SCHEDULE 14A
                               (Rule 14a-101)

                    INFORMATION REQUIRED IN PROXY STATEMENT

                           SCHEDULE 14A INFORMATION

  Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
                        of 1934 (Amendment No.         )

  Filed by Registrant  [X]
  Filed by a Party other than the Registrant [ ]
  Check the appropriate box:
  [ ]  Preliminary Proxy Statement
  [ ]  Confidential, for Use of the Commission Only (as permitted by
        Rule 14a-6(e) (2))
  [X]  Definitive Proxy Statement
  [ ]  Definitive Additional Materials
  [ ]  Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12


               (Name of Registrant as Specified In Its Charter)

                       HALLMARK FINANCIAL SERVICES, INC.
  ___________________________________________________________________________
   (Name of Person(s) Filing Proxy Statement, If Other Than the Registrant)

  Payment of Filing Fee (Check the appropriate box):
  [X]  No fee required.
  [ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

       (1) Title of each class of securities to which transaction applies:
  ___________________________________________________________________________
       (2) Aggregate numer of securities to which transactions applies:
  ___________________________________________________________________________
       (3) Per unit price or other underlying value of transaction computed
       pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
       the filing fee is calculated and state how it was determined):
  ___________________________________________________________________________
       (4) Proposed maximum aggregate value of transaction:
  ___________________________________________________________________________
       (5) Total Fee Paid
  ___________________________________________________________________________
  [ ]  Fee paid previously with preliminary materials.
  [ ]  Check box if any part of the fee is offset as provided by Exchange
       Act Rule 0-11(a)(2) and identify the filing for which the offsetting
       fee was paid previously.  Identify the previous filing by registration
       statement number, or the Form or Schedule and the date of its filing.
  ___________________________________________________________________________
       (1) Amount Previously Paid:
  ___________________________________________________________________________
       (2) Form, Schedule or Registration Statement No:
  ___________________________________________________________________________
       (3) Filing Party:
  ___________________________________________________________________________
       (4) Date Filed:
  ___________________________________________________________________________



                      HALLMARK FINANCIAL SERVICES, INC.
                        777 Main Street, Suite 1000
                           Fort Worth, Texas 76102


                   NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

                           TO BE HELD MAY 25, 2006


 To Our Shareholders:

      NOTICE IS HEREBY GIVEN that the 2006 Annual Meeting of Shareholders  of
 Hallmark Financial Services,  Inc. (the "Company")  will be  held at  Carter
 Burgess Plaza, 777 Main Street, 11th Floor, Fort Worth, Texas, at 9:00 a.m.,
 Central  Daylight  Time,  on  Thursday,  May 25,  2006,  for  the  following
 purposes:

      1.   To elect four directors to serve until the next annual meeting  of
           shareholders or  until  their  successors  are  duly  elected  and
           qualified;

      2.   To approve an amendment  to the Articles  of Incorporation of  the
           Company to increase  the authorized capital  stock of the  Company
           from 100,000,000 shares of Common  Stock to 200,000,000 shares  of
           Common Stock;

      3.   To  approve  permitting   the  conversion  of   an  aggregate   of
           $25,000,000 of  subordinated  convertible  promissory  notes  into
           shares of the Common Stock of the Company; and

      4.   To transact such other business that may properly come before  the
           meeting or any adjournment thereof.

      Shareholders of record at the close of business on April 13, 2006,  are
 entitled to notice of and to vote  at the Annual Meeting or any  adjournment
 thereof.

      All shareholders of  the Company are  cordially invited  to attend  the
 Annual Meeting.

                               BY ORDER OF THE BOARD OF DIRECTORS


                               /s/ Cecil R. Wise
                               ------------------------
                               Cecil R. Wise, Secretary

 Dated: April 19, 2006


      WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE
 ENCLOSED  PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED STAMPED ENVELOPE.  IF
 YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON.



                      HALLMARK FINANCIAL SERVICES, INC.
                         777 Main Street, Suite 1000
                           Fort Worth, Texas 76102


                               PROXY STATEMENT

                                     FOR

                        ANNUAL MEETING OF SHAREHOLDERS

                           TO BE HELD MAY 25, 2006

                           _______________________


                   SOLICITATION AND REVOCABILITY OF PROXIES

      This Proxy Statement is furnished  in connection with the  solicitation
 of proxies by  the Board of  Directors (the "Board")  of Hallmark  Financial
 Services, Inc., a  Nevada corporation (the  "Company"), to be  voted at  the
 2006 Annual Meeting  of Shareholders (the  "Annual Meeting") to  be held  on
 Thursday, May 25, 2006, at the time and place and for the purposes set forth
 in the accompanying Notice of Annual Meeting of Shareholders (the "Notice"),
 and at any adjournment thereof.  When proxies  in the accompanying form  are
 properly executed and received, the shares represented thereby will be voted
 at the Annual Meeting in accordance  with the directions  noted thereon.  If
 no direction is indicated on the proxy, the shares represented thereby  will
 be voted for the election of each of the nominees for director, in favor  of
 amending the Articles  of Incorporation to  increase the authorized  capital
 stock of  the Company,  in favor  of permitting  the conversion  of  certain
 subordinated convertible  promissory notes,  and in  the discretion  of  the
 proxy holder on any other matter that may properly come before the meeting.

      Submitting a proxy  will not affect  a shareholder's right  to vote  in
 person at the Annual Meeting.  Any shareholder who gives a proxy may  revoke
 it at  any time  before it  is  exercised by  delivering written  notice  of
 revocation to the Company, by substituting  a new proxy executed on a  later
 date, or by making a  written request in person  at the Annual Meeting  that
 the proxy be returned.  However,  mere attendance at the Annual Meeting will
 not revoke the proxy.

      All expenses of preparing, assembling and mailing this Proxy  Statement
 and the enclosed materials and all costs of soliciting proxies will be  paid
 by the  Company.   In  addition  to solicitation  by  mail, proxies  may  be
 solicited by officers and regular employees  of the Company by telephone  or
 in  person.  Such officers  and  employees who solicit proxies will  receive
 no compensation  for  their  services  other  than  their  regular salaries.
 Arrangements will also be made with  brokerage houses and other  custodians,
 nominees and fiduciaries to forward solicitation materials to the beneficial
 owners of  shares  they  hold,  and  the  Company  may  reimburse  them  for
 reasonable out-of-pocket expenses they incur in forwarding these materials.

      The principal executive offices of the Company are located at 777  Main
 Street, Suite 1000, Fort Worth, Texas 76102.  The Company's mailing  address
 is the same as that of its principal executive offices.

      This Proxy Statement and the accompanying form of proxy are first being
 mailed or given to shareholders on or about April 19, 2006.  A  copy  of the
 Company's Annual Report  for the  fiscal year  ended  December 31, 2005,  is
 enclosed herewith.   Except as expressly  incorporated by reference  herein,
 such Annual Report does not constitute a part of the materials used for  the
 solicitation of proxies.

