Document:

EXHIBIT 4.2

      THIS NOTE  AND  THE  SECURITIES UNDERLYING  THIS  NOTE  HAVE  NOT  BEEN
 REGISTERED UNDER THE  SECURITIES ACT  OF 1933,  AS AMENDED  (THE "ACT"),  OR
 QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE
 SOLD OR  OTHERWISE  TRANSFERRED IN  THE  ABSENCE OF  SUCH  REGISTRATION  AND
 QUALIFICATION WITHOUT,  EXCEPT AS  OTHERWISE  AGREED BY  HALLMARK  FINANCIAL
 SERVICES, INC., AN  OPINION OF COUNSEL  REASONABLY SATISFACTORY TO  HALLMARK
 FINANCIAL SERVICES, INC.  THAT SUCH REGISTRATION  AND QUALIFICATION ARE  NOT
 REQUIRED.

                         CONVERTIBLE PROMISSORY NOTE

 [$12,550,000] [$12,450,000]                                 January 27, 2006

      FOR VALUE RECEIVED, the undersigned, HALLMARK FINANCIAL SERVICES, INC.,
 a Nevada corporation (the "Maker"), hereby  promises to pay to the order  of
 Newcastle Special  Opportunity  Fund  [I] [II],  L.P.,  a  Delaware  limited
 partnership, or its assigns  (the "Payee"), at such  place as the Payee  may
 designate in  writing, the  principal sum  of Twelve  Million [Five]  [Four]
 Hundred Fifty Thousand Dollars ([$12,550,000] [$12,450,000]), or such lesser
 amount as shall  equal the outstanding  principal amount  hereof, under  the
 terms set forth herein.  Capitalized terms used but not defined herein shall
 have the respective meanings given to such terms in the Purchase  Agreement,
 dated as of the  date hereof (the "Purchase  Agreement"), between the  Maker
 and the Payer.

      1. Interest.  Except as otherwise provided herein, the unpaid principal
 balance hereof from time  to time outstanding shall  bear interest from  the
 date hereof at the rate of  four percent (4%) per  annum.  Interest on  this
 Note shall be computed on the basis of a 365-day year.

      2. Payment of Interest  and Principal.  Except  as  otherwise  provided
 herein (including, without limitation, Sections 5 and 6 hereof), and subject
 to any default hereunder,  the principal and interest  hereof is payable  as
 follows:

           (a) Interest  is payable in cash  quarterly in arrears on December
 31, March 31, June  30 and September  30 of each  year, beginning March  31,
 2006.

           (b) The entire outstanding principal amount  of the Note  together
 with all accrued but unpaid interest shall be  due in cash on July 27,  2007
 (the "Maturity Date").

           (c) The Maker will have no right of early prepayment on this Note.

      3. Conversion at the Option of Payee.

           (a) At any time while any portion of the principal or interest  of
 this Note is outstanding, the Payee may give the Maker written notice of its
 intention to convert all or any portion of the outstanding principal  and/or
 accrued but unpaid interest on this Note  into such number of shares of  the
 Maker's common stock, par value $0.03 per share (the "Common Stock"),  equal
 to the amount to be converted divided  by the Conversion Price in effect  at
 such  time.  Upon receipt  of the Payee's  written notice,  the Maker  shall
 cause certificates representing those shares to be delivered to Payee within
 three  business  days of  Maker's receipt  of  such notice.  The  person  or
 persons entitled  to receive  the shares  of Common  Stock issuable  upon  a
 conversion of this  Note shall  be treated for  all purposes  as the  record
 holder or holders of such shares of Common Stock on the date the  applicable
 conversion notice is given.

           (b) The "Conversion Price" initially shall  be $1.28 and shall  be
 subject  to  adjustment  as  set  forth  below.  The  Conversion Price shall
 be  adjusted  proportionally for  any  subsequent  stock  dividend or split,
 stock combination  or  other  similar recapitalization, reclassification  or
 reorganization of or affecting Maker's Common Stock.

           (c) In case of a Change of Control, instead of receiving shares of
 Maker's Common Stock  upon conversion  of this  Note, Payee  shall have  the
 right thereafter to receive the kind and amount of shares of stock and other
 securities, cash and property which the Payee would have owned or have  been
 entitled to receive immediately  after such Change of  Control had the  same
 portion of this Note been converted immediately prior to the effective  date
 of such Change of Control and,  in any such case, if necessary,  appropriate
 adjustment shall be made in the  application of the provisions set forth  in
 this Section with  respect to  the rights  and interests  thereafter of  the
 Payee, to  the end  that the  provisions  set forth  in this  Section  shall
 thereafter correspondingly be made applicable,  as nearly as may  reasonably
 be, in  relation to  any shares  of  stock and  other securities,  cash  and
 property  thereafter  deliverable  in  connection  with  this  Note.     The
 provisions of this subsection shall similarly apply to successive Changes of
 Control.

           (d) "Change of Control"  means that the Maker shall,  directly  or
 indirectly, in one or  more related transactions,  (i) consolidate or  merge
 with or into (whether or not the Maker is the surviving corporation) another
 person, (ii) sell, assign, transfer, convey  or otherwise dispose of all  or
 substantially all  of the  properties  or assets  of  the Maker  to  another
 person, (iii) allow another  person to make a  purchase, tender or  exchange
 offer that is accepted by  the holders of more  than 50% of the  outstanding
 shares of Common Stock (not including any shares of Common Stock held by the
 person or persons making or party  to, or associated or affiliated with  the
 persons making or  party to, such  purchase, tender or  exchange offer),  or
 (iv) consummate a  stock purchase  agreement or  other business  combination
 (including, without limitation, a reorganization, recapitalization or  spin-
 off) with another person whereby such other person acquires more than 50% of
 the outstanding shares of Common Stock  (not including any shares of  Common
 Stock held by  the other  person or  other persons  making or  party to,  or
 associated or affiliated  with the other  persons making or  party to,  such
 stock purchase agreement or other business combination); provided,  however,
 that a  transaction  in  which  Newcastle  Partners,  L.P.  or  any  of  its
 affiliates is the acquiring party shall not be deemed to constitute a Change
 of Control.

           (e) In the event that the Maker consummates an offering of  rights
 to purchase Common Stock  or Convertible Securities on  or before the  nine-
 month anniversary of the Closing Date and the price to acquire one share  of
 Common Stock (or the  equivalent thereof) pursuant  to such rights  offering
 (the "Rights Offering Price")  is less than the  Conversion Price in  effect
 immediately  prior  to  the  consummation  of  such  rights  offering,  then
 immediately after the consummation of  such rights offering, the  Conversion
 Price then in  effect shall  be reduced  to an  amount equal  to the  Rights
 Offering Price.

           (f) No fractional shares of Maker's  Common Stock shall be  issued
 upon conversion  of  the Note.  In lieu of  any fractional  shares to  which
 Payee would otherwise  be entitled, the  Maker shall pay  cash equal to  the
 product of such fraction multiplied by the average of the closing prices  of
 the Common Stock  on the American  Stock Exchange for  the five  consecutive
 trading days immediately preceding the date of the conversion.

           (g) In the event  of an adjustment  to the  Conversion Price,  the
 Maker shall promptly deliver to the Payee a certificate, signed by its Chief
 Financial Officer, setting forth the new Conversion Price and a  calculation
 in reasonable detail of the adjustment to the Conversion Price.

           (h) The Maker shall pay any and all taxes that may be payable with
 respect to the issuance and delivery of Common Stock upon conversion of this
 Note; provided that the Maker shall not be required to pay any tax that  may
 be payable in respect of  any issuance of Common  Stock to any person  other
 than the Payee  or with  respect to any  income tax  due by  the Payee  with
 respect to such Common Stock.

