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, 2002

                       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  -  11,049,133 shares
       outstanding as of October 31, 2002.

<PAGE>
                                      PART I
                               FINANCIAL INFORMATION

 Item 1.   Financial Statements



                   INDEX TO FINANCIAL STATEMENTS

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


 Consolidated Balance Sheets at September 30, 2002           3
 (unaudited) and December 31, 2001

 Consolidated Statements of Operations                       4
 (unaudited) for the three and nine months

 Consolidated Statements of Cash Flows                       5
 (unaudited) for the nine months ended

 Notes to Consolidated Financial Statements                  6
 (unaudited)

<PAGE>

           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEETS
                  (In thousands, except share amounts)
                                --------
                                                   September 30   December 31
                     ASSETS                            2002          2001
                                                    -----------   -----------
                                                    (Unaudited)
 Investments:
    Debt securities, held-to-maturity,
      at amortized cost                            $      8,280  $        876
    Equity securities, available-for-sale,
      at market value                                        93           144
    Short-term investments, at cost which
      approximates market value                           6,442        15,203
                                                    -----------   -----------
             Total investments                           14,815        16,223

 Cash and cash equivalents                                6,361         5,533
 Restricted cash                                          1,607         1,990
 Prepaid reinsurance premiums                             9,068        11,611
 Premiums receivable from lender for financed
   premiums (net of allowance for doubtful
   Accounts of $172 in 2002 and $208 in 2001)            11,510        13,740
 Premiums receivable                                        891           414
 Reinsurance recoverable                                 13,272        16,871
 Deferred policy acquisition costs                        1,246           761
 Excess of cost over net assets acquired                  4,431         4,431
 Current federal income taxes recoverable                     -           696
 Deferred federal income taxes                              279           425
 Accrued investment income                                   69             6
 Other assets                                               733           904
                                                    -----------   -----------
                                                   $     64,282  $     73,605
                                                    ===========   ===========
      LIABILITIES AND STOCKHOLDERS' EQUITY
 Liabilities:
    Notes payable                                  $     12,317  $     13,933
    Unpaid losses and loss adjustment expenses           17,202        20,089
    Unearned premiums                                    15,367        16,793
    Reinsurance balances payable                          3,217         4,426
    Drafts outstanding                                      610           890
    Accrued ceding commission refund                      2,217         4,598
    Accounts payable and other accrued expenses           2,506         2,508
    Current federal income taxes payable                     67             -
                                                    -----------   -----------
          Total liabilities                              53,503        63,237
                                                    -----------   -----------

 Stockholders' equity
     Common stock, $.03 par value, authorized
       100,000,000 shares Issued 11,855,610
       in 2002 and 2001                                     356           356
     Capital in excess of par value                      10,875        10,875
     Retained earnings                                      591           180
     Treasury stock, 806,477 shares in 2002
       and 2001, at cost                                 (1,043)       (1,043)
                                                    -----------   -----------
          Total stockholders' equity                     10,779        10,368
                                                    -----------   -----------
                                                   $     64,282  $     73,605
                                                    ===========   ===========

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

<PAGE>
<TABLE>

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

                                                 Three Months Ended           Nine Months Ended
                                                    September 30                 September 30
                                                ---------------------       ----------------------
                                                  2002         2001           2002          2001
                                                --------     --------       --------      --------
 <S>                                           <C>          <C>            <C>           <C>
 Gross premiums written                        $  12,123    $   9,085      $  37,542     $  38,919
 Ceded premiums written                           (7,001)      (6,146)       (22,131)      (26,409)
                                                --------     --------       --------      --------
      Net premiums written                     $   5,122    $   2,939      $  15,411     $  12,510
                                                ========     ========       ========      ========

 Revenues:
   Gross premiums earned                          13,193       12,087         38,682        37,580
   Ceded premiums earned                          (7,986)      (8,185)       (24,388)      (24,972)
                                                --------     --------       --------      --------
      Net premiums earned                          5,207        3,902         14,294        12,608

   Investment income, net of expenses                146          275            417           817
   Finance charges                                   514          763          1,804         2,457
   Processing and service fees                       121          246            335           975
   Other income                                       92          184            257           291
                                                --------     --------       --------      --------
       Total revenues                              6,080        5,370         17,107        17,148

 Benefits, losses and expenses:
   Losses and loss adjustment expenses             9,316       10,223         26,584        34,392
   Reinsurance recoveries                         (5,634)      (6,486)       (15,908)      (22,017)
                                                --------     --------       --------      --------
       Net losses and loss adjustment expenses     3,682        3,737         10,676        12,375

