As filed with the Securities and Exchange Commission on July 9, 2003
                                                     Registration No. 333-104274

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                 AMENDMENT NO.2

                                       TO
                                    FORM S-3
                             REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933
                            -------------------------

                        HALLMARK FINANCIAL SERVICES, INC.
             (Exact name of registrant as specified in its charter)

         Nevada                                               87-0447375
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                            Identification Number)


                                 777 Main Street
                                   Suite 1000
                             Fort Worth, Texas 76102
                                 (817) 348-1600

               (Address, including zip code, and telephone number,
        including area code, of registrant's principal executive offices)
                          ----------------------------

                                 Mark E. Schwarz
                                Chairman and CEO
                                 777 Main Street
                                   Suite 1000
                             Fort Worth, Texas 76102
                                 (817) 348-1600
            (Name, address, including zip code, and telephone number,
             including area code, of agent for service of process)
                         ------------------------------

                                   Copies to:
                              Steven Wolosky, Esq.
                 Olshan Grundman Frome Rosenzweig & Wolosky LLP
                                 505 Park Avenue
                            New York, New York 10022
                                 (212) 753-7200
                         ------------------------------

        Approximate date of commencement of proposed sale to the public:
 As soon as practicable after the effective date of this registration statement.
                            -------------------------






            If the only  securities  being  registered  on this  Form are  being
offered pursuant to dividend or interest  reinvestment  plans,  please check the
following box. |_|

            If any of the  securities  being  registered  on this Form are to be
offered  on a  delayed  or  continuous  basis  pursuant  to Rule 415  under  the
Securities Act of 1933,  other than  securities  offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|

            If this  Form is  filed to  register  additional  securities  for an
offering  pursuant to Rule 462(b)  under the  Securities  Act,  please check the
following box and list the Securities Act  registration  statement number of the
earlier effective registration statement for the same offering. |_|

            If this Form is a  post-effective  amendment  filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act  registration   statement  number  of  the  earlier  effective  registration
statement for the same offering. |_|

            If delivery  of the  prospectus  is expected to be made  pursuant to
Rule 434, please check the following box. |_|


                         CALCULATION OF REGISTRATION FEE

======================================================================================
                                              Proposed Maximum
                                             Aggregate Offering        Amount Of
   Title of Shares to be Registered               Price(1)           Registration Fee
--------------------------------------------------------------------------------------


Common Stock, par value $.03 per share,
issuable upon exercise of nontransferable
rights.....................................    $10,000,000(2)            $809.00(3)
=======================================================================================

(1)   Estimated  solely for the purpose of calculating the  registration  fee in
      accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Represents   the  gross   proceeds  from  the  assumed   exercise  of  all
      nontransferable rights issued.
(3)   Previously paid with the initial filing on April 2, 2003.

            The  Registrant  hereby amends this  registration  statement on such
date or  dates as may be  necessary  to  delay  its  effective  date  until  the
Registrant shall file a further  amendment which  specifically  states that this
registration  statement  shall  thereafter  become  effective in accordance with
Section  8(a)  of  the  Securities  Act  of  1933,  as  amended,  or  until  the
registration  statement  shall become  effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.






            The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.


                    SUBJECT TO COMPLETION, DATED JULY 8, 2003

PROSPECTUS
                        Hallmark Financial Services, Inc.
                        [________] Shares of Common Stock


            Our Board of Directors declared a dividend of rights to purchase our
common stock to holders of record as of June 27, 2003.  Through this prospectus,
we are offering the shares of common stock that rights holders may purchase upon
exercising such subscription rights.

            o    You received one right for each share of common stock you owned
on the record  date of June 27,  2003.  Each right will  entitle you to purchase
_______ shares of our common stock at a subscription price of $______ per share.

            o    The rights are  currently  exercisable  and will expire if they
are not exercised by 5:00 p.m., New York City time, on ______________,  2003. We
may extend the period for exercising the rights in our sole  discretion.  If you
want to exercise your rights, you must submit your subscription  documents to us
before the expiration date. Rights that are not exercised by the expiration date
will expire and will have no value.

            The  proceeds  from the  exercise of rights will be used to repay an
outstanding  loan  made  to  us  by  Newcastle   Partners,   L.P.,  our  largest
stockholder. Any remaining proceeds will be used for working capital and general
corporate purposes.  Mark E. Schwarz,  our chairman and chief executive officer,
is an affiliate of Newcastle.


            Shares of our common stock are traded on the American Stock Exchange
Emerging  Company  Marketplace  under the symbol "HAF. EC." On July 7, 2003, the
last reported sales price for our common stock was $1.03 per share.


            AN  INVESTMENT  IN OUR  COMMON  STOCK  IS  VERY  RISKY.  YOU  SHOULD
CAREFULLY  CONSIDER  THE RISK  FACTORS  BEGINNING  ON PAGE 6 OF THIS  PROSPECTUS
BEFORE EXERCISING YOUR SUBSCRIPTION RIGHTS.

            NEITHER  THE  SECURITIES  AND  EXCHANGE  COMMISSION  NOR  ANY  STATE
SECURITIES  COMMISSION  HAS  APPROVED  OR  DISAPPROVED  OF THESE  SECURITIES  OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
                             -----------------------

               The date of this prospectus is ____________, 2003.






                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----


Questions and Answers about this Offering......................................1
Risk Factors...................................................................6
Our Company...................................................................12
Use of Proceeds...............................................................12
Capitalization................................................................13
Price Range of Common Stock...................................................13
The Offering..................................................................14
Material United States Federal Income Tax Consequences........................21
Plan of Distribution..........................................................22
Legal Matters.................................................................23
Experts.......................................................................23

Material Changes..............................................................23
Where You Can Find More Information...........................................24

Forward-Looking Statements....................................................24

                                       i





            You should rely only on the  information in this  prospectus and the
additional  information  described  under the  heading  "Where You Can Find More
Information."  We have not  authorized  any  other  person to  provide  you with
different  information.  If anyone  provides you with different or  inconsistent
information, you should not rely on it. We are not making an offer to sell these
securities in any  jurisdiction  where the offer or sale is not  permitted.  You
should  assume  that  the  information  in this  prospectus  and the  additional
information  described  under the heading "Where You Can Find More  Information"
were  accurate  on the date on the  front  cover  of the  prospectus  only.  Our
business,  financial  condition,  results of  operations  and prospects may have
changed since that date.


                    QUESTIONS AND ANSWERS ABOUT THIS OFFERING

            This  section   highlights   information   contained   elsewhere  or
incorporated by reference in this prospectus.  This section does not contain all
of the important  information  that you should consider  before  exercising your
subscription  rights and  investing  in our common  stock.  You should read this
entire prospectus carefully.

Q:    WHAT ARE WE OFFERING IN THIS PROSPECTUS?

A:    Our  Board  of  Directors  has  declared  a  dividend  of  nontransferable
      subscription  rights to purchase shares of our common stock to each of our
      stockholders of record on June 27, 2003.  Through this prospectus,  we are
      offering  the shares of common  stock that  holders of rights may purchase
      upon exercise of their rights.

Q:    WHO MAY PARTICIPATE IN THIS OFFERING?

A:    Only  holders  of  record  of our  common  stock as of June  27,  2003 are
      entitled to participate  in this  offering.  Any attempt to participate in
      this  offering  by anyone  that was not a holder  of record of our  common
      stock on such date will be null and void.

Q:    WHAT IS A SUBSCRIPTION RIGHT?

A:    Each  subscription  right is a right to purchase ____ shares of our common
      stock  and  carries  with  it  a  basic  subscription   privilege  and  an
      over-subscription privilege.

Q:    WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?

A:    The basic  subscription  privilege of each right  entitles you to purchase
      _____  shares of our common  stock at a  subscription  price of $_____ per
      share. You may exercise any number of your subscription rights, or you may
      choose not to exercise any subscription rights. We will not distribute any
      fractional shares or pay cash in place of fractional  shares,  but we will
      round down the  aggregate  number of shares you are entitled to receive to
      the nearest whole number.

Q:    WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?

A:    We do not expect that all of our  stockholders  will exercise all of their
      basic subscription  rights. By extending  over-subscription  privileges to
      our stockholders, we are providing stockholders that exercise all of their
      basic  subscription  privileges  with the  opportunity  to purchase  those
      shares that are not purchased by other stockholders. The over-subscription
      privilege of each right  entitles  you, if you fully  exercise  your basic
      subscription  privilege,  to subscribe for additional shares of our common
      stock  unclaimed by other holders of rights in this offering,  at the same
      subscription  price  per  share.  If an  insufficient  number of shares is
      available to fully satisfy all over-subscription  privilege requests,  the
      available shares will be distributed  proportionately among rights holders
      who exercised  their  over-subscription  privilege  based on the number of
      shares  each rights  holder  subscribed  for under the basic  subscription
      privilege.  The subscription agent will return any excess payments by mail
      without  interest  or  deduction  promptly  after  the  expiration  of the
      subscription period.

Q:    HOW LONG WILL THE SUBSCRIPTION PERIOD LAST?

A:    You  will be able to  exercise  your  subscription  rights  only  during a
      limited  period.  If you do not exercise your  subscription  rights before
      5:00 p.m., New York City time, on  _____________,  2003, your subscription
      rights will expire. We may, in our sole discretion,  decide to extend this

                                       1





      offering until some later time. If we extend the expiration  date, we will
      give oral or written  notice to the  subscription  agent on or before such
      expiration date,  followed by a press release no later than 9:00 a.m., New
      York City time,  on the next business day after the  previously  scheduled
      expiration date.

Q:    AM I REQUIRED TO SUBSCRIBE IN THIS OFFERING?

A:    No.

Q:    WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?

A:    You will retain your current  number of shares of common stock even if you
      do not exercise your  subscription  rights.  If you choose not to exercise
      your subscription rights, then the percentage of our common stock that you
      own may  decrease.  The  magnitude  of the  reduction  of your  percentage
      ownership  will  depend  upon  the  extent  to  which  you and  the  other
      stockholders exercise your rights.

Q:    HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS?

A:    You may  exercise  your  subscription  rights by properly  completing  and
      signing your  subscription  certificate,  and delivering it and the rights
      certificate,  with full payment of the  subscription  price for the shares
      you  are   subscribing   (including   any   amounts   in  respect  of  the
      over-subscription privilege), to the subscription agent on or prior to the
      expiration  date. If you use the mail, we recommend  that you use insured,
      registered  mail,  return  receipt  requested.  If you cannot deliver your
      rights  certificate to the subscription  agent on time, you may follow the
      guaranteed delivery procedures  described under "The Offering - Guaranteed
      Delivery Procedures."

Q:    WHAT  SHOULD I DO IF I WANT TO  EXERCISE  MY  SUBSCRIPTION  RIGHTS  BUT MY
      SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?

A:    If you hold shares of our common stock through a broker, custodian bank or
      other nominee, we will ask your broker, custodian bank or other nominee to
      notify you of this  offering.  If you wish to exercise  your  subscription
      rights, you will need to have your broker, custodian bank or other nominee
      act for you. To indicate your decision,  you should complete and return to
      your broker, custodian bank or other nominee the form entitled "Beneficial
      Owner  Election  Form." You  should  receive  this form from your  broker,
      custodian  bank or other nominee with the other  offering  materials.  You
      should contact your broker, custodian bank or other nominee if you believe
      you are entitled to participate in this offering but you have not received
      this form.

Q:    WHAT SHOULD I DO IF I WANT TO EXERCISE MY  SUBSCRIPTION  RIGHTS AND I AM A
      STOCKHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?

A:    The subscription  agent will mail subscription  certificates to you if you
      are a rights  holder whose  address is outside the United States or if you
      have an Army Post Office or a Fleet Post Office address.  To exercise your
      rights,  you must notify the subscription  agent on or prior to 5:00 p.m.,
      New York City time, on ____________,  2003, and take all other steps which
      are necessary to exercise your rights, on or prior to that time. If you do
      not follow these procedures prior to the expiration date, your rights will
      expire.

Q:    WILL I BE  CHARGED  A  SALES  COMMISSION  OR A FEE BY  HALLMARK  FINANCIAL
      SERVICES IF I EXERCISE MY SUBSCRIPTION RIGHTS?

A:    No. We will not charge a brokerage  commission or a fee to rights  holders
      for exercising their subscription  rights.  However,  if you exercise your
      subscription  rights through a broker or nominee,  you will be responsible
      for any fees charged by your broker or nominee.

Q:    WHAT ARE THE UNITED STATES FEDERAL INCOME TAX  CONSEQUENCES  OF EXERCISING
      MY SUBSCRIPTION RIGHTS AS A HOLDER OF COMMON STOCK?