      4. Redemption Upon Change of Control.  No sooner than 15 days nor later
 than 10  days prior  to the  consummation of  a Change  of Control,  if  the
 Shareholder Approval has  not then been  obtained, the  Maker shall  deliver
 written notice of such Change of Control to the Payee (a "Change of  Control
 Notice").  At any time during the period beginning after the Payee's receipt
 of a Change of Control Notice and ending on the date of the consummation  of
 such Change of Control, the Payee may require the Maker to redeem all or any
 portion of this  Note by  delivering written  notice thereof  (a "Change  of
 Control Redemption Notice") to the Maker, which Change of Control Redemption
 Notice shall indicate  the portion of  the outstanding  principal amount  of
 this Note that the  Payee is electing  to redeem. The  portion of this  Note
 subject to redemption pursuant  to this Section 4  shall be redeemed by  the
 Maker at a price equal to 110% of the principal amount being redeemed,  plus
 accrued but unpaid interest on such principal amount (the "Change of Control
 Redemption Price"). Redemptions required by this Section 4 shall be made  on
 the date  of  the consummation  of  the Change  of  Control and  shall  have
 priority to payments to  shareholders of the Maker  in connection with  such
 Change of Control. Notwithstanding anything to the contrary in this  Section
 4, until  the  Change of  Control  Redemption Price  is  paid in  full,  the
 principal amount submitted  for redemption  under this  Section 4  (together
 with any accrued but unpaid interest thereon) may be converted, in whole  or
 in part, by the Payee into Common Stock pursuant to Section 3.

      5. Required Conversion On Maturity Date.  On the Maturity Date, in lieu
 of making the payment required by Section 2(b), the Maker shall issue to the
 Payee a certificate representing such number of shares of Common Stock as is
 equal to the quotient  obtained by dividing the  entire principal amount  of
 this Note then outstanding, plus all accrued but unpaid interest thereon, by
 the Conversion Price in  effect at such time,  in full satisfaction of  this
 Note (the "Maturity Date Conversion").  The applicable provisions of Section
 3 shall apply with equal force to the Maturity Date Conversion.

      6. Condition  to Issuance of  Shares Upon  Conversion.  Notwithstanding
 anything to the contrary contained in Section  3 or Section 5 of this  Note,
 it shall be a  condition precedent to Maker's  issuance of shares of  Common
 Stock upon  conversion  of  this  Note, whether  on  the  Maturity  Date  or
 otherwise, that the Stockholder Approval shall  have been obtained prior  to
 such issuance.

      7. Dividends.   If, at any  time while any portion  of the principal or
 interest on the Note is outstanding, Maker declares a distribution in  cash,
 property (including securities) or a combination thereof, whether by way  of
 dividend or otherwise,  with respect to  its Common Stock,  the Payee  shall
 participate pro  rata in  such distribution  on an  as-converted basis  with
 holders of Maker's Common Stock.

      8. Ranking.   The Note  is subordinate and  junior to  all existing and
 future secured indebtedness of Maker.  This  Note will rank pari passu  with
 all existing and future unsecured indebtedness  of Maker, unless such  other
 unsecured indebtedness is, by its terms or by operation of law,  subordinate
 and junior to the unsecured indebtedness represented by this Note, and  will
 rank senior to the indebtedness and obligations evidenced by the  Indenture,
 dated as of June 21, 2005 (the "Indenture"), between the Maker and  JPMorgan
 Chase Bank, National Association, as trustee (the "Trustee"), the  Guarantee
 Agreement, dated as of June 21, 2005, between the Maker and the Trustee  and
 the Trust Securities  (as defined in  the Indenture)  of Hallmark  Statutory
 Trust I.

      9. Covenants.   From the date hereof and  until payment in full of this
 Note, the Maker will, and will cause each of its Subsidiaries to:

           (a) Maintenance of Existence.  Do all things necessary to preserve
 and keep in full force and effect its existence as a corporation.

           (b) Compliance  with  Applicable  Laws.  Comply  in  all  material
 respects with  the requirements  of all  applicable statutes,  laws,  rules,
 regulations and orders of any governmental authority, except where contested
 in good faith and by proper proceedings.

           (c) Licenses.  Obtain and maintain all material licenses, permits,
 franchises or other governmental  authorizations necessary to the  ownership
 of its properties or to the conduct of its business.

      10.  Default.  The occurrence of any one or more of the following events
 shall constitute  an event  of default,  upon which  Payee may  declare  the
 entire principal amount of this Note,  together with all accrued but  unpaid
 interest, to be immediately due and payable in cash:

           (a) The Maker shall fail to make any payment of principal (whether
 in cash or by  conversion pursuant to Section  5 hereof) and/or accrued  but
 unpaid interest (at  the applicable  rate) when  due and  payable, and  such
 failure, in the case of any interest payment, shall continue for a period of
 at least five business days.

           (b) The  Maker  shall  be  in  material  default  of  any term  or
 provision of this Note,  the Purchase Agreement  or the Registration  Rights
 Agreement, and such failure shall continue through 15 days after Payee gives
 written notice of such default to Maker.

           (c) Any  representation or warranty of  the Maker contained in the
 Purchase Agreement  or the  Registration Rights  Agreement shall  have  been
 false in any material respect on the Closing Date.

           (d) The Maker or any  of its Subsidiaries,  pursuant to or  within
 the meaning of Title 11, U.S. Code, or any similar federal, foreign or state
 law  for  the  relief  of  debtors  (collectively,  "Bankruptcy  Law"),  (i)
 commences a  voluntary case,  (ii) consents  to the  entry of  an order  for
 relief against it in an involuntary case, (iii) consents to the  appointment
 of  a  receiver,  trustee,  assignee,  liquidator  or  similar  official  (a
 "Custodian"), (iv)  makes  a  general assignment  for  the  benefit  of  its
 creditors or (v) admits in  writing that it is  generally unable to pay  its
 debts as they become due.

           (e) A court of competent  jurisdiction enters an  order or  decree
 under any Bankruptcy Law that (i) is for relief against the Maker or any  of
 its Subsidiaries in an  involuntary case, (ii) appoints  a Custodian of  the
 Maker or any  of its  Subsidiaries or (iii)  orders the  liquidation of  the
 Maker or any of its Subsidiaries.

      Without limiting the  above, the  Maker acknowledges  that payments  in
 cash or by the issuance of stock on  the various scheduled due dates are  of
 essence and that any failure to timely pay the principal or interest (within
 any permitted grace period) permits Payee  to declare this Note  immediately
 due in cash in its entirety without any  prior notice of any kind to  Maker,
 except for the  specific notices provided  above.  Upon  the occurrence  and
 during the continuance of an event of default, the interest rate under  this
 Note shall be increased to 10%.  In the event that such event of default  is
 subsequently cured, the  adjustment referred  to in  the preceding  sentence
 shall cease to be effective as of the  date of such cure; provided that  the
 interest as  calculated  and  unpaid  at  such  increased  rate  during  the
 continuance of such event of default  shall continue to apply to the  extent
 relating to the days after the  occurrence of such event of default  through
 and including the date of cure of such event of default.

      11. Applicable Law.  THE VALIDITY,  CONSTRUCTION AND ENFORCEABILITY  OF
 THE NOTE SHALL  BE GOVERNED  BY THE  INTERNAL LAWS  OF THE  STATE OF  TEXAS,
 WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.

      12. Waivers.  The Maker hereby  waives presentment for payment,  notice
 of dishonor, protest and notice of payment and all other demands and notices
 of any kind in connection with the enforcement of this Note.  Any  provision
 of this Note may be amended, waived or modified upon the written consent  of
 Maker and Payee.  No  failure  or  delay on  the part  of the  Payee in  the
 exercise of  any power,  right or  privilege hereunder  shall operate  as  a
 waiver thereof, nor shall any single or partial exercise of any such  power,
 right or privilege  preclude other  or further  exercise thereof  or of  any
 other power, right or privilege.