                           PURPOSES OF THE MEETING

      At the Annual Meeting,  the shareholders of  the Company will  consider
 and vote on the following matters:

           1.   Election of four  directors to  serve until  the next  annual
      meeting of shareholders or until their successors are duly elected  and
      qualified;

           2.   Approval of an amendment to the Articles of Incorporation  of
      the Company to  increase the authorized  capital stock  of the  Company
      from 100,000,000 shares of Common Stock to 200,000,000 shares of Common
      Stock;

           3.   Approval for  permitting the  conversion of  an aggregate  of
      $25,000,000 of subordinated convertible promissory notes into shares of
      the Common Stock of the Company; and

           4.   Transaction of  such  other  business as  may  properly  come
      before the meeting or any adjournment thereof.


                              QUORUM AND VOTING

      The record  date  for the  determination  of shareholders  entitled  to
 notice of and to  vote at the Annual  Meeting was the  close of business  on
 April 13, 2006  (the  "Record  Date").   On  the  Record  Date,  there  were
 86,909,647 shares  of  common stock  of the  Company,  par  value $0.03  per
 share (the  "Common  Stock"),  issued and  outstanding,  each  of  which  is
 entitled to one vote on all matters to be acted upon at the Annual  Meeting.
 There  are  no cumulative  voting rights.   The  presence, in  person or  by
 proxy, of holders  of one-third of  the outstanding shares  of Common  Stock
 entitled to  vote at  the meeting  is necessary  to constitute  a quorum  to
 transact business.   Assuming the presence  of a quorum,  directors will  be
 elected by a plurality of the votes cast.  Approval of the proposed increase
 in the authorized capital stock of the Company will require the  affirmative
 vote of the holders of  a majority of the  issued and outstanding shares  of
 the Common Stock.  The affirmative vote of the holders of a majority of  the
 shares of Common Stock actually voted  will be required for the approval  of
 all other matters to come before the Annual Meeting.

      Abstentions and broker non-votes will be counted solely for purposes of
 determining whether a quorum is present at the Annual Meeting.  Pursuant  to
 the Bylaws of  the Company,  abstentions and  broker non-votes  will not  be
 counted in determining the number of shares voted on any matter.  Therefore,
 abstentions and broker non-votes will have the effect of a vote against  the
 proposed increase in the authorized capital  stock of the Company, but  will
 have no effect on  the election of  directors or the  approval of any  other
 proposal submitted to a vote of the shareholders at the Annual Meeting.


                            ELECTION OF DIRECTORS
                                   (Item 1)

      At the  Annual Meeting,  four  directors will  be  elected for  a  term
 expiring at the 2007  annual meeting of the  Company's shareholders or  when
 their successors are elected  and qualify.  Directors  will be elected by  a
 plurality of the votes cast at the Annual Meeting.  Cumulative voting is not
 permitted in the election of directors.

      The Board has proposed the following slate of nominees for election  as
 directors at the Annual Meeting.  None  of the nominees was selected on  the
 basis of any special  arrangement  or  understanding with  any other person.
 None of the nominees bears any  family relationship to any other nominee  or
 to any executive officer of the Company.  The Board has determined that  all
 of its nominees  other than Mark E. Schwarz  meet  the current  independence
 requirements of the American Stock Exchange ("AMEX").

      In the absence of instructions to  the contrary, shares represented  by
 proxy will be  voted for the  election of each  nominee named  below.   Each
 nominee has accepted  nomination and  agreed to serve  if elected.   If  any
 nominee becomes unable to serve before election, shares represented by proxy
 may be voted  for the  election of a  substitute nominee  designated by  the
 Board.

      The Board recommends a vote FOR election of each nominee below.

                            Director
 Name                Age     Since   Current Position(s) with the Company
 ----                ---     -----   ------------------------------------
 Mark E. Schwarz     45      2001    Chief Executive Officer, Director
                                     and Chairman of the Board

 Scott T. Berlin     36      2001    Director

 James H. Graves     57      1995    Director

 George R. Manser    74      1995    Director

      Mark E. Schwarz was elected Chief  Executive Officer of the Company  in
 January, 2003, and  also served as  President from  November, 2003,  through
 March, 2006.   Since 1993,  Mr. Schwarz has served,  directly or  indirectly
 through entities  he controls,  as the  sole  general partner  of  Newcastle
 Partners, L.P., a private investment firm.   Since 2000, he has also  served
 as the  President  and sole  Managing  Member of  Newcastle  Capital  Group,
 L.L.C., the  general  partner  of  Newcastle  Capital Management,  L.P.,  a
 private investment management firm.  From  1995 until 1999, Mr. Schwarz  was
 also a  Vice President  of Sandera  Capital  Management, L.L.C.,  a  private
 investment firm associated  with the  Lamar Hunt  family.   From 1993  until
 1996, Mr. Schwarz  was a securities  analyst and portfolio  manager for  SCM
 Advisors, L.L.C., an investment advisory firm. Mr. Schwarz presently  serves
 as Chairman of the boards of directors  of Pizza Inn, Inc., an operator  and
 franchisor of pizza restaurants; Bell Industries, Inc., a company  primarily
 engaged in providing computer systems integration services; and New  Century
 Equity Holdings Corp.,  a firm focused  on investment  in alternative  asset
 management companies.  Mr. Schwarz is also a director of Nashua Corporation,
 a manufacturer  of  specialty  papers,  labels  and  printing  supplies;  SL
 Industries, Inc.,  a  developer  of  power systems  used  in  a  variety  of
 aerospace, computer, datacom,  industrial, medical, telecom,  transportation
 and utility equipment applications; Vesta Insurance Group, Inc., a  property
 and casualty  insurance  holding  company  unrelated  to  the  Company;  and
 WebFinancial Corporation, a banking and specialty finance company.

      Scott T. Berlin is a Managing Director and principal of Brown, Gibbons,
 Lang & Company, an investment banking firm serving middle market  companies.
 His  professional  activities  are  focused on  the  corporate  finance  and
 mergers/acquisitions practice.   Prior  to joining  Brown, Gibbons,  Lang  &
 Company in 1997, Mr. Berlin was a lending officer in the Middle Market Group
 at The Northern Company.

      James H.  Graves is  a Partner  of Erwin,  Graves &  Associates, LP,  a
 management consulting firm  founded in  2002.  He  is  also Chief  Operating
 Officer and Vice Chairman of the board of directors of Detwiler, Mitchell  &
 Company, a securities  brokerage and investment  banking firm.   Previously,
 Mr. Graves was a  Managing Director of UBS  Warburg, Inc., an  international
 financial services firm which provides investment banking, underwriting  and
 brokerage services.  He was a  Managing Director of Paine Webber Group  Inc.
 prior to its  acquisition by UBS  Warburg in November,  2000, and was  Chief
 Operating Officer of J.C. Bradford & Co.  at the time of its acquisition  by
 Paine Webber Group Inc.  in June, 2000.   Mr. Graves  had earlier served  as
 Managing Director of  J.C. Bradford &  Co. and co-manager  of its  Corporate
 Finance Department.  Prior  to its acquisition by  Paine Webber Group  Inc.,
 J.C. Bradford  &  Co. provided investment  advisory services to the Company.
 Prior to joining J.C. Bradford  &  Co. in 1991,  Mr. Graves had for 11 years
 been employed by Dean Witter Reynolds, where he completed his tenure as  the
 head of  the Special  Industries Group  in New  York City.  Mr. Graves  also
 serves as  a  director  of  Cash  America  International,  Inc.,  a  company
 operating pawn shops and jewelry stores.

      George R. Manser is Chairman of Concorde Holding Co. and CAH, Inc. LLC,
 each a private investment management company.  From 1991 to 2003, Mr. Manser
 served as a  director of State  Auto Financial Corp.,  an insurance  holding
 company  engaged  primarily in the property and casualty insurance business.
 Prior to  his retirement  in 2000,  Mr. Manser  also served  as Chairman  of
 Uniglobe Travel (Capital Cities), Inc., a franchisor of travel agencies;  as
 a director  of CheckFree  Corporation, a  provider of  financial  electronic
 commerce services,  software  and  related  products;  and  as  an  advisory
 director of J.C. Bradford & Co.  From 1995 to 1999, Mr. Manser served as the
 Director of Corporate Finance of Uniglobe Travel USA, L.L.C.,  a  franchisor
 of travel agencies, and also served  as a director of Cardinal Health,  Inc.
 and AmerLink Corp.   From 1984  to 1994, he  also served as  a director  and
 Chairman of North American National Corporation and various of its insurance
 subsidiaries.