A:    A holder of common stock  generally will not recognize  income or loss for
      federal income tax purposes in connection  with the receipt or exercise of
      subscription  rights.  We urge you to consult  your own tax  advisor  with
      respect to the  particular tax  consequences  of this offering to you. See
      "Material United States Federal Income Tax Consequences."

                                       2





Q:    HOW MANY SHARES MAY I PURCHASE?

A:    You will receive one nontransferable  subscription right for each share of
      common stock that you owned at the close of business on June 27, 2003, the
      record date. Each right contains the basic subscription  privilege and the
      over-subscription  privilege.  Each basic subscription  privilege entitles
      you to  purchase  _____  shares of our  common  stock for $___ per  share.
      Fractional shares will be eliminated by rounding down the aggregate number
      of shares you are  entitled to receive to the nearest  whole  number.  See
      "The Offering - Subscription  Privileges - Basic Subscription  Privilege."
      The  over-subscription  privilege entitles you to subscribe for additional
      shares of our common stock at the same  subscription  price per share on a
      pro-rata  basis to the  number of shares  you  purchased  under your basic
      subscription   privilege,   provided   you  fully   exercise   your  basic
      subscription  privilege.  "Pro-rata"  means in proportion to the number of
      shares of our common stock that you and the other rights holders  electing
      to  exercise  their   over-subscription   privileges   have  purchased  by
      exercising the basic  subscription  privileges on their holdings of common
      stock.  See "The Offering -  Subscription  Privileges -  Over-Subscription
      Privilege."

Q:    WHEN  WILL I  RECEIVE  CERTIFICATES  FOR  THE  SHARES  PURCHASED  IN  THIS
      OFFERING?

A:    We will issue certificates  representing shares purchased in this offering
      to you or to the Depository Trust Company on your behalf,  as the case may
      be, as soon as practicable after the expiration of the subscription period
      and after all pro rata allocations and adjustments have been completed. We
      will not be able to  calculate  the  number of shares to be issued to each
      exercising  holder  until  5:00  p.m.,  New York City  time,  on the third
      business day after the expiration  date, which is the latest time by which
      subscription  rights  certificates  may be delivered  to the  subscription
      agent  under the  guaranteed  delivery  procedures  described  under  "The
      Offering - Guaranteed Delivery Procedures."

Q:    IF THIS  OFFERING  IS NOT  COMPLETED,  WILL  MY  SUBSCRIPTION  PAYMENT  BE
      REFUNDED TO ME?

A:    Yes.  The  subscription  agent will hold all funds it  receives  in escrow
      until completion of this offering. If this offering is not completed,  the
      subscription   agent  will  return   promptly,   without   interest,   all
      subscription payments.

Q:    HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?

A:    The subscription  price was established by our board of directors based on
      the  recommendation of a special  committee of directors,  excluding those
      directors  affiliated  with  Newcastle who did not  participate  (in their
      capacity as directors)  in the  discussion,  consideration  or voting with
      respect to these  matters.  These  factors  included the historic and then
      current  market price of our common  stock,  our business  prospects,  our
      recent  and  anticipated  operating  results,  general  conditions  in the
      securities markets, our need for capital, alternatives available to us for
      raising capital,  the amount of proceeds  desired,  the pricing of similar
      transactions,  the liquidity of our common stock, and the level of risk to
      our investors.

Q:    ARE THERE RISKS IN EXERCISING MY SUBSCRIPTION RIGHTS?

A:    Yes. The exercise of your rights  involves  risks.  Exercising your rights
      means  buying  additional  shares  of  our  common  stock  and  should  be
      considered as carefully as you would consider any other equity  investment
      in our company.  Among other  things,  you should  carefully  consider the
      risks described under the heading "Risk Factors," beginning on page 6.

Q:    AFTER I EXERCISE MY SUBSCRIPTION  RIGHTS,  CAN I CHANGE MY MIND AND CANCEL
      MY PURCHASE?

A:    No. Once you send in your subscription  certificate and payment you cannot
      revoke the exercise of your subscription  rights,  even if you later learn
      information  about us that you consider to be unfavorable  and even if the
      market  price of our common  stock is below the  subscription  price.  You
      should not exercise your  subscription  rights unless you are certain that
      you  wish  to  purchase  additional  shares  of our  common  stock  at the
      subscription price. See "The Offering - No Revocation."

                                       3





Q:    MAY I TRANSFER MY  SUBSCRIPTION  RIGHTS IF I DO NOT WANT TO  PURCHASE  ANY
      SHARES?

A:    No. Should you choose not to exercise your  subscription  rights,  you may
      not  sell,  give  away  or  otherwise   transfer  your  rights.   However,
      subscription  rights will be  transferable  to affiliates of the recipient
      and by operation of law (for example, upon death of the recipient).

Q:    WHY IS HALLMARK FINANCIAL SERVICES ENGAGING IN THIS OFFERING?

A:    We are making this offering in order to raise $10.0 million in new capital
      to be used as follows:

      o    to  repay  an  $8.6  million  loan,  and  accrued  interest,  made by
           Newcastle  Partners,  L.P.  (referred to as  Newcastle)  to us during
           2002,  that is evidenced by promissory  notes with an annual interest
           rate of 11.75% (referred to as the Newcastle Notes), and

      o    as additional  working capital for our business and general corporate
           purposes.

      Our  board of  directors  believes  that  this  offering  will  ultimately
      strengthen our financial  condition  through  generating  additional cash,
      reducing our indebtedness and increasing our stockholders' equity. We want
      to give you the opportunity to participate in this fund raising effort and
      to purchase additional shares of our common stock.

      For your  information,  Mark E. Schwarz,  our Chairman and Chief Executive
      Officer,  is the  managing  member of the  general  partner of the general
      partner of Newcastle.

Q:    WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THIS OFFERING?

A:    Our board of directors is not making any  recommendation as to whether you
      should  exercise  your  subscription  rights.  You are  urged to make your
      decision based on your own assessment of this offering and our company.

Q:    HOW MANY  SHARES  OF OUR  COMMON  STOCK  WILL BE  OUTSTANDING  AFTER  THIS
      OFFERING?

A:    As of July 7, 2003,  we had  11,318,245  shares of common stock issued and
      outstanding.  We expect to issue up to ________  shares in this  offering.
      After this offering,  we anticipate  that we will have ________  shares of
      common  stock  outstanding.  Depending on the number of  subscriptions  we
      receive  from  stockholders,  this  offering  could  result in a change in
      control of Hallmark  Financial  Services because of the over  subscription
      privilege held by Newcastle. See "Risk Factors" beginning on page 6.

Q:    WILL THE NEW SHARES BE  INITIALLY  LISTED ON THE AMERICAN  STOCK  EXCHANGE
      EMERGING COMPANY MARKETPLACE AND TREATED LIKE OTHER SHARES?

A:    Yes. Our common stock is traded on the American  Stock  Exchange  Emerging
      Company  Marketplace  under the symbol "HAF.EC." We expect that the shares
      of common  stock issued in this  offering  will also be listed on the AMEX
      Emerging Company Marketplace under the same symbol.

Q:    HOW WILL THIS OFFERING AFFECT NEWCASTLE'S OWNERSHIP OF OUR COMMON STOCK?

A:    Newcastle   beneficially   owns  5,334,001  shares  of  our  common  stock
      (including  currently  exercisable  options to purchase  50,000  shares of
      common stock),  representing approximately 42.3% of our outstanding common
      stock and of the voting power of our outstanding voting securities.

      If no holders of subscription  rights other than Newcastle  exercise their
      rights   in  this   offering,   Newcastle   may,   as  a  result   of  its
      over-subscription  privilege, own approximately _____ shares, representing
      ____% of our  outstanding  common  stock  and of the  voting  power of our
      outstanding voting securities.  If all rights holders exercise their basic
      subscription   privileges  in  full,   then  Newcastle  will  continue  to
      beneficially own approximately 42.3% of our common stock and of the voting
      power of our outstanding voting securities.

                                       4





Q:    CAN THE BOARD OF DIRECTORS WITHDRAW THIS OFFERING?

A:    Yes. Our board of directors  may decide to withdraw  this  offering at any
      time for any reason. If we withdraw this offering, any money received from
      subscribing stockholders will be refunded promptly,  without interest. See
      "The Offering - Withdrawal  and  Amendment."

Q:    WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS OR NEED ASSISTANCE?

A:    If you have  questions  or need  assistance,  please  contact  Timothy  A.
      Bienek, our President and Chief Operating Officer,  or Securities Transfer
      Corporation,  the subscription  agent for this offering,  at the following
      addresses and telephone numbers:

                                Timothy A. Bienek
                        Hallmark Financial Services, Inc.
                           777 Main Street, Suite 1000
                             Fort Worth, Texas 76102
                                 (817) 348-1600

                                       or

                             The Subscription Agent:
                         Securities Transfer Corporation
                         2591 Dallas Parkway, Suite 102
                               Frisco, Texas 75034
                                 (469) 633-0101

For a more complete  description of this offering,  see "The Offering" beginning
on page 14.


                                       5






                                  RISK FACTORS

            THE  EXERCISE OF YOUR  SUBSCRIPTION  RIGHTS FOR SHARES OF OUR COMMON
STOCK  INVOLVES  A HIGH  DEGREE  OF RISK.  YOU  SHOULD  CAREFULLY  CONSIDER  THE
FOLLOWING FACTORS AND OTHER  INFORMATION  PRESENTED OR INCORPORATED BY REFERENCE
IN THIS  PROSPECTUS  BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. IF WE DO NOT
SUCCESSFULLY  ADDRESS ANY ONE OR MORE OF THE RISKS DESCRIBED BELOW,  THERE COULD
BE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL  CONDITION,  OPERATING RESULTS AND
BUSINESS. WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY ADDRESS THESE RISKS.


RISKS RELATING TO OUR BUSINESS:

OUR  RESULTS   MAY   FLUCTUATE   AS  A  RESULT  OF   CYCLICAL   CHANGES  IN  THE
PROPERTY-CASUALTY INSURANCE INDUSTRY.

            All of our revenue is attributable to  property-casualty  insurance,
which  as  an  industry  is  cyclical  in  nature  and  has  historically   been
characterized  by soft  markets  followed  by hard  markets.  A soft market is a
period  of  relatively  high  levels  of  price  competition,  less  restrictive
underwriting  standards  and  generally  low premium  rates.  A hard market is a
period  of  capital  shortages  resulting  in  lack of  insurance  availability,
relatively low levels of competition,  more selective  underwriting of risks and
relatively  high premium  rates.  The industry is currently  experiencing a hard
market,  with premium rates increasing and more selective  underwriting of risks
occurring.

OUR INDUSTRY IS VERY  COMPETITIVE,  WHICH MAY UNFAVORABLY  IMPACT OUR RESULTS OF
OPERATIONS.

            The  property-casualty   insurance  industry,  our  sole  source  of
revenue, is highly competitive and, except for regulatory considerations,  there
are very few barriers to entry.  As of July 11, 2002,  A.M. Best  Company,  Inc.
reported that there were 2,874  property-casualty  insurance companies and 1,829
property-casualty  insurance  groups  operating  in the  United  States.  In the
personal lines markets we compete with large national  insurance  companies such
as Allstate, State Farm, and Progressive,  as well as a large number of regional
insurance companies and managing general agents. In the commercial lines markets
we compete with large national carriers such as Hartford,  Zurich and Safeco, as
well as a number of regional  insurance  companies and managing  general agents.
Our competition  includes entities which have, or are affiliated with,  entities
that have greater financial and other resources than we have.

ESTIMATING  RESERVES IS  INHERENTLY  UNCERTAIN  AND IF OUR LOSS RESERVES ARE NOT
ADEQUATE, IT WILL HAVE AN UNFAVORABLE IMPACT ON OUR RESULTS.

            We maintain  loss reserves to cover  estimated  liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of general  expenses,  for reported and unreported claims incurred as of
the end of each accounting period.  Reserves represent management's estimates of
what the  ultimate  settlement  and  administration  of claims will cost.  These
estimates,   which  generally  involve  actuarial  projections,   are  based  on
management's  assessment  of facts  and  circumstances  then  known,  as well as
estimates of future trends in claim severity,  frequency,  judicial  theories of
liability,  and other factors. These variables are affected by both internal and
external  events,  such as  changes  in claim  handling  procedures,  inflation,
judicial  trends and legislative  changes.  Many of these items are not directly
quantifiable in advance. Additionally,  there may be a significant reporting lag
between  the  occurrence  of an event  and the time it is  reported  to us.  The
inherent  uncertainties of estimating  reserves are greater for certain types of
liabilities,  particularly those in which the various  considerations  affecting
the type of claim are  subject to change  and in which long  periods of time may
elapse before a definitive determination of liability is made. Reserve estimates
are continually  refined in a regular and ongoing process as experience develops
and further  claims are  reported  and  settled.  Adjustments  to  reserves  are
reflected  in the results of the periods in which such  estimates  are  changed.
Because  settling  reserves is inherently  uncertain,  there can be no assurance
that the current reserves will prove adequate.