 Acquisition costs, net                              (36)        (261)          (486)         (351)
 Other acquisition and underwriting expenses
   (net of year-to-date ceding commission of
   $5,795 in 2002 and $7,176 in 2001)              1,626          902          4,001         2,724
 Operating expenses                                  490          822          1,662         2,832
 Interest expense                                    205          266            630           816
 Amortization of intangible assets                     -           39              -           118
                                                --------     --------       --------      --------
        Total benefits, losses and expenses        5,967        5,505         16,483        18,514
                                                --------     --------       --------      --------
 Income (loss) from operations before
   federal income taxes                              113         (135)           624        (1,366)
 Federal income tax expense (benefit)                 38          (31)           213          (453)
                                                --------     --------       --------      --------
 Net income (loss)                             $      75    $    (104)     $     411     $    (913)
                                                ========     ========       ========      ========

 Basic and diluted earnings (loss) per share   $    0.01    $   (0.01)     $    0.04     $   (0.08)
                                                ========     ========       ========      ========

 Common stock shares outstanding              11,049,133   11,049,133     11,049,133    11,049,133
                                              ==========   ==========     ==========    ==========

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

</TABLE>
<PAGE>

           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Unaudited)
                            (In thousands)

                                                          Nine Months Ended
                                                             September 30
                                                    -------------------------
                                                        2002          2001
                                                    -----------   -----------
 Cash flows from operating activities:
   Net income (loss)                               $        411  $       (913)

   Adjustments to reconcile net income (loss) to
   cash flows used in operating activities:
      Depreciation and amortization expense                 120           216
      Change in deferred federal income taxes               146            57
      Change in prepaid reinsurance premiums              2,543        (1,438)
      Change in premiums receivable                        (477)          (18)
      Change in deferred policy acquisition costs          (485)         (351)
      Change in unpaid losses and loss
        adjustment expenses                              (2,887)         (481)
      Change in unearned premiums                        (1,426)        1,339
      Change in reinsurance recoverable                   3,599           (99)
      Change in reinsurance balances payable             (1,209)          948
      Change in current federal income
        tax payable/recoverable                             763          (419)
      Change in accrued ceding commission refund         (2,381)        1,793
      Change in litigation cost                               -        (1,386)
      Change in all other liabilities                      (282)           59
      Change in all other assets                            138          (265)
                                                    -----------   -----------
          Net cash used in operating activities          (1,427)         (958)
                                                    -----------   -----------
 Cash flows from investing  activities:
   Purchases of property and equipment                     (150)         (205)
   Premium finance notes originated                     (31,243)      (39,337)
   Premium finance notes repaid                          33,473        38,234
   Change in restricted cash                                383         2,056
   Purchase of debt securities                          (10,638)            -
   Maturities and redemptions
     of investment securities                             3,285         4,962
   Purchase of short-term investments                   (20,961)      (17,972)
   Maturities of short-term investments                  29,722        12,751
                                                    -----------   -----------
      Net cash provided by investing activities           3,871           489
                                                    -----------   -----------

 Cash flows from financing activities:
    Net advances from lender                             (1,616)          455
    Repayment of borrowings                                   -          (546)
                                                    -----------   -----------
        Net cash used in financing activities            (1,616)          (91)
                                                    -----------   -----------

 Increase (decrease) in cash and cash equivalents           828          (560)
 Cash and cash equivalents at beginning of period         5,533         6,831
                                                    -----------   -----------
 Cash and cash equivalents at end of period        $      6,361  $      6,271
                                                    ===========   ===========

             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, 2002 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  accounting  principles  generally
 accepted in the  United States  ("GAAP")  have  been  condensed  or omitted.
 Reference is made to the Company's annual consolidated financial  statements
 for the  year  ended December  31,  2001  for a  description  of  accounting
 policies and certain other disclosures.   Certain items in the 2001  interim
 financial  statements  have  been  reclassified  to  conform  to  the   2002
 presentation.

     The results of  operations for the period  ended September 30, 2002  are
 not necessarily indicative of the operating  results to be expected for  the
 full year.


 Note 2 - 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,  2000   between  the  Company   and  Dorinco  Reinsurance   Company
 ("Dorinco"). Under the  agreement, the Company,  upon mutual agreement  with
 Dorinco, may elect on a quarterly basis to retain  30% to 45%  of  the risk.
 The Company currently retains 40% of the risk and cedes 60% to Dorinco.  For
 the period of January 1, 2002  through March 31, 2002, the Company  retained
 35% of the risk  and ceded 65% to  Dorinco.  Prior to  January 1, 2002,  the
 Company retained 30% of the risk and ceded 70% to Dorinco.


 Note 3 - Intangible Assets

     When the  Company's primary operating  subsidiaries were purchased,  the
 excess cost over the fair value of  the net assets acquired was recorded  as
 goodwill and was amortized on a straight-line basis over forty years.  Other
 intangible assets  consist  of a  trade  name, a  managing  general  agent's
 license and non-compete arrangements, all of  which were fully amortized  at
 September 30, 2002.