                                 APPROVAL OF
                      INCREASE IN AUTHORIZED CAPITAL
                                   (Item 2)

      On April 6, 2006, the Board adopted a resolution proposing amendment of
 the  Articles  of  Incorporation of the  Company to increase  the authorized
 capital of the Company from  100,000,000 shares of common  stock,  $0.03 par
 value per share, to 200,000,000 shares of common stock,  $0.03 par value per
 share.  Pursuant to the Nevada law, such proposal must be  approved  by  the
 affirmative  vote of the holders of a majority of the issued and outstanding
 shares of the Common Stock.

      As of the Record Date,  86,909,647 shares  of the Common Stock  of  the
 Company were  issued  and  outstanding.  In  addition, options  to  purchase
 1,391,500  shares  of  the Common Stock  were outstanding as  of the  Record
 Date, and 4,470,000 shares  of the Common Stock  were reserved for  issuance
 under the Company's 2005 Long Term Incentive  Plan (the "2005 LTIP").  As  a
 result, the Company only had 7,228,853 shares of Common Stock available  for
 future issuance as of the Record Date.

      The Board believes that increasing the  number of authorized shares  of
 the Common Stock will  benefit the Company by  providing the flexibility  to
 issue shares  for  a  variety of  future  business  and  financial  purposes
 including,  without limitation,  additional capitalization and acquisitions.
 If the  shareholders  also approve  the  proposal to  permit  conversion  of
 certain subordinated convertible promissory notes into shares of the  Common
 Stock, a portion of the additional  authorized shares will be necessary  for
 issuance upon such conversion.  (See, Item 3 - Approval of Convertibility of
 Convertible Notes.)  In addition,  the Board presently contemplates  issuing
 additional shares of the Common Stock  in connection with a rights  offering
 to shareholders during  2006.   The Company has  no other  current plans  to
 issue additional shares of the Common Stock.

      Amending the  Articles  of  Incorporation to  increase  the  number  of
 authorized shares of the  Common Stock will not  alter the number of  shares
 presently issued or change the relative rights of holders of the issued  and
 outstanding Common Stock.  If the amendment is approved by shareholders, the
 additional shares of Common Stock will  be identical in all respects to  the
 presently authorized shares of Common Stock.   Holders of Common Stock  have
 no preemptive right to purchase or subscribe for any newly issued shares  of
 the Common Stock.  Therefore, the  authorization and subsequent issuance  of
 additional shares of Common Stock may,  among other things, have a  dilutive
 effect on  the voting  power,  earnings per  share  and equity  of  existing
 holders of Common Stock.  However, the actual effect on the present  holders
 of Common Stock cannot be ascertained until additional shares of the  Common
 Stock are issued in the future.

      The Board recommends a vote FOR  approval of the proposal to amend  the
 Articles of Incorporation to increase the number of authorized shares of the
 Common Stock.


                                 APPROVAL OF
                     CONVERTIBILITY OF CONVERTIBLE NOTES
                                   (Item 3)

      On January 27, 2006, the Company issued an aggregate of $25,000,000  in
 subordinated convertible promissory notes ("Convertible Notes") to Newcastle
 Special Opportunity Fund I, L.P. and Newcastle Special Opportunity Fund  II,
 L.P.,  which  are  investment  partnerships  managed  by  Newcastle  Capital
 Management, L.P., an  entity controlled by  Mark E.  Schwarz, the  Company's
 Chairman and Chief Executive Officer.  The proceeds from the issuance of the
 Convertible Notes were used to establish a trust account securing payment of
 future installments of purchase price and restrictive covenant consideration
 payable in connection with the Company's recent acquisition of Texas General
 Agency, Inc. and affiliated entities.

      Conversion of the  Convertible Notes  is conditioned  on the  Company's
 shareholders approving the issuance of shares of the Common Stock upon  such
 conversion.  The purchase agreements pursuant to which the Convertible Notes
 were issued obligated the Company to hold its annual meeting of shareholders
 on or before May 31, 2006,  and to solicit shareholder approval of both  (i)
 the issuance of shares of the Company's Common Stock upon conversion  of the
 Convertible Notes, and  (ii) at  least a  20,000,000 share  increase in  the
 authorized shares of the Common Stock of the Company in order to accommodate
 full conversion  of  the  Convertible  Notes.  (See, Item 2  -  Approval  of
 Increase in Authorized Capital.)

      Subject to shareholder approval, the  principal and accrued but  unpaid
 interest of each Convertible Note is  convertible into shares of the  Common
 Stock of the Company at any  time prior to maturity  at the election of  the
 holder and, to the  extent not previously  converted, will be  automatically
 converted to shares of the Common Stock  at the maturity date.  The  initial
 conversion price of the Convertible Notes  is $1.28 per share of the  Common
 Stock.  In  the  event that,  on  or  before October 27, 2006,  the  Company
 completes an offering of rights to purchase shares of its Common Stock at  a
 price per share less  than the initial conversion  price of the  Convertible
 Notes, then the conversion price of the Convertible Notes will be reduced to
 an amount equal  to the rights  offering price.  The conversion  price  will
 also be  adjusted proportionally  for any  stock  dividend or  split,  stock
 combination  or   other   similar  recapitalization,   reclassification   or
 reorganization affecting the Common Stock of the Company.

      At the initial conversion price,  and subject to shareholder  approval,
 the aggregate  principal  of  the  Convertible  Notes  is  convertible  into
 19,531,250 shares of the Common Stock of the  Company.  If issued as of  the
 Record Date,  such additional  shares would  have represented  18.3% of  the
 issued and outstanding Common Stock and would have increased the  beneficial
 ownership of Mark  E. Schwarz and  his affiliates from  78.1% of the  Common
 Stock of the Company to 82.1% of the Common Stock of the Company.

      The Convertible Notes bear interest at the rate of 4% per annum,  which
 rate increases to 10% per annum in the  event of default.  Interest on  each
 Convertible Note  is payable  in arrears  each calendar  quarter  commencing
 March 31, 2006.  Principal and all accrued but unpaid interest is due at the
 maturity of each Convertible Note  on July 27, 2007.   The Company does  not
 have the right to prepay the Convertible Notes.  In the event of a change in
 control of the  Company at  any time prior  to shareholder  approval of  the
 convertibility of the Convertible Notes, the holders may require the Company
 to redeem all or a portion of the Convertible Notes at a price equal to 110%
 of the principal amount being redeemed, plus accrued but unpaid interest  on
 such principal amount.   Each Convertible  Note is subordinate  in right  of
 payment to all existing and future secured indebtedness of the Company.

      Subject to certain  limitations, the holders  of the Convertible  Notes
 have the  right  at  any  time  to  require  that  the  Company  effect  one
 registration under the Securities Act of  1933, as amended (the  "Securities
 Act"), of the resale of all or any portion of the shares of the Common Stock
 of the Company issuable  upon conversion of the  Convertible Notes.  If  the
 Company at any  time proposes to  register any of  its securities  under the
 Securities Act, then  the holders  of the  Convertible Notes  will have  the
 right to require that all or any portion  of the shares of the Common  Stock
 issuable  upon conversion  of the  Convertible  Notes be  included  in  such
 registration,  subject  to  certain limitations.  In  addition,  subject  to
 certain limitations, on or before January 27, 2009, the Company is obligated
 to file and maintain in effect for up to two years a registration  statement
 under the Securities  Act covering the  resale of all  shares of the  Common
 Stock issuable  upon conversion  of the  Convertible  Notes which  have  not
 previously been resold  pursuant to an  effective registration statement  or
 Rule 144 promulgated under the Securities Act.

      The Board recommends a vote FOR approval of the proposal to permit  the
 conversion of the Convertible Notes.