            During 2002 and 2001, loss and loss adjustment expense reserves were
increased  $177,000 and $522,000 for prior  accident  years,  respectively.  The
increases represented, as compared to beginning of year loss and loss adjustment
expense  reserves,  a 2.2%  increase in 2002 and 7.0%  increase in 2001. We have
established  our loss and loss adjustment  expense  reserves at a level slightly
above the mid-point of the range established by our actuaries.

                                       6





OUR RESULTS  MAY BE  UNFAVORABLY  IMPACTED  IF WE ARE UNABLE TO OBTAIN  ADEQUATE
REINSURANCE.

            If we are unable to obtain adequate  reinsurance  protection for the
risks we have  underwritten,  we will  either be exposed to greater  losses from
these risks or we will reduce the level of business  that we  underwrite,  which
will reduce our revenue.  The amount,  availability  and cost of reinsurance are
subject to prevailing market  conditions beyond our control,  and may affect our
ability to write additional premiums as well as our profitability.

            We currently reinsure 55% of our Texas non-standard auto business to
Dorinco Re, our sole  reinsurer.  Dorinco Re has been a reinsurer  of ours since
July 1, 1996.  The current  contract  with  Dorinco  renews  annually and if the
contract  is not  renewed,  we will be  required  to  enter  into a  reinsurance
agreement with another  reinsurance company or reduce the level of business that
we  underwrite.  We  cannot  be  certain  the we would  be able to enter  into a
contract with another reinsurance  company, or that such contract would have the
same terms and conditions as the contract with Dorinco Re.

IF THE COMPANIES THAT PROVIDE OUR  REINSURANCE DO NOT PAY ALL OF OUR CLAIMS,  WE
COULD INCUR SEVERE LOSSES.

            We purchase reinsurance by transferring, or ceding, part of the risk
we have assumed to a reinsurance  company in exchange for part of the premium we
receive in connection with the risk.  Although  reinsurance  makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve  us, the  reinsured,  of our  liability  to our  policyholders.
Accordingly,  we bear  credit  risk with  respect to our  reinsurers.  We cannot
assure that our reinsurers will pay all of our reinsurance  claims, or that they
will pay our claims on a timely basis.

CATASTROPHIC  LOSSES MAY ADVERSELY  AFFECT OUR RESULTS OF OPERATIONS,  LIQUIDITY
AND FINANCIAL CONDITION.

            Property-casualty  insurance companies are subject to claims arising
out of  catastrophes  that may have a  significant  affect on their  results  of
operations,  liquidity and financial  condition.  Catastrophes  can be caused by
various events,  including  hurricanes,  windstorms,  earthquakes,  hail storms,
explosions,  severe winter  weather and fires and may include  man-made  events,
such as the September 11, 2001 terrorist attacks on the World Trade Center.  The
incidence, frequency, and severity of catastrophes are inherently unpredictable.
The extent of losses from a  catastrophe  is a function of both the total amount
of insured  exposure in the area  affected by the event and the  severity of the
event.

OUR  RESULTS  MAY  BE  UNFAVORABLY  IMPACTED  IF  WE  LOSE  OUR  GENERAL  AGENCY
APPOINTMENT IN OUR COMMERCIAL LINES GROUP OPERATIONS.

            In our  Commercial  Lines Group  Operations  we are  appointed  as a
general agent by Clarendon National Insurance Company, which is our sole general
agency appointment.  The general agency agreement with Clarendon began in August
2000 and is  continuous  until  cancelled.  Under  the  terms of the  agreement,
Clarendon is required to provide at least 180 days notice prior to canceling the
contract.  If the  agreement  is  canceled,  we will be required to enter into a
general  agency  agreement  with a  different  insurance  company.  We cannot be
certain  that we would be able to enter into such an agreement or that the terms
of such  agreement  would be on the same terms and  conditions  as the agreement
with Clarendon.

WE ARE SUBJECT TO COMPREHENSIVE  REGULATION,  AND OUR RESULTS MAY BE UNFAVORABLY
IMPACTED BY THESE REGULATIONS.

            We  are  subject  to  comprehensive   governmental   regulation  and
supervision. Most insurance regulations are designed to protect the interests of
policyholders  rather than of the of the stockholders and other investors of the
insurance companies. These regulations, generally administered by the department
of  insurance  in each state in which we do  business,  relate to,  among  other
things;

            o    Approval of policy forms and rates,

            o    Standards   of   solvency,   including   risk   based   capital
                 measurements  (which are a measure  developed  by the  National
                 Association  of Insurance  Commissioners  and used by the state
                 insurance  regulators  to  identify  insurance  companies  that
                 potentially are inadequately capitalized),

            o    Licensing of insurers and their agents,

            o    Restrictions  on  the  nature,  quality  and  concentration  of
                 investments,

            o    Restrictions   on  the   ability  of  our   insurance   company
                 subsidiaries to pay dividends,

                                       7





            o    Restrictions  on  transactions  between the  insurance  company
                 subsidiaries and their affiliates,

            o    Requiring certain methods of accounting,

            o    Periodic examinations of operations and finances,

            o    Prescribing  the form  and  content  of  records  of  financial
                 condition to be filed, and

            o    Requiring  reserves  for  unearned  premium,  losses  and other
                 purposes.

            State insurance  departments also conduct  periodic  examinations of
the  affairs  of  insurance  companies  and  require  filing of annual and other
reports  relating to the  financial  condition of insurance  companies,  holding
company  issues and other  matters.  Our  business  depends on  compliance  with
applicable  laws and  regulations and our ability to maintain valid licenses and
approvals for our operations. Regulatory authorities may deny or revoke licenses
for various reasons,  including violations of regulations.  Changes in the level
of  regulation  of the  insurance  industry  or changes  in laws or  regulations
themselves or interpretations by regulatory  authorities,  could have a material
adverse affect on our operations.

            During  2002,  and  for the  three  months  ended  March  31,  2003,
approximately 56% and 54%, respectively, of our written premium was in the State
of Texas. During such periods,  approximately 71% and 73%, respectively,  of the
written  premium  in  the  State  of  Texas  was in  the  non-standard  personal
automobile  line of  business.  On June 10,  2003,  the Governor of Texas signed
legislation Senate Bill 14, which has been described as comprehensive  insurance
reform effecting  homeowners and personal automobile  business.  With respect to
personal  automobile  insurance,  the most  significant  provisions  provide for
additional rate  regulation and  limitations on the use of credit scoring.  With
the new law, broadened  rulemaking  authority has been given to the Commissioner
of Insurance.

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

STATE STATUTES LIMIT THE AGGREGATE AMOUNT OF DIVIDENDS THAT OUR SUBSIDIARIES MAY
PAY US, THEREBY LIMITING OUR FUNDS TO PAY EXPENSES AND DIVIDENDS.

            We are a holding  company and a legal  entity  separate and distinct
from  our  insurance  company   subsidiaries  and  our   non-insurance   company
subsidiaries.  As a holding company without  significant  operations of our own,
our principal sources of funds are dividends and other sources of funds from our
subsidiaries.  State  insurance laws limit the ability of our insurance  company
subsidiaries  to pay dividends  and require the insurance  companies to maintain
specified levels of statutory capital and surplus. These restrictions affect the
ability of the  insurance  company  subsidiaries  to pay dividends and use their
capital in other ways. Our rights to participate in any  distribution  of assets
of  the  insurance   company   subsidiaries  are  subject  to  prior  claims  of
policyholders  and creditors (except to the extent that our rights, if any, as a
creditor are recognized).  Consequently,  our ability to pay debts, expenses and
cash dividends to our stockholders may be limited.

            The maximum dividend that can be paid by American Hallmark Insurance
Company of Texas, without prior regulatory  approval,  is limited to the greater
of 10% of  policyholders'  surplus as of the preceding  calendar year end or the
statutory  net income of the  preceding  calendar  year.  The  maximum  dividend
payout, which may be made without prior regulatory approval,  is $839,380 during
2003.

            The maximum dividend that can be paid by Phoenix Indemnity Insurance
Company,  without prior regulatory approval,  is limited to the lesser of 10% of

                                       8





policyholders'  surplus as of the preceding  calendar year end or net investment
income for the preceding  calendar year. The maximum dividend payout,  which may
be made without prior regulatory approval, is $601,688 during 2003.

            As of March 31,  2003,  there was  $302,907  in cash at the  holding
company level. The operating cash requirements of the holding company, including
all current debt  obligations of the holding  company (with the exception of the
Newcastle Notes) are anticipated to be adequately funded from dividends from the
insurance  subsidiaries,  management  fees from the insurance  subsidiaries  and
payments under tax sharing agreements with subsidiaries.

            In the event this  offering did not raise  sufficient  cash to repay
the Newcastle Notes,  there would be insufficient cash at the holding company to
repay the Newcastle Notes.

OUR INSURANCE  COMPANY  SUBSIDIARIES  ARE SUBJECT TO MINIMUM CAPITAL AND SURPLUS
REQUIREMENTS.  FAILURE TO MEET THESE REQUIREMENTS COULD SUBJECT US TO REGULATORY
ACTION.

            Our insurance  company  subsidiaries  are subject to minimum capital
and  surplus  requirements  imposed  under  the laws of Texas and  Arizona.  Any
failure by one of the insurance company subsidiaries to meet minimum capital and
surplus  requirements  imposed  by  applicable  state  law  will  subject  it to
corrective action,  including  requiring  adoption of a comprehensive  financial
plan, examination and the issuance of a corrective order by the applicable state
insurance  department,  revocation of its license to sell insurance  products or
placing the subsidiary under state regulatory  control.  Any new minimum capital
and surplus  requirements  adopted in the future may require us to increase  the
capital and surplus of our insurance  company  subsidiaries  which we may not be
able to do.

            As of March 31, 2003,  American Hallmark  Insurance Company of Texas
and Phoenix  Indemnity  Insurance Company had statutory capital and surplus that
exceeded the minimum policyholders' surplus required by state regulators by 322%
and 587%, respectively.

THE LOSS OF KEY EXECUTIVES COULD DISRUPT OUR BUSINESS.

            Our success  will depend in part upon the  continued  service of our
Chairman and Chief  Executive  Officer,  Mark E. Schwarz and our  President  and
Chief Operating Officer,  Timothy A. Bienek.  Messrs.  Schwarz and Bienek do not
have employment  agreements with us. We do not have key person  insurance on the
lives of Messrs. Schwarz and Bienek. Our success will also depend on our ability
to attract  and retain  additional  executives  and  personnel.  The loss of key
personnel could cause disruption in our business.

ADVERSE  SECURITIES MARKET CONDITIONS CAN HAVE A SIGNIFICANT AND NEGATIVE IMPACT
ON OUR INVESTMENT PORTFOLIO.

            Our results of operations  depend in part on the  performance of our
invested  assets.  As of March 31, 2003,  69% of our  investment  portfolio  was
invested in fixed maturity securities.  Certain risks are inherent in connection
with fixed maturity securities  including loss upon default and price volatility
in reaction to changes in interest rates and general market factors. In general,
the fair market  value of a portfolio of fixed  income  securities  increases or
decreases  inversely  with  changes  in the  market  interest  rates,  while net
investment  income realized from future  investments in fixed income  securities
increases or decreases along with interest rates. In addition, some of our fixed
income  securities  have call or  prepayment  options.  This could subject us to
reinvestment  risk should  interest rates fall or issuers call their  securities
and we reinvest  proceeds at lower interest  rates.  We attempt to mitigate this
risk by investing  in  securities  with varied  maturity  dates,  so that only a
portion of the portfolio will mature at any point in time.  Furthermore,  actual
net investment  income and/or cash flows from  investments that carry prepayment
risk (such as mortgage-back and other  asset-backed  securities) may differ from
those  anticipated  at the time of  investment  as a  result  of  interest  rate
fluctuations.  An investment has  prepayment  risk when there is a risk that the
timing of cash flows that result from the  repayment  of  principal  might occur
earlier  than  anticipated  because of  declining  interest  rates or later than
anticipated because of rising interest rates. The fair value of our fixed income
securities as of March 31, 2003 was $16.0 million. If market interest rates were
to  change  1%,  (e.g.  from 5% to 6%),  the  fair  value  of our  fixed  income
securities  would change  approximately  $0.6 million as of March 31, 2003.  The
change  in fair  value  was  determined  using  duration  modeling  assuming  no
prepayments.

            Historically,  the impact of market  fluctuations  has only slightly
affected  our  financial   statements  since  we  used  an  investment  strategy
classified as "held to maturity." In 2003, we changed the  classification of our
investment portfolio to "available for sale." A classification of "available for
sale"  means  that  changes  in the  fair  market  value of our  securities  are
reflected in our other  comprehensive  income section of  stockholders'  equity.