     In June 2001, the Financial Accounting Standards Board issued  Statement
 of  Financial  Accounting   Standards  No.  141   ("SFAS  141"),   "Business
 Combinations", and  No. 142  ("SFAS 142"),  "Goodwill and  Other  Intangible
 Assets".  SFAS  141 supersedes Accounting  Principles Board Opinion  ("APB")
 No. 16, "Business Combinations".   SFAS 141 (1)  requires that the  purchase
 method of accounting be used for  all business combinations initiated  after
 June 30, 2001, (2)  provides specific criteria  for the initial  recognition
 and measurement of intangible assets apart  from goodwill, and (3)  requires
 that  unamortized  negative  goodwill  be  written  off  immediately  as  an
 extraordinary gain.  SFAS  142 supersedes APB  No. 17, "Intangible  Assets,"
 and is effective for fiscal years  beginning after December 15, 2001.   SFAS
 142 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.

     The Company adopted the provisions of SFAS 142 during the first  quarter
 of 2002  and  immediately  ceased  recording  amortization  expense  of  its
 goodwill.  A reconciliation of net income and earnings per share as reported
 to illustrate the impact of goodwill amortization for the nine months  ended
 September 30, 2002 and 2001 is as follows:

                                       Three Months Ended   Nine Months Ended
                                           September 30        September 30
 (In thousands except for earnings         2002    2001        2002    2001
 per share amounts)                        -----   -----       -----   -----

 Reported net income (loss)               $   75  $ (104)     $  411  $ (913)
 Add back:  Goodwill amortization              -      39           -     118
                                           -----   -----       -----   -----
 Adjusted net income (loss)               $   75  $  (65)     $  411  $ (795)
                                           =====   =====       =====   =====

 Basic and diluted earnings per share:
 Reported net income (loss)               $ 0.01  $(0.01)     $ 0.04  $(0.08)
 Add back:  Goodwill amortization              -       -           -    0.01
                                           -----   -----       -----   -----
 Adjusted net income (loss)               $ 0.01  $(0.01)     $ 0.04  $(0.07)
                                           =====   =====       =====   =====

     SFAS 142 requires that goodwill be tested annually for impairment  using
 a two-step process.   The  first step is  to determine  reporting  units and
 compare the fair value  of each reporting  unit as of  the beginning of  the
 fiscal year with its  carrying amount (including  goodwill) to  identify any
 potential  impairment.   The  Company has  completed  this  first  step  and
 determined that an impairment of goodwill exists.

 The second  step  of the  goodwill  impairment test  under  SFAS 142  is  to
 quantify the amount of any impairment loss as of the beginning of the fiscal
 year.   This process must be completed not later than the end of the  fiscal
 year.  In accordance with SFAS 142, the Company presently expects to  record
 a significant  charge to  earnings resulting  from  the completion  of  this
 transitional impairment  test. Although  the amount  of such  charge  cannot
 presently  be  reasonably  estimated,  the  Company  anticipates  that   the
 implementation of this mandatory change in accounting principle will have  a
 material adverse  impact on  net income  when  recognized.   The  cumulative
 effect of  the change  in  accounting principle  will  be recognized  as  of
 January 1, 2002.


 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  property and  casualty insurance products.  The  Company's
 business primarily involves marketing, underwriting and premium financing of
 non-standard automobile insurance,  as well  as claims  adjusting and  other
 insurance related services.

     The  Company  pursues its  business  activities  through  an  integrated
 insurance group (collectively, the "Insurance  Group") the members of  which
 are an authorized  Texas 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 four 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 a  reinsurance arrangement with  an unaffiliated  company,
 State and County Mutual Fire Insurance Company ("State & County").   Through
 State & County, Hallmark provides insurance primarily for high-risk  drivers
 who do not qualify for standard-rate insurance. Under a supplementary quota-
 share reinsurance agreement  with Dorinco  Reinsurance Company  ("Dorinco"),
 Hallmark, upon mutual agreement with its reinsurer, may elect on a quarterly
 basis to retain 30% to 45% of the risk while ceding the remaining percentage
 to its reinsurer.  HFC finances annual and six-month policy premiums through
 its  premium  finance program.   AHGA  manages  the  marketing  of  Hallmark
 policies through the Hallmark Agencies and independent agents. Additionally,
 AHGA provides premium processing,  underwriting, reinsurance accounting  and
 cash  management  for unaffiliated  managing  general  agents ("MGAs").  HCS
 provides fee-based  claims  adjustment, salvage,  subrogation  recovery  and
 litigation services to Hallmark and unaffiliated MGAs.

 Financial Condition and Liquidity

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

     At September 30, 2002 and December 31, 2001, the Company's  consolidated
 liquid  assets  consisting  of   cash,  cash  equivalents  and   investments
 (excluding  restricted  cash)   were  $21.2  million   and  $21.8   million,
 respectively.  The Company's  liquidity decreased 3%  during the first  nine
 months of  2002 as  compared to  December 31,  2001 principally  due to  the
 payment of an annual ceding commission adjustment with its reinsurer in  the
 amount of $3.4 million during the first quarter of 2002.