      13. No  Setoffs.  The Maker shall pay  principal and interest under the
 Note without any deduction for any setoff or counterclaim.

      14. Costs of Collection.  If this Note is not paid when due, the  Maker
 shall pay  Payee's  reasonable  costs of  collection,  including  reasonable
 attorneys' fees.

      15. Notices.   Whenever notice is required to be given under this Note,
 such notice shall be  given in accordance with  Section 7.7 of the  Purchase
 Agreement.

                         [SIGNATURE PAGE FOLLOWS]

<PAGE>

      IN WITNESS WHEREOF, the undersigned has hereunto affixed its signature.

             HALLMARK FINANCIAL SERVICES, INC.

             By______________________________

             Its_____________________________EXHIBIT 10.1

                              PURCHASE AGREEMENT

      THIS PURCHASE AGREEMENT  (the "Agreement") is  entered into  as of  the
 27th day of January, 2006, by and between Hallmark Financial Services, Inc.,
 a Nevada corporation (the "Company"), and Newcastle Special Opportunity Fund
 [I] [II], L.P., a Delaware limited partnership (the "Purchaser").

                              R E C I T A L S :
                              -----------------

      WHEREAS, in consideration of  [$12,550,000] [$12,450,000], the  Company
 proposes to issue to the Purchaser, and the Purchaser desires to purchase, a
 [$12,550,000] [$12,450,000] convertible promissory note in the form attached
 as Exhibit A (the "Note").

      NOW, THEREFORE,  in  consideration of  the  foregoing recital  and  the
 mutual promises hereinafter set forth, the parties hereto agree as follows:

 SECTION 1. AGREEMENT TO SELL AND PURCHASE

      1.1 Authorization of Transaction.  On  or prior to  the closing of  the
  transactions contemplated in  this Agreement (the  "Closing"), the  Company
  shall have authorized the  sale and issuance to  the Purchaser of the  Note
  and, subject  to obtaining  Shareholder Approval  (as defined  below),  the
  shares of  the  Company's common  stock, $0.03  par  value per  share  (the
  "Common Stock"), issuable  upon conversion of  the Note (collectively,  the
  "Shares").

      1.2 Sale and Purchase.  Subject to the terms and conditions hereof,  at
  the Closing, the Company hereby agrees to issue and sell to the  Purchaser,
  and the Purchaser  agrees to  purchase from the  Company, the  Note for  an
  aggregate purchase  price  of [$12,550,000]  [$12,450,000]  (the  "Purchase
  Price").

 SECTION 2. CLOSING, DELIVERY AND PAYMENT

      2.1 Closing.  The Closing  shall take place at  10:00 a.m. on the  date
  hereof at the  offices of the  Purchaser's legal  counsel, Olshan  Grundman
  Frome Rosenzweig &  Wolosky LLP, in New  York, New York,  or at such  other
  time or place  as the  Company and the  Purchaser may  mutually agree  (the
  "Closing Date").   At  the Closing,  subject to  the terms  and  conditions
  hereof, the  Company will  issue, sell  and deliver  to the  Purchaser  the
  Note, against  payment of the  Purchase Price  by certified  check or  wire
  transfer of immediately  available funds.   At that time,  the Company  and
  the Purchaser shall also execute  the Registration Rights Agreement in  the
  form attached as Exhibit B (the "Registration Rights Agreement").

 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company hereby represents and warrants  to the Purchaser as of  the
 Closing Date, and agrees, as follows:

      3.1 Organization, Good Standing  and Qualification.   The Company is  a
  corporation duly  organized, validly existing  and in  good standing  under
  the laws of the  State of Nevada.   The Company's only active  subsidiaries
  are the subsidiaries listed on  Schedule 3.1 (the "Subsidiaries").   Except
  as indicated on  Schedule 3.1, each Subsidiary  is duly organized,  validly
  existing and  in  good standing  under  the  laws of  its  jurisdiction  of
  organization.  Each of the  Company and the Subsidiaries has all  requisite
  corporate power and authority to own and operate its respective  properties
  and assets and to carry  on its respective business as presently  conducted
  and as presently proposed to be  conducted.  The Company has all  requisite
  corporate power and  authority to execute and  deliver this Agreement,  the
  Note and  the  Registration Rights  Agreement (together,  the  "Transaction
  Documents"), to  issue and  sell the  Shares upon  conversion of  the  Note
  (subject  to  obtaining  Shareholder  Approval)   and  to  carry  out   the
  provisions of  the Transaction  Documents.   Each of  the Company  and  the
  Subsidiaries is duly qualified and is  authorized to do business and is  in
  good standing in  each jurisdiction in which  the nature of its  respective
  activities and of its respective  properties (both owned and leased)  makes
  such qualification  necessary,  except  for those  jurisdictions  in  which
  failure to be so qualified would not have a material adverse effect on  the
  Company or its business, taken as a whole.

      3.2 Capitalization.   The Company  is authorized  to issue  100,000,000
  shares  of  Common  Stock,  of  which  86,841,791  shares  are  issued  and
  outstanding as  of  the date  hereof, and  no  shares of  preferred  stock.
  Except  as  set  forth  on  Schedule  3.2  or  in  the  Company's  current,
  quarterly, annual and other periodic  filings (the "SEC Reports") with  the
  U.S. Securities and  Exchange Commission (the  "Commission"), there are  no
  outstanding  options, warrants  or  other  rights to  acquire  any  of  the
  Company's  capital  stock,   or  securities  convertible,  exercisable   or
  exchangeable for the Company's capital  stock or for securities  themselves
  convertible, exercisable or  exchangeable for the  Company's capital  stock
  (together, "Convertible Securities").  Except as set forth on Schedule  3.2
  or in the SEC Reports, the Company  has no agreement or commitment to  sell
  or issue  any  shares of  capital stock  or  Convertible Securities.    All
  issued and outstanding shares of the Company's capital stock (i) have  been
  duly authorized and validly issued, (ii) are fully paid and  nonassessable,
  (iii) are free  from any preemptive and  cumulative voting rights and  (iv)
  were issued pursuant to an effective registration statement filed with  the
  Commission and  applicable  state  securities authorities  or  pursuant  to
  valid exemptions under  federal and state securities  laws.  Except as  set
  forth on  Schedule 3.2  or in  the SEC  Reports, there  are no  outstanding
  rights of  first refusal or  proxy or  shareholder agreements  of any  kind
  relating to any of the Company's securities to which the Company or any  of
  its executive officers and directors is a party or as to which the  Company
  otherwise has knowledge.  When issued in compliance with the provisions  of
  the Note, the Shares will be validly issued, fully paid and  nonassessable,
  and will be free of any liens or encumbrances; provided, however, that  the
  Shares may  be  subject to  restrictions  on transfer  under  state  and/or
  federal securities laws  as set forth  herein or as  otherwise required  by
  such laws at the time a transfer is proposed.

      3.3 Authorization; Binding Obligations.   All corporate  action on  the
  part of  the  Company, its  officers  and directors  (including  a  special
  committee of independent directors) necessary for the authorization of  the
  Transaction  Documents and  the  performance  of  all  obligations  of  the
  Company  hereunder   and   thereunder  at   the  Closing,   including   the
  authorization, sale, issuance  and delivery of  the Shares upon  conversion
  of the Note, has  been taken, and no  further corporate action is  required
  to  be  taken  except  for  the  Shareholder  Approval.    The  Transaction
  Documents,  when  executed  and  delivered,  will  be  valid  and   binding
  obligations of the  Company enforceable against  the Company in  accordance
  with  their  terms,  except  (i)  as  limited  by  applicable   bankruptcy,
  insolvency,  reorganization,   moratorium   or  other   laws   of   general
  application affecting enforcement  of creditors' rights, (ii) according  to
  general principles of  equity that restrict  the availability of  equitable
  remedies  and  (iii) to   the  extent  that   the  enforceability  of   the
  indemnification provisions  of  the Registration  Rights Agreement  may  be
  limited by  applicable laws.   The  issuance and  sale of  the Shares  upon
  conversion of the Note are  not and will not  be subject to any  preemptive
  rights or rights of first refusal.

