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 March 31, 1997



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.RS. Employer
corporation or organization)                 Identification No.)

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


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

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

                        Yes   X       No   

                APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:  Common Stock, par
value $.03 per share - 10,662,277 shares outstanding as of May 9, 1997.
<PAGE>
                                 PART I
                         FINANCIAL INFORMATION

Item 1.   Financial Statements

                     INDEX TO FINANCIAL STATEMENTS


                                                      Sequential Page
Consolidated balance sheets at March 31, 1997
(unaudited) and December 31, 1996                           3

Consolidated statements of income (unaudited)
for the three months ended March 31, 1997
and March 31, 1996                                          4

Consolidated statements of cash flows (unaudited)
for the three months ended March 31, 1997
and March 31, 1996                                          5

Notes to consolidated financial
statements (unaudited)                                      6
<PAGE>
<TABLE>
           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEETS

                                                 March 31   December 31
            ASSETS                                 1997         1996   
                                               (Unaudited)
<S>                                           <C>           <C>
Investments:
  Debt securities, held-to-maturity           $ 4,870,017   $ 5,160,137
  Equity securities, available-for-sale           149,433       152,246
  Short-term investments, at cost which
  approximates market value                     4,196,139     3,380,059

     Total investments                          9,215,589     8,692,442

  Cash and cash equivalents                     4,153,840     4,749,388
  Prepaid reinsurance premiums                  9,125,748     8,480,257
  Premium receivable                            3,360,435     2,524,938
  Note receivable                               6,174,144         -    
  Reinsurance recoverable                      19,964,108    20,058,062
  Deferred policy acquisition costs             2,911,841     2,536,564
  Excess of cost over net assets acquired,
  net of accumulated amortization               5,176,651     5,215,905
  Deferred federal income taxes                   296,841       330,718
  Accrued investment income                        64,469        46,606
  Other assets                                  1,138,006     1,128,882

     Total assets                             $61,581,672   $53,763,762

     LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Notes payable                               $ 7,578,014   $   590,853
  Unpaid losses and loss adjustment expenses   18,585,067    20,697,393
  Unearned premiums                            12,270,216    11,310,250
  Reinsurance balances payable                  3,828,792     2,946,034
  Deferred ceding commissions                   2,464,230     2,368,264
  Drafts outstanding                            1,164,885       838,007
  Accounts payable and other accrued expenses   3,963,191     3,591,597
 
      Total liabilities                        49,854,395    42,342,398

Stockholders' equity:
  Common stock, $.03 par value, authorized
  100,000,000 shares;(issued 10,962,277 shares
  in 1997 and 1996)                               328,868       328,868
  Capital in excess of par value               10,349,665    10,349,665
  Retained earnings                             1,648,744     1,342,831
  Treasury stock                                 (600,000)     (600,000)
      Total stockholders' equity               11,727,277    11,421,364

                                              $61,581,672   $53,763,762

               The accompanying notes are an integral part
                of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
           HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Unaudited)
          

                                                                       
                                                  Three Months Ended
                                                       March 31        
                                                  1997          1996
<S>                                           <C>           <C>
Gross premiums written                        $11,140,479   $10,458,399
Ceded premiums written                        ( 7,846,463)  ( 7,845,566)
  Net premiums written                        $ 3,294,016   $ 2,612,833
Revenues:
  Premiums earned                             $10,180,513   $12,076,910
  Premiums ceded                              ( 7,200,971)  ( 9,048,429)
    Net premiums earned                         2,979,542     3,028,481

Investment income, net of expenses                184,555       214,489
Interest income - note receivable                  32,454           -  
Processing fees                                   363,374       495,995
Service fees                                       50,332        29,502
Other income                                       65,822        30,445

    Total revenues                              3,676,079     3,798,912

Benefits, losses and expenses:
  Losses and loss adjustment expenses           6,676,723     8,082,104
  Reinsurance recoveries                      ( 5,038,874)  ( 6,073,637)
   Net losses and loss adjustment expenses      1,637,849     2,008,467

  Acquisition costs, net                      (   279,311)  (   105,321)
  Other acquisition and underwriting expenses   1,344,755       957,392
  Operating expenses                              474,575       434,650
  Interest expense                                 44,065        11,076
  Amortization of intangible assets                43,370        41,399

  Total benefits, losses and expenses           3,265,303     3,347,663

Income from operations before
  federal income taxes                            410,776       451,249
Federal income tax                                104,863       148,660

  Net income                                  $   305,913    $  302,589

Net income per share of common stock          $       .03    $      .03 

Weighted average shares outstanding            11,640,734    11,533,131

              The accompanying notes are an integral part
               of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
          HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Unaudited)

                                                  Three Months Ended   
                                                       March 31
                                                   1997         1996
<S>                                            <C>         <C>
Cash flows from operating activities:
  Net income                                   $  305,913  $   302,589
  Adjustments to reconcile net income to
   cash provided by operating activities:
   Depreciation and amortization expense           72,146       63,055
   Change in deferred federal income taxes         33,877        6,775
   Change in prepaid reinsurance premiums      (  645,491)   1,202,864
   Change in premium receivable                (  835,497)   1,787,569
   Change in deferred policy acquisition
    costs                                      (  375,277)     255,524
   Change in deferred ceding commissions            95,966  (  360,845)
   Change in unpaid losses and loss
    adjustment expenses                        (2,112,326)   1,707,719
   Change in unearned premiums                    959,966   (1,618,511)
   Change in reinsurance recoverable               93,954   (1,659,929)
   Change in reinsurance balances payable         882,758      301,519
   Change in all other liabilities                698,472   (  243,046)
   Change in all other assets                      59,502   (  158,819)
   Net cash provided by (used in)
    operating activities                       (  766,037)   1,586,464