                               OTHER BUSINESS
                                  (Item 4)

      The Board knows  of no other business to  be brought before the  Annual
 Meeting.  If, however,  any other business should  properly come before  the
 Annual Meeting, the persons  named in the accompanying  proxy will vote  the
 proxy as they  in their  discretion may  deem appropriate,  unless  they are
 directed by the proxy to do otherwise.


                              BOARD OF DIRECTORS

 Board Committees

      Standing committees  of the  Board of  the  Company include  the  Audit
 Committee, the Compensation Committee and the  Stock Option Committee.   All
 directors presently serve on both the  Compensation Committee and the  Stock
 Option Committee.  All directors except  Mark E. Schwarz presently serve  on
 the Audit Committee.

      George R. Manser currently serves  as  chairman of the Audit Committee.
 The Board has determined that all members of the Audit Committee satisfy the
 current independence  and  experience  requirements  of  the  AMEX  and  the
 Securities and Exchange Commission ("SEC").   The Board has also  determined
 that Mr. Manser satisfies the requirements for an "audit committee financial
 expert" under applicable rules of the  SEC and has designated Mr. Manser  as
 its "audit committee  financial expert."  The Audit  Committee oversees  the
 conduct of the financial reporting processes  of the Company, including  (i)
 reviewing with management  and the  outside auditors  the audited  financial
 statements included  in  the Company's  Annual  Report, (ii)  the  Committee
 chairman reviewing with the outside  auditors the interim financial  results
 included in  the  Company's quarterly  reports  filed with  the  SEC,  (iii)
 discussing with management and the outside auditors the quality and adequacy
 of internal controls,  and (iv) reviewing  the independence  of the  outside
 auditors.  (See, Audit  Committee Report.)  The  Audit Committee held  eight
 meetings during 2005.

      James  H.  Graves  currently serves  as  chairman  of  the Compensation
 Committee  and  the  Stock  Option  Committee.  Because  the  Company  is  a
 "controlled company,"  AMEX  rules  do  not  require  that  members  of  the
 Compensation Committee  be independent.  The Compensation Committee  reviews
 and approves compensation  of the directors,  executive officers and  senior
 management  of  the Company.  (See,  Compensation  Committee  Report.)   The
 Compensation Committee also  administers the  2005  LTIP.  The Stock  Option
 Committee administers the  Company's 1994 Key  Employee Long Term  Incentive
 Plan and 1994 Non-Employee Director Stock Option Plan, both of which expired
 during  2004  but  have  unexpired  options  outstanding.  The  Compensation
 Committee and Stock Option Committee met twice during 2005.

 Attendance at Meetings

      The Board held  six meetings during  2005.  Various  matters were  also
 approved by the unanimous written consent  of the directors during the  last
 fiscal year.   Each  director attended  at  least 75%  of the  aggregate  of
 (i) the total number of meetings of  the Board and (ii) the total number  of
 meetings held by all committees of the Board on which such director  served.
 The  Company has no  formal policy with respect  to the attendance of  Board
 members at the annual meeting of shareholders, but encourages all  incumbent
 directors  and  director   nominees  to  attend   each  annual  meeting   of
 shareholders.  All of the incumbent directors and director nominees attended
 the Company's last annual meeting of shareholders held on May 26, 2005.

 Director Compensation

      During 2005, each non-employee  director received a  fee of $1,500  for
 each Board meeting attended in person and  a fee of $750 for each  committee
 meeting attended in  person.   No other compensation  was paid  to any  non-
 employee  director  during  2005.  Commencing  in  2006,  each  non-employee
 director will receive  a $12,000 annual  retainer plus  a fee of $1,500  for
 each Board meeting attended  in person or telephonically  and a fee of  $750
 for  each  committee meeting  attended in  person  or  telephonically.  Also
 commencing in 2006,  the chairman  of the  Audit Committee  will receive  an
 additional $5,000 annual retainer.

 Nomination of Directors

      Because the  Company  is a  "controlled  company," AMEX  rules  do  not
 require that  the  Company have  a  nominating  committee.   The  Board  has
 determined that such a committee is not necessary to identify, evaluate  and
 attract qualified nominees.  Therefore,  the full Board  acts in place of  a
 nominating committee to investigate qualified  nominees for election to  the
 Board when vacancies occur.  The Board has not adopted any charter or formal
 procedures with respect to its consideration of director nominees.

      The Board  strives to  identify and  attract director  nominees with  a
 variety  of  experience  who  have  the  business  background  and  personal
 integrity to  represent the  interests of  all shareholders.   Although  the
 Board has not established any specific  minimum qualifications that must  be
 met by  a  director  nominee, factors  considered  in  evaluating  potential
 candidates include educational achievement, managerial experience,  business
 acumen, financial sophistication, insurance industry expertise and strategic
 planning and policy-making skills.  Depending upon the current needs of  the
 Board, some factors may be weighed more  or less heavily than others in  the
 Board's deliberations.  The Board evaluates  the suitability of a  potential
 director  nominee  on  the  basis  of  written  information  concerning  the
 candidate,  discussions  with  persons  familiar  with  the  background  and
 character of the candidate and personal interviews with the candidate.

      The Board will consider candidates for nomination to the Board from any
 reasonable source, including  shareholder recommendations.  The  Board  does
 not evaluate candidates differently  based  on  the source  of the proposal.
 The Board  has not,  and has  no present  intention to,  use consultants  or
 search firms  to  assist  in  the  process  of  identifying  and  evaluating
 candidates.

      Shareholders may recommend director candidates for consideration by the
 Board by writing to the Chairman of the Board at the Company's  headquarters
 in Fort  Worth, Texas,  giving the  candidate's name,  contact  information,
 biographical   data  and  qualifications.   A  written  statement  from  the
 candidate consenting  to be  named  as a candidate  and,  if  nominated  and
 elected,  to serve  as a director  should accompany any such recommendation.
 The Board has  not implemented any  formal procedures  for consideration  of
 director nominees submitted by  shareholders of the Company.  The  Board  of
 Director has not received any recommendations for director nominees from any
 person or group beneficially owning more than 5% of the Common Stock of  the
 Company.

 Shareholder Communications

      The Board believes that, in light of the accessibility of its directors
 to informal communications, a formal process for shareholders to communicate
 with directors is unnecessary.   Any shareholder  communication sent to  the
 Board, either generally or  in care of  the Chairman of  the Board, will  be
 forwarded  to  members  of the  Board  without  screening.  Any  shareholder
 communication to the Board  should be addressed in  care of the Chairman  of
 the Board  and  transmitted to the  Company's  headquarters in  Fort  Worth,
 Texas.  In order to assure proper handling, the transmittal envelope  should
 include  a   notation   indicating  "Board   Communication"   or   "Director
 Communication." All  such correspondence  should identify  the author  as  a
 shareholder and  clearly  state  whether the  intended  recipients  are  all
 members  of  the  Board or  only  specified  directors.  The  Chairman  will
 circulate all such correspondence to the appropriate directors.


              EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES

 Executive Officers

      The following persons are currently the only executive officers of  the
 Company:

 Name                Age             Position(s) with the Company
 ----                ---             ----------------------------
 Mark E. Schwarz      45   Chief Executive Officer, Director and Chairman

 Mark J. Morrison     46   President, Chief Operating Officer and Chief
                           Financial Officer

 Kevin T. Kasitz      43   Executive Vice President and President of
                           Commercial Insurance Operation

 Brookland F. Davis   42   President of Personal Insurance Operation

 Jeffrey R. Passmore  38   Senior Vice President and Chief Accounting Officer

      No executive  officer  bears  any  family  relationship  to  any  other
 executive officer or to any director or nominee for director of the Company.
 No director, nominee for director  or  executive officer of the Company  has
 been involved  in  any  legal  proceedings  that  would  be material  to  an
 evaluation of the  management of the  Company.  Information  concerning  the
 business  experience  of  Mark E. Schwarz  is  provided  under  Election  of
 Directors.