     Net cash  used by  operating activities was  $1.4 million  for the  nine
 months ended September 30,  2002 as compared  to approximately $1.0  million
 for the same period of 2001.  The approximate $3.4 million ceding commission
 adjustment paid to reinsurers during the first quarter of 2002 was partially
 offset by an increase in the Company's retention of State & County  business
 to 40% (from 35% at January 1, 2002  and 30% prior to 2002) effective  April
 1, 2002 under the Company's quota share retrocession agreement with  Dorinco
 and by an increase in monthly policy production.

      Cash provided by investing activities during  the first nine months  of
 2002 increased  approximately $3.4  million as  compared to  the first  nine
 months of 2001.  This increase in cash provided by investing activities  was
 primarily the combined  result of an  increase in  maturities of  short-term
 investments and  an increase  in repayments  of premium  finance notes  when
 netted against originations of premium finance  notes during the first  nine
 months of 2002 as compared to the first nine months of 2001.  This  increase
 was partially offset  by reinvestment  in both  intermediate and  short-term
 investments during the first nine months of 2002.

     Cash used by financing  activities increased by $1.5 million during  the
 first nine months  of 2002  as compared  to the  first nine  months of  2001
 primarily due  to a  decrease in  net advances  from the  Company's  premium
 finance lender.  The decrease in net advances was attributable to  decreased
 production of annual policies during 2002 as compared to 2001.

     A  substantial  portion  of the  Company's  liquid  assets  is  held  by
 Hallmark and  is not  available  for general  corporate  purposes.   Of  the
 Company's consolidated liquid assets of $21.2 million at September 30,  2002
 and $21.8  million at  December 31,  2001, $2.1  million and  $1.9  million,
 respectively,  represented   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.   Although TDI has  sanctioned the  payment of  management
 fees,  commissions  and  claims  handling  fees  by  Hallmark  to  HFS   and
 affiliates, since the second  half of 2000, Hallmark  has chosen not to  pay
 all of the commissions allowed to  AHGA. These steps were taken to  preserve
 Hallmark's surplus.   During the first  nine months of  2002, Hallmark  paid
 $243,000 of management fees  to HFS.   Management anticipates that  Hallmark
 may pay management fees during the fourth quarter of 2002.  The Company  has
 never received a dividend from Hallmark,  and there is no immediate plan  to
 pay a dividend.

     Ceding commission  income represents a  significant source  of funds  to
 the Company.   Ceding commission income  for the first  nine months of  2002
 decreased $1.4  million (representing  a 19%  decrease) as  compared to  the
 similar period of 2002.  This decrease was the result of the combined effect
 of (1) less favorable reinsurance terms during 2002 compared to 2001, (2)  a
 decrease in  core State  & County  premium volume,  and (3)  an increase  in
 Hallmark's risk  retention  to  40%  effective April  1,  2002  and  to  35%
 effective January 1, 2002 from 30% prior to January 1, 2002.  In  accordance
 with GAAP,  a portion  of ceding  commission income  and policy  acquisition
 costs is deferred  and recognized as  income and  expense, respectively,  as
 related net premiums are earned.  Deferred policy acquisition costs (net  of
 deferred ceding commission) increased to $1.2 million at September 30,  2002
 from $0.8  million at  December 31,  2001.   The  increase in  net  deferred
 acquisition costs was principally due to  the decrease in ceding  commission
 partially offset by a decrease in underwriting expenses.

     At  September 30,  2002, Hallmark's  statutory capital  and surplus  was
 approximately $6.5 million, which reflects an increase of $0.5 million since
 December 31, 2001.   Hallmark's  premium to  surplus  ratio  for the  twelve
 months ended September 30,  2002 was 2.9 to  1 as compared  to 2.62 for  the
 twelve months  ended December  31, 2001.   Effective  January 1,  2001,  TDI
 adopted  the   Codification   of  Statutory   Accounting   Principles   (the
 "Codification"),  which  replaced  the  National  Association  of  Insurance
 Commissioners primary guidance on statutory accounting.  As a result of  the
 implementation of the Codification, Hallmark recognized a deferred tax asset
 which is recognized by TDI as an increase to surplus.

     The  Company  provides   on-going  program  administration  and   claims
 handling  for  unaffiliated  MGAs.  The  Company  currently  provides  these
 services for  one unaffiliated  MGA which continues to produce new business.
 Hallmark assumes  a  pro-rata share  of  the business  produced  under  this
 unaffiliated MGA program, and  Dorinco assumes the  remainder.  Three  other
 unaffiliated MGAs  for  whom  the Company  provided  similar  services  have
 discontinued writing new business due to the inability to obtain reinsurance
 and are in run-off.