Cash flows from investing activities:
  Purchases of property and equipment          (   36,972)  (  129,651)
  Purchase of note receivable                  (6,174,144)        -   
  Maturities of debt securities                      -         121,374
  Maturities, redemptions, and capital
   distributions of investment securities         292,933          807
  Purchase of short-term investments           (  816,080)  (4,449,259)
  Maturities of short-term investments               -       3,139,554
   Net cash used in investing activities       (6,734,263)  (1,317,175)

Cash flows from financing activities:
  Proceeds from long-term borrowings            7,000,000        -    
  Payment of borrowing cost                    (   82,409)       -    
  Repayment of short-term borrowings           (   12,839)  (  11,622)
   Cash provided by (used in) financing
    activities                                  6,904,752   (  11,622)
Increase (decrease) in cash and cash
 equivalents                                   (  595,548)     257,667
Cash and cash equivalents at beginning
 of period                                      4,749,388    4,257,755
Cash and cash equivalents at end
 of period                                     $4,153,840   $4,515,422 
Supplemental cash flow information:
  Cash paid during the period for
  interest                                     $     -      $   11,076

                  The accompanying notes are an integral part
                   of the consolidated financial statements.
</TABLE>
<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  March  31,  1997  and  the  consolidated  results  of
operations and cash flows for the  periods presented.  The  accompanying
financial statements have been prepared by the Company without audit.

  Certain  information and  disclosures normally  included in  financial
statements prepared  in accordance  with generally  accepted  accounting
principles ("GAAP") have been condensed or  omitted.  Reference is  made
to the Company's annual consolidated  financial statements for the  year
ended December  31,  1996 for  a  description of  all  other  accounting
policies.  Certain items in the  1996 interim financial statements  have
been reclassified to conform to the 1997 presentation.

  The results of operations for the period ended March 31, 1997 are  not
necessarily indicative of the operating results  to be expected for  the
full year.

New Accounting Pronouncements

  In February 1997, the FASB issued SFAS No. 128, "Earnings Per  Share."
 SFAS No. 128 is designed to improve the earnings per share  information
provided in financial statements by simplifying the existing computation
guidelines provided for in APB Opinion No. 15 Earnings Per Share.   SFAS
No. 128 is effective for financial  statements for periods ending  after
December 15, 1997.   Management does  not anticipate that  SFAS No.  128
will have any effect on the Company's consolidated financial statements.

  In  February  1997, the  FASB  issued  SFAS No.  129,  "Disclosure  of
Information about Capital  Structure."  SFAS  129 is  applicable to  all
entities  and  requires  that  disclosure  about  an  entity's   capital
structure include  a  brief  discussion of  rights  and  privileges  for
securities outstanding.    SFAS  No.  129  is  effective  for  financial
statements for periods ending after December 15, 1997.

Note 2 - Investments

  Debt securities,  held-to-maturity, for the  three month period  ended
March  31,  1997  include  investments  in  U.S.  Government  securities
totaling $2,747,335, which includes special revenue bonds of $2,122,682.
Short-term investments consist of U.S. Government agency securities  of
$4,196,139.  Short-term investments mature within one year.

  Realized investment gains  and losses are recognized in operations  on
the specific identification  method.  The  Company has  the ability  and
intent to hold  all investments to  maturity.   Provisions for  possible
losses are recorded only on  other-than-temporary declines in the  value
of an investment.
<PAGE>
Note 3 - Notes Payable

  A summary of  the Company=s notes payable as of  March 31, 1997 is  as
follows:

  Note payable to Dorinco                    $7,000,000
  Note payable to unaffiliated finance
   company                                      380,187
  Note payable to individual                    197,827

    Total                                    $7,578,014

  Effective March  11, 1997, the Company  entered into a loan  agreement
with Dorinco Reinsurance Company  ("Dorinco"), an unaffiliated  company,
whereby the Company  borrowed $7,000,000  to contribute  to its  premium
finance subsidiary, Hallmark Finance Corporation ("HFC").  Proceeds from
this loan are intended to be used by HFC to fund premium finance  notes.
(See Notes 4 and 8.)  The loan agreement provides for a seven-year term
at a fixed interest rate of 8.25%.  Interest is payable monthly  through
February 28, 1999, with principal and interest payments commencing March
31, 1999 through  March 31,  2004.  A  penalty ranging  from $80,000  to
$120,000  is  charged  for  prepaying  the  loan  prior  to  the  fourth
anniversary date except that  after the second  anniversary date, up  to
40% of the outstanding balance may be prepaid without penalty.