                                       9





Fluctuations  in the fair market  value of fixed income  securities  may greatly
reduce the value of our  investment  portfolio  and, as a result,  our financial
condition may suffer. In addition to the general risks described above, although
we maintain an investment grade portfolio  (fixed income  securities - 71% U. S.
government or U.S. government agencies, 16% municipals and 13% other), our fixed
income  securities are also subject to credit risk. If any of the issuers of our
fixed income  securities  suffer  financial set backs,  the ratings on the fixed
income  securities could fall (with a concurrent fall in market value) and, in a
worst case scenario, the issuer could default on its obligations. Because of the
change in classification of investments to available for sale, future changes in
the fair market value of our securities will be reflected in other comprehensive
income. Similar treatment is not available for liabilities.  Therefore, interest
rate  fluctuations  could  adversely  affect  our  shareholders'  equity,  total
comprehensive income and/or our cash flows.

SINCE WE ARE RELIANT ON INDEPENDENT AGENTS TO MARKET OUR PRODUCTS, THEIR FAILURE
TO DO SO WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

            We principally  market our insurance  programs  through  independent
insurance  agents.  As a result,  our business  depends in part on the marketing
efforts of these  agents  and on our  ability to offer  insurance  products  and
services that meet the requirements of the agents and customers of these agents.
The agents,  however, are not obligated to sell or promote our products and many
sell or promote competitors' insurance products in addition to our products. The
failure  or  inability  of  insurance  agents to market our  insurance  products
successfully  could have a material  adverse  impact on our business,  financial
condition and results of operations.

            During 2002, our top 10 agency groups produced  approximately 15% of
our total written  premium and no individual  agent or group  produced more than
3.5% of our total written premium.

MARK  E.  SCHWARZ,  OUR  CHAIRMAN  AND  CHIEF  EXECUTIVE  OFFICER,  THROUGH  HIS
AFFILIATION WITH NEWCASTLE PARTNERS,  L.P., HAS THE ABILITY TO EXERT SIGNIFICANT
INFLUENCE  OVER OUR  OPERATIONS AND MAY HAVE INTERESTS THAT DIFFER FROM THOSE OF
OUR OTHER STOCKHOLDERS.


            Newcastle  Partners,  L.P.  beneficially  owns  approximately  42.3%
(including  outstanding options) of our common stock prior to this offering.  If
no  stockholders  other  than  Newcastle  exercise  their  subscription  rights,
Newcastle will purchase all of the shares in this offering,  thereby  increasing
its ownership to  approximately  __%. Mark E. Schwarz,  has sole  investment and
voting control over the shares  beneficially owned by Newcastle and thus has the
ability to exert significant influence over our policies and affairs,  including
the election of our board of directors and the approval of any action  requiring
stockholder  vote,  such as  amendments  to our  Articles  of  Incorporation  or
Regulations and approving  mergers or sales of substantially  all of our assets.
The  interests of Mark E. Schwarz and Newcastle may differ from the interests of
our other  stockholders  in some  respects and Mark E. Schwarz and Newcastle may
take action adverse to our other stockholders.

RISKS RELATING TO THIS OFFERING:

THE  SUBSCRIPTION  PRICE PER SHARE IS NOT AN INDICATION OF OUR VALUE AND YOU MAY
NOT BE ABLE TO SELL SHARES  PURCHASED  UPON THE  EXERCISE  OF YOUR  SUBSCRIPTION
RIGHTS AT A PRICE EQUAL TO OR GREATER THAN THE SUBSCRIPTION PRICE.

            The  subscription  price per  share  does not  necessarily  bear any
relationship to the book value of our assets, operations,  cash flows, earnings,
financial  condition or any other  established  criteria for value. As a result,
you should not consider the  subscription  price as an indication of the current
value of our company or our common stock.  We cannot assure you that you will be
able to sell shares  purchased  in this  offering at a price equal to or greater
than the subscription price.

[IF PRICED AT A DISCOUNT] THIS OFFERING MAY CAUSE THE PRICE OF OUR COMMON STOCK
TO DECREASE IMMEDIATELY, AND THIS DECREASE MAY CONTINUE.

            The  subscription  price per share equals ___% of the current market
price of our common  stock  determined  by  averaging  the closing  price of our
common stock on the AMEX for the ten  preceding  trading days ending on _______,
2003.  This  discount,  along  with the number of shares we propose to issue and
ultimately will issue if this offering is completed,  may result in an immediate
decrease in the market  value of our common  stock.  This  decrease may continue
after the completion of this offering.

                                       10





AS A HOLDER  OF  COMMON  STOCK,  YOU MAY  SUFFER  SIGNIFICANT  DILUTION  OF YOUR
PERCENTAGE OWNERSHIP OF OUR COMMON STOCK.

            If you do not  exercise  your  subscription  rights  and  shares are
purchased by other stockholders in this offering,  your proportionate voting and
ownership  interest will be reduced and the percentage that your original shares
represent of our expanded equity after exercise of the subscription  rights will
be diluted.  For example,  if you own 200,000  shares of our common stock before
this offering,  or approximately  1.8% of our outstanding  common stock, and you
exercise none of your subscription  rights while all other  subscription  rights
are exercised by other  stockholders,  then your  percentage  ownership would be
reduced to approximately ___%. The magnitude of the reduction of your percentage
ownership  will depend upon the extent to which you exercise  your  subscription
rights.

ONCE YOU EXERCISE  YOUR  SUBSCRIPTION  RIGHTS,  YOU MAY NOT REVOKE SUCH EXERCISE
EVEN IF THERE IS A DECLINE IN OUR COMMON STOCK PRICE.

            The public  trading  market  price of our common  stock may  decline
after you elect to exercise your subscription  rights.  If that occurs,  you may
have  committed  to buy shares of common  stock at a price above the  prevailing
market price and you will have an immediate unrealized loss. Moreover, we cannot
assure you that following the exercise of  subscription  rights you will be able
to sell your  shares of common  stock at a price  equal to or  greater  than the
subscription price.

YOU MAY NOT REVOKE THE  EXERCISE  OF YOUR RIGHTS EVEN IF WE DECIDE TO EXTEND THE
EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.

            We may, in our sole  discretion,  extend the expiration  date of the
subscription  period.  During any potential  extension of time, our common stock
price may  decline  below the  subscription  price and  result in a loss on your
investment upon the exercise of rights to acquire shares of our common stock. If
the expiration  date is extended after you send in your  subscription  forms and
payment, you still may not revoke or change your exercise of rights.

YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.

            If we cancel this offering,  neither we nor the  subscription  agent
will have any  obligation  with  respect to the  subscription  rights  except to
return, without interest, any subscription payments to you.

THE  SUBSCRIPTION  RIGHTS  ARE NOT  TRANSFERABLE  AND THERE IS NO MARKET FOR THE
SUBSCRIPTION RIGHTS.

            You may not sell, give away or otherwise  transfer your subscription
rights. The subscription  rights are only transferable to your affiliates and by
operation of law. Because the subscription rights are non-transferable, there is
no market or other means for you to directly  realize any value  associated with
the subscription  rights. You must exercise the subscription  rights and acquire
additional shares of our common stock to realize any value.

BECAUSE WE MAY TERMINATE THIS OFFERING,  YOUR  PARTICIPATION  IN THE OFFERING IS
NOT ASSURED.

            Once you exercise your subscription  rights,  you may not revoke the
exercise for any reason unless we amend this offering. If we decide to terminate
the offering,  we will not have any obligation with respect to the  subscription
rights except to return any subscription payments, without interest.

YOU NEED TO ACT PROMPTLY AND FOLLOW  SUBSCRIPTION  INSTRUCTIONS,  OTHERWISE YOUR
SUBSCRIPTION MAY BE REJECTED.

            Stockholders who desire to purchase shares in this offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to 5:00 p.m., New York City time, on the expiration
date. If you fail to complete and sign the required  subscription forms, send an
incorrect   payment  amount,  or  otherwise  fail  to  follow  the  subscription
procedures that apply to your desired  transaction,  the subscription agent may,
depending on the  circumstances,  reject your  subscription  or accept it to the
extent of the payment received. Neither we nor our subscription agent undertakes
to contact you  concerning,  or attempt to correct,  an  incomplete or incorrect
subscription form or payment. We have the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.

                                       11





MOST,  IF NOT ALL, OF THE PROCEEDS OF THIS OFFERING WILL BE USED TO REPAY A LOAN
TO AN AFFILIATE AND THEREFOR WILL NOT BE AVAILABLE FOR WORKING  CAPITAL OR OTHER
GENERAL CORPORATE PURPOSES.


            The  proceeds  from  this  offering  will be used to repay  the $8.6
million  bridge loan from  Newcastle,  our  largest  stockholder,  plus  accrued
interest on such loan.  Therefore,  most,  if not all,  of the  proceeds of this
offering  will not be  available  to us for  working  capital  or other  general
corporate purposes.  Mark E. Schwarz,  our Chairman and Chief Executive Officer,
is the  managing  member of the  general  partners  of the  general  partner  of
Newcastle.


RISKS RELATING TO OUR COMMON STOCK:

OUR COMMON STOCK IS VOLATILE AND THE VALUE OF ANY INVESTMENT IN OUR COMMON STOCK
MAY FLUCTUATE.

            The  market  price for our common  stock has been,  and is likely to
continue to be, highly  volatile.  The market for our common stock is subject to
fluctuations as a result of a variety of factors,  including  factors beyond our
control. These include:

            o    current  expectations of our future revenue and earnings growth
                 rates;

            o    changes in market valuations of similar companies;

            o    conditions or trends in the industry;

            o    general market and economic conditions; and

            o    other events or factors that are unforeseen.


            Our  common  stock  has  traded  on the  American  Stock  Exchange's
Emerging Marketplace under the symbol "HAF.EC" since January 6, 1994. During the
past two years, the price per share of our common stock has ranged from a low of
$0.30 to a high of $1.05. See "Price Range of Common Stock."


SINCE WE DO NOT INTEND TO PAY  DIVIDENDS  ON SHARES OF OUR  COMMON  STOCK IN THE
FORESEEABLE  FUTURE, AN INVESTOR WILL ONLY SEE A RETURN ON HIS INVESTMENT IF THE
VALUE OF THE SHARES APPRECIATES.

            We currently expect to retain our future earnings, if any, to reduce
debt and for use in the operation of our business.  We do not anticipate  paying
any cash  dividends  on shares of our common  stock in the  foreseeable  future.
Therefore,  an investor will only see a return on his investment if the value of
the shares appreciates.


                                   OUR COMPANY

            We engage in the sale of property and casualty  insurance  products.
Our  business  involves (i)  marketing,  underwriting  and premium  financing of
non-standard  personal automobile  insurance primarily in Texas, Arizona and New
Mexico,  (ii)  commercial  insurance  in Texas,  New Mexico,  Idaho,  Oregon and
Washington,  (iii) third party claims  administration  and (iv) other  insurance
related  services.  Our  principal  executive  offices  are  located at 777 Main
Street,  Suite 1000, Fort Worth,  Texas 76102, and our telephone number is (817)
348-1600.


                                 USE OF PROCEEDS


            The gross proceeds from the exercise of the  subscription  rights in
this offering will be approximately  $10.0 million.  We will use the proceeds of
this  offering to fully repay $8.6 million in loans,  plus  accrued  interest on
such loans, made to us by Newcastle.

            On November 1, 2002,  Newcastle  Partners,  L.P. provided an interim
financing facility to us, whereby we could borrow up to $9,000,000.  On November
1, 2002, we borrowed  $6,500,000 to purchase a  $15,000,000  promissory  note in
default, payable by Millers American Group, Inc. The purchase price of such note
receivable was determined by arm's-length negotiations between us and the seller
of the note.  Effective  January 1, 2003,  we exchanged  $7,000,000  of the note

                                       12





receivable  for  100% of the  outstanding  common  stock  of  Phoenix  Indemnity
Insurance  Company, a wholly owned subsidiary of Millers American Group, Inc. We
do not expect to collect any  additional  amounts on the note  receivable due to
the lack of operations of Millers  American Group,  Inc. On December 3, 2002, we
borrowed an additional  $2,100,000 to purchase the  Commercial  Lines Group from
Millers Insurance Company.

            The note agreement provides for a fixed interest rate of 11.75%. The
unpaid  principal  balance and accrued and unpaid interest is due and payable on
demand at any time after September 30, 2003.

            Mark E. Schwarz,  our Chairman and Chief Executive  Officer,  is the
managing member of Newcastle Capital Group, L.L.C., which is the general partner
of Newcastle Capital  Management,  L.P., which in turn is the general partner of
Newcastle Partners, L.P.

            We intend to use the remaining  net proceeds,  if any, as additional
working capital for our business and for other general corporate purposes.


