SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                   ----------
                                   FORM 10-QSB

            Quarterly report pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                      For the Quarter ended March 31, 1998

                         Commission file number: 0-18188

                              PAULSON CAPITAL CORP.
                              ---------------------
              Exact name of registrant as specified in its charter


                       Oregon                        93-0589534
              ------------------------    --------------------------------
              (State of incorporation)    (I.R.S. Employer Identification)


              811 S.W. Naito Parkway
                   Portland, OR                       97204
              ----------------------                ----------
              (Address of principal                 (Zip Code)
                executive offices)

       Registrant's telephone number, including area code: (503) 243-6000
                                                           --------------


     Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

                                 Yes [X] No [ ]


     Number of shares outstanding of each of the issuer's classes of common
stock, as of May 12, 1998:

                  Common stock, no par value - 3,956,160 shares

          Transitional Small Business Disclosure Format Yes [ ] No [X]

                                       1
<PAGE>
                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                  (unaudited)

                                                         3/31/98                 12/31/97
ASSETS

CURRENT ASSETS
<S>                                                  <C>                      <C>        
Cash and cash equivalents                            $    88,385              $    73,220
Receivable from broker-dealers and
  clearing organizations                               2,673,538                4,497,086
Notes and other receivables                              563,471                  657,918
Trading securities                                     3,222,917                8,901,802
Investment securities                                  8,943,500                7,068,580
Refundable income taxes                                   61,171                  101,907
Prepaid and deferred expenses                            259,953                  400,845
Secured demand note                                      100,000                  100,000
Deferred income taxes                                    289,100                  289,100
                                                      ----------              -----------

Total current assets                                  16,202,035               22,090,458
                                                     -----------              -----------

FURNITURE AND EQUIPMENT, net                             229,581                  202,605
                                                     -----------              -----------

INVESTMENT IN REAL ESTATE                                169,900                  169,900
                                                     -----------              -----------

DEFERRED INCOME TAXES                                         --                       --
                                                     -----------              -----------

                                                     $16,601,516              $22,462,963
                                                     ===========              ===========

        The accompanying notes are an integral part of these statements.
</TABLE>

                                       2
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEET - CONTINUED
                                   (unaudited)


                                                         3/31/98                 12/31/97
<S>                                                  <C>                      <C>        
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities             $   276,709              $   264,294
Payable to broker-dealers and clearing
  organizations                                        1,479,108                6,041,296
Compensation, employee benefits and
  payroll taxes                                          671,895                1,942,906
Securities sold, not yet purchased                       191,722                  330,729
Income taxes payable                                          --                       --
Subordinated note payable                                100,000                  100,000
                                                     -----------              -----------

Total current liabilities                              2,719,434                8,679,225
                                                     -----------              -----------

SHAREHOLDERS' EQUITY

Preferred stock, no par value;
  authorized, 500,000 shares; issued and
  outstanding, no shares                                      --                       --
Common stock, no par value; authorized,
  10,000,000 shares; issued and
  outstanding, 3,956,169 and
  3,970,536, respectively                                791,543                  794,416
Retained earnings                                     13,090,539               12,989,322
                                                     -----------              -----------

Total shareholders' equity                            13,882,082               13,783,738
                                                     -----------              -----------

                                                     $16,601,516              $22,462,963
                                                     ===========              ===========

        The accompanying notes are an integral part of these statements.
</TABLE>

                                       3
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                for the three month periods ended March 31, 1998
                         and March 31, 1997 (unaudited)

                                                         3/31/98                  3/31/97
<S>                                                  <C>                      <C>        
Revenues

Commissions                                          $ 2,717,473              $ 2,459,554
Corporate finance                                        232,365                  299,409
Investment income                                        332,974                1,488,198
Trading income (loss)                                    348,554                  237,250
Interest and dividends                                       798                    1,409
Other                                                      4,977                    9,024
                                                     -----------              -----------

                                                       3,637,141                4,494,844
                                                     -----------              -----------
Expenses

Commissions and salaries                               2,422,031                2,367,050
Underwriting expenses                                    158,239                   13,833
Rent, telephone and quotation services                   214,774                  194,642
Interest expense                                           1,515                    1,532
Professional fees                                         95,068                  141,907
Bad debt expense                                          30,000                   29,000
Travel and entertainment                                  63,932                   39,287
Settlements                                                3,693                       --
Other                                                    358,549                  389,034
                                                     -----------              -----------

                                                       3,347,801                3,176,285
                                                     -----------              -----------