      Mark J. Morrison was named President of the Company effective  April 1,
 2006.  He joined the Company in March, 2004, as Executive Vice President and
 Chief Financial  Officer and  was appointed  to the  additional position  of
 Chief Operating Officer in April, 2005.   Mr. Morrison has been employed  in
 the property and casualty insurance industry  since 1993.  Prior to  joining
 the Company, he had since 2001  served as President of Associates  Insurance
 Group,  a  subsidiary of  St. Paul  Travelers.  From 1996  through 2000,  he
 served as Senior Vice President  and  Chief Financial Officer of  Associates
 Insurance  Group,  the  insurance  division  of  Associates  First   Capital
 Corporation.  From 1995  to  1996,  Mr. Morrison  served  as  Controller  of
 American Eagle  Insurance Group,  and  from 1993  to  1995 was  Director  of
 Corporate Accounting for Republic  Insurance Group.  From  1991 to 1993,  he
 served as Director of Strategic Planning  and Analysis at Anthem, Inc.   Mr.
 Morrison began his  career as a  public accountant with  Ernst & Young,  LLP
 from 1982 to 1991, where he completed his  tenure as a Senior Manager.   Mr.
 Morrison presently serves as  a director of Vesta  Insurance Group, Inc.,  a
 property and casualty insurance holding company unrelated to the Company.

      Kevin T.  Kasitz was  named Executive  Vice  President of  the  Company
 effective April 1, 2006.  He has  served as the President of the  Commercial
 Insurance Operation, a functional segment of the Company handling commercial
 insurance products and services,  since April, 2003.   Prior to joining  the
 Company, Mr. Kasitz had since 1991 been employed by Benfield Blanch Inc.,  a
 reinsurance intermediary, where he served as a Senior Vice President in  the
 Program Services  division  (2000  to  2003)  and  Alternative  Distribution
 division (1999 to 2000),  a Vice President  in the Alternative  Distribution
 division (1994 to 1999)  and a Manager in  the Wholesale Insurance  Services
 division (1991  to 1994).   From  1989  to 1991,  he  was a  personal  lines
 underwriter for Continental Insurance Company and  from 1986 to 1989 was  an
 internal auditor for  National County Mutual  Insurance Company, a  regional
 non-standard automobile insurer.

      Brookland F. Davis has, since January, 2003, served as the President of
 the Personal  Insurance  Operation,  a functional  segment  of  the  Company
 handling non-standard personal automobile  insurance  products and services.
 Since 2001,  Mr. Davis  had previously  been employed  by Bankers  Insurance
 Group, Inc.,  a property/casualty  and life  insurance group  of  companies,
 where he began as the Chief  Accounting Officer and was ultimately  promoted
 to President  of their  Texas  managing general  agency  and head  of  their
 nationwide non-standard personal automobile operations.  From 1998 to  2000,
 he served as Executive Vice President and Chief Financial Officer of Paragon
 Insurance Holdings,  LLC,  a  multi-state personal  lines  managing  general
 agency offering non-standard personal  automobile and homeowners  insurance,
 which Mr. Davis  co-founded.  During  1997, Mr. Davis  was a Senior  Manager
 with  KPMG Peat Marwick  focusing  on the financial  services practice area.
 From 1993 to  1997, he  served as Vice  President and  Treasurer of  Midland
 Financial Group,  Inc., a  multi-state property/casualty  insurance  company
 focused   on  non-standard  automobile  insurance.   Mr.  Davis  began   his
 professional career  in  1986 in  public  accounting with  first  Coopers  &
 Lybrand and later KPMG Peat Marwick, where he ended his tenure in 1992 as  a
 Supervising  Senior  Tax  Specialist.   Mr.  Davis  is  a  certified  public
 accountant licensed in Texas and Tennessee.

      Jeffrey R.  Passmore has  served as  Senior  Vice President  and  Chief
 Accounting Officer of the Company since June, 2003, and previously served as
 Vice President of Business  Development for the Company.   Prior to  joining
 the Company in November, 2002,  Mr. Passmore had  since 2000 served as  Vice
 President and Controller of Benfield Blanch, Inc.  and  its predecessor E.W.
 Blanch Holdings, Inc., a  reinsurance intermediary.  From  1998 to 1999,  he
 served E.W. Blanch Holdings, Inc. as  Assistant Vice President  of Financial
 Reporting.  From 1994 to  1998, he was a  senior financial analyst with  TIG
 Holdings, Inc.,  a property  and casualty  insurance  holding  company.  Mr.
 Passmore  began his  career as an  accountant for Gulf Insurance Group  from
 1990 to 1993.   Mr. Passmore is a certified  public accountant  licensed  in
 Texas.


                            EXECUTIVE COMPENSATION


 Summary Compensation Table

      The following table sets  forth information concerning compensation  of
 the Chief Executive Officer and all other executive officers of the  Company
 for the last three fiscal years or  such shorter period as they have  served
 as an executive officer:


                                                                                 Long Term
                                          Annual Compensation                   Compensation
                            --------------------------------------------------  ------------
                                                                  Other Annual   Securities    All Other
      Name and               Year Ended                           Compensation   Underlying  Compensation
 Principal Position         December 31  Salary ($)  Bonus ($) 1      ($) 2      Options (#)     ($) 3
 -------------------        -----------  ----------  -----------      -----      -----------     -----
                                                                               
 Mark E. Schwarz                2005      150,000         -0-         1,845           -0-        4,500
   Chief Executive Officer      2004      150,000         -0-         2,223           -0-        1,289
                                2003      150,000         -0-          -0-            -0-         -0-

 Mark J. Morrison               2005      214,792      150,000        1,660        100,000       2,000
   Chief Operating Officer;     2004      148,346      150,000        2,994        100,000        -0-
   Chief Financial Officer

 Kevin T. Kasitz                2005      160,160      150,000         2,564       100,000       4,805
   President of subsidiaries    2004      160,160      150,000         4,635       100,000       1,890
                                2003      115,500       40,000         7,493        25,000        -0-

 Brookland F. Davis             2005      156,000      150,000         3,869       100,000       4,680
   President of subsidiaries    2004      156,000      150,000         7,014       100,000       1,862
                                2003      142,500       40,000        12,927        25,000        -0-

 Jeffrey R. Passmore            2005      123,542       40,000         1,282        50,000       3,460
   Chief Accounting Officer     2004      115,333       34,320          -0-         25,000       1,219

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

 1  Bonuses are reflected in the  calendar year  earned.  Bonuses for Messrs.
    Morrison, Kasitz  and  Davis for 2005  and  2004 were payable  75% in the
    following  calendar year  and  the  remaining  25%  in  two  equal annual
    installments, without interest, due on the first and second anniversaries
    of the initial payment.  All other bonuses were paid in the calendar year
    following the year earned.

 2  Represents employee portion of medical coverage paid by the Company.

 3  Represents the Company's matching contributions to employee 401(k)
    accounts.


 Option Grants in Last Fiscal Year

      The following table  shows all individual  grants of  stock options  to
 executive officers of the Company during the fiscal year ended  December 31,
 2005.