      3.4 Financial Statements.  The  audited consolidated balance sheets  at
  December 31, 2004  of the Company and  the audited consolidated  statements
  of operations, cash flows and  stockholders' equity of the Company for  the
  year ended December 31, 2004  and the unaudited consolidated balance  sheet
  at, and the unaudited consolidated statements of operations and cash  flows
  for the nine months ended,  September 30, 2005 of  the Company (all of  the
  foregoing together,  the "Financial  Statements," with  September 30,  2005
  being  the  "Latest   Statement  Date"  and   the  consolidated   financial
  statements at and for  the nine months ended  September 30, 2005 being  the
  "Latest Financial  Statements"), as contained  in the  SEC Reports,  fairly
  present the  consolidated financial  condition, results  of operations  and
  cash flows of the Company and  its Subsidiaries on a consolidated basis  as
  of the  respective dates  and for  the respective  periods covered  thereby
  (subject, in the  case of unaudited financial  statements, to normal  year-
  end audit adjustments) and have been prepared in accordance with  generally
  accepted  accounting  principles  in  the   United  States  applied  on   a
  consistent basis (except as may be indicated in the notes thereto) and  the
  rules and regulations of the Commission.

      3.5 Liabilities.   Except as  reflected or  expressly reserved  in  the
  Latest Financial  Statements  or disclosed  on  Schedule 3.5,  neither  the
  Company nor any  Subsidiaries has any  material liabilities or  obligations
  and there  is  no known  basis  for any  material  contingent  liabilities,
  except current liabilities incurred after the Latest Statement Date in  the
  ordinary course of business of the Company  and the Subsidiaries.

      3.6 Certain Agreements and  Actions.  Except  as disclosed on  Schedule
  3.6 or in  the SEC Reports,  since the Latest  Statement Date, neither  the
  Company nor  any Subsidiary  has  (i) declared or  paid any  dividends,  or
  authorized or made any  distribution upon or with  respect to any class  or
  series of  its  capital stock,  (ii) incurred  any indebtedness  for  money
  borrowed or any  other material liabilities out  of the ordinary course  of
  business, (iii) made  any  loans or  advances  to any  person,  other  than
  ordinary advances  for  travel  or entertainment  expenses,  or  (iv) sold,
  exchanged or otherwise disposed of any of its assets or rights, other  than
  in the ordinary course of business.   "Person" shall mean an individual,  a
  limited liability company, a partnership,  a joint venture, a  corporation,
  a trust, an unincorporated organization or any other entity.

      3.7 Obligations of  or to  Related  Parties.   Except as  disclosed  on
  Schedule 3.7  or  in the  SEC  Reports, there  are  no obligations  of  the
  Company or any Subsidiary to  executive officers, directors, 1% or  greater
  shareholders or key  employees (listed in the  Company's most recent  proxy
  materials) of the  Company or  any Subsidiary or  to any  members of  their
  immediate  families  or  other  affiliates,  other  than  (i) for   accrued
  salaries, (ii) reimbursement for expenses reasonably incurred on behalf  of
  the  Company or  any  Subsidiary  and  (iii) for  other  standard  employee
  benefits made generally available to all employees (including stock  option
  agreements outstanding under  any stock option plan  approved by the  Board
  of Directors of the Company).   Except as disclosed  on Schedule 3.7 or  in
  the SEC Reports, none of  the executive officers, directors, 1% or  greater
  shareholders or key  employees (listed in the  Company's most recent  proxy
  materials) of  the  Company or  any Subsidiary,  or  any members  of  their
  immediate families or other affiliates, are indebted to the Company or  any
  Subsidiary or have any direct  or indirect ownership interest in any  firm,
  corporation or other  entity with which  the Company or  any Subsidiary  is
  affiliated or  with which  the Company  or any  Subsidiary has  a  business
  relationship, or any firm, corporation  or other entity that competes  with
  the Company or any Subsidiary.  Except as disclosed in the SEC Reports,  no
  executive officer,  director, 1%  or greater  shareholder or  key  employee
  (listed in the  Company's most recent  proxy materials) of  the Company  or
  any  Subsidiary, or,  to  the  Company's knowledge,  any  member  of  their
  immediate  families  or  other  affiliates,  is,  directly  or  indirectly,
  interested in or a party to any  material contract with the Company or  any
  Subsidiary.  Except  as disclosed on  Schedule 3.7 or  in the SEC  Reports,
  neither the Company nor any Subsidiary is a guarantor or indemnitor of  any
  indebtedness or obligation of any  other person, other than the Company  or
  its Subsidiaries.  The representations contained in this Section 3.7  shall
  not be deemed to apply to the Purchaser or any of its affiliates.

      3.8 No Material Adverse Change.  Since  the Latest Statement Date,  and
  except as disclosed  in the SEC  Reports, there has  not been any  material
  adverse change in the  business, assets, liabilities, condition  (financial
  or otherwise), operations  or prospects of  the Company, and  no event  has
  occurred or circumstance exists that may result in such a material  adverse
  change.

      3.9 Title to Properties  and Assets;  Liens.   Except as  set forth  on
  Schedule 3.6 or  Schedule 3.9 or in  the SEC Reports,  each of the  Company
  and its Subsidiaries  has good and marketable  title to its properties  and
  assets,  including the  properties  and  assets  reflected  in  the  Latest
  Financial Statements,  and good  title to  its leasehold  estates, in  each
  case subject to  no mortgage, pledge, lien,  lease, encumbrance or  charge,
  other  than (i) those  resulting  from  taxes  that  have  not  yet  become
  delinquent,  (ii) minor liens  and  encumbrances  that  do  not  materially
  detract from  the  value of  the  property subject  thereto  or  materially
  impair the  operations of  the Company  or any  Subsidiary and  (iii) those
  that  have  otherwise  arisen  in  the  ordinary  course of  business.  All
  facilities, machinery,  equipment,  fixtures and  other  properties  owned,
  leased or  used by  the Company  or any  Subsidiary are  in good  operating
  condition and repair  and are reasonably  fit and usable  for the  purposes
  for which they are being used, reasonable wear and tear excepted.

      3.10 Intellectual Property. Except as set forth on Schedule 3.10 or  in
  the SEC Reports, each of the Company and its Subsidiaries owns or  licenses
  all trademarks,  service  marks, trade  names, copyrights,  trade  secrets,
  information and other  proprietary rights and  processes necessary for  its
  business as  now conducted and  as proposed  to be  conducted, without  any
  known infringement of the rights of others.