                                 CAPITALIZATION

            The  following  table sets forth our  summary  capitalization  as of
March 31, 2003 on an historical basis and should be read in conjunction with our
financial  statements  and notes  thereto  incorporated  by reference  into this
prospectus.  The table also  includes  our  capitalization  on a pro forma basis
assuming the completion of this offering and the use of the net proceeds for the
repayment  of  the  Newcastle  Notes,  but  prior  to the  use of the  remaining
proceeds. See "Use of Proceeds."

                                                                               Actual        Pro Forma
                                                                               ------        ---------
                                                                          (in thousands) (in thousands)

Cash and cash equivalents ...............................................     $ 26,774      $ 27,336

Total debt (excluding advances for financed premiums)
Short-term debt .........................................................        8,600             0
Long-term debt ..........................................................        1,565         1,565


     Total debt .........................................................     $ 10,165      $  1,565

Stockholders' equity:
      Common stock, $.03 par value, authorized 100,000,000 shares, issued
      11,855,610 ........................................................     $    356        $_____
      Capital in excess of par value ....................................       10,725         _____
      Retained earnings .................................................        7,067         7,067
      Accumulated other comprehensive income
      (loss) ............................................................         (127)         (127)
      Treasury stock, 806,477 shares, at cost ...........................         (892)         (892)

            Total stockholders' equity ..................................       17,129         _____

Total capitalization ....................................................     $ 27,294        $_____

                                       13





                           PRICE RANGE OF COMMON STOCK

            Our common stock has traded on the American Stock Exchange  Emerging
Company  Marketplace under the symbol "HAF.EC" since January 6, 1994. On July 7,
2003,  the closing price of our common stock was $1.03 per share.  The following
table  shows the common  stock's  high and low sales  prices on the AMEX for the
periods indicated.

            Period                       High Sale           Low Sale

            2001:
            -----
            First Quarter                $   0.69             $   0.50
            Second Quarter                   0.65                 0.50
            Third Quarter                    0.61                 0.43
            Fourth Quarter                   0.60                 0.40

            2002:
            -----
            First Quarter                $   0.60             $   0.40
            Second Quarter                   0.60                 0.40
            Third Quarter                    0.54                 0.35
            Fourth Quarter                   0.70                 0.30

            2003:
            -----
            First Quarter                $   0.75             $   0.50
            Second Quarter                   0.95                 0.65
            Third Quarter
             (through July 7)                1.05                 0.87

            On July 7, 2003 there were  approximately  160  record  holders  and
approximately 560 beneficial stockholders of our common stock.

            We have never paid  dividends  on our common  stock and we intend to
continue this policy for the foreseeable  future in order to retain earnings for
development of our business.

                                  THE OFFERING

            Our Board of Directors  has proposed that we attempt to raise equity
capital through this offering to all of our stockholders and to use the proceeds
from the subscription of such rights to repay the Newcastle Notes. Any remaining
proceeds  would be used for  working  capital  purposes.  The Board  declared  a
dividend of rights to purchase  our common stock to holders of record as of June
27, 2003.  Through this  prospectus,  we are offering the shares of common stock
that rights holders may purchase upon exercising such subscription rights.


REASONS FOR THIS OFFERING

            In  approving  this  offering,  our  Board  of  Directors  carefully
considered  our need for  additional  capital  and several  alternative  capital
raising methods,  including a credit facility and a private  placement of equity
securities.  The Board  also  considered  the  potential  change in  control  by
Newcastle and the potential dilution of the ownership  percentage of our current
common stockholders caused by this offering.  While the ownership  percentage of
our current common  stockholders  may decrease,  the Board  considered  that the
magnitude of this dilution would be subject to, and dependent upon, the decision
of each common  stockholder  whether to exercise their  subscription  rights for
additional shares of our common stock in this offering.

            After  weighing the factors  discussed  above and the effect of this
offering of generating  $10.0 million (less expenses related to the offering) in
additional capital for us, the board of directors believes that this offering is
the best  alternative  for capital  raising and is in the best  interests of our
company and our stockholders. As described in "Use of Proceeds," the proceeds of

                                       14





this  offering  are  intended  to be used to repay the  Newcastle  Notes and any
remaining  amounts will be used for additional  working capital for our business
and other general corporate purposes.

            Our Board of Directors  believes that this offering will  ultimately
strengthen our financial condition through generating  additional cash, reducing
our indebtedness, and increasing our stockholders' equity. See "Use of Proceeds"
and  "Capitalization".  However,  our  board  of  directors  is not  making  any
recommendation as to whether you should exercise your subscription rights.

SUBSCRIPTION RIGHTS


            BASIC  SUBSCRIPTION  PRIVILEGE.  We  distributed  to the  holders of
record of our common  stock,  at the close of business on June 27,  2003,  at no
charge,  one  nontransferable  subscription  right for each  share of our common
stock  they  own.   The   subscription   rights  will  be  evidenced  by  rights
certificates.  Each  subscription  right will  entitle  the  holder to  purchase
_______ shares of our common stock.  You are not required to exercise any or all
of your subscription rights.

            If,  pursuant to your  exercise  of your  subscription  rights,  the
number of shares of common  stock you are  entitled to receive  would  result in
your receipt of fractional  shares, the aggregate number of shares issued to you
will be rounded down to the nearest whole  number.  You will not receive cash in
lieu of fractional shares.

            OVER-SUBSCRIPTION  PRIVILEGE.  Subject to the  allocation  described
below,  each subscription  right also grants each subscription  rights holder an
over-subscription  privilege to purchase  additional  shares of our common stock
that are not  purchased  by other  rights  holders  pursuant to the other rights
holders'  basic  subscription  privileges.  You are  entitled to  exercise  your
over-subscription  privilege  only  if  you  exercise  your  basic  subscription
privilege in full.

            If you wish to exercise your over-subscription privilege, you should
indicate the number of additional  shares that you would like to purchase in the
space  provided  on  your  subscription  certificate.  When  you  send  in  your
subscription  certificate,  you must also send the full  purchase  price for the
number of additional  shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares  remaining after the exercise of all basic  subscription
privileges  is not  sufficient  to satisfy all requests  for shares  pursuant to
over-subscription  privileges,  you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased  through the basic  subscription  privilege in proportion to the total
number of  shares  that you and other  over-subscribing  stockholders  purchased
through the basic subscription  privilege.  However, if your pro-rata allocation
exceeds the number of shares you  requested  on your  subscription  certificate,
then you will  receive  only the number of shares  that you  requested,  and the
remaining  shares  from your  pro-rata  allocation  will be divided  among other
rights holders exercising their over-subscription privileges.


            As  soon  as  practicable  after  the  expiration  date,  Securities
Transfer  Corporation,  acting as our  subscription  agent,  will  determine the
number  of  shares  of  common  stock  that  you may  purchase  pursuant  to the
over-subscription  privilege.  You will receive certificates  representing these
shares  as  soon  as  practicable  after  the  expiration  date  and  after  all
pro-rations and adjustments have been effected.  If you request and pay for more
shares than are  allocated  to you, we will  refund  that  overpayment,  without
interest.  In connection with the exercise of the  over-subscription  privilege,
banks,  brokers  and other  nominee  holders of  subscription  rights who act on
behalf  of  beneficial  owners  will be  required  to  certify  to us and to the
subscription  agent as to the aggregate number of subscription  rights that have
been  exercised,  and the  number  of  shares  of  common  stock  that are being
requested through the over-subscription  privilege,  by each beneficial owner on
whose behalf the nominee holder is acting.


SUBSCRIPTION PRICE

            The subscription price for a subscription right is $_____ per share.
The per share price equals ___% of the current  market price of our common stock
determined  by averaging  the closing  price of our common stock on the AMEX for
the ten preceding  trading days ending on ______,  2003. The subscription  price
does not  necessarily  bear any  relationship  to our  past or  expected  future
results of operations,  cash flows,  current financial  condition,  or any other
established  criteria for value. No change will be made to the cash subscription
price by reason of changes in the trading price of our common stock prior to the
closing of this offering.

                                       15





DETERMINATION OF SUBSCRIPTION PRICE

            Our board of directors  set all of the terms and  conditions of this
offering,   including   the   subscription   price,   which  was  based  on  the
recommendation  of a special  committee of directors,  excluding those directors
affiliated  with  Newcastle  who did  not  participate  (in  their  capacity  as
directors)  in the  discussion,  consideration  or voting with  respect to these
matters.  In  establishing  the  subscription  price,  our  board  of  directors
considered the following factors:

            o   strategic alternatives for capital raising,

            o   the market price of our common stock,

            o   the pricing of similar transactions,

            o   the amount of proceeds desired,

            o   our business prospects,

            o   our recent and anticipated operating results, and

            o   general conditions in the securities markets.


            We determined  the ___%  [premium][discount]  to our current  market
price after taking into account the preceding factors. We did not seek or obtain
any opinion of financial  advisors or  investment  bankers in  establishing  the
subscription  price for the offering.  You should not consider the  subscription
price as an  indication  of the value of our  company  or our common  stock.  We
cannot  assure you that you will be able to sell  shares  purchased  during this
offering at a price equal to or greater than the subscription  price. On July 7,
2003, the closing sale price of our common stock was $1.03 per share.


EXPIRATION DATE, EXTENSIONS AND TERMINATION

            You may  exercise  your  subscription  right at any time before 5:00
p.m.,  New York  City  time,  on  ______,  2003,  the  expiration  date for this
offering.  However,  we may  extend the  offering  period  for  exercising  your
subscription  rights  from  time to time in our sole  discretion.  If you do not
exercise your  subscription  rights before the expiration date, your unexercised
subscription  rights will be null and void.  We will not be  obligated  to honor
your exercise of  subscription  rights if the  subscription  agent  receives the
documents  relating to your exercise  after the expiration  date,  regardless of
when you  transmitted  the  documents,  unless you have timely  transmitted  the
documents under the guaranteed delivery procedures described below.

            We have the sole  discretion to extend the expiration date from time
to time by giving oral or written notice to the subscription  agent on or before
the  scheduled  expiration  date.  If we elect to extend the  expiration of this
offering,  we will issue a press release  announcing the extension no later than
9:00 a.m.,  New York City time, on the next business day after the most recently
announced expiration date.

WITHDRAWAL AND AMENDMENT

            We reserve the right to withdraw or terminate  this  offering at any
time for any reason. In the event that this offering is withdrawn or terminated,
all funds received from subscriptions by stockholders will be returned. Interest
will not be payable on any returned funds.

            We reserve the right to amend the terms of this offering. If we make
an amendment that we consider significant, we will:

            o    mail notice of the amendment to all  stockholders  of record as
                 of the record date;

            o    extend the expiration date by at least 10 days; and

            o    offer  all  subscribers  no less  than 10  days to  revoke  any
                 subscription already submitted.

            The extension of the expiration date will not, in and of itself,  be
treated as a significant amendment for these purposes.

                                       16





METHOD OF SUBSCRIPTION - EXERCISE OF SUBSCRIPTION RIGHTS

            You  may  exercise  your  subscription   rights  by  delivering  the
following to the  subscription  agent,  at or prior to 5:00 p.m.,  New York City
time, on ______________, 2003, the date on which the rights expire:

            o    your properly  completed and executed rights  certificate  with
                 any  required   signature   guarantees  or  other  supplemental
                 documentation; and

            o    your full subscription  price payment for each share subscribed
                 for  under  your   basic   subscription   privilege   and  your
                 over-subscription privilege.

You should read and follow the instructions  accompanying the rights certificate
carefully.

SIGNATURE GUARANTEE MAY BE REQUIRED

            Your signature on each rights  certificate  must be guaranteed by an
eligible  institution such as a member firm of a registered  national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States,  subject to standards and procedures  adopted by the subscription
agent, unless:

            o    your  rights  certificate   provides  that  shares  are  to  be
                 delivered to you as record holder of those subscription rights;
                 or

            o    you are an eligible institution.

DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT


            You  should  deliver  your  rights  certificate  and  payment of the
subscription  price or, if  applicable,  notice of guaranteed  delivery,  to the
subscription  agent by mail,  by hand or by  overnight  courier  to:  Securities
Transfer Corporation,  2591 Dallas Parkway,  Suite 102, Frisco, Texas 75034. The
subscription agent's telephone number is (469) 633-0101.

            You are  responsible  for the  method  of  delivery  of your  rights
certificate(s)  with your subscription price payment to the subscription  agent.
If you send your rights  certificate(s)  and subscription price payment by mail,
we recommend  that you send them by  registered  mail,  properly  insured,  with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time this offering expires.

            Do not  send  your  rights  certificate(s)  and  subscription  price
payment to us.  Your  delivery  to an address  other than the  address set forth
above will not constitute valid delivery.