  As long as certain financial covenants defined as "triggering  events"
are maintained, collateral for the loan  is limited to the stock of  HFC
and a covenant by the Company not to use the stock of American  Hallmark
Insurance Company of  Texas ("Hallmark") and  American Hallmark  General
Agency, Inc. ("AHGA").  To avoid  a triggering event, Hallmark must  (1)
maintain a combined ratio and loss ratio which does not exceed 107%  and
83%, respectively;  (2) maintain  statutory  surplus of  $4,200,000  and
experience no decreases to surplus in  any one year that exceeds 15%  of
the prior year surplus; and (3) cause HFC to maintain a certain interest
coverage ratio  and  stockholders' equity  levels  as  defined  in  the
agreement.  If a triggering event should occur, the Company has ten days
to pledge the stock  of AHGA and Hallmark  as additional collateral  for
the Dorinco  loan.   The loan  agreement also  contains covenants  which
require the Company to satisfy certain  financial ratios which are  less
restrictive than the  triggering event ratios  and, among other  things,
restrict capital expenditures,  payment of dividends,  and incurring  of
additional debt.  For the period  ending March 31, 1997, the Company  is
in compliance with the covenants of the loan.

  The  note payable  to unaffiliated  finance company  with interest  at
prime plus one percent was due March 31, 1993.  The Company has not made
payments on the note since November 1992, and is in technical default.  
The note provides  for an interest  rate after maturity  of the  maximum
statutory interest  rate.   The Company  believes it  has the  right  to
offset  $240,000  which  is  on  deposit   with  a  subsidiary  of   the
unaffiliated finance  company.   The  total  principal and  interest  in
arrears aggregates $776,959 at March 31, 1997.  Both the lender and  its
subsidiary  are  currently  in  bankruptcy  proceedings.    Upon   final
settlement, management believes the  cost, if any,  to the Company  will
not exceed amounts accrued in these financial statements.

  The note payable to an individual is collateralized by most assets  of
AHGA and  requires monthly  principal and  interest payments  of  $6,000
through May 1, 2000, with interest at 10%.
<PAGE>

Note 4 - Note Receivable

  Proceeds of  $5,915,109 from the  Dorinco loan (discussed  in Note  3)
were used to repay external borrowing by Peregrine Premium Finance  L.C.
("Peregrine") incurred to  fund premium  finance notes  pursuant to  the
financing and  servicing  arrangement between  HFC  and Peregrine.    In
addition,  $259,035  in  internally  generated  funds  were  loaned   to
Peregrine to fund new premium finance notes.  As a result, at March  31,
1997, the Company had a $6,174,144 note receivable from Peregrine.   The
Peregrine note  principal varies  in proportion  to the  amount used  by
Peregrine  to  fund  premium  finance  notes,  but  is  not  to   exceed
$7,500,000.  The note is collateralized by the premium finance notes and
bears interest at prime plus 1% ( 9.5% at March 31, 1997).


Note 5 - Federal Income Taxes

  The  composition  of  deferred tax  assets  and  liabilities  and  the
related tax effects  as of March  31, 1997 and  December 31, 1996 is  as
follows:

                                                     1997        1996    
Deferred Tax Assets:
  Property and equipment basis                    $  21,873   $ 32,607
  Unearned premiums                                 213,824    192,439
  Loss reserve discounting                           39,082     65,207
  Deferred ceding commissions,
  non-deductible for tax                          ( 152,188)  ( 57,222)
  Net operating loss carryforward                    33,171     33,171
  Other                                             174,250     97,694
   Total gross deferred tax assets                  330,012    363,896

  Valuation allowance                             (  33,171)  ( 33,178)
  Net deferred tax asset                          $ 296,841  $ 330,718

  A reconciliation of the income tax provisions based on the prevailing
corporate tax rate of 34 percent to the provision reflected in the
consolidated financial statements for the period ended March 31, 1997
and 1996 is as follows:
                                                 1997         1996 
  Computed expected income tax expense
  at statutory regulatory tax rate           $  139,664   $ 147,924
  Amortization of excess cost                    13,399      13,226
  Tax-exempt interest                        (      492)   (    328)
  Change in valuation allowance                    -       ( 16,098)
  Other                                      (   47,708)      3,936
  Income tax expense                         $  104,863   $ 148,660

  The Company has available, for federal income tax purposes, unused
net operating losses of $97,562 at March 31, 1997, which may be used to
offset future taxable income.  The net operating losses will expire, if
unused, as follows:

                   Year
                   2002                 $    1,325
                   2003                     96,237
                                           $97,562
<PAGE>
Note 6 - Warrants Outstanding

  The Company  has two stock  option plans for  key employees, the  1991
Key Employee  Stock Option  Plan and  the 1994  Key Employee  Long  Term
Incentive Plan, and  a non-qualified plan  for non-employee directors.  
The number  of  shares  reserved for  future  issuance  under  the  1991
employee plan, the 1994 employee plan and the non-employee director plan
is 500,000, 1,500,000  and 1,350,000, respectively.   The option  prices
under the plans are not to be less than the closing price of the  common
stock on the day preceding the grant date.  Pursuant to the stock option
plans, the Company has granted incentive stock options under Section 422
of the Internal  Revenue Code  of 1986.   The stock  options granted  to
employees vest over a  3 year period  on a graded  schedule, 40% in  the
first 6 months and 20% on each anniversary date of the grant date.   The
stock options granted to the  directors vest over a  6 year period on  a
graded schedule, 40% in the first  6 months and 10% on each  anniversary
date of the grant date.  In accordance with APB No. 25, the Company  has
not recognized compensation  expense for  the stock  options granted  in
1996 and 1995.