     Management is  continuing to  investigate opportunities  to enhance  and
 expand the  Company's operations.   While  additional capital  or  strategic
 alliances may be required to fund future expansion, operational enhancements
 through  increased  information  technology  capabilities  are in  progress.
 During the summer of 2001, the Company rolled out its web-based  information
 system (named e-Integrity and referred to  as the "Integrity System")  which
 is designed to enhance Company and agency relationships by improving content
 and  timeliness  of  information  to  support  agents  in  servicing   their
 customers.  The  second phase  of the Integrity  System is  composed of  two
 parts.   Part  One   relates  to  electronic  reporting  and   communication
 capabilities, and Part Two encompasses, among other things, payment and  new
 business upload to support agents in more promptly and efficiently producing
 new business, as well as to improve the quality and timeliness of service to
 existing policyholders.   Part One alleviates  certain manual processes  and
 results in daily communication of time-sensitive information to agents, thus
 decreasing labor,  supplies and  postage costs  and increasing  the  agent's
 likelihood of policyholder retention.  This  phase was completed during  the
 first quarter of 2002.  Payment upload  by the agents, which is included  in
 Part Two, was  introduced during August  2002.  The  remainder of Part  Two,
 which will further reduce processing costs,  is targeted to be completed  by
 year-end 2002 with related cost savings to commence in 2003.


 Results of Operations

 Overview

     The Company  had profitable results  for the first  nine months of  2002
 principally due to its focus on  rate adequacy, underwriting discipline  and
 agent management.  For the first  nine months ended September 30, 2002,  net
 income was $0.4 million compared to a net loss of $0.9 million for the  same
 period of 2001.  Gross  premiums written for the  first nine months of  2002
 decreased approximately 4% as compared to  2001, while net premiums  written
 for the first nine months of 2002 increased by 23% to $15.4 million for 2002
 compared to $12.5 million in 2001.  Net premiums earned of $14.3 million for
 the first nine  months of  2002 increased 13%  in relation  to net  premiums
 earned of $12.6 million for the comparable period of 2001.

     The Company's net incurred loss  ratios declined to 74.7% for the  first
 nine months of 2002 from 98.2% for the  first nine months of 2001.   Certain
 key financial operational ratios follow:

                                           Qtr       Qtr       YTD       YTD
                                          ended     ended     ended     ended
                                         9/30/02   9/30/01   9/30/02   9/30/01
                                         ------    ------    ------    ------
 GAAP Incurred Loss Ratio
   (excluding storm and loss corridor)    68.4%     83.7%     67.0%     88.5%
 GAAP Loss Corridor Incurred
   Loss Ratio  (1)                         1.7%     10.2%      6.2%      6.5%
 GAAP Storm\Flood Incurred
   Loss Ratio (2)                          0.6%      1.9%      1.5%      3.2%
                                         ------    ------    ------    ------
 GAAP Incurred Loss Ratio                 70.7%     95.8%     74.7%     98.2%
 GAAP Expense Ratio  (3)                  29.6%     21.2%     23.8%     18.6%
                                         ------    ------    ------    ------
      GAAP Combined Ratio                100.3%    117.0%     98.5%    116.8%
                                         ======    ======    ======    ======

 (1)    Effective  April 1,  2001, the Company's  reinsurance agreement
     was amended to include a loss corridor provision.  Losses incurred
     within the loss corridor range  are  retained 100% by the Company.
     Losses incurred  within the  loss corridors  for the  three months
     ended  September 30,  2002 and  2001  were $0.1  million  and $0.4
     million, respectively.  Losses  incurred within the loss corridors
     for the  nine months ended September  30, 2002 and  2001 were $0.9
     million and $0.8 million, respectively.

 (2)    Net  storm losses  retained by  the Company  were approximately
     $0.03  million  and  $0.1  million  for  the  three  months  ended
     September  30, 2002  and  2001, respectively.    Net storm  losses
     retained by the  Company were approximately $0.2  million and $0.4
     million for  the nine  months ended  September 30, 2002  and 2001,
     respectively.

 (3)     The GAAP  expense ratio  represents underwriting  expenses and
     other income less certain expenses as a percentage of net premiums
     written.   The  principal reason  for the  increased  GAAP expense
     ratio is the decrease in ceding commission income. As a percentage
     of net  premiums written, ceding  commission income for  the three
     months ended September 30, 2002 declined  21.8%.   As a percentage
     of net  premiums written,  ceding commission  income for  the nine
     months ended  September 30, 2002  declined 19.8%, as  discussed in
     the Financial Condition and Liquidity section.