METHOD OF PAYMENT

            Your payment of the subscription  price must be made in U.S. dollars
for  the  full  number  of  shares  of  common  stock  you are  subscribing  (or
over-subscribing) for by either:

            o    check or bank draft (cashier's check) drawn upon a U.S. bank or
                 money order payable to the subscription agent; or

            o    wire  transfer  of   immediately   available   funds,   to  the
                 subscription  account  maintained by the subscription  agent at
                 Wells  Fargo  Bank  Texas,  N.A.,  ABA #  111900659,  Account #
                 9278791711, Account Name: Securities Transfer Corporation Trust
                 Account for Hallmark Financial.

RECEIPT OF PAYMENT

            Your payment will be considered  received by the subscription  agent
only upon:

            o    receipt and clearance of any uncertified check,

            o    receipt by the  subscription  agent of any  certified  check or
                 bank draft drawn upon a United States bank,  any money order or
                 any funds transferred by wire transfers, or

            o    receipt  of good  funds  in the  subscription  agent's  account
                 designated above.

            Please note that funds paid by  uncertified  personal check may take
at least five business days to clear.  Accordingly,  if you wish to pay by means
of an uncertified  personal check,  we urge you to make payment  sufficiently in

                                       17





advance of the expiration  date to ensure that the  subscription  agent receives
cleared funds before that date. We also urge you to consider payment by means of
a certified or cashier's check or money order.

CALCULATION OF SUBSCRIPTION RIGHTS EXERCISED

            If you do not  indicate  the  number of  subscription  rights  being
exercised,  or do not forward full payment of the total  subscription  price for
the number of subscription  rights that you indicate are being  exercised,  then
you will be deemed to have  exercised  your basic  subscription  privilege  with
respect to the maximum number of rights that may be exercised with the aggregate
subscription price payment you delivered to the subscription agent.

YOUR FUNDS WILL BE HELD BY THE  SUBSCRIPTION  AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED

            The  subscription  agent will hold your payment of the  subscription
price payment in a segregated  account with other  payments  received from other
rights  holders  until we issue  your  shares to you.  If this  offering  is not
completed,  or we do not apply  your full  subscription  price  payment  to your
purchase  of shares of our common  stock,  the  subscription  agent will  return
promptly, without interest, all excess subscription payments.

NO REVOCATION

            Once you have exercised your  subscription  privileges,  you may not
revoke your exercise.  Subscription rights not exercised prior to the expiration
date of this offering will expire.

NON-TRANSFERABILITY OF THE SUBSCRIPTION RIGHTS

            Except in the limited  circumstances  described below,  only you may
exercise the basic subscription  privilege and the over-subscription  privilege.
You may not  sell,  give  away or  otherwise  transfer  the  basic  subscription
privilege or the over-subscription privilege.

            Notwithstanding  the foregoing,  you may transfer your rights to any
affiliate of yours and your rights also may be  transferred by operation of law;
for example a transfer of rights to the estate of the  recipient  upon the death
of the recipient would be permitted.  As used in this paragraph, an affiliate of
yours shall mean any person (for this purpose,  a person includes a partnership,
corporation or other legal entity such as a trust or estate) which controls,  is
controlled by or is under common control with you. If the rights are transferred
as permitted,  evidence  satisfactory to us that the transfer was proper must be
received by us prior to the expiration date of this offering.

ISSUANCE OF STOCK CERTIFICATES

            Stock  certificates  for shares  purchased in this  offering will be
issued as soon as practicable after the expiration date. Our subscription  agent
will  deliver  subscription  payments  to us  only  after  consummation  of this
offering  and the  issuance  of  stock  certificates  to our  stockholders  that
exercised rights. Unless you instruct otherwise in your subscription certificate
form, shares purchased by the exercise of subscription rights will be registered
in the name of the person exercising the rights.

GUARANTEED DELIVERY PROCEDURES

            If you wish to exercise  your  subscription  rights,  but you do not
have sufficient time to deliver the rights certificate evidencing your rights to
the subscription  agent on or before the time your  subscription  rights expire,
you may exercise your subscription  rights by the following  guaranteed delivery
procedures:

            o    deliver your subscription  price payment in full for each share
                 you  subscribed for under your  subscription  privileges in the
                 manner set forth in "- Method of Payment"  to the  subscription
                 agent on or prior to the expiration date;

            o    deliver  the form  entitled  "Notice of  Guaranteed  Delivery,"
                 substantially in the form provided with the "Instructions as to
                 Use  of  Rights  Certificates"  distributed  with  your  rights
                 certificates, at or prior to the expiration date; and

            o    deliver the properly  completed rights  certificate  evidencing
                 your rights  being  exercised  and the related  nominee  holder
                 certification,  if  applicable,  with any  required  signatures
                 guaranteed,  to the  subscription  agent within three  business
                 days following the date of your Notice of Guaranteed Delivery.

            Your  Notice  of   Guaranteed   Delivery   must  be   delivered   in
substantially  the same form provided with the  Instructions as to Use of Rights
Certificates,  which will be  distributed  to you with your rights  certificate.

                                       18





Your Notice of Guaranteed  Delivery must come from an eligible  institution,  or
other eligible guarantee  institutions which are members of, or participants in,
a signature guarantee program acceptable to the subscription agent.

            In your Notice of Guaranteed Delivery, you must state:

            o    your name;

            o    the number of  subscription  rights  represented by your rights
                 certificates  and the number of shares of our common  stock you
                 are subscribing (and over-subscribing) for; and

            o    your guarantee that you will deliver to the subscription  agent
                 any rights certificates  evidencing the subscription rights you
                 are  exercising  within three  business days following the date
                 the  subscription  agent  receives  your  Notice of  Guaranteed
                 Delivery.

            You  may  deliver  your  Notice  of   Guaranteed   Delivery  to  the
subscription agent in the same manner as your rights certificates at the address
set forth above  under " - Delivery  of  Subscription  Materials  and  Payment."
Alternatively,  you may  transmit  your  Notice of  Guaranteed  Delivery  to the
subscription agent by facsimile transmission (Facsimile No.: (469) 633-0088). To
confirm facsimile deliveries, you may call (469) 633-0101.

            Please call Timothy A. Bienek , our  President  and Chief  Operating
Officer,  at (817)  348-1600,  to request any  additional  copies of the form of
Notice of Guaranteed Delivery you may need.

DETERMINATIONS REGARDING THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS

            We will decide all questions  concerning the  timeliness,  validity,
form and  eligibility  of your  exercise  of your  subscription  rights  and our
determinations will be final and binding. We, in our sole discretion,  may waive
any defect or  irregularity,  or permit a defect or irregularity to be corrected
within such time as we may determine.  We may reject the exercise of any of your
subscription  rights because of any defect or irregularity.  We will not receive
or accept any subscription  until all  irregularities  have been waived by us or
cured by you within such time as we decide, in our sole discretion.

            Neither  we nor the  subscription  agent  will be under  any duty to
notify you of any defect or  irregularity  in connection with your submission of
rights  certificates  and we will not be liable for failure to notify you of any
defect  or  irregularity.  We  reserve  the  right to reject  your  exercise  of
subscription rights if your exercise is not in accordance with the terms of this
offering or in proper form.  We will also not accept your  exercise of rights if
our issuance of shares of our common stock to you could be deemed unlawful under
applicable law or is materially burdensome to us.

            If you are given notice of a defect in your  subscription,  you will
have five  business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than 5:00 p.m., New York City time,
on _______,  2003. We will not consider an exercise to be made until all defects
have been cured or waived.

NOTICE TO BANKERS, TRUSTEES OR OTHER DEPOSITARIES

            If you are a broker,  a trustee or a depositary  for  securities who
holds  shares  of our  common  stock for the  account  of others at the close of
business on the record date, you should notify the respective  beneficial owners
of such shares of this offering as soon as possible to find out their intentions
with  respect  to  exercising  their  subscription  rights.  You  should  obtain
instructions from the beneficial owners with respect to the subscription rights,
as set forth in the  instructions we have provided to you for your  distribution
to beneficial owners. If the beneficial owner so instructs,  you should complete
the appropriate  rights  certificates and submit them to the subscription  agent
with the proper payment. If you hold shares of our common stock for the accounts
of more than one beneficial  owner,  you may exercise the number of subscription
rights to which all such beneficial owners in the aggregate otherwise would have
been  entitled  had they been direct  record  holders of our common stock on the
record  date,  provided  that you,  as a nominee  record  holder,  make a proper
showing to the  subscription  agent by  submitting  the form  entitled  "Nominee
Holder Certification" which we will provide to you with your offering materials.

                                       19





NOTICE TO BENEFICIAL OWNERS

            If you are a beneficial  owner of shares of our common stock or will
receive  your  subscription  rights  through a broker,  custodian  bank or other
nominee, we will ask your broker,  custodian bank or other nominee to notify you
of this offering.  If you wish to exercise your  subscription  rights,  you will
need to have your broker,  custodian  bank or other  nominee act for you. If you
hold  certificates  of our common  stock  directly and would prefer to have your
broker,  custodian bank or other nominee exercise your subscription  rights, you
should contact your nominee and request it to effect the transaction for you. To
indicate  your  decision with respect to your  subscription  rights,  you should
complete and return to your  broker,  custodian  bank or other  nominee the form
entitled  "Beneficial  Owner  Election  Form." You should receive this form from
your broker,  custodian bank or other nominee with the other offering materials.
If you wish to obtain a separate  rights  certificate,  you should  contact  the
nominee as soon as possible and request that a separate  rights  certificate  be
issued to you.

SHARES OF COMMON STOCK OUTSTANDING AFTER THIS OFFERING

            Upon the  issuance  of the  shares of common  stock  offered in this
offering, _________ shares of common stock will be issued and outstanding.  This
would represent an approximate ___% increase in the number of outstanding shares
of common stock.

EFFECTS OF OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS

            As of July 7, 2003,  there  were  outstanding  options  to  purchase
1,478,500  shares of our common stock issued or committed to be issued  pursuant
to  stock  options  granted  by  us.  None  of  the  outstanding   options  have
anti-dilution  or other provisions for adjustment to exercise price or number of
shares which will be automatically  triggered by this offering. Each outstanding
and  unexercised  option will remain  unchanged and will be exercisable  for the
same number of shares of common stock and at the same  exercise  price as before
this offering.

RELATIONSHIP WITH NEWCASTLE

            On November 1, 2002,  Newcastle  Partners,  L.P. provided an interim
financing facility to us, whereby we could borrow up to $9,000,000.  On November
1, 2002, we borrowed  $6,500,000 to purchase a  $15,000,000  promissory  note in
default, payable by Millers American Group, Inc. The purchase price of such note
receivable was determined by arm's-length negotiations between us and the seller
of the note.  Effective  January 1, 2003,  we exchanged  $7,000,000  of the note
receivable  for  100% of the  outstanding  common  stock  of  Phoenix  Indemnity
Insurance  Company, a wholly owned subsidiary of Millers American Group, Inc. We
do not expect to collect any  additional  amounts on the note  receivable due to
the lack of operations of Millers  American Group,  Inc. On December 3, 2002, we
borrowed an additional  $2,100,000 to purchase the  Commercial  Lines Group from
Millers Insurance Company.

            The note agreement provides for a fixed interest rate of 11.75%. The
unpaid  principal  balance and accrued and unpaid interest is due and payable on
demand at any time after September 30, 2003.

            Mark E. Schwarz,  our Chairman and Chief Executive  Officer,  is the
managing member of Newcastle Capital Group, L.L.C., which is the general partner
of Newcastle Capital  Management,  L.P., which in turn is the general partner of
Newcastle Partners, L.P.

            Newcastle Partners, L.P. also currently owns 5,334,001 shares of our
common stock (including currently  exercisable options to purchase 50,000 shares
of  common  stock),  which is equal to  approximately  42.3% of our  outstanding
shares of common stock. Mark E. Schwarz is deemed to beneficially own all of the
shares owned by Newcastle due to his affiliation  therewith.  Newcastle has been
offered   its  pro  rata   portion  of  the   subscription   rights   (including
over-subscription  privilege).  If our other  stockholders  purchase  all of the
shares offered to them for sale, Newcastle will purchase its pro rata amount and
would  continue to  beneficially  own  approximately  42.3% of our common  stock
outstanding. If no stockholders other than Newcastle exercise their subscription
rights, Newcastle will purchase up to __________ shares in the offering. In that
case,  Newcastle's  ownership  interest  could  be  approximately  __%,  and the
aggregate  ownership  interest  of  the  other  outstanding  stockholders  could
decrease to approximately  __%. Even if some  stockholders  other than Newcastle
exercise  their  rights,  Newcastle  could  still  obtain a  majority  ownership
interest pursuant to its subscription  rights.  As a result,  Newcastle may have
the voting  power to control  the  election  of our board of  directors  and the

                                       20





approval of other matters presented for consideration by the stockholders, which
could  include  mergers,  acquisitions,  amendments  to our  charter and various
corporate governance actions.