  In  October 1992,  the Company  issued  warrants to  purchase  981,333
shares of its Common Stock  ("Guaranty Warrants") to executive  officers
and directors in consideration for  the recipients' agreement to  pledge
outstanding shares of the Company's common stock they owned as  security
for a working capital line of credit the Company proposed to obtain from
a commercial bank.   The Company subsequently  abandoned its efforts  to
obtain the  working  capital line  of  credit.   Each  Guaranty  Warrant
covered the same number  of shares the recipient  agreed to pledge.   No
value was assigned to these warrants.  The Guaranty Warrants were  fully
exercisable between October 2, 1992 and  October 1, 1996, at which  time
they would have expired to the extent not exercised.  On March 28, 1996,
the Board  of  Directors extended  the  exercisability of  the  Guaranty
Warrants through  October 1,  1998.   This resulted  in a  new  exercise
period from October 1, 1996 (new measurement date) to October 1, 1998.  
The exercise  price is  $.50 per  share,  an amount  equal to  the  last
reported sale price of the Common Stock on the American Stock Exchange's
Emerging Company Marketplace  prior to October  2, 1992.   The  Guaranty
Warrants are  not transferrable,  but may  be  exercised only  by  their
recipients (or by a recipient's estate in the event of his/her death).

Note 7 - Reinsurance

  Hallmark  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,  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 AHGA and written on State & County policies.  
The arrangement was  supplemented by a  separate retrocession  agreement
between Hallmark  and  Vesta  Fire  Insurance  Corporation  ("Vesta").  
Hallmark and Vesta shared the risk  on the State & County policies  with
Hallmark retaining  25%.   This retrocession  agreement with  Vesta  was
terminated on a run-off basis effective June 30, 1996.
<PAGE>

  Effective July 1,  1996, Hallmark renewed its reinsurance  arrangement
with State & County and entered  into a new retrocession agreement  with
Kemper Reinsurance Company, Dorinco and Odyssey Reinsurance Corporation.
Under the new retrocession agreement, Hallmark continues to retain 25%.


Note 8 - Commitments and Contingencies

  Effective March 17,  1997, HFC entered  into a  loan agreement  (ABank
Credit Line@)  with a  bank  whereby the  bank  committed to  provide  a
revolving credit facility  of $8,000,000  for funding  of up  to 60%  of
premium finance  notes  outstanding  for State  and  County  policies.  
Beginning on  or about  June 15,  1997, upon  completion of  the  90-day
cancellation notification period to Peregrine, HFC will commence funding
all new notes issued by HFC with proceeds from both the Dorinco loan  as
discussed in Note 3 and the Bank Credit Line.

  The  Bank  Credit  Line provides  for  an  eighteen-month  term  which
expires September 17,1998.   Fundings under this line  are limited to  a
60% advance rate against  a borrowing base  of eligible premium  finance
notes receivable as defined  in the agreement.   The agreement  provides
for monthly interest payments with interest  rate options of prime  plus
three-eighths floating or  the London Interbank  Offered Rate  ("LIBOR")
plus two and eight-tenths with fixed rate tranches of three, six  and/or
twelve months in  $250,000-minimum increments up  to a  total of  twelve
tranches.   A one-fourth  of one  percent usage  fee is  payable on  any
unused portion of the Bank Credit Line.  To collateralize advances under
the line, HFC  must grant the  bank a security  interest in the  premium
finance notes and the  Company must guarantee  HFC's indebtedness.   The
Bank Credit Line  agreement also contains  covenants which, among  other
things, require the Company to satisfy  the same financial ratios as  in
the Dorinco  loan  agreement,  and includes,  but  is  not  limited  to,
restrictions  on  capital  expenditures,   payment  of  dividends,   and
incurring of  additional  debt, and  requires  that the  Company  be  in
compliance with all terms and covenants of the Dorinco loan agreement.

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

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

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

  Hallmark  provides  non-standard  automobile  liability  and  physical
damage  insurance   through   reinsurance  arrangements   with   several
unaffiliated companies.  Through arrangements with State & County Mutual
Fire Insurance Company ("State  & County"), Hallmark provides  insurance
primarily for high  risk drivers who  do not  qualify for  standard-rate
insurance.  Under  supplementary  quota-share  reinsurance   agreements,
Hallmark cedes  a  substantial  portion of  its  risk  and  retains  the
balance.  From  March 1, 1992  through June 30,  1996, Hallmark ceded  a
portion of its risk to Vesta  Fire Insurance Corporation ("Vesta")  (60%
between March 31, 1992 and July 31, 1993 and 75% between August 1,  1993
and June 30, 1996).  Effective July 1, 1996, Hallmark entered into a new
reinsurance treaty with Kemper  Reinsurance Company ("Kemper"),  Dorinco
Reinsurance Company  ("Dorinco"),  and Odyssey  Reinsurance  Corporation
("Odyssey"), ceding a  total of  75% of its  risk.   HFC offers  premium
financing to Hallmark  policyholders through a  financing and  servicing
arrangement with an unaffiliated premium finance company.  Beginning  in
June 1997, HFC will begin offering  premium financing and issue its  own
premium finance notes funded by $15 million in loan proceeds pursuant to
agreements executed  in  March  1997.    (See  Notes  3  and  8  to  the
Consolidated  Financial  Statements.)  AHGA  manages  the  marketing  of
Hallmark policies through a network  of retail insurance agencies  which
operate  under  the  American   Hallmark  Agencies  name,  and   through
independent agents operating under their own respective names. 