 Analysis

      Gross premiums  written (prior  to reinsurance)  for the  three  months
 ended September 30,  2002 increased 33%  as compared to  the same period  of
 2001, while gross premium  written for the nine  months ended September  30,
 2002 decreased  approximately 4%  over the  same period  of 2001.   The  33%
 increase in gross premiums written during the third quarter of 2002 compared
 to the  same period  in 2001  is principally  due to  unusually low  premium
 volume in 2001 as a result  of (1) a one-third  reduction in the agent  base
 during the last  12 months,  a significant portion  of the  business of  the
 terminated agents ran-off early in the third quarter of 2001 (2)  successive
 rate increases  in June  and  July 2001,  and  (3) temporary  disruption  of
 insurance purchasing  patterns  as a  result  of the  terrorist  attacks  of
 September 11, 2001.   The overall  year to date  decrease in gross  premiums
 written from 2001  to 2002 was  principally due to  the Company's  strategic
 focus on underwriting profitability  rather than market  share.  This  focus
 included  increased  attention  to  rate  adequacy,  agent  performance  and
 underwriting discipline.  Net premiums  written (after reinsurance) for  the
 three and  nine months  ended  September 30,  2002  increased 74%  and  23%,
 respectively, over the  same periods in  2001. The  disparity between  gross
 premiums written and net premiums written  is primarily due to the  increase
 in the Company's retention of premiums from 30% to 35% effective January  1,
 2002 and further to 40% effective April 1, 2002.

     Despite the decrease in  gross premiums written compared to 2001,  gross
 premiums earned (prior to reinsurance) for  the three and nine months  ended
 September 30, 2002  increased 9% and  3%, respectively, as  compared to  the
 same periods of 2001.   This was principally due to the combined effect of a
 shift in  policy mix  from  annual to  monthly  policies and  the  continued
 earnings of annual premiums written at  a higher volume level during 2001.
 For the three and nine months ended September 30, 2002, net premiums  earned
 (after reinsurance) increased 33% and 13%, respectively, as compared to  the
 same periods of 2001.  The disproportionate change in premiums earned  prior
 to and after reinsurance is due to the impact of the increased retention  of
 core State &  County premium  volume which  has reduced  ceded premiums  and
 ultimately increased net premiums written and earned.

      Net incurred  loss  ratios  (computed  on  net  premiums  earned  after
 reinsurance) for the  three and nine  months ended September  30, 2002  were
 approximately 70.7% and 74.7%, respectively, compared to 95.8% and 98.2% for
 the same periods of 2001.  During the second quarter of 2001, the  Company's
 reinsurance agreement was amended to include a loss corridor provision which
 increases net  losses incurred  by the  Company between  certain loss  ratio
 levels.  If the loss corridor  had not been in  place during the first  nine
 months of 2002 and the second and third  quarters of 2001, the year to  date
 net  incurred  loss  ratios would have  been 68.5% and  91.7%, respectively.
 Additionally, severe storms occurring in the spring of 2002 and the  Houston
 flood of May 2001  impacted the 2002  and 2001 loss  ratios.  Excluding  the
 impact  of  storms and  the loss  corridor,  the  year  to  date loss ratios
 for 2002  and  2001  would have  been  67.0%  and  88.5%, respectively.  The
 significant improvement  in the  loss  ratio in  2002  compared to  2001  is
 principally the result  of the  Company's increasing  focus on  underwriting
 profitability during 2001 which is now reflected in 2002 results.   Specific
 strategies implemented in late 2000 and  2001 to improve the Company's  loss
 ratio  included  multiple  rate  increases,  more  restrictive  underwriting
 guidelines, reductions in  agency force and  emphasis on  faster payment  of
 claims.

      Investment income decreased 47% and 49% during the first three and nine
 months of 2002,  respectively, compared to  the same periods  of 2001.   The
 decrease is  attributable to  the combined  effect  of the  decreased  yield
 currently available in the marketplace and maturities/calls of higher  yield
 investments.

      Finance charges, which decreased  approximately $0.2 million (33%)  and
 $0.7 million  (27%)  during  the  first  three  and  nine  months  of  2002,
 respectively, as compared to  the same periods  of 2001, represent  interest
 earned on premium notes issued by HFC.  This decrease is directly correlated
 to the decrease in annual policy premium volume.

      Processing and  service  fees  represent fees  earned  on  third  party
 processing and servicing contracts with  unaffiliated MGAs.  Processing  and
 service fees  for  the  three  and nine  months  ended  September  30,  2002
 decreased $0.1 million (51%) and $0.6 million (66%), respectively,  compared
 to the same  periods of 2001,  as a result  of cancellation  of the  service
 contracts with three unaffiliated MGAs (which are currently in run-off).

     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.  The  $0.1
 million decrease in acquisition costs, net, is primarily due to the combined
 effect of  a decrease  in ceding  commission income  due to  changes in  the
 Company's reinsurance terms and an increase in the deferral rate as a result
 of the Company increasing its retention of State & County business under its
 quota share retrocession agreement.