Earnings (loss) before income taxes                      289,340                1,318,559

Provision for income taxes
Current                                                  115,736                  527,500
Deferred                                                      --                       --
                                                     -----------              -----------

Net Earnings (Loss)                                  $   173,604              $   791,059
                                                     ===========              ===========

Earnings (loss) per share                            $       .04              $       .20
                                                     ===========              ===========


         The accompanying notes are an integral part of these statements
</TABLE>

                                       4
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                For the three year period ended December 31, 1997
              and the three months ended March 31, 1998 (unaudited)

                                                                Common Stock
                                                 -------------------------------------                Retained
                                                       Shares                   Amount                Earnings
                                                 ------------             ------------            ------------
<S>                                                <C>                    <C>                     <C>
Balance at December 31,  1994                      4,363,501                 775,730                 1,225,043

Issuance of common stock in lieu
    of directors' cash compensation                   10,338                  10,500                         -

Redemption of common stock                           (49,300)                (50,341)                        -

Net earnings for the year                                  -                       -                 2,925,033
                                                 ------------             ------------            ------------
Balance at December 31,  1995                       4,324,539                 735,889                4,150,076
 
Exercise of stock options                              38,570                  40,892                        -

Issuance of common stock in lieu
    of directors' cash compensation                     3,432                   7,500                        -

Redemption of common stock                           (285,300)                (50,580)                (712,432)

Net earnings for the year                                   -                       -                5,727,202
                                                 ------------             ------------            ------------

Balance at December 31, 1996                        4,081,241             $   733,701             $  9,164,846

Exercise of stock options                              87,140                  89,283                        -

Issuance of common stock in lieu
    of directors' cash compensation                     2,266                   8,000                        -

Redemption of common stock                           (200,111)                (36,568)                (529,919)

Net earnings for the year                                   -                        -               4,354,395
                                                 ------------             ------------            ------------

Balance at December 31, 1997                        3,970,536             $    794,416            $ 12,989,322

Exercise of stock options                                   -                        -                       -
 
Redemption of common stock                            (14,367)                  (2,873)                (72,387)

Net earnings for the year to date                           -                        -                 173,604
                                                 ------------             ------------            ------------
Balance at March 31, 1998                           3,956,169             $    791,543            $ 13,090,539
                                                 ============             ============            ============

                               The accompanying notes are an integral part of these statements
</TABLE>

                                       5
<PAGE>
<TABLE>
<CAPTION>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               (unaudited) for the three month periods ended March
                           31, 1998 and March 31, 1997


                                                                      3/31/98             3/31/97
                                                                 ------------        ------------
Increase (Decrease) in Cash and Cash Equivalents

<S>                                                              <C>                 <C>
Cash flows from operating activities
    Net earnings (loss)                                          $    173,604        $    791,059
      Adjustments to reconcile net earnings (loss) to
       net cash used in operating activities
          Unrealized (appreciation) depreciation
              on investment securities                                644,506            (279,500)
          Realized gain on investment securities                     (977,480)         (1,231,159)
          Depreciation and amortization                                18,040              14,468
          Gain from sale of furniture and equipment                        --              (6,799)
          Change in assets and liabilities
              Receivables                                           1,917,995           3,812,486
              Trading securities                                    5,678,885          (1,478,923)
              Refundable income taxes                                  40,736             412,261
              Prepaid and deferred expenses                           140,892              32,681
              Accounts payable and accrued liabilities             (5,820,783)         (4,512,159)
              Securities sold, not yet purchased                       23,622             (96,094)
              Bank overdraft                                               --                  --
              Income taxes payable                                         --             115,239
                                                                 ------------        ------------

       Net cash provided by (used in) operating activities          1,840,017          (2,426,440)
                                                                 ------------        ------------

Cash flows from investing activities
    Purchases of investment securities                            (10,666,360)         (3,736,816)
    Proceeds from sale of investment securities                     8,961,785           6,406,788
    Additions to furniture and equipment                              (45,017)            (21,059)
    Proceeds from sale of furniture and equipment                          --               9,600
                                                                 ------------        ------------

       Net cash provided by (used in) investing activities        $(1,749,592)       $  2,658,513
                                                                 ------------        ------------

         The accompanying notes are an integral part of these statements
</TABLE>

                                       6
<PAGE>
<TABLE>
<CAPTION>
          CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED

                                                                      3/31/98             3/31/97
                                                                 ------------        ------------
<S>                                                              <C>                 <C>         
Cash flows from financing activities
    Proceeds from exercise of stock options                                --              25,892
    Payments to retire common stock                                   (75,260)           (329,224)
    Decrease in bank overdraft payable                                      -                   -
                                                                 ------------        ------------

       Net cash provided by (used in) financing activities            (75,260)           (303,332)
                                                                 ------------        ------------


              NET INCREASE (DECREASE) IN CASH AND
                  CASH EQUIVALENTS                                     15,165             (71,259)

Cash and cash equivalents at beginning of year                         73,220             185,445
                                                                 ------------        ------------

Cash and cash equivalents at March 31                            $     88,385        $    114,186
                                                                 ============        ============


Cash paid during the three months for

    Interest                                                     $      1,515        $      1,532
                                                                 ============        ============

    Income taxes                                                 $     75,000                  --
                                                                 ============        ============


         The accompanying notes are an integral part of these statements
</TABLE>

                                        7
<PAGE>
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1. Basis of Presentation

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for interim financial statements in
Article 10 of Regulation S-X and, therefore, do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the interim financial
statements include all adjustments (consisting only of normal recurring
accruals) necessary to state fairly the information shown therein. The nature of
the Company's business is such that the results of any interim period are not
necessarily indicative of results for a full fiscal year.

2. Securities Owned

     Any losses from the disposition of securities are reflected in trading
revenues on the income statement for the period.

3. Commitments and Contingencies

     The Company and PIC are defendants in Holly Millar and Bertram Ostrau v.
Pearce Systems International, Inc., et al., filed in San Francisco Superior
Court, State of California, in March 1996. An asserted class action, plaintiffs
allege violations of the California securities law, deceit, negligent
misrepresentation and unfair business practices relating to alleged
misstatements in the prospectus used in connection with a February 1994, $5
million public offering in which PIC acted as the managing underwriter.
Plaintiffs seek rescission of the offering as well as actual damages, interest,
attorney fees and punitive damages. No class has been certified, although a
motion for class certification is pending. The case is set for trial February
18, 1999. Discovery in this matter is still in the early stages. Therefore, the
Company and PIC have not had an opportunity to investigate this matter fully but
believe they have meritorious defenses and intend to defend this matter
vigorously. Pursuant to a tolling agreement with the plaintiff, the Company (but
not PIC) expects to be dismissed without prejudice from the lawsuit.

     Richard Toscano Claim  Richard Toscano, a former PIC customer, has filed an
arbitration claim against PIC and Jeff Hudson, a former PIC broker, alleging
various securities law violations, including unsuitability and
misrepresentation, in connection with his account with PIC. He has also alleged
that PIC failed to supervise Mr. Hudson. Mr. Toscano seeks damages in excess of
$90,000 plus interest, attorney fees and punitive damages. An arbitration
hearing for this matter is set for October 7, 1998. PIC has not had an
opportunity to fully investigate this claim, but believes it has meritorious
defenses and intends to defend this matter vigorously.

     Philip Cutler Claim  In March 1996, Philip Cutler, a former PIC customer,
asserted various claims against Todd Bollman, a former PIC broker, and PIC
alleging unsuitability and churning in 

                                       8
<PAGE>
his account with PIC. Mr. Cutler has indicated that his losses approach $90,000,
not including commissions. PIC has indicated to Mr. Cutler that it believes he
is an experienced, sophisticated investor who spoke regularly with Mr. Bollman
and was well informed with respect to the risks involved in the trading that he
selected in his account. Although Mr. Cutler indicated that he would seek
arbitration, no arbitration has been filed at this time. PIC has not had an
opportunity to fully investigate this matter, but believes it has meritorious
defenses and intends to defend this matter vigorously if an arbitration claim is
filed.

     Craig and Cherie Cline Claim  In December 1997, Craig and Cherie Cline,
former PIC customers, asserted claims against PIC and Clint Holland, a PIC
broker, alleging misrepresentation, unsuitability and breach of fiduciary duty
in connection with the handling of their account by PIC and Mr. Holland. The
Clines have demanded $250,000 to settle this matter. PIC has not had an
opportunity to fully investigate this matter but believes it has meritorious
defenses and intends to defend this matter vigorously if an arbitration claim is
filed.