SUBSCRIPTION AGENT

            We have appointed Securities  Transfers  Corporation as subscription
agent  for this  offering.  We will pay the fees  and  certain  expenses  of the
subscription  agent, which we estimate will total  approximately  $5,000.  Under
certain  circumstances,  we may  indemnify the  subscription  agent from certain
liabilities that may arise in connection with this offering.

FEES AND EXPENSES

            Other  than  for  fees  charged  by the  information  agent  and the
subscription agent, you are responsible for paying any other commissions,  fees,
taxes or  other  expenses  incurred  in  connection  with  the  exercise  of the
subscription  rights.  Neither us, the  information  agent nor the  subscription
agent will pay such expenses.

OTHER MATTERS

            We are not making this  offering in any state or other  jurisdiction
in which it is unlawful to do so, nor are we selling or accepting  any offers to
purchase any shares of our common stock from rights holders who are residents of
those  states or other  jurisdictions.  We may delay  the  commencement  of this
offering  in those  states or other  jurisdictions,  or change the terms of this
offering,  in order to comply  with the  securities  law  requirements  of those
states or other jurisdictions. We may decline to make modifications to the terms
of this  offering  requested  by those states or other  jurisdictions,  in which
case,  if you are a resident in those states or  jurisdictions,  you will not be
eligible to participate in this offering.

            We will not be  required  to issue to you  shares  of  common  stock
pursuant to this  offering if, in our  opinion,  you would be required to obtain
prior  clearance or approval from any state or federal  regulatory  authority to
own or control such shares if, at the time the subscription  rights expire,  you
have not obtained such clearance or approval.

NO BOARD RECOMMENDATION

            An investment  in shares of our common stock must be made  according
to each investor's evaluation of its own best interests.  Accordingly, our board
of directors makes no  recommendation  to rights holders  regarding whether they
should exercise their subscription rights.

IF YOU HAVE QUESTIONS ABOUT EXERCISING RIGHTS

            If you have  questions or need  assistance  concerning the procedure
for exercising  subscription  rights,  or if you would like additional copies of
this prospectus, the Instructions as to Use of Rights Certificates or the Notice
of Guaranteed Delivery,  you should contact Timothy A. Bienek, our President and
Chief Operating Officer,  or the subscription  agent at the following  addresses
and telephone numbers:

                                       21





                                Timothy A. Bienek
                        Hallmark Financial Services, Inc.
                           777 Main Street, Suite 1000
                             Fort Worth, Texas 76201
                            Telephone: (817) 348-1600

                                       or

                             The Subscription Agent:
                         Securities Transfer Corporation
                         2591 Dallas Parkway, Suite 102
                               Frisco, Texas 75034
                            Telephone: (469) 633-0101


             MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

            The following  discussion is a summary of the material U.S.  federal
income tax  consequences  of (i) the  dividend by us of  subscription  rights to
holders  of common  stock that hold such  stock as a capital  asset for  federal
income tax purposes,  and (ii) the exercise of such rights.  This  discussion is
based on laws, regulations,  rulings and decisions in effect on the date of this
prospectus,  all of which are  subject  to  change  (possibly  with  retroactive
effect)  and to  differing  interpretations.  This  discussion  applies  only to
holders that are U.S. persons,  which is defined as a citizen or resident of the
United States, a domestic partnership, a domestic corporation, any estate (other
than a foreign  estate),  and any  trust so long as a court  within  the  United
States is able to exercise primary  supervision over the  administration  of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust. Generally,  for federal income tax purposes an estate is
classified as a "foreign estate" based on the location of the estate assets, the
country of the estate's  domiciliary  administration,  and the  nationality  and
residency of the domiciliary's personal representative.

            This  discussion  does not  address  all  aspects of federal  income
taxation  that  may  be  relevant  to  holders  in  light  of  their  particular
circumstances  or to holders who may be subject to special tax  treatment  under
the Internal Revenue Code of 1986, as amended,  including  holders of options or
warrants,  holders who are dealers in  securities or foreign  currency,  foreign
persons (defined as all persons other than U.S. persons),  insurance  companies,
tax-exempt organizations, banks, financial institutions, broker-dealers, holders
who hold common  stock as part of a hedge,  straddle,  conversion  or other risk
reduction transaction,  or who acquired common stock pursuant to the exercise of
compensatory stock options or warrants or otherwise as compensation.

            We have not  sought,  and will not seek,  an opinion of counsel or a
ruling from the  Internal  Revenue  Service  regarding  the  federal  income tax
consequences  of the  distribution  of the rights or the related share issuance.
The following  summary does not address the tax consequences of the distribution
of the rights or the related share issuance under foreign,  state,  or local tax
laws.  ACCORDINGLY,  EACH  HOLDER OF COMMON  STOCK  SHOULD  CONSULT  ITS OWN TAX
ADVISOR WITH RESPECT TO THE PARTICULAR TAX  CONSEQUENCES OF THE  DISTRIBUTION OF
THE RIGHTS OR THE RELATED SHARE ISSUANCE TO SUCH HOLDER.

                                       22





            The federal income tax  consequences for a holder of common stock on
the  receipt of  subscription  rights  and the  exercise  of such  rights are as
follows:

            o    A holder will not recognize  taxable  income for federal income
                 tax  purposes in  connection  with the receipt of  subscription
                 rights.

            o    Except as provided in the following sentence,  the tax basis of
                 the  subscription  rights received by a holder will be zero. If
                 either (i) the fair market value of the subscription  rights on
                 the date such  subscription  rights are distributed is equal to
                 at least  15% of the  fair  market  value  on such  date of the
                 common stock with respect to which the subscription  rights are
                 received or (ii) the holder irrevocably  elects, by attaching a
                 statement to its federal income tax return for the taxable year
                 in which the subscription rights are received, to allocate part
                 of the tax  basis  of such  common  stock  to the  subscription
                 rights,  then upon  exercise of the  subscription  rights,  the
                 holder's  tax  basis  in the  common  stock  will be  allocated
                 between  the  common  stock  and  the  subscription  rights  in
                 proportion to their  respective  fair market values on the date
                 the  subscription  rights are  distributed.  A holder's holding
                 period for the  subscription  rights  received will include the
                 holder's  holding  period for the common  stock with respect to
                 which the  subscription  rights were received.  We believe that
                 the fair  market  value  of the  subscription  rights  will not
                 exceed  15% of the fair  market  value of the  common  stock to
                 which the subscription rights relate.

            o    A holder that allows the subscription rights received to expire
                 will not recognize  any gain or loss,  and the tax basis of the
                 common  stock owned by such  holder with  respect to which such
                 subscription  rights were  distributed will be equal to the tax
                 basis of such common  stock  immediately  before the receipt of
                 the subscription rights.

            o    A holder will not  recognize any gain or loss upon the exercise
                 of the subscription rights.

            o    The tax basis of the common stock acquired  through exercise of
                 the subscription  rights will equal the sum of the subscription
                 price for the common stock and the holder's tax basis,  if any,
                 in the subscription rights as described above.

            o    The  holding  period  for the  common  stock  acquired  through
                 exercise of the subscription  rights will begin on the date the
                 subscription rights are exercised.

                              PLAN OF DISTRIBUTION

            We are offering the shares of our common stock underlying the rights
directly to you. We have not employed any brokers,  dealers or  underwriters  in
connection  with the  solicitation  or exercise of  subscription  rights in this
offering and no  commissions,  fees or discounts will be paid in connection with
this offering.  Securities  Transfer  Corporation is acting as our  subscription
agent to effect the  exercise of the rights and the  issuance of the  underlying
shares  of  common  stock.  Therefore,  we  anticipate  that our  officers'  and
employees' role will be limited to:

            o    Responding to inquiries of potential  purchasers,  provided the
                 response   is  limited   to   information   contained   in  the
                 registration statement of which this prospectus is a part; and

            o    Ministerial   and   clerical   work   involved   in   effecting
                 transactions  pertaining  to  the  sale  of  the  common  stock
                 underlying the rights.

            We intend to  distribute  and deliver this  prospectus by hand or by
mail  only,  and not by  electronic  delivery.  Also,  we intend to use  printed
prospectuses only, and not any other forms of prospectus.


            We have distributed to the holders of record of our common stock, at
the close of  business  on June 27,  2003,  at no  charge,  one  nontransferable
subscription   right  for  each  share  of  our  common  stock  they  own.  Each
subscription  right is a right to purchase  ____ shares of our common  stock and
carries  with  it  a  basic  subscription  privilege  and  an  over-subscription
privilege.  The basic  subscription  privilege  of each  right  entitles  you to
purchase _____ shares of our common stock at a subscription  price of $_____ per
share.  You may  exercise  any number of your  subscription  rights,  or you may
choose not to exercise  any  subscription  rights.  We will not  distribute  any

                                       23





fractional shares or pay cash in lieu of fractional  shares, but will round down
the aggregate  number of shares you are entitled to receive to the nearest whole
number.

            We do not expect that all of our  stockholders  will exercise all of
their basic subscription privileges. By extending  over-subscription  privileges
to our  stockholders,  we are providing  stockholders that exercise all of their
basic subscription privileges with the opportunity to purchase those shares that
are not purchased by other stockholders.

            If you wish to exercise your over-subscription privilege, you should
indicate the number of additional  shares that you would like to purchase in the
space  provided  on  your  subscription  certificate.  When  you  send  in  your
subscription  certificate,  you must also send the full  purchase  price for the
number of additional  shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares  remaining after the exercise of all basic  subscription
privileges  is not  sufficient  to satisfy all requests  for shares  pursuant to
over-subscription  privileges,  you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased  through the basic  subscription  privilege in proportion to the total
number of  shares  that you and other  over-subscribing  stockholders  purchased
through the basic subscription  privilege.  However, if your pro-rata allocation
exceeds the number of shares you  requested  on your  subscription  certificate,
then you will  receive  only the number of shares  that you  requested,  and the
remaining  shares  from your  pro-rata  allocation  will be divided  among other
rights holders exercising their over-subscription privileges.


            As  soon  as  practicable  after  the  expiration  date,  Securities
Transfer  Corporation,  acting as our subscription  agent, and we will determine
the  number of shares of common  stock  that you may  purchase  pursuant  to the
over-subscription  privilege.  You will receive certificates  representing these
shares as soon as practicable  after the expiration date. If you request and pay
for more shares  than are  allocated  to you,  we will refund that  overpayment,
without  interest.  In  connection  with the  exercise of the  over-subscription
privilege,  banks,  brokers and other nominee holders of subscription rights who
act on behalf of beneficial  owners will be required to certify to us and to the
subscription  agent as to the aggregate number of subscription  rights that have
been  exercised,  and the  number  of  shares  of  common  stock  that are being
requested through the over-subscription  privilege,  by each beneficial owner on
whose behalf the nominee holder is acting.

            We will pay Securities Transfer Corporation, the subscription agent,
a fee of approximately $5,000 plus expenses, for its services in connection with
this offering.  We also have agreed to indemnify under certain circumstances the
subscription  agent  from any  liability  it may incur in  connection  with this
offering.

            We expect that shares of our common  stock  issued upon the exercise
of  subscription  rights will be traded on the American Stock Exchange  Emerging
Company  Marketplace  under the symbol  "HAF.EC,"  the same symbol our currently
outstanding shares of common stock now trade.


                                  LEGAL MATTERS

            The validity of the shares of common stock offered  hereby,  and the
description in this  prospectus of the U.S.  federal income tax  consequences of
this offering,  will be passed upon for us by Olshan Grundman Frome Rosenzweig &
Wolosky LLP, New York, New York.


                                     EXPERTS

            The  consolidated   financial   statements  of  Hallmark   Financial
Services,  Inc.  at December  31,  2002 and 2001,  and for the years then ended,
appearing  in our annual  report on Form 10-KSB for the year ended  December 31,
2002 have been audited by  PricewaterhouseCoopers  LLP, independent accountants,
as set  forth  in their  report  thereon  included  therein.  Such  consolidated
financial  statements are incorporated herein by reference in reliance upon such
report  given  on the  authority  of such  firm as  experts  in  accounting  and
auditing.

                                       24





                                MATERIAL CHANGES

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

                       WHERE YOU CAN FIND MORE INFORMATION

            We are subject to the  informational  requirements of the Securities
Exchange Act of 1934.  Accordingly,  we file reports, proxy statements and other
information  with the SEC. You may read and copy any materials that we file with
the  SEC  at  the  SEC's  Public  Reference  Room  at 450  Fifth  Street,  N.W.,
Washington,  D.C.  20549 upon  payment of the  prescribed  fees.  You may obtain
information on the operation of the Public  Reference Room by calling the SEC at
1-800-SEC-0330.  The SEC also maintains an Internet site that contains  reports,
proxy and information  statements and other materials that are filed through the
SEC's Electronic Data Gathering,  Analysis, and Retrieval, or EDGAR, system. You
can access this web site at  HTTP://WWW.SEC.GOV.  Our common  stock is listed on
the American Stock  Exchange  Emerging  Capital  Markets.  These reports,  proxy
statements and other  information  can also be read and copied at the offices of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006.