  HUI, formed to market and produce commercial excess and surplus  lines
("E&S")  insurance  on  behalf  of  unaffiliated  E&S  insurers,   began
operations in late April 1996.   HUI is expected to generate  commission
income by producing E&S  insurance business through  the network of  the
Company's fourteen retail  agencies, certain agents  from the  Company's
current independent agent group, and other selected independent agents.
<PAGE>

Financial Condition and Liquidity

  The Company's sources of funds are principally derived from  insurance
related operations.  Major sources of funds are from premiums  collected
(net of policy  cancellations and premiums  ceded), external funding  of
premium notes,  ceding  commissions, processing  fees,  premium  finance
service charges and investment activities.  Net cash flow utilized  from
the Company's consolidated operations for  the three months ended  March
31, 1997 was $766,037  and net cash flow  provided for the three  months
ended March 31, 1996 was $1,586,464.  While premiums receivable at March
31, 1997  and 1996  are approximately  the same,  the year-end  premiums
receivable   balances   preceding   each   respective   quarter   varied
significantly.  Premiums receivable at December 31, 1996 were almost 50%
lower than at December 31, 1995 principally due to unusually high annual
premium volume  during 1995.    As a  result,  cash received  under  the
Company's premium finance program during the  first quarter of 1997  was
considerably less than cash received during the same period of 1996.
  
  On a consolidated  basis, the Company=s liquidity remained  relatively
unchanged as of March 31,  1997 as compared to  December 31, 1996.   The
Company's total cash and investments were $13,369,429 and $13,441,830 as
of March 31, 1997  and December 31, 1996,  respectively.  Although  cash
flow from operations decreased during the first quarter of 1997 compared
to the same  quarter in 1996  (as discussed above),  the unusually  high
1995 premium volume moderated during 1996 and thus, did not continue  to
affect subsequent quarters.

  Under HFC's premium finance program, premiums for annual policies  due
Hallmark are  funded-in-full in  approximately 30  days and  immediately
invested.   Any  unfunded  premium balances  are  recorded  as  premiums
receivable.  Premiums receivable of  $3,360,435 and $2,524,938 at  March
31, 1997 and December 31,  1996, respectively, include unfunded  premium
balances due of $3,252,023 and $2,437,024 at March 31, 1997 and December
31, 1996, respectively.  Premiums receivable increased at March 31, 1997
compared to December 31, 1996 principally due to the combined effect  of
a 7% increase in gross premiums written during the first quarter of 1997
as compared to the prior year,  and a change in  the 1997 policy mix  to
55% annual policies compared to 47% annual policies in 1996.  During the
first quarter  of  1997 and  1996,  respectively, the  Company  received
external funds, net  of cancellations, of  $3,090,451 and $3,814,277  to
fund premiums generated by the Company.
<PAGE>

  At March  31, 1997, the Company  reported $7,578,014 in notes  payable
as compared to $590,853 at December 31, 1996.  Effective March 11, 1997,
the Company entered into  a loan agreement  with Dorinco (ADorinco  Loan
Agreement@),  an  unaffiliated  company   and  principal  reinsurer   of
Hallmark, whereby the Company borrowed $7,000,000 to contribute to  HFC.
(See Note 3 to the Consolidated  Financial Statements.)  Proceeds  from
the Dorinco Loan Agreement were used  to pay $5,915,109 outstanding  and
to fund  February  premium notes  under  HFC=s financing  and  servicing
arrangement with an unaffiliated premium finance company.  As a  result,
the Company recorded notes receivable in the amount of $6,174,144 as  of
March 31, 1997.  (See Note 4 to the Consolidated Financial  Statements.)
Of the  outstanding  notes  payable balance,  $420,679  is  due  before
December 31, 1997.  The Company  expects to repay these notes with  cash
from operations.  However,  the amount to  be paid in  1997 may be  less
than the $420,679 reflected in the  notes payable balance.  Included  in
this amount is a  disputed obligation of $380,000  in connection with  a
financing transaction which occurred prior to the Company's  acquisition
of the insurance group.   Further, if any  portion of the  approximately
$380,000 is ultimately deemed  owing, the Company  believes that it  has
the right to offset  $240,000 which is on  deposit with a subsidiary  of
the unaffiliated finance company.
    