      3.11 Compliance  with  Other  Instruments.    Except  as  disclosed  in
  Schedule 3.11 or  the SEC Reports, neither  the Company nor any  Subsidiary
  is in violation or default of any term of its Articles of Incorporation  or
  Bylaws,  or  of  any  provision  of  any  mortgage,  indenture,   contract,
  agreement or instrument to which it is party or by which it is bound or  of
  any judgment, decree, order, writ,  statute, rule or regulation  applicable
  to the  Company  or any  Subsidiary  that would  materially  and  adversely
  affect  the  business,   assets,  liabilities,   condition  (financial   or
  otherwise), operations  or prospects  of the  Company.   The execution  and
  delivery of, and  the performance of and  compliance with the  transactions
  contemplated by, the  Transaction Documents, and the  issuance and sale  of
  the Shares  upon conversion  of the  Note, will  not, with  or without  the
  passage of time or giving  of notice or both,  result in any such  material
  violation, or be in  conflict with or constitute  a default under any  such
  term, or result in the creation of any mortgage, pledge, lien,  encumbrance
  or charge  upon any  of the  properties or  assets of  the Company  or  any
  Subsidiary  or  the  suspension,  revocation,  impairment,  forfeiture   or
  nonrenewal of any permit, license, authorization or approval applicable  to
  the Company or  any Subsidiary, the business  or operations of the  Company
  or any Subsidiary or any of the assets or properties of the Company or  any
  Subsidiary.

      3.12 Litigation.  Except as disclosed in the SEC Reports, Schedule  3.5
  or Schedule 3.12,  there is no  action, suit,  proceeding or  investigation
  pending or, to  the Company's knowledge,  currently threatened against  the
  Company  that questions  the  validity  of  this  Agreement  or  the  other
  agreements contemplated hereby  or the right of  the Company to enter  into
  any of  such agreements,  or to  consummate the  transactions  contemplated
  hereby or thereby.   Except as disclosed in  the SEC Reports, Schedule  3.5
  or Schedule 3.12,  there is no  action, suit,  proceeding or  investigation
  pending or, to  the Company's knowledge,  currently threatened against  the
  Company or any Subsidiary that could result, either individually or in  the
  aggregate,  in  any  material  adverse  change  in  the  business,  assets,
  liabilities, condition (financial  or otherwise),  operations or  prospects
  of the Company,  or in any change  in the current  equity ownership of  the
  Company,  nor is  the  Company  aware  that there  is  any  basis  for  the
  foregoing.   Except  as disclosed  in  the  SEC Reports,  Schedule  3.5  or
  Schedule 3.12,  neither  the Company  nor  any  Subsidiary is  a  party  or
  subject to  the provisions of  any order,  writ,   injunction, judgment  or
  decree of any court or government agency or instrumentality.

      3.13 Tax Returns and Payments.  Except  as disclosed on Schedule  3.13,
  each  of the  Company  and  its Subsidiaries  has  filed  all  tax  returns
  (federal, state and local) required to be filed by it.  All taxes shown  to
  be due and payable  on such returns, any  assessments imposed, and, to  the
  Company's knowledge, all other taxes due and payable by the Company or  any
  Subsidiary on or before the  Closing have been paid  or will be paid  prior
  to the  time they  become delinquent.   The  Company has  not been  advised
  (i) that any of the tax returns of the Company or any Subsidiary have  been
  or are being  audited as of the  date hereof or  (ii) of any deficiency  in
  assessment or proposed  judgment to federal,  state or other  taxes of  the
  Company or any Subsidiary.  The  Company has no knowledge of any  liability
  of any tax to be  imposed upon the properties or  assets of the Company  or
  any Subsidiary as  of the  date of this  Agreement that  is not  adequately
  provided for.

      3.14 Employees.   Neither  the  Company  nor  any  Subsidiary  has  any
  collective bargaining agreements  with any of its  employees.  There is  no
  labor union  organizing activity pending  or, to  the Company's  knowledge,
  threatened with respect to  the Company or any  Subsidiary.  Except as  set
  forth on Schedule 3.14 or in the  SEC Reports, no executive officer or  key
  employee (listed  in the  Company's most  recent proxy  materials) has  any
  agreement  or  contract,  written  or  verbal,  regarding  his  employment.
  Except as disclosed  on Schedule 3.14  or in the  SEC Reports, neither  the
  Company nor  any  Subsidiary  is a  party  to  or bound  by  any  currently
  effective deferred compensation  arrangement, bonus  plan, incentive  plan,
  profit sharing plan,  retirement agreement or  other employee  compensation
  plan or agreement.  To the Company's knowledge, no employee of the  Company
  or  any Subsidiary,  nor  any  consultant with  whom  the  Company  or  any
  Subsidiary has  contracted, is in  violation of  any material  term of  any
  employment or  consulting agreement  with the  Company or  any  Subsidiary.
  Except as disclosed on  Schedule 3.14 or in  the SEC Reports, no  executive
  officer  or key  employee  (listed  in  the  Company's  most  recent  proxy
  materials) of the Company or any  Subsidiary has been granted the right  to
  continued employment by  the Company or any  Subsidiary or to any  material
  compensation following termination  of employment with  the Company or  any
  Subsidiary.  The  Company is not  aware that any  executive officer or  key
  employee (listed in  the Company's most  recent proxy  materials), or  that
  any group of executive officers  or key employees (listed in the  Company's
  most recent proxy materials), intends to terminate his or their  employment
  with the Company or any Subsidiary, nor does the Company or any  Subsidiary
  have a  present intention  to  terminate the  employment of  any  executive
  officer,  key  employee  (listed  in   the  Company's  most  recent   proxy
  materials) or group of executive  officers or key employees (listed in  the
  Company's most recent proxy materials).

      3.15 Registration Rights.   Except  as disclosed  on Schedule  3.15  or
  required pursuant  to the  Registration Rights  Agreement, the  Company  is
  presently not  under any obligation,  and has  not granted  any rights,  to
  register (as  defined in  the  Registration Rights  Agreement) any  of  the
  Company's presently outstanding  securities or any  of its securities  that
  may hereafter be issued.

      3.16 Compliance with Laws;  Permits.  Except  as disclosed in  Schedule
  3.16 or  the SEC  Reports, neither  the Company  nor any  Subsidiary is  in
  violation  of   any  applicable   statute,  rule,   regulation,  order   or
  restriction of any  domestic or foreign  government or any  instrumentality
  or agency  thereof  in  respect of  the  conduct  of its  business  or  the
  ownership of  its  properties  that would materially  and  adversely affect
  the  business,  assets,  liabilities,  condition  (financial  or  otherwise),
  operations  or  prospects   of  the   Company.   No  governmental   orders,
  permissions, consents,  approvals  or  authorizations are  required  to  be
  obtained  and  no  registrations,  filings,  notices  or  declarations  are
  required to be filed in connection with the execution and delivery of,  and
  the  performance of  the  transactions  contemplated  by,  the  Transaction
  Documents or  the  issuance of  the Shares  upon  conversion of  the  Note,
  except such  as have  been duly  and  validly obtained  or filed,  or  with
  respect to any  filings that must  be made after  the Closing,  as will  be
  filed in a  timely manner.  Each  of the Company  and the Subsidiaries  has
  all franchises, permits, licenses and  any similar authority necessary  for
  the conduct  of its business  as now  being conducted  by it,  the lack  of
  which  could  materially  and   adversely  affect  the  business,   assets,
  liabilities, condition (financial  or otherwise),  operations or  prospects
  of  the Company,  and  the  Company  believes  it  can  (and  covenants  to
  Purchaser that it  will) obtain any  similar authority for  the conduct  of
  its business as planned to be conducted.

      3.17 Environmental and Safety  Laws.  Except  as disclosed in  Schedule
  3.17 or the  SEC Reports, to the  Company's knowledge, neither the  Company
  nor any  Subsidiary  is in  violation of  any  applicable statute,  law  or
  regulation relating to the environment  or occupational health and  safety,
  and, to the  Company's knowledge, no material  expenditures are or will  be
  required  in order  to  comply  with any  such  existing  statute,  law  or
  regulation.