     Masood Asif Claim  In March 1998, Masood Asif, a former PIC customer,
asserted various claims against PIC and Sid Lodhi, a PIC broker, alleging
various securities law violations, including unsuitability and
misrepresentation, in connection with his account with PIC. He has also alleged
breach of fiduciary duty and failure to advise of potential tax liabilities. Mr.
Asif seeks $200,000 in damages. Although Mr. Asif has indicated that he will
seek arbitration of this matter, no arbitration has yet been filed. Although PIC
has not completed its investigation of this matter, it believes it has
meritorious defenses and intends to defend this matter vigorously if an
arbitration claim is filed.

     Shahid and Lita Choudhry Claim  In February 1998, the Choudhrys, former PIC
customers, asserted various claims against PIC and Sid Lodhi, a PIC broker,
claiming that Mr. Lodhi did not execute certain sales according to directions
allegedly received from Mr. Choudhry. The Choudhrys seek damages of $343,000.
PIC believes it has meritorious defenses and intends to defend this matter
vigorously if an arbitration claim is filed.

     An adverse outcome in certain of the matters described above could have a
material adverse effect on PIC or the Company. PIC has been named in certain
other legal proceedings and has received notice that certain customers may
commence legal proceedings against PIC. The Company believes, based upon
information received to date and, where the Company believes it appropriate,
discussions with legal counsel, that resolution of this additional pending or
threatened litigation will have no material adverse effect on the consolidated
financial condition, results of operations, or business of the Company.

                                       9
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997

     Results of Operations

     The revenues and operating results of the Company's operating subsidiary,
Paulson Investment Company, Inc. ("PIC"), are influenced by fluctuations in the
equity underwriting markets as well as general economic and market conditions,
particularly conditions in the over-the-counter market, where PIC's investment
account, trading inventory positions and underwriter warrants are heavily
concentrated. Significant fluctuations can occur in PIC's revenues and operating
results from one period to another. PIC's operations depend upon many factors,
such as the number of companies that are seeking public financing, the quality
and financial condition of those companies, market conditions in general, the
performance of previous PIC underwritings and interest in certain industries by
investors. As a result, revenues and income derived from these activities may
vary significantly from period to period. In the table below, "Trading Income"
is the net gain or loss from trading positions before commissions paid to the
representatives in the trading department. "Investment Income" includes amounts
received, if any, from the exercise of PIC's underwriter warrants.

<TABLE>
<CAPTION>
                     Summary of Changes in Major Categories
                            of Revenues and Expenses

                                                                             Quarters Ended
                                                                          3/31/98 vs. 3/31/97
         <S>                                                     <C>                     <C>
         Revenues:
         Sales Commissions                                       $    257,919             10.5%
         Corporate Finance                                            (67,044)           (22.4%)
         Investment Income                                         (1,155,224)           (77.6%)
         Trading Income                                               111,304             46.9%
         Other                                                         (4,658)           (44.6%)
                                                                 ------------        ----------

         Total                                                   $   (857,703)           (19.1%)

         Expenses:
         Commissions and Salaries                                $     54,981              2.3%
         Underwriting Expenses                                        144,406              N/A
         Rent, Telephone and Quotes                                    20,132             10.3%
         Other                                                        (48,003)            (8.0%)
                                                                 ------------             ------

         Total                                                   $    171,516              5.4%

         Pretax Income                                           $ (1,029,219)           (78.1%)
</TABLE>

                                       10
<PAGE>
     Total revenues for the first quarter of 1998 fell 19.1 percent from the
first quarter of 1997, from $4,494,844 to $3,637,141. As shown in the table
above, sales commissions rose $257,919, or 10.5 percent, to $2,717,473 in the
first quarter of 1998 from $2,459,554 in the comparable 1997 period. This
increase resulted primarily from the more favorable price movements and trading
levels in smaller capitalization issues in the 1998 quarter compared to 1997
(the Nasdaq Industrial Average rose 11.52 percent in the first quarter of 1998
but fell 8.26 percent in the first quarter of 1997). Corporate finance revenues
fell 22.4 percent, or $67,044, in the first quarter of 1998 compared to the
first quarter of 1997. One corporate finance transaction was completed in the
1998 quarter, raising a total of $3.8 million for the issuer; no transactions
were completed in the 1997 quarter, but PIC participated in a large transaction
managed by others in the 1997 quarter. Corporate finance revenue is directly
related to the amount of money raised in completed transactions. Investment
income fell $1,155,224, or 77.6 percent, to $332,974 in the first quarter of
1998 from $1,488,198 in the first quarter of 1997, primarily due to the exercise
in the 1997 quarter of an underwriter warrant received in previous corporate
finance transactions and substantial