  A  substantial portion  of the  Company's liquid  assets are  held  by
Hallmark and are not available for  general corporate purposes.  Of  the
Company's consolidated  liquid  assets  at March  31,  1997,  $1,785,792
represents non-restricted  cash (compared  to $991,095  at December  31,
1996  and  $1,233,481  at   March 31, 1996).    Since  state   insurance
regulations restrict financial transactions between an insurance company
and its  affiliates,  the Company  is  limited  in its  ability  to  use
Hallmark funds  for  its own  working  capital purposes.    Furthermore,
dividends and  loans  by Hallmark  to  the Company  are  restricted  and
subject to Texas Department of Insurance ("TDI") approval.  However, TDI
has sanctioned the  payment of management  fees, commissions and  claims
handling fees by  Hallmark to the  Company and affiliates.   During  the
first quarter of 1997, Hallmark paid  or accrued $200,000 in  management
fees as compared to  $250,000 for the  first quarter of  1996.  For  the
year ended December 31,  1996, Hallmark paid or  accrued  $1,050,000  in
management fees.  While management fees for 1997 may be higher than  the
fees paid  or accrued  in 1996,  they should  be less  than the  amounts
authorized by TDI.   Management fees from Hallmark should continue to be
a moderate  source  of  unrestricted  liquidity.    However,  management
intends  to  continue  to  restrict  payment  of  management  fees,   as
necessary, to insure the surplus strength of Hallmark.
<PAGE>

  Commissions from the  Company's annual policy program for  independent
agents represent  a  source  of  unrestricted  liquidity.    Under  this
program, AHGA   offers independent agents  the ability  to write  annual
policies, but commissions to independent agents  are paid monthly on  an
"earned" basis.  However,  consistent with customary industry  practice,
Hallmark is  paying total  commissions up-front  to  AHGA based  on  the
entire annual premiums written.  Independent agent production of  annual
policies was approximately $4.7 million for the three months ended March
31, 1997.  During the first quarter of 1997, AHGA received $2.0  million
in commissions  related to  this program  from  Hallmark, and  will  pay
earned commissions of $1.2 million  to independent agents. During  1996,
AHGA received approximately $6.3 million in commissions related to  this
annual policy program from Hallmark, of which approximately $5.2 million
was paid to independent agents in 1996 and approximately $1.1 million is
being paid to independent agents during 1997 as earned.

  Ceding commission income  represents a significant source of funds  to
the Company.  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  annual premiums are earned.  
Deferred ceding commission income increased  to $2,464,230 at March  31,
1997 from $2,368,264 at December 31, 1996.  This increase is principally
attributable to the combined effect  of increased premium volume  during
the first quarter of 1997, and an  increase in the annual policy mix  to
55% in 1997 from 47% in 1996.  Partially offsetting this increase is  an
approximate 8% decrease  in ceding  commission income  during the  first
quarter of 1997 as compared to the same quarter of 1996 primarily due to
a change in reinsurance treaty terms  effective July 1, 1996.   Deferred
policy acquisition  costs  of  $2,911,841 as  of  March  31,  1997  were
$375,276 greater than  at December  31, 1996 as  a result  of the  first
quarter increase  in  1997 premium  volume  as  well as  the  change  in
reinsurance terms with regard to front fees and premium taxes.

  At March 31, 1997, Hallmark reported statutory capital and surplus  of
$5,349,871, which  shows an  increase of  $171,877 over  the  $5,177,994
reported  at  December  31,  1996.    On  an  annualized-premium  basis,
Hallmark's premium-to-surplus ratio at March 31,  1997 was 2.46 to 1  as
compared to 2.21 to 1 at December 31, 1996,  and 2.12 to 1 at March  31,
1996.    Management  does  not  presently  expect  Hallmark  to  require
additional capital during 1997.  Management anticipates that Hallmark is
positioned  to  maintain  and   strengthen  statutory  surplus   through
increased earnings  from insurance  operations.   For the  three  months
ended March 31, 1997, the statutory  loss ratio was approximately  61.3%
compared to 64.1%  and 81.8% for  the twelve months  ended December  31,
1996 and 1995, respectively.  See  Results of Operations for  discussion
of loss ratio improvement.
<PAGE>

  As  previously mentioned,  effective July  1, 1996,  Hallmark  entered
into new  reinsurance  treaties  with Kemper,  Dorinco,  and  Odyssey.  
Certain  provisions  of  the  reinsurance  treaties  could  impact   the
Company's liquidity.    Under  the  new  reinsurance  agreement  between
Hallmark and the reinsurers, Hallmark retains 62.5% and cedes only 37.5%
of the policy fees (rather than ceding  75% of the policy fees as  under
the Vesta treaty),  pays premium  taxes and front  fees on  100% of  the
business produced (rather than premium taxes and front fees on only  its
retained  business  under  the  Vesta   treaty),  and  receives  a   30%
provisional commission on the portion of the business ceded (rather than
a guaranteed 30% ceding commission under the Vesta treaty).  Policy fees
are up-front, fully earned fees that the Company is permitted by law  to
charge in  addition  to  premiums  to  cover  or  defray  certain  costs
associated with  producing policies.   The  provisional commission  paid
under the new treaty will be adjusted annually over a three-year  rating
period on a sliding scale based on  annual loss ratios.  Based upon  its
loss experience, Hallmark can earn a maximum commission of 33.5% and  is
guaranteed a minimum commission of 26%  regardless of loss experience.  
Currently, the Company  is recognizing a  commission of  27.5% based  on
current loss experience.  Pursuant to the loan agreement dated March 11,
1997 between the  Company and  Dorinco (as  discussed above),  effective
January 1, 1997, the commission structure of  Dorinco=s  pro-rata  share
of the July 1, 1996 reinsurance treaty was amended to include terms that
allows Hallmark to  earn an additional  1% commission at  a higher  loss
ratio than under the previous structure  and also increases the  maximum
ceding commission that Hallmark may earn by 1% up to 34.5%, but  reduces
the minimum ceding commission from 26% to 23%. In addition, the  Dorinco
Loan Agreement requires that effective  July 1, 1997, Hallmark  increase
future volume  of business  ceded  to Dorinco  under  the July  1,  1996
reinsurance treaty and satisfy certain  annual volume levels ceded  over
the seven year term of the loan agreement.