                                  % of Total
                     Securities    Options                             Grant
                     Underlying   Granted to   Exercise                Date
                      Options    Employees in   Price    Expiration   Present
                     Granted 1   Fiscal Year    ($/Sh)     Date 2     Value 3
                     ---------   -----------   --------  ----------   -------

 Mark E. Schwarz         -0-         -0-          -          -            -

 Mark J. Morrison     100,000        18.9        1.19    05/26/2010   $67,000

 Brookland F. Davis   100,000        18.9        1.19    05/26/2010   $67,000

 Kevin T. Kasitz      100,000        18.9        1.19    05/26/2010   $67,000

 Jeffrey R. Passmore   50,000         9.4        1.19    05/26/2010   $33,500

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

 1    Options are to purchase shares  of the Company's Common Stock.  Options
      vest on the first four  anniversaries of the date  of grant as to  10%,
      20%, 30% and 40% of the  shares, respectively, subject to  acceleration
      of vesting upon death, disability, retirement  or change in control  of
      the Company.

 2    All options are subject to earlier termination due to death, disability
      or termination of employment.

 3    The present value  of each  option is estimated  as of  the grant  date
      using the  Black-Scholes  option-pricing  model assuming  a  five  year
      expected term, no dividend yield and a weighted-average 62.5%  expected
      volatility and 3.88% risk-free interest rate.

 Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values


      The  following  table  provides  information  regarding  stock  options
 exercised by  the  executive officers  during  fiscal 2005  and  unexercised
 options held by the executive officers as of December 31, 2005.

                                                    Securities Underlying       Value of Unexercised
                        Shares                     Unexercised Options (#)   In-the-Money Options ($) 1
                     Acquired on      Value      --------------------------  --------------------------
       Name          Exercise (#)  Realized ($)  Exercisable  Unexercisable  Exercisable  Unexercisable
       ----          ------------  ------------  -----------  -------------  -----------  -------------
                                                                           
 Mark E. Schwarz        150,000      115,000          -0-         25,000         -0-          16,813

 Mark J. Morrison        10,000        6,700          -0-        190,000         -0-          80,900

 Brookland F. Davis      15,000        9,050          -0-        195,000         -0-          91,650

 Kevin T. Kasitz          -0-          -0-           15,000      195,000        11,450        91,650

 Jeffrey R. Passmore      2,500        1,950          8,000       74,500         5,680        27,695

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

 1    Values stated are pre-tax and are based upon the closing price of $1.36
      per share of the Common Stock on AMEX  on December 30, 2005,  the  last
      trading day of the year.


 Equity Compensation Plan Information

      The following table sets forth  information  regarding  shares  of  the
 Common Stock authorized for issuance under the Company's equity compensation
 plans as of December 31, 2005:

                       (a) Number of   (b) Weighted-  (c) Number of securities
                       securities to      average        remaining available
                       be issued upon  exercise price    for future issuance
                        exercise of    of outstanding       under equity
                        outstanding       options,       compensation plans
                         options,         warrants      (excluding securities
                       warrants and         and             reflected in
                          rights           rights            column (a))
                       ------------       --------          -------------
 Equity compensation
 plans approved by
 security holders 1     1,416,500           $0.85              4,470,000

 Equity compensation
 plans not approved
 by security holders 2    100,000           $0.38                 -0-
                        ---------                             ----------

 TOTAL                  1,516,500           $0.82              4,470,000

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

 1    Includes shares of the Common Stock authorized for issuance  under  the
      2005 LTIP, as well as shares of the Common Stock issuable upon exercise
      of options outstanding under the  1994 Key Employee Long Term Incentive
      Plan and the  1994  Non-Employee Director Stock Option  Plan,  both  of
      which terminated in accordance with their terms in 2004.

 2    Represents shares of the Common Stock issuable  upon exercise  of  non-
      qualified stock options granted to  the  non-employee  directors of the
      Company  in  lieu  of  cash compensation for their service on the Board
      during fiscal 1999.  The options became fully exercisable on August 16,
      2000,  and  terminate  on  March 15, 2010, to the extent not previously
      exercised.


                        COMPENSATION COMMITTEE REPORT

 Committee Organization and Duties

      The Compensation Committee of the Board is presently comprised of James
 H. Graves (chairman), Scott T. Berlin, George R. Manser and Mark E. Schwarz.
 The Compensation Committee reviews, evaluates  and  recommends to the  Board
 compensation policies of the  Company with respect to directors  and  senior
 management, including  the  Chief  Executive  Officer  and  other  executive
 officers.  The  Compensation Committee also  administers the Company's  2005
 Long Term Incentive Plan.  The  members of the  Compensation Committee  also
 serve as  a Stock  Option Committee  to administer  the Company's  1994  Key
 Employee Long  Term  Incentive Plan  and  1994 Non-Employee  Director  Stock
 Option Plan, both of which expired during 2004 but have unexercised  options
 outstanding.  The Compensation Committee met twice during 2005.

 Compensation Objectives and Components

      The Compensation  Committee strives  to  ensure that  the  compensation
 policies of  the  Company  reinforce  the  Company's  annual  and  long-term
 performance objectives, reward and encourage quality performance, and assist
 the Company  in attracting,  retaining and  motivating directors,  executive
 officers and other senior management with exceptional leadership  abilities.
 Consistent  with   these  objectives,   the   Compensation   Committee   has
 established an executive compensation program consisting  primarily  of base
 salary, annual bonus and stock options.

      Base Salary.   Base salaries of  the Company's  executive officers  are
 determined based on  factors including scope  of responsibilities, level  of
 experience,  contributions  to  the  achievement  of  business   objectives,
 leadership skills and overall management  effectiveness.  Base salaries  are
 generally intended to be  competitive with those offered  in the markets  in
 which the Company competes for executive talent.  The overall assessment  is
 primarily subjective, reflecting  the level of  responsibility and  personal
 performance of the individual executive.

      Annual Bonus.  The Compensation Committee approved discretionary annual
 bonuses for the executive officers (other than the Chief Executive  Officer)
 and certain other senior management of the Company for fiscal 2005 based  on
 an evaluation of the Company's financial performance and the job performance
 of  each  executive  officer,  including  characteristics  of   cooperation,
 positive attitude and teamwork in achieving corporate goal.

      Stock Options.  The  Compensation Committee believes that  periodically
 granting stock options to the executive officers and other senior management
 can promote the  Company's long-term performance  by aligning the  officers'
 economic interests with shareholder value.  Stock option grants are based on
 various subjective factors primarily relating to the responsibilities of the
 officer and his  past and expected  future contributions to  the growth  and
 profitability of the Company.  During  2005, each of the executive  officers
 (other than the Chief Executive Officer) was granted stock options under the
 2005 LTIP which will  vest on the  first four anniversaries  of the date  of
 grant as to  10%, 20%, 30%  and 40% of  the shares,  respectively, and  will
 expire on the fifth anniversary of the date of grant.

 Compensation of the Chief Executive Officer

      The Company's  Chief  Executive  Officer,  Mark E. Schwarz,  indirectly
 controls  Newcastle  Partners,  L.P.,  a  private  investment  firm which is
 the  largest  shareholder  of  the  Company.  Although  Mr. Schwarz  devotes
 substantial time and attention to his duties as Chief Executive Officer,  he
 is not a  full-time employee  of the  Company.   The Compensation  Committee
 established a base salary  for the Chief Executive  Officer of $150,000  for
 2005, which  was unchanged  from his  base  salary for  2004.   Mr.  Schwarz
 declined to participate in either the annual bonuses or stock option  grants
 provided to the other executive officers.   Based on his overall  leadership
 of  the  management  team,  his  management  of  the  Company's   investment
 portfolio,  his  significant  efforts  in  expanding  the  Company   through
 strategic acquisitions, and the Company's improved operating results  during
 his tenure, the Compensation Committee believes that the total  compensation
 provided to the Chief Executive Officer  during 2005 was significantly  less
 than was merited by his contributions to the success of the Company.