            The SEC allows us to  "incorporate  by reference" the information we
file with the SEC. This permits us to disclose  important  information to you by
referencing  these  filed  documents.  Any  information  referenced  this way is
considered part of this prospectus, and any information filed with the SEC after
the date on the cover of this prospectus will  automatically be deemed to update
and supercede this information. We incorporate by reference the documents listed
below and any future  filings made by us with the SEC file number  0-16090 under
Sections  13(a),  13(c),  14 or 15(d) of the Exchange  Act of 1934,  as amended,
until all of the securities described in this prospectus are sold:

            o    our annual  report on Form  10-KSB for the year ended  December
                 31, 2002,

            o    our quarterly  report on Form 10-QSB for the period ended March
                 31, 2003,

            o    our current report on Form 8-K, filed on January 29, 2003,

            o    our current report on Form 8-K/A, filed on February 14, 2003,

            o    our current report on Form 8-K/A, filed on April 14, 2003,

            o    our current report on Form 8-K/A, filed on May 13, 2003,

            o    our current report of Form 8-K, filed on June 17, 2003, and

            o    the   description   of  our  common  stock   contained  in  our
                 resignation statement on Form 8-A filed with the SEC on July 8,
                 1992,  including all  amendments and reports filed for purposes
                 of updating such description.

            This  prospectus is part of a registration  statement filed with the
SEC.  This  prospectus  does not contain all the  information  contained  in the
registration statement. The full registration statement can be obtained from the
SEC.  This  prospectus  contains a general  description  of our  company and the
securities being offered for sale. You should read this prospectus together with
the additional information incorporated by reference.

                                       25





            You can request a copy of any document  incorporated by reference in
this prospectus, at no cost, by writing or telephoning us at the following:


                        Hallmark Financial Services, Inc.
                           777 Main Street, Suite 1000
                             Fort Worth, Texas 76201
                 Attention: Timothy A. Bienek, President and COO
                            Telephone: (817) 348-1600


                           FORWARD-LOOKING STATEMENTS

            We believe that certain  statements  contained  or  incorporated  by
reference in this prospectus are "forward-looking statements" within the meaning
of the  Private  Securities  Litigation  Reform  Act of 1995 and are  considered
prospective.  The following  statements  are or may  constitute  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995:

            o    statements before,  after or including the words "may," "will,"
                 "could," "should," "believe," "expect," "future,"  "potential,"
                 "anticipate," "intend," "plan," "estimate" or "continue" or the
                 negative or other variations of these words, and

            o    other statements about matters that are not historical facts.

            We may be  unable to  achieve  the  future  results  covered  by the
forward-looking  statements.  The statements are subject to risks, uncertainties
and other factors that could cause actual results to differ  materially from the
future results that the statements  express or imply. See "Risk Factors" on page
6. Please do not put undue reliance on these forward-looking  statements,  which
speak only as of the date of this prospectus.

                                       26





                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14.       OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

            The following is an itemization  of all expenses  (subject to future
contingencies)  incurred or to be incurred by us in connection with the issuance
and distribution of the securities being offered.  All items below are estimates
other than the Securities and Exchange Commission  registration fee and the AMEX
listing fee. Hallmark Financial Services, Inc. will pay all of such expenses.


            Securities and Exchange Commission registration fee        $  809.00
            AMEX listing fee.........................................  22,500.00
            Printing and engraving expenses..........................   1,000.00
            Accounting fees and expenses.............................  10,000.00
            Legal fees and expenses..................................  60,000.00
            Subscription Agent fees and expenses.....................   5,000.00
            Miscellaneous............................................     691.00
                                                                     ------------
                        Total........................................$100,000.00
                                                                     ============

* To be completed by amendment.

ITEM 15.    INDEMNIFICATION OF DIRECTORS AND OFFICERS.

            The Nevada General Corporation Law ("NGCL") provides that a director
or officer of a corporation  will not be personally  liable for monetary damages
for breach of that individual's fiduciary duties as a director or officer except
for  liability  for (1) any act or omission  constituting  a breach of fiduciary
duties as a director  or officer  and when (2) breach of those  duties  involved
intentional  misconduct,  fraud or a knowing violation of law. Under the NGCL, a
corporation may indemnify directors and officers, as well as other employees and
individuals, to any threatened, pending or completed action, suit or proceeding,
except an action  by or in the right of the  corporation,  by reason of the fact
that he is or was a director, officer, employee or agent of the corporation. The
termination of any action,  suit or proceeding by judgment,  order,  settlement,
conviction  or upon a plea of nolo  contendere or its  equivalent,  does not, of
itself,  create a presumption that the person did not act in good faith and in a
manner  which  he  reasonably  believed  to be in or not  opposed  to  the  best
interests of the  corporation,  or that,  with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.

            The NGCL further provides that  indemnification  may not be made for
any claim as to which such a person has been  adjudged  by a court of  competent
jurisdiction,  after  exhaustion of all appeals  therefrom,  to be liable to the
corporation  or for amounts paid in  settlement to the  corporation,  unless and
only to the  extent  that the court in which the  action or suit was  brought or

                                      II-1





other court of competent  jurisdiction  determines upon application that in view
of all the  circumstances  of the case,  the  person is  fairly  and  reasonably
entitled to indemnity for such expenses as the court deems proper. To the extent
that a director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any action,  suit or  proceeding  or in
defense of any claim,  issue or matter therein,  the corporation shall indemnify
him  against  expenses,  including  attorneys'  fees,  actually  and  reasonably
incurred by him in connection  with the defense.  The NGCL provides that this is
not  exclusive of other  rights to which those  seeking  indemnification  may be
entitled  under any bylaw,  agreement,  vote of  stockholders  or  disinterested
directors or otherwise.

            The  Registrant's   articles  of  incorporation   provide  that  the
directors and officers will not be  personally  liable to the  Registrant or its
stockholders  for  monetary  damages  for  breach of their  fiduciary  duty as a
director or officer,  except for  liability of a director or officer for acts or
omissions involving intentional misconduct, fraud or a knowing violation of law,
or the payment of dividends in violation of the NGCL.  The  Registrant's  bylaws
provide that the  Registrant is required to indemnify its directors and officers
to the fullest extent permitted by law. The Registrant's bylaws also require the
Registrant to advance  expenses  incurred by a director or officer in connection
with the  defense of any  proceeding  upon  receipt of an  undertaking  by or on
behalf  of the  director  or  officer  to repay the  amount if it is  ultimately
determined by a court of competent  jurisdiction  that he or she is not entitled
to be indemnified by the  Registrant.  The  Registrant's  bylaws also permit the
Registrant to purchase and maintain errors and omissions  insurance on behalf of
any director or officer for any liability arising out of his or her actions in a
representative capacity.

ITEM 16.       EXHIBITS.

Exhibit #      Description

3.1            Articles  of   Incorporation   of  the  Registrant,   as  amended
               (incorporated  by reference  to Exhibit 3(a) to the  Registrant's
               Annual  Report on Form 10-KSB for the fiscal year ended  December
               31, 1993).

3.2            By-Laws of the Registrant,  as amended (incorporated by reference
               to Exhibit 3(b) to the Registrant's  Annual Report on Form 10-KSB
               for the fiscal year ended December 31, 1993).

4.1            Specimen  certificate  for Common Stock,  $.03 par value,  of the
               Registrant  (incorporated  by  reference  to  Exhibit  4  to  the
               Registrant's  Annual  Report on Form  10-KSB for the fiscal  year
               ended December 31, 1991).

4.2*           Form of Subscription Rights Certificate.

5.1**          Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.

23.1**         Consent of PricewaterhouseCoopers LLP.

23.2**         Consent of Deloitte & Touche LLP.

23.3**         Consent  of  Olshan  Grundman  Frome  Rosenzweig  &  Wolosky  LLP
               (included  in  opinion  filed as  Exhibit  5.1).

24.1*          Power of Attorney (included on signature page hereto).

99.1*          Form of Instructions as to Use of Rights Certificates.

99.2*          Form of Notice of Guaranteed Delivery for Rights Certificates.

99.3*          Form of Letter to Security Holders Who Are Record Holders.

99.4*          Form of Letter to Securities  Dealers,  Commercial  Banks,  Trust
               Companies and Other Nominees.

99.5*          Form of Letter to Clients of Security  Holders Who Are Beneficial
               Holders.

                                      II-2





99.6*          Form of Nominee Holder Certification Form.

99.7*          Beneficial Owner Election Form.

99.8*          Substitute Form W-9 (including  Guidelines for  Certification  of
               Taxpayer Identification Number on Substitute Form W-9).

99.9**         Form of Subscription  Agency Agreement between Hallmark Financial
               Services, Inc. and Securities Transfer Corporation.

------------------------

*        Previously filed
**       Filed herewith


ITEM 17.       UNDERTAKINGS.

            (a) The undersigned Registrant hereby undertakes:

                        (1) To file,  during any period in which offers or sales
            are being made,  a  post-effective  amendment  to this  Registration
            Statement  to include any material  information  with respect to the
            plan of distribution  not previously  disclosed in the  Registration
            Statement  or  any  material  change  to  such  information  in  the
            Registration Statement;

                        (2) That, for the purpose of  determining  any liability
            under the  Securities  Act of 1933,  each  post-effective  amendment
            shall be deemed to be a new registration  statement  relating to the
            securities  offered therein,  and the offering of such securities at
            that  time  shall be  deemed to be the  initial  bona fide  offering
            thereof; and

                        (3)  To  remove   from   registration   by  means  of  a
            post-effective  amendment  any of the  securities  being  registered
            which remain unsold at the termination of the offering.

            (b) The undersigned  registrant hereby undertakes that, for purposes
of determining  any liability  under the Securities Act of 1933,  each filing of
the  registrant's  annual  report  pursuant  to  Section  13(a)  or 15(d) of the
Securities  Exchange  Act of 1934  (and,  where  applicable,  each  filing of an
employee  benefit  plan's  annual  report  pursuant  to  Section  15(d)  of  the
Securities  Exchange  Act of 1934) that is  incorporated  by  reference  in this
Registration  Statement  shall  be  deemed  to be a new  registration  statement
relating to the securities offered therein,  and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

            (c) Insofar as  indemnification  for  liabilities  arising under the
Securities Act of 1933 may be permitted to directors,  officers and  controlling
persons of the Registrant  pursuant to the foregoing  provisions,  or otherwise,
the  Registrant  has been  advised  that in the  opinion of the  Securities  and
Exchange  Commission such  indemnification is against public policy as expressed
in the Act and is,  therefore,  unenforceable.  In the  event  that a claim  for
indemnification  against  such  liabilities  (other  than  the  payment  by  the
Registrant of expenses  incurred or paid by a director,  officer or  controlling
person  of the  Registrant  in the  successful  defense  of an  action,  suit or
proceeding)  is  asserted by such  director,  officer or  controlling  person in
connection with the securities being registered,  the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

                                      II-3





                                   SIGNATURES

            Pursuant to the  requirements  of the  Securities  Act of 1933,  the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the  requirements  for filing on Form S-3 and has duly caused this  Amendment
No.  2 to  the  Registration  Statement  to be  signed  on  its  behalf  by  the
undersigned,  thereunto duly authorized,  in the City of Dallas, State of Texas,
on the 8th day of July, 2003.

                                       HALLMARK FINANCIAL SERVICES, INC.




                                       By: /s/ Mark E. Schwarz
                                           -------------------------------------
                                           Mark E. Schwarz
                                           Chairman and Chief Executive Officer


            Pursuant to the  requirements  of the Securities  Act of 1933,  this
Amendment No. 2 to the  Registration  Statement has been signed by the following
persons in the capacities and on the dates indicated:

Signature                      Title                           Date
---------                      -----                           ----


/s/ Mark E. Schwarz            Chairman, Chief Executive       July 8, 2003
--------------------           Officer and Director
Mark E. Schwarz                (principal executive officer)


     *                         President, Chief Operating      July 8, 2003
--------------------           Officer and Director
Timothy A. Bienek


     *                         Vice President (principal      July 8, 2003
--------------------           financial and accounting
Scott K. Billings              officer)

     *                         Director                       July 8, 2003
-------------------
James H. Graves

     *                         Director                       July 8, 2003
-------------------
George R. Manser

     *                         Director                       July 8, 2003
-------------------
Scott T. Berlin

                                      II-4





                               Director                       July __, 2003
-------------------
James C. Epstein


   *  Executed by Mark E. Schwarz, as attorney-in-fact


                                      II-5