  Unearned  premiums increased  approximately 9%  as of  March 31,  1997
compared to December 31, 1996.  This increase was principally due to  an
approximate 7% increase in gross premiums written (prior to reinsurance)
for the quarter  ended March 31,  1997 compared to  the same quarter  in
1996 and a  shift in the  annual policy mix  to 55%  for the  respective
quarter in 1997 from 47% for the first  quarter of 1996.   As  expected,
prepaid reinsurance premiums increased proportionately. 

  Unpaid  losses   and  loss  adjustment   expenses  ("LAE")   decreased
approximately 10% due to the combined effect of a continued decrease  in
average claim payments during the first  quarter of 1997 as compared  to
the first quarter of 1996 as well as a decrease in the number of days to
process  and  pay  a  claim.      Accordingly,  reinsurance  recoverable
decreased proportionately. 
<PAGE>

  During  1997, management  expects that  the Company's  liquidity  will
continue  to  be  favorably  impacted  by  a  continued  focus  on   the
performance of the Company's core State & County business with  emphasis
on claims operations.   The Company has increased  its claims staff  and
hired additional experienced claims adjusters and supervisory  personnel
that, in  turn, have  contributed to  lower loss  and LAE  payments  and
favorably impacted the Company=s  profitability. This focus, along  with
the Company's ongoing ability to identify and retain quality independent
agents and  to respond  on a  timely  basis to  rate-change  indications
arising from both loss experience and competitive market considerations,
is  expected  to   enhance  earnings   and  liquidity   during  1997.   
Additionally,  revised  reinsurance   terms  related   to  the   Dorinco
financing, as well as reduced borrowing costs for the Company's  premium
finance program from both  the Dorinco financing  and bank credit  line,
should positively impact  liquidity and earnings  beginning late-1997.  
Management also anticipates  that an integrated  cash management  system
implemented  in  late-1995  will  continue  to  positively  impact  1997
liquidity.

  The  Company continues  to  pursue  third party  claims  handling  and
administrative contracts. Effective January 1, 1997, the Company entered
into a  new  agreement  with an  unaffiliated  managing  general  agency
(AMGA@).   Under  this  three-year contract,  the  Company,  as  program
administrator, performs certain administrative functions, including  but
not limited to, cash management, underwriting and rate-setting  reviews,
and claims handling.  In addition, Hallmark assumes a 10% pro-rata share
of the business produced  under this MGA=s program.   It is  anticipated
that  fees  under  this  contract  could  positively  impact   liquidity
increasingly throughout the year.

  Beginning late-April 1996,  the Company began marketing E&S  insurance
through HUI.  This business is  produced by the Hallmark Agencies and  a
select group of independent agents, and some portion of the premiums are
financed by HFC.   No entity within the  Company bears any  underwriting
risk.  The  E&S policies  are written on  behalf of  A-rated (A.M.  Best
rating) unaffiliated insurance companies.  HFC offers premium  financing
for E&S business produced by HUI, and is currently financing E&S premium
notes with internally generated  funds.  As  anticipated, the growth  of
this business has been  gradual due, in  part, to increased  competition
from the standard insurance market.  Management remains committed to the
development of its E&S program, and  HUI is increasing its  appointments
of qualified independent agents.  In addition, HUI recently entered into
a relationship with  a London broker  and may  begin producing  business
effective May 1, 1997 on behalf  of two London-based carriers. HCS  will
perform claims handling functions  on a fee basis.   Nonetheless, it  is
not anticipated that the E&S program will significantly impact liquidity
during 1997.

  Management  intends  to  continue  to  investigate  opportunities  for
future growth  and expansion.   However,  the Company  currently has  no
growth plans  which would  require significant  external funding  during
1997.
<PAGE>

Results of Operations

  Gross  premiums  written  (prior  to  reinsurance)  and  net  premiums
written (after reinsurance) of $11,140,479 and $3,294,016, respectively,
for the quarter ended March 31, 1997 increased approximately 7% and 26%,
respectively, in relation  to gross  premiums written  and net  premiums
written of $10,458,399 and $2,612,833, respectively, for the same period
last year.   The  disproportionate increase  in gross  and net  premiums
written pertains to Hallmark=s retention of 62.5% of policy  origination
fees during the quarter ended March  31, 1997 as compared to 25%  during
the quarter ended March 31, 1996.  As previously discussed, this  change
in the policy fee retention-percentage is due to a change in reinsurance
terms effective July 1, 1996.