     Other  acquisition and  underwriting expenses  for  the three  and  nine
 months ended  September 30,  2002 increased  80% and  47%, respectively,  as
 compared to the same periods of 2001. The increase in expenses is  primarily
 attributable to decreased ceding commission income as a result of  increases
 in the Company's retention  of its core business  since year end 2001,  less
 favorable reinsurance  terms,  and  decreased core  State  &  County  annual
 premium volume.

     Operating  expenses   include  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  processing and  service fees.   Operating  expenses during  the
 three and  nine months  ended September  30, 2002,  decreased 40%  and  41%,
 respectively, as compared to the same periods of 2001.  The majority of this
 decrease in operating expenses is attributable to decreased operating  costs
 related to  third party  processing and  claims handling,  and to  a  lesser
 extent, decreased operating costs related to premium finance.

     Interest expense  during the three and  nine months ended September  30,
 2002, decreased approximately $0.1 million and $0.2 million respectively, as
 compared to 2001.  This decrease is principally the result of a decrease  in
 the effective interest rate  related to the premium  finance line of  credit
 and to lower premium note volume as a result of lower annual premium volume.

 Recent Developments

     The Company's retrocession  reinsurance agreement with Dorinco has  been
 modified  effective  October  1, 2002  with  modestly improved  terms.   The
 threshold of the loss corridor has been raised to a loss ratio of 65.5% from
 a loss ratio of 65.01%.  In addition, the ceiling  of the loss corridor  has
 been lowered to  a loss  ratio of  75.5%, resulting  in a  narrowing of  the
 corridor from 15  percentage points to  10 percentage points.   The  minimum
 ceding commission has been increased by  0.5%, and the loss ratio  threshold
 for minimum commissions  has been  raised  by  0.5%.   Further, Dorinco  has
 waived any deficit  loss carryforward. A  deficit loss carryforward  results
 when the loss  ratio exceeds  an established  benchmark and  the deficit  is
 carried forward into subsequent ceding  commission adjustments. As a  result
 of the wavier of  the deficit loss carryforward  effective October 1,  2002,
 the Company will be able to recognize additional ceding commission above the
 minimum commission at established loss ratios  below 65.5%.  If the  deficit
 loss carryforward had not been  waived, any potential additional  commission
 would have been applied to the deficit loss carryforward accumulated through
 September 30, 2002.


 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.


 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 as of a date
 within 90 days of  the filing date  of this report  and have concluded  that
 such controls and procedures are effective.   There have been no significant
 changes in the Company's  internal controls or in  other factors that  could
 significantly  affect  these  controls  subsequent  to  the  date  of  their
 evaluation.

                                   PART II
                              OTHER INFORMATION



      Item 1.  Legal Proceedings.

               Except for routine litigation incidental to the business
               of the Company, neither the Company, nor any of the
               properties of the Company was subject to any material
               pending or threatened legal proceedings as of the date
               of this report.


      Item 2.  Changes in Securities.

               None.


      Item 3.  Defaults upon Senior Securities.

               None.


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

               None


      Item 5.  Other Information.

               None.


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


          (a)  The exhibits listed in the Exhibit Index following the
               signature page are filed herewith.


          (b)  The Company did not file any Form 8-K Current Reports
               during the third quarter of 2002.



                                  SIGNATURES

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

                      HALLMARK FINANCIAL SERVICES, INC.
                                 (Registrant)



 Date: October 31, 2002           /s/ Linda H. Sleeper
                                  ---------------------------
                                  Linda H. Sleeper, President
                                  (Chief Executive Officer)


 Date: October 31, 2002           /s/ John J. DePuma
                                  ---------------------------
                                  John J. DePuma,
                                  Chief Financial Officer


<PAGE>

                                CERTIFICATIONS

 I, Linda H. Sleeper, Chief Executive Officer of Hallmark Financial Services,
 Inc. (the "Company"), certify that:

      1.   I have  reviewed  this quarterly  report  on Form  10-QSB  of  the
 Company;

      2.   Based on my knowledge, this quarterly report does not contain  any
 untrue statement  of  a material  fact  or omit  to  state a  material  fact
 necessary to make the statements made,  in light of the circumstances  under
 which such statements were made, not  misleading with respect to the  period
 covered by this quarterly report;

      3.   Based  on  my  knowledge,  the  financial  statements,  and  other
 financial information included in this  quarterly report, fairly present  in
 all material respects  the financial  condition, results  of operations  and
 cash flows of the registrant as of,  and for, the periods presented in  this
 quarterly report;

      4.   The registrant's other certifying  officers and I are  responsible
 for establishing  and maintaining  disclosure  controls and  procedures  (as
 defined in Exchange  Act Rules  13a-14 and  15d-14) for  the registrant  and
 have:

           a)   designed such disclosure  controls and  procedures to  ensure
      that material  information relating  to the  registrant, including  its
      consolidated subsidiaries, is made known to  us by others within  those
      entities, particularly during the period in which this quarterly report
      is being prepared;

           b)   evaluated the  effectiveness of  the registrant's  disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this quarterly report (the "Evaluation Date"); and

           c)   presented in this quarterly report our conclusions about  the
      effectiveness of the  disclosure controls and  procedures based on  our
      evaluation as of the Evaluation Date;