      3.18 Private  Offering.    Assuming  the  truth  and  accuracy  of  the
  representations and  warranties of the  Purchaser contained  in Section  4,
  the offer, sale  and issuance  of the Note  (and the  Shares issuable  upon
  conversion of the Note) will  be exempt from the registration  requirements
  of the Securities Act of 1933, as amended (the "Securities Act"), and  will
  have  been  registered  or  qualified  (or  are  exempt  from  registration
  and  qualification)   under   the  registration,  permit  or  qualification
  requirements of the State of Texas.

      3.19 Full Disclosure.  None  of the Transaction  Documents nor the  SEC
  Reports contains  any untrue  statement of  a material  fact nor  omits  to
  state a material fact necessary  in order to make the statements  contained
  herein or therein  not misleading in  light of the  circumstances in  which
  they  were  made.   There  are  no  facts  that  (individually  or  in  the
  aggregate) materially adversely  affect the business, assets,  liabilities,
  condition (financial or otherwise), operations or prospects of the  Company
  that have not been set forth in the Transaction Documents, the SEC  Reports
  or in  other  documents delivered  to the  Purchaser  or its  attorneys  or
  agents in connection herewith.

      3.20 Investment Company Act. The Company is  not, and will not use  the
  proceeds from  the  Note  in a  manner  so  as to  become,  an  "investment
  company," within  the meaning of  the Investment  Company Act  of 1940,  as
  amended.

      3.21 American Stock Exchange  Compliance.  The  Company's Common  Stock
  is registered pursuant to Section  12(b) of the Securities Exchange Act  of
  1934, as amended (the "Exchange Act"), and is listed on the American  Stock
  Exchange (the "Amex").   The Company  has taken no  action designed to,  or
  likely to have  the effect of,  and the transactions  contemplated by  this
  Agreement will not have the effect of, terminating the registration of  the
  Common Stock under Section 12(b) of  the Exchange Act or de-listing of  the
  Common Stock from the Amex.   Except as disclosed  in Schedule 3.21 or  the
  SEC  Reports, the  Company  has  not received  any  notification  that  the
  Commission, the Amex  or any other  self-regulatory organizational body  is
  contemplating terminating such registration or listing.

      3.22 Reporting Status.  The  Company has filed  all documents that  the
  Company was required to  file under the Exchange  Act during the 12  months
  preceding the date  of this  Agreement.  The  SEC Reports  complied in  all
  material respects with  the applicable requirements  of the Securities  Act
  or the  Exchange Act, as  the case  may be,  and the  applicable rules  and
  regulations promulgated  thereunder as  of their  respective filing  dates,
  and the  information  contained therein  as of  the  date thereof  did  not
  contain an untrue statement of a material fact or omit to state a  material
  fact required  to be stated  therein or  necessary to  make the  statements
  therein, in  light of the  circumstances under  which they  were made,  not
  misleading.  The Company  has disclosed in Item  4 of the Company's  Report
  on Form 10-Q for the quarter ended September 30, 2005 the effectiveness  of
  its disclosure controls and  procedures.  The Company  is not aware of  any
  material weaknesses (as defined in  Section 404 of the Sarbanes-Oxley  Act)
  in its internal controls.

      3.23  No  Manipulation of  Price.   Neither  the  Company nor,  to  the
  knowledge of the  Company, any agent  or other person  acting on behalf  of
  the Company has  taken or will,  in violation of  applicable law, take  any
  action designed to or that might reasonably be expected to cause or  result
  in, or which  has constituted, stabilization or  manipulation of the  price
  of the Common  Stock to  facilitate the sale  or resale  of the  securities
  issued  or  issuable  in  connection  with  the  transactions  contemplated
  hereunder.

      3.24 Foreign Corrupt Practices; Sarbanes-Oxley.

       (a) Neither the  Company nor,  to the  knowledge of  the Company,  any
  agent or other person acting on behalf  of the Company has (i) directly  or
  indirectly, used  any corporate  funds for  unlawful contributions,  gifts,
  entertainment or  other unlawful expenses  related to  foreign or  domestic
  political activity, (ii)  made any direct or  indirect unlawful payment  to
  foreign or domestic government officials or employees or to any foreign  or
  domestic political parties or campaigns from corporate funds, (iii)  failed
  to disclose fully  any contribution  made by the  Company (or  made by  any
  person acting on  its behalf of  which the Company  is aware)  which is  in
  violation of law,  or (iv) violated in  any material respect any  provision
  of the Foreign Corrupt Practices Act of 1977, as amended.

       (b) The Company, to its  knowledge, is in  compliance in all  material
  respects  with the  provisions  of  the Sarbanes-Oxley  Act  of  2002  (and
  related rules  of the  Commission) that  are  applicable to  it as  of  the
  Closing Date.

      3.25 No Material Transactions or Events.   As of the Closing Date,  the
  Company is  not aware of  any pending  or proposed  merger, acquisition  or
  disposition of  assets that support  20% or  more of  current revenues,  or
  revenue shortfall against publicly issued  Company guidance, other than  as
  previously disclosed  in the  SEC  Reports or  in a  publicly  disseminated
  press release.

      3.26 Acknowledgment Regarding  the Purchaser's  Purchase of  the  Note.
  The Company acknowledges  that the Purchaser is  not acting as a  financial
  advisor or  fiduciary of  the Company  (or in  any similar  capacity)  with
  respect to  the  Transaction Documents  and the  transactions  contemplated
  hereby and thereby,  and any advice given  by the Purchaser  or any of  its
  representatives or agents in connection with the Transaction Documents  and
  the transactions contemplated  hereby and thereby  is merely incidental  to
  the Purchaser's purchase  of the Note.   The Company further represents  to
  the Purchaser that  the Company's decision  to enter  into the  Transaction
  Documents has  been  based solely  on  the independent  evaluation  by  the
  Company and its representatives.

      3.27 No General  Solicitation.  Neither the  Company,  nor any  of  its
  affiliates, nor any person  acting on its or  their behalf, has engaged  in
  any  form of  general  solicitation  or  general  advertising  (within  the
  meaning of Regulation D) in connection with  the offer or sale of the  Note
  and the Shares.

      3.28 No Integrated  Offering. None  of the  Company, its  Subsidiaries,
  any  of their  affiliates,  or  any person  acting  on  their  behalf  has,
  directly or  indirectly,  made any  offers  or  sales of  any  security  or
  solicited any offers  to buy any security,  under circumstances that  would
  require registration of any of the Note or the Shares under the  Securities
  Act or cause  this offering to  be integrated with  prior offerings by  the
  Company for purposes  of the Securities Act  or any applicable  shareholder
  approval provisions,  including, without  limitation, under  the rules  and
  regulations of any exchange or  automated quotation system on which any  of
  the securities of the Company are listed or designated.

      3.29 Off-Balance Sheet Arrangements. There is no material  transaction,
  arrangement   or  other   relationship   between   the   Company   and   an
  unconsolidated or other  off-balance sheet entity  that is  required to  be
  disclosed by  the  Company  in its  Exchange  Act  filings and  is  not  so
  disclosed

      3.30 Form  S-3  Eligibility.  The  Company  is  currently  eligible  to
  register the Shares for resale by the Purchaser using Form S-3  promulgated
  under the Securities Act.