  Premiums earned (prior to reinsurance) of $10,180,513 were  $1,896,397
lower than in  1996 representing  a 16%  decrease for  the period  ended
March 31, 1997 over the same period in 1996.  Net premiums earned (after
reinsurance) of $2,979,542 for 1997 remained relatively the same as  the
1996 quarter.  During the first quarter of 1996, premiums earned  (prior
to reinsurance) were high  due to the 1996  earning of premiums  written
during high-volume  months of  late  1995 as  well  as the  increase  in
monthly policy production during 1996 from 39% in 1995 to 52% in 1996.  
Hallmark did  not  experience any  high-volume  months during  1996  and
additionally, annual policy production has been  on the rise during  the
first three months of 1997 (55% for 1997 as compared to 47% for the same
period of 1996).  The disproportionate decrease between premiums  earned
(prior to and after reinsurance) resulted  from the change discussed  in
the paragraph above.

  Net  incurred loss  ratios  (computed  on net  premiums  earned  after
reinsurance) for the  three months ended  March 31, 1997  and 1996  were
approximately 55% and 66%, respectively.  The decrease in the loss ratio
between the first quarter of 1997  and 1996, was primarily  attributable
to  a  continued  emphasis  on  effective  claims  handling  procedures,
adequate rates, responsive  rate-setting procedures and  an increase  in
retention of policy  fees to  62.5%.   Reinsurance recoveries  decreased
accordingly. 

  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 increase in the credit balance of acquisition costs, net is
primarily due to the deferral of increased premium taxes and front  fees
during the first quarter of 1997 as compared to the same period in 1996.

  Other acquisition and underwriting expenses increased $387,363  during
the first quarter of 1997 as compared to the same quarter of 1996.  This
increase is  primarily due  to an  increase in  the Company=s  share  of
premium taxes and  front fees paid  under the July  1, 1996  reinsurance
treaty as  previously discussed,  and a  decrease in  ceding  commission
income for the first quarter due to the change in treaty terms effective
July  1,  1996.    Partially  offsetting  these  fluctuations  are   the
cumulative affect of decreases in a number of underwriting expenses with
no single amount accounting for a significant fluctuation.
<PAGE>

  Operating expenses increased  during the three months ended March  31,
1997 as compared to the same period in  1996, due to an increase in  the
expenditures of  management  time  and financial  resources  to  premium
finance, the managing general agency, and the surplus lines programs.

  Interest expense for the  first quarter of 1997 increased in  relation
to the same period in 1996 as a result of the Dorinco loan which  closed
early-March to  fund  premium  finance  operations.    Previous  premium
financing was through an unaffiliated  premium finance company and  thus
did  not  result  in  interest  expense  on  the  Company's   financial
statements.  (See Note 3 to the Consolidated Financial Statements.)

  Investment income  of $184,555 for  the quarter ended  March 31,  1997
decreased by approximately  14% over the  comparable 1996  quarter as  a
result of a decrease in funds available for investment and the  maturity
of some higher-yielding long-term investments.  Long-term invested funds
have decreased  principally due  to recent  maturities and  to  changing
market conditions whereby long-term rates  were less favorable for  1997
as compared to 1996. 

  Processing fees  of $363,374 for the  1997 quarter decreased  $132,621
in relation to the  same quarter in 1996.   These fees represent  income
earned by  HFC  pursuant to  the  commencement of  its  premium  finance
program January 1, 1995.   The decrease in  processing fees is  directly
related to a decrease in the outstanding premium notes at March 31, 1997
as compared to  the outstanding premium  notes at March  31, 1996.   The
lower premium note balances in 1997 compared to 1996 is due to the large
volume of  notes generated  in connection  with unusually  high  premium
volumes during the third quarter of 1995.  At March 31, 1997, there were
28,828 premium notes  totaling approximately $10,085,053,  and at  March
31, 1996, there were 31,501 notes totaling $12,224,662.

  Service and  consulting fees  for the  quarter ended  March 31,  1997,
increased by $20,830 over the same period of 1996 primarily as a  result
of the  Company's  contract  to act  as  program  administrator  for  an
unaffiliated MGA.

  Other income for the three  months ended March 31, 1997, increased  by
$35,377 as compared to the same  period of 1996 principally as a  result
of additional outside  commissions earned  by the  captive agencies  and
HUI, the Company=s excess and surplus lines agency.    
<PAGE>
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  as representation by the  Company
or any other person that the objectives and plans of the Company will be
achieved.
<PAGE>

                                 PART II
                            OTHER INFORMATION

Item 1.Legal Proceedings.

  Except  for routine  litigation  incidental  to the  business  of  the
Company and  as  described  in Note  9  to  the  Consolidated  Financial
Statements of the Company  contained in its Form  10-KSB as of  December
31, 1996, neither the Company, nor any of the properties of the  Company
was subject to any material pending  or threatened legal proceedings  as
of the date of this report. 

Item 2.  Changes in Securities.

  None.

Item 3.  Defaults upon Security Securities.

  None.

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)  No exhibits are filed herewith.

  (b)  The Company did not file a Current Report on Form 8-K to report
any events which occurred during the quarter ended March 31, 1997.
<PAGE>

                                   SIGNATURES

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

                         HALLMARK FINANCIAL SERVICES, INC.
                                  (Registrant)


Date: May 13, 1997                 /s/ Ramon D. Phillips         
                                   Ramon D. Phillips, President (Chief
                                   Executive Officer)

Date: May 13, 1997                 /s/ John J. DePuma        
                                   John J. DePuma,
                                   Chief Financial Officer