 Deductibility of Compensation

      IRC Section 162(m)  generally imposes a  $1 million  per person  annual
 limit on the amount the Company  may deduct as compensation expense for  its
 executive  officers.  The  Compensation Committee  has not  established  any
 policy precluding  the  payment of  compensation  in excess  of  the  amount
 deductible under IRC  Section 162(m).   However, the Compensation  Committee
 does not presently anticipate that the compensation to any of the  executive
 officers for 2006 will exceed this limit on deductibility.

 Conclusion

      The  Compensation  Committee  believes  that  the  Company's  executive
 compensation program provides  a competitive  and motivational  compensation
 package to  the  Company's  executive  officers  necessary  to  achieve  the
 Company's financial objectives and enhance stockholder value.

                                         Respectfully submitted by the
                                         Compensation Committee:

                                         James H. Graves (chairman)
                                         Scott T. Berlin
                                         George R. Manser
                                         Mark E. Schwarz


         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      Messrs. Graves, Berlin and Schwarz comprised the Compensation Committee
 during fiscal 2005.   Mr. Schwarz has served  as Chief Executive Officer  of
 the Company since January, 2003.   Mr. Schwarz also indirectly controls  the
 investment partnerships which purchased  Convertible Notes from the  Company
 in January, 2006.  (See, Item 3 - Approval of Convertibility of  Convertible
 Notes.) During fiscal 2005,  no executive officer of  the Company served  on
 the board of directors or compensation committee of any other entity  any of
 whose executive officers served  on the Board  or Compensation Committee  of
 the Company.


                              PERFORMANCE GRAPH

      The line graph below compares  the cumulative total stockholder  return
 on the Common Stock  from January 1, 2001,  through December 31, 2005,  with
 the return on  the Amex Market  Value (U.S.) Index  and the  S&P Property  &
 Casualty Insurance Index for the same period.  In accordance with SEC rules,
 the measurement assumes a $100 initial  investment in the Common Stock  with
 all dividends reinvested, and a $100 initial investment in the indices.


                      [ PERFORMANCE GRAPH APPEARS HERE ]


                 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN *
 AMONG HALLMARK FINANCIAL SERVICES, INC., THE AMEX MARKET VALUE (U.S.) INDEX
               AND THE S & P PROPERTY & CASUALTY INSURANCE INDEX


                             12/00   12/01   12/02   12/03   12/04   12/05
                             -----   -----   -----   -----   -----   -----
 HALLMARK FINANCIAL
   SERVICES, INC.           100.00   62.55  101.82  114.91  174.55  221.05
 AMEX MARKET VALUE (U.S.)   100.00   88.73   75.76  108.19  128.37  142.31
 S & P PROPERTY &
   CASUALTY INSURANCE       100.00   91.98   81.85  103.46  114.24  131.51


   * $100 invested on 12/31/00 in stock or index-including reinvestment of
     dividends.  Fiscal year ending December 31.


                                CODE OF ETHICS

      The Board  has  adopted a  Code  of Ethics  applicable  to all  of  the
 Company's employees,  officers and  directors.   The Code  of Ethics  covers
 compliance with  law;  fair  and  honest  dealings  with  the  Company,  its
 competitors and others; full,  fair and accurate  disclosure to the  public;
 and procedures for compliance with the Code of Ethics.  This Code of  Ethics
 is posted on the Company's website at www.hallmarkgrp.com.


     COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

      The Company's executive  officers, directors and  beneficial owners  of
 more than 10% of the Company's Common Stock are required to file reports  of
 ownership and changes in ownership of the Common Stock with the SEC.   Based
 solely upon information  provided to  the Company  by individual  directors,
 executive officers and beneficial owners, the Company believes that all such
 reports were timely filed during and  with respect to the fiscal year  ended
 December 31, 2005, except that Brookland F. Davis was late filing one Form 4
 reporting the exercise of employee stock options.


           PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT

      The following table and the notes thereto set forth certain information
 regarding the beneficial  ownership of  the Common  Stock as  of the  Record
 Date, by  (i) the  current executive  officers  of the  Company,  (ii)  each
 current director and nominee for director of the Company, (iii) all  current
 executive officers and  current directors  of the  Company as  a group;  and
 (iv) each other person known  to the Company to  own beneficially more  than
 five percent of the  presently outstanding Common  Stock.  Unless  otherwise
 indicated, the  persons  identified  in  the  table  have  sole  voting  and
 dispositive power with respect to the shares shown as beneficially owned  by
 them.  Except as otherwise indicated, the mailing address for all persons is
 the same as that of the Company.

                                         No. of Shares      Percent of Class
 Shareholder                          Beneficially Owned   Beneficially Owned
 -----------                          ------------------   ------------------

 Mark E. Schwarz 1                        67,825,787              78.1

 Mark J. Morrison 2                          132,220                *

 Brookland F. Davis 3                        407,489                *

 Kevin T. Kasitz 4                            95,555                *

 Jeffrey R. Passmore 5                        25,925                *

 Scott T. Berlin 6                           147,500                *

 James H. Graves 7                           736,024                *

 George R. Manser 8                          337,481                *

 All executive officers and current
 directors, as a group (8 persons) 9      69,707,981              79.9

 Newcastle Partners, L.P. 10              67,520,362              77.7

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

 *    Represents less than 1%.

 1    Includes 12,500 shares which may be acquired by Mr. Schwarz pursuant to
      stock options exercisable on  or within 60 days  after the Record  Date
      and 67,520,362  shares owned  by Newcastle  Partners, L.P.,  a  limited
      partnership indirectly controlled by Mr. Schwarz.  (See Note 9, below.)
      Does not include shares which,  subject to shareholder  approval,  will
      become issuable  to   Newcastle Special  Opportunity Fund  I, L.P.  and
      Newcastle Special Opportunity Fund II, L.P., each a limited partnership
      indirectly  controlled  by   Mr.  Schwarz,  upon   conversion  of   the
      Convertible Notes.   (See, Item  3  -  Approval  of  Convertibility  of
      Convertible Notes.)

 2    Includes 30,000 shares which may be acquired pursuant to stock  options
      exercisable on or within 60 days after the Record Date.

 3    Includes 10,000 shares which may be acquired pursuant to stock  options
      exercisable on or within 60 days after the Record Date.

 4    Includes 50,000 shares which may be acquired pursuant to stock  options
      exercisable on or within 60 days after the Record Date.

 5    Includes 20,000 shares which may be acquired pursuant to stock  options
      exercisable on or within 60 days after the Record Date.

 6    Includes 87,500 shares which may be acquired pursuant to stock  options
      exercisable on or within 60 days after the Record Date.

 7    Includes 50,000 shares which may be acquired pursuant to stock  options
      exercisable on or  within 60  days after  the  Record  Date and 437,442
      shares owned  by a  limited partnership  indirectly controlled  by  Mr.
      Graves.

 8    Includes 50,000 shares which may be acquired pursuant to stock  options
      exercisable on  or within  60 days  after the  Record Date  and  30,575
      shares held by Mr. Manser's spouse, over which shares Mr. Manser shares
      voting and dispositive power.

 9    Includes 310,000 shares which may be acquired pursuant to stock options
      exercisable on or within 60 days after the Record Date.

 10   Mark E. Schwarz is the managing member of Newcastle Capital Group  LLC,
      which is the  general partner  of Newcastle  Capital Management,  L.P.,
      which is the general partner of  Newcastle Partners, L.P.  The  address
      for Newcastle Partners, L.P. is 300 Crescent Court, Suite 1110, Dallas,
      Texas 75201.


                            AUDIT COMMITTEE REPORT

      The Audit  Committee  of the  Board  of  Directors of  the  Company  is
 composed of three independent directors and operates under a written charter
 adopted by the Board of Directors in accordance with applicable rules of the
 SEC and AMEX. A copy of the Amended and Restated Audit Committee Charter  is
 posted on the Company's website at www.hallmarkgrp.com.