 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

      The Purchaser hereby represents and warrants  to the Company as of  the
 Closing Date, and agrees, as follows:

      4.1 Investment  Representations.    The   Purchaser  understands   that
  neither  the offer  nor  the  sale of  the  Note  or the  Shares  has  been
  registered under the Securities Act.   The Purchaser also understands  that
  the  Note  is  being  offered  and  sold  pursuant  to  an  exemption  from
  registration  contained in  the  Securities  Act based  in  part  upon  the
  Purchaser's representations  contained  in the  Agreement.   The  Purchaser
  hereby represents and warrants as follows:

      (a) Purchaser Bears  Economic  Risk.   The  Purchaser  has  substantial
 experience in evaluating and investing in private placement transactions  of
 securities in companies  similar to  the Company so  that it  is capable  of
 evaluating the merits and risks of its investment in the Company and has the
 capacity to protect its own interests.  The Purchaser must bear the economic
 risk of this  investment indefinitely  unless the  Note (or  the Shares)  is
 subsequently registered pursuant to the Securities Act, or an exemption from
 registration is  available.   Except  as  contemplated by  the  Registration
 Rights Agreement,  the Purchaser  has no  present  intention of  selling  or
 otherwise transferring the Note or the Shares, or any interest therein.  The
 Purchaser also understands  that there is  no assurance  that any  exemption
 from registration under the Securities Act will be available and that,  even
 if available, such exemption may not allow the Purchaser to transfer all  or
 any portion  of the  Note or  the  Shares under  the circumstances,  in  the
 amounts or at the times the Purchaser might propose.

      (b) Acquisition  for  Own  Account.   Except  as  contemplated  by  the
 Registration Rights Agreement, the Purchaser is  acquiring the Note and  the
 Shares for the Purchaser's own account  for investment only, and not with  a
 view towards their public distribution.

      (c) Purchaser  Can Protect Its Interest.   By reason of  its, or of its
 management's  business  or  financial  experience,  the  Purchaser  has  the
 capacity to protect its  own interests in  connection with the  transactions
 contemplated in  this  Agreement,  the  Note  and  the  Registration  Rights
 Agreement.   Further,  the Purchaser  is  aware  of no  publication  of  any
 advertisement or general  solicitation in connection  with the  transactions
 contemplated in the Agreement.

      (d) Accredited  Investor.    The Purchaser  is  an  accredited investor
 within the meaning of Regulation D of the Securities Act.

      (e) Residence.   The Purchaser is organized under the laws of the State
 of Delaware and its principal office is located in the State of Texas.

      (f) Rule 144.  The Purchaser acknowledges and agrees that the Note and,
 if issued, the Shares must be held indefinitely unless they are subsequently
 registered under the Securities Act or  an exemption from such  registration
 is available.  The Purchaser has been advised or is aware of the  provisions
 of Rule 144  promulgated under  the Securities  Act, which  permits  limited
 resale  of  shares  purchased  in  a   private  placement  subject  to   the
 satisfaction of specified conditions.

      (g) Access  To Information.   The Purchaser  has had  an opportunity to
 discuss the Company's  business, management and  financial affairs with  the
 Company's management and to review the Company's facilities.  The  Purchaser
 acknowledges that  the  Company  has  given  the  Purchaser  access  to  the
 corporate records and  accounts of the  Company, has made  its officers  and
 representatives available for interview by  the Purchaser and has  furnished
 the Purchaser  with all  documents and  other information  requested by  the
 Purchaser to make an informed decision  with respect to the purchase of  the
 Note.

      4.2 Transfer Restrictions.  The Purchaser acknowledges and agrees  that
  the  Note and,  if  issued,  the Shares  are  subject  to  restrictions  on
  transfer and will bear restrictive legends.

      4.3 Organization; Authorization;  Binding  Obligations.  The  Purchaser
  is a  limited partnership  duly  organized, validly  existing and  in  good
  standing under the laws of  the State of Delaware.   The Purchaser has  all
  requisite limited partnership  power and authority  to execute and  deliver
  this Agreement and the Registration  Rights Agreement and to carry out  its
  obligations under the  provisions of such  documents.   This Agreement  and
  the Registration  Rights Agreement, when  executed and  delivered, will  be
  valid and  binding obligations  of the  Purchaser enforceable  against  the
  Purchaser  in accordance  with  their  terms,  except  (i)  as  limited  by
  applicable  bankruptcy, insolvency,  reorganization,  moratorium  or  other
  laws of  general application  affecting enforcement  of creditors'  rights,
  (ii) according  to  general   principles  of  equity   that  restrict   the
  availability  of equitable  remedies  and  (iii) to  the  extent  that  the
  enforceability  of  the  indemnification  provisions  of  the  Registration
  Rights Agreement may be limited by applicable laws.

 SECTION 5. CONDITIONS FOR CLOSING

      5.1 Conditions for  the Company  to  Satisfy.   The obligation  of  the
  Purchaser  to purchase  the  Note  as contemplated  by  this  Agreement  is
  subject to  satisfaction of  the  following contingencies  at or  prior  to
  Closing:

      (a) The  Company shall  have obtained  all consents  and approvals from
 third parties,  governmental authorities  and self-regulatory  organizations
 required in connection herewith.

      (b) The  Company shall have executed and  delivered to the Purchaser at
 Closing the Transaction Documents.

 SECTION 6. COVENANTS

      6.1  Use of Proceeds. The Company will use the proceeds from the  sale
  of the Note  in connection with  the acquisition of  Texas General  Agency,
  Inc. and/or Aerospace Holdings, LLC.

      6.2 Listing. The Company shall  promptly secure the  listing of all  of
  the  Registrable  Securities  (as   defined  in  the  Registration   Rights
  Agreement) upon each national  securities exchange and automated  quotation
  system, if any,  upon which  the Common Stock  is then  listed (subject  to
  official notice  of issuance)  and shall  maintain, so  long as  any  other
  shares of Common Stock shall be so listed, such listing of all  Registrable
  Securities from time  to time issuable under  the terms of the  Transaction
  Documents. The Company shall maintain the Common Stock's authorization  for
  listing on the Amex; provided, however, that the Company makes no  covenant
  regarding applicable listing  standards based on the  trading price of  the
  Common Stock. Neither  the Company nor any  of its Subsidiaries shall  take
  any action that would be reasonably expected to result in the delisting  or
  suspension of the Common Stock on the Amex.

      6.3 No Integrated  Offering. None  of  the Company,  its  Subsidiaries,
  their affiliates or any person acting on their behalf will take any  action
  or steps referred  to in Section  3.28 that would  require registration  of
  any of  the  Note or  the Shares  under the  Securities  Act or  cause  the
  offering of the Note or the Shares to be integrated with other offerings.

      6.4 Reservation  of  Shares.  The   Company  shall  take  all   action,
  including, without  limitation,  using reasonable  best efforts  to  obtain
  Shareholder Approval, necessary  to have authorized,  and reserved for  the
  purpose of issuance,  the number of Shares  issuable pursuant to the  terms
  of the Note.

      6.5 Shareholder Approval. The  Company shall  provide each  shareholder
  entitled to vote at the annual meeting of shareholders of the Company  (the
  "Shareholder Meeting"), which shall be  promptly called and held not  later
  than May 31, 2006 (the "Shareholder Meeting Deadline"), a proxy  statement,
  substantially in the  form which will have  been reviewed by the  Purchaser
  and its  counsel, soliciting each  such shareholder's  affirmative vote  at
  the Shareholder Meeting for approval  of resolutions providing for (i)  the
  Company's issuance of  all of the  Shares as described  in the  Transaction
  Documents in accordance with applicable  law and the rules and  regulations
  of the Amex and  (ii) the increase in  the Company's authorized capital  by
  at least 20,000,000  shares of Common Stock  (such affirmative approval  of
  the matters set  forth in  (i) and (ii)  of this  Section 6.5  collectively
  being referred to  herein as the "Shareholder  Approval"), and the  Company
  shall  use  its  reasonable  best  efforts  to  solicit  its  shareholders'
  approval of such resolutions and  use its reasonable best efforts to  cause
  the Board of  Directors of the  Company (including a  special committee  of
  independent directors) to recommend to  the shareholders that they  approve
  such resolutions.  The Company shall  be obligated  to seek  to obtain  the
  Shareholder Approval by the Shareholder Meeting Deadline.