      5.   The registrant's other certifying  officers and I have  disclosed,
 based on our most  recent evaluation, to the  registrant's auditors and  the
 audit committee of  registrant's board of  directors (or persons  performing
 the equivalent functions):

           a)   all significant deficiencies  in the design  or operation  of
      internal controls which could adversely affect the registrant's ability
      to record,  process,  summarize  and report  financial  data  and  have
      identified for  the registrant's  auditors any  material weaknesses  in
      internal controls; and

           b)   any fraud, whether or not material, that involves  management
      or other  employees who  have a  significant role  in the  registrant's
      internal controls; and

      6.   The registrant's other certifying officers and I have indicated in
 this quarterly  report whether  or not  there  were significant  changes  in
 internal controls  or  in  other factors  that  could  significantly  affect
 internal controls  subsequent to  the date  of our  most recent  evaluation,
 including any corrective actions with regard to significant deficiencies and
 material weaknesses.

 Date:  October 31, 2002

                                    /s/ Linda H. Sleeper
                                    -----------------------------------------
                                    Linda H. Sleeper, Chief Executive Officer



 I, John J. DePuma, Chief Financial  Officer of Hallmark Financial  Services,
 Inc. (the "Company"), certify that:

      1.   I have reviewed this quarterly report on Form 10-QSB of the
 Company;

      2.   Based on my knowledge, this quarterly report does not contain  any
 untrue statement  of  a material  fact  or omit  to  state a  material  fact
 necessary to make the statements made,  in light of the circumstances  under
 which such statements were made, not  misleading with respect to the  period
 covered by this quarterly report;

      3.   Based  on  my  knowledge,  the  financial  statements,  and  other
 financial information included in this  quarterly report, fairly present  in
 all material respects  the financial  condition, results  of operations  and
 cash flows of the registrant as of,  and for, the periods presented in  this
 quarterly report;

      4.   The registrant's other certifying  officers and I are  responsible
 for establishing  and maintaining  disclosure  controls and  procedures  (as
 defined in Exchange  Act Rules  13a-14 and  15d-14) for  the registrant  and
 have:

           a)   designed such disclosure  controls and  procedures to  ensure
      that material  information relating  to the  registrant, including  its
      consolidated subsidiaries, is made known to  us by others within  those
      entities, particularly during the period in which this quarterly report
      is being prepared;

           b)   evaluated the  effectiveness of  the registrant's  disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this quarterly report (the "Evaluation Date"); and

           c)   presented in this quarterly report our conclusions about  the
      effectiveness of the  disclosure controls and  procedures based on  our
      evaluation as of the Evaluation Date;

      5.   The registrant's other certifying  officers and I have  disclosed,
 based on our most  recent evaluation, to the  registrant's auditors and  the
 audit committee of  registrant's board of  directors (or persons  performing
 the equivalent functions):

           a)   all significant deficiencies  in the design  or operation  of
      internal controls which could adversely affect the registrant's ability
      to record,  process,  summarize  and report  financial  data  and  have
      identified for  the registrant's  auditors any  material weaknesses  in
      internal controls; and

           b)   any fraud, whether or not material, that involves  management
      or other  employees who  have a  significant role  in the  registrant's
      internal controls; and

      6.   The registrant's other certifying officers and I have indicated in
 this quarterly  report whether  or not  there  were significant  changes  in
 internal controls  or  in  other factors  that  could  significantly  affect
 internal controls  subsequent to  the date  of our  most recent  evaluation,
 including any corrective actions with regard to significant deficiencies and
 material weaknesses.

 Date:  October 31, 2002

                                    /s/ John J. DePuma
                                    -----------------------------------------
                                    John J. DePuma, Chief Financial Officer


<PAGE>

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


    Exhibit                      Description
    -------                      -----------

    10 ( a )     Addendum  No.   3  to   the  Quota   Share  Retrocession
                 Agreement,  effective  July  1, 2000,  between  American
                 Hallmark  Insurance   Company   of  Texas   and  Dorinco
                 Reinsurance Company, effective June 30, 2001.

    10 ( b )     Amendment of  Article VII  of  the Amended  and Restated
                 Bylaws  of Hallmark  Financial  Services,  Inc., adopted
                 July 19, 2002.

    10 ( c )     Form  of  Indemnification   Agreement  between  Hallmark
                 Financial Services, Inc. and its officers and directors,
                 adopted July 19, 2002.

    99           Certification  Pursuant to  18  U.S.C.  1350 Enacted  by
                 Section 906 of the Sarbanes-Oxley Act of 2002.