      The primary purpose of  the Audit Committee is  to assist the Board  in
 fulfilling  its  responsibility  to  oversee  management's  conduct  of  the
 Company's financial reporting process.  In  discharging its oversight  role,
 the Audit Committee is  empowered to investigate any  matter brought to  its
 attention with full access to all  books, records, facilities and  personnel
 of the Company  and is  authorized to  retain outside  counsel, auditors  or
 other experts for this purpose.  Subject to any action that may be  taken by
 the  full  Board,   the  Audit  Committee   also  has   the  authority   and
 responsibility to  select,  evaluate  and, where  appropriate,  replace  the
 Company's independent certified public accountants.

      The Company's  management is  responsible for  preparing the  Company's
 financial statements  and the  independent accountants  are responsible  for
 auditing those financial statements.  The role of the Audit Committee is  to
 monitor and oversee these processes.

      In this context,  the Audit Committee  has reviewed  and discussed  the
 consolidated financial statements with  both management and the  independent
 accountants.   The  Audit  Committee also  discussed  with  the  independent
 accountants the matters required  to be discussed  by Statement on  Auditing
 Standards No. 61 (Communication with Audit Committees).  The Audit Committee
 received from the independent  accountants the written disclosures  required
 by Independence  Standards Board  Standard No.  1 (Independence  Discussions
 with  Audit  Committees),  and  the  Audit  Committee  discussed  with   the
 independent accountants their independence.

      Based upon the Audit Committee's review and discussions with management
 and the  independent accountants,  the Audit  Committee recommended  to  the
 Board of Directors that the audited financial statements be included in  the
 Company's Annual Report on Form 10-K  filed with the SEC for the year  ended
 December 31, 2005.

                               Respectfully submitted by the Audit Committee:

                               George R. Manser (chairman)
                               Scott T. Berlin
                               James H. Graves


                  INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

      The Audit Committee has selected KPMG  LLP ("KPMG") as the  independent
 registered public  accounting  firm  to  audit  the  consolidated  financial
 statements of the Company for the 2006  fiscal year.  KPMG also reported  on
 the Company's consolidated financial statements  for the fiscal years  ended
 December 31, 2005  and  2004.  Representatives  of KPMG are  expected to  be
 present at the Annual Meeting, will have the opportunity to make a statement
 if they so desire and are expected to be available to respond to appropriate
 questions from shareholders.

      The following table presents fees for professional services rendered by
 KPMG for the audit  of the Company's  consolidated financial statements  for
 the fiscal years ended  December 31, 2005, and  December 31, 2004, and  fees
 billed for other  services rendered  by the  independent accountants  during
 those periods.

                              Fiscal 2005        Fiscal 2004
                              -----------        -----------

  Audit Fees 1                  $389,044          $363,846

  Audit-Related Fees 2            $8,000             -0-

  Tax Fees                         -0-               -0-

  All Other Fees                   -0-               -0-

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

 1    Reflects fees for services attributable to the indicated fiscal year, a
      portion of which fees were paid in the subsequent fiscal year.

 2    Audit-related  fees  pertained  to  services  in  connection  with  the
      Company's shareholder rights offering.

      The current policy of the Audit Committee is to review and approve  all
 proposed audit and non-audit services prior to the engagement of independent
 accountants to perform such  services.  Therefore, the Audit Committee  does
 not  presently  have  any  pre-approval policy  or procedures.  Review  and
 approval of such services generally occur at the Audit Committee's regularly
 scheduled quarterly meetings.  In situations where it is impractical to wait
 until the next  regularly scheduled quarterly  meeting, the Audit  Committee
 has delegated to its chairman the  authority to approve audit and  non-audit
 services up to a pre-determined level set by the Audit Committee.  Any audit
 or non-audit services approved pursuant to such delegation of authority must
 be reported to  the full  Audit Committee  at its  next regularly  scheduled
 meeting. During  fiscal 2005  and 2004,  all  audit and  non-audit  services
 performed by the Company's independent accountants were approved  in advance
 by the Audit Committee.


                SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING

      Any shareholder  desiring to  submit a  proposal for  inclusion in  the
 proxy material relating to the 2007  annual meeting of shareholders must  do
 so in writing.   The proposal  must be received  at the Company's  principal
 executive offices by December 20, 2006.  In  addition,  with respect to  any
 matter proposed by a shareholder at the 2007 Annual Meeting but not included
 in the  Company's  proxy materials,  the  proxy holders  designated  by  the
 Company may exercise discretionary voting authority if appropriate notice of
 the shareholder proposal  is not received  by the Company  at its  principal
 executive office by March 5, 2007.

                               By Order of the Board of Directors,

                               /s/ Cecil R. Wise
                               ------------------------
                               Cecil R. Wise, Secretary

 April 19, 2006
 Fort Worth, Texas




         THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

                                    PROXY
                  FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
                      HALLMARK FINANCIAL SERVICES, INC.
                           TO BE HELD MAY 25, 2006

      The  undersigned  hereby  appoints  Mark E. Schwarz,  Mark J. Morrison,
 Brookland F. Davis and  Kevin T. Kasitz, and  each of them individually,  as
 the lawful  agents  and Proxies  of  the  undersigned, with  full  power  of
 substitution, and hereby authorizes each of  them to represent and vote,  as
 designated below, all shares of Common Stock of Hallmark Financial Services,
 Inc. held of record by the undersigned as  of April 13, 2006, at the  Annual
 Meeting of Shareholders to be  held  on May 25, 2006, or at any  adjournment
 thereof.

 ITEM 1.   ELECTION OF DIRECTORS

     [ ] FOR all nominees listed below      [ ] WITHHOLD AUTHORITY to vote
         (except as marked to the contrary)     for all nominees listed below

      Instructions:  To withhold authority to vote for any nominee, mark the
      space beside the nominee's name with an "X".

      Mark E. Schwarz     _____                James H. Graves     _____
      Scott T. Berlin     _____                George R. Manser    _____

 ITEM 2.   APPROVAL OF INCREASE IN AUTHORIZED CAPITAL

      [ ]  FOR           [ ]  AGAINST            [ ]  ABSTAIN

 ITEM 3.   APPROVAL OF CONVERTIBILITY OF CONVERTIBLE NOTES

      [ ]  FOR           [ ]  AGAINST            [ ]  ABSTAIN

 ITEM 4.   OTHER BUSINESS.  In their  discretion, the Proxies are  authorized
           to vote on  any other matter  which may properly  come before  the
           Annual Meeting or any adjournment thereof.

      When properly executed, this proxy will be voted in the manner directed
 by the shareholder.  If no direction is specified, this proxy will be  voted
 FOR the election  of all nominees  proposed in Item  1, FOR  approval of  an
 increase in authorized capital  as proposed in Item  2, and FOR  approval of
 the convertibility of convertible notes as proposed in Item 3.

      The undersigned hereby  revokes all  previous proxies  relating to  the
 shares covered hereby and  confirms all that said  Proxies may do by  virtue
 hereof.



      Instructions.  Please  sign below exactly  as your shares  are held  of
 record.  When  shares are held  by  joint tenants,  both should  sign.  When
 signing as attorney,  executor, administrator, trustee  or guardian,  please
 give full title as such.  If a corporation,  please sign in  full  corporate
 name by President  or other authorized  officer.  If  a partnership,  please
 sign in partnership name by authorized person.


 Date: ___________________, 2006   __________________________________________
                                   Signature
 PLEASE MARK, SIGN, DATE AND
 RETURN THE PROXY CARD PROMPTLY,
 USING THE ENCLOSED ENVELOPE.
                                   __________________________________________
                                   Signature, if held jointly:


   PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING
   OF SHAREHOLDERS.  [ ]