      6.6 Further Assurances.  Each party shall  do and perform, or cause  to
  be done and performed, all such further acts and things, and shall  execute
  and  deliver all  such  other  agreements,  certificates,  instruments  and
  documents, as the other party may reasonably request in order to carry  out
  the  intent  and  accomplish  the  purposes  of  this  Agreement  and   the
  consummation of the  transactions contemplated  hereby, including,  without
  limitation, to enable the full conversion of the Note.

 SECTION 7. MISCELLANEOUS

      7.1 Governing Law.   This Agreement shall  be governed by  the laws  of
  the State of Texas, without regard to conflicts of law principles.

      7.2 Survival. The representations, warranties, covenants and agreements
  made herein shall survive any investigation  made by the  parties  and  the
  closing  of  the  transactions  contemplated hereby  until  the  earlier to
  occur  of  the  Maturity Date (as defined in the Note) of the Note and  the
  payment (or conversion)  in full of  the principal amount  of the Note  and
  any accrued  but unpaid interest  thereon.   All statements  as to  factual
  matters contained in  any certificate or other  instrument delivered by  or
  on  behalf  of  the  Company   pursuant  hereto  in  connection  with   the
  transactions contemplated hereby shall be deemed to be representations  and
  warranties  by the  Company  hereunder  solely  as  of  the  date  of  such
  certificate or instrument.

      7.3 Successors and  Assigns.   Except as  otherwise expressly  provided
  herein, the  provisions  hereof shall  inure  to  the benefit  of,  and  be
  binding upon, the successors, assigns, heirs, executors and  administrators
  of the parties hereto and shall inure to the benefit of and be  enforceable
  by each person who shall  be a holder of the Note  or the Shares from  time
  to time.   The Company shall  not assign this  Agreement or  any rights  or
  obligations hereunder without the prior  written consent of the  Purchaser.
  The Purchaser may assign  some or all of  its rights hereunder without  the
  consent of the Company  in connection with a  transfer by the Purchaser  of
  any of the Notes or the Shares.

      7.4 Entire  Agreement.    The  Transaction  Documents  and  the   other
  documents  delivered  pursuant  hereto  constitute  the  full  and   entire
  understanding  and  agreement  between  the  parties  with  regard  to  the
  subjects hereof and thereof and  no party shall be  liable or bound to  the
  other in  any  manner by  any  representations, warranties,  covenants  and
  agreements, except as specifically set forth herein and therein.

      7.5 Severability.  The  invalidity, illegality  or unenforceability  of
  one or more of the provisions  of this Agreement in any jurisdiction  shall
  not affect the  validity, legality or  enforceability of  the remainder  of
  this  Agreement  in  such  jurisdiction   or  the  validity,  legality   or
  enforceability of  this Agreement,  including any  such provision,  in  any
  other jurisdiction, it  being intended that all  rights and obligations  of
  the parties hereunder shall be enforceable to the fullest extent  permitted
  by law.

      7.6 Amendment and Waiver.  This Agreement  may be amended or  modified,
  and any provision  hereunder may be waived,  only upon the written  consent
  of the Company and the Purchaser.

      7.7 Notices.  All notices, requests, consents and other  communications
  hereunder shall be made in writing and shall be deemed given (i) when  made
  if made by hand delivery, (ii) one business day after being deposited  with
  an overnight courier  if made by  courier guaranteeing overnight  delivery,
  (iii) on the  date indicated on  the notice of  receipt if  made by  first-
  class mail, return  receipt requested or (iv)  on the date of  confirmation
  of receipt of transmission by facsimile, addressed as follows:

      (a)  if to the Company, at

           Hallmark Financial Services, Inc.
           777 Main Street, Suite 1000
           Fort Worth, TX 76102
           Facsimile: (817) 348-1815
           Attention:  Chief Financial Officer

           with a copy to:

           McGuire, Craddock & Strother, P.C.
           3550 Lincoln Plaza
           500 N. Akard Street
           Dallas, Texas  75201
           Facsimile:  (214) 954-6868
           Attention:  Steven D. Davidson, Esq.

      (b)  if to the Purchaser, in care of:

           Newcastle Partners, L.P.
           300 Crescent Court, Suite 1110
           Dallas, TX  75201
           Facsimile:  (214) 661-7475
           Attention:  Steven J. Pully

           with a copy to:

           Olshan Grundman Frome Rosenzweig & Wolosky LLP
           65 East 55th Street
           New York, New York  10022
           Facsimile: (212) 451-2222
           Attention:  Steven Wolosky, Esq.

      7.8 Indemnification by the  Company.  The  Company agrees to  indemnify
  and hold  the Purchaser  harmless against  any loss,  liability, damage  or
  expense (including reasonable legal fees and costs) that the Purchaser  may
  suffer, sustain or become subject to as  a result of or in connection  with
  the breach  by the  Company of  any representation,  warranty, covenant  or
  agreement of the  Company contained in  any of  the Transaction  Documents;
  provided,  however,  that  no  indemnification shall  be required hereunder
  for  the negligence  or willful misconduct  of the  Purchaser or  breach by
  the  Purchaser of any  of  the  representations and  warranties  set  forth
  in Section  4 hereof.  In case  any such  action  is  brought  against  the
  Purchaser, the Company  will be entitled to  participate in and assume  the
  defense thereof with counsel reasonably satisfactory to the Purchaser,  and
  after notice from the  Company to the Purchaser  of its election to  assume
  the defense thereof, the Company shall not be responsible for any legal  or
  other expenses subsequently  incurred by the  Purchaser in connection  with
  the   defense  thereof;   provided,  that  if  the  Purchaser  shall   have
  reasonably  concluded  that  there  may  be  one  or  more  legal  defenses
  available to  the Purchaser  which conflict  in any  material respect  with
  those available to  the Company, the  Company shall not  have the right  to
  assume the  defense of  such action  on  behalf of  the Purchaser  and  the
  Company shall  reimburse the Purchaser  for that  portion of  the fees  and
  expenses of one counsel retained by the Purchaser.

      7.9 Expenses.   At  Closing,  the Company  shall  pay  the  Purchaser's
  counsel, Olshan Grundman  Frome Rosenzweig &  Wolosky LLP,  $8,000 for  its
  legal fees and  expenses in representing the  Purchaser in connection  with
  the preparation, negotiation, execution,  delivery and performance  of this
  Agreement,  the  Note  and  the  Registration  Rights  Agreement  and   the
  consummation of  the  transactions contemplated  hereby  and  thereby.   In
  addition, the  Company agrees to  pay or  reimburse the  Purchaser for  its
  reasonable legal fees and expenses that it may incur after the date  hereof
  in  connection with  the  granting  of any  waiver  with  respect  to,  the
  modification of any of  the terms or provisions  of, or the enforcement  of
  any of the Transaction Documents.

      7.10 Titles and Subtitles.  The titles of the sections and  subsections
  of the Agreement are for  convenience of reference only  and are not to  be
  considered in construing this Agreement.

      7.11 Counterparts.  This  Agreement may be  delivered via facsimile  or
  other  means  of   electronic  communication,  and   may  be  executed   in
  counterparts,  each of  which  shall  be an  original,  but  all  of  which
  together shall constitute one instrument.

      IN WITNESS  WHEREOF, the  parties hereto  have hereunto  affixed  their
 signatures.

                                         Newcastle Special Opportunity
                                              Fund [I] [II], L.P.

 Hallmark Financial Services, Inc.       By: Newcastle Capital Management,
                                             L.P., its general partner

 By                                      By
     _____________________________           _____________________________
 Its                                     Its
     _____________________________           _____________________________

<PAGE>

                                  Exhibit A

                                 Form of Note

<PAGE>

                                  Exhibit B

                    Form of Registration Rights Agreement

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00096-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00096-of-00352.parquet"}]]