     Quota Share Reinsurance Agreement by and among American
             Hallmark Insurance Company of Texas, American Hallmark
             General Agency, Inc. and State and County Mutual Insurance
             Company, effective April 1, 2003.

  10 (f)     Quota Share Reinsurance Agreement by and among American
             Hallmark General Agency, Inc., State and County Mutual
             Insurance Company and Dorinco Reinsurance Company, effective
             April 1, 2003.

  10 (g)     Fourth Modification Agreement effective June 19, 2003 by and
             among Hallmark Finance Corporation and FPF, Inc.

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

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

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

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

<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: August 14, 2003       /s/ Mark E. Schwarz
                             ---------------------------------------------
                             Mark E. Schwarz, Chairman (Chief
                             Executive Officer)


 Date: August 14, 2003       /s/ Scott K. Billings
                             ---------------------------------------------
                             Scott K. Billings, Executive Vice President
                             (Chief Financial Officer/Principal Accounting
                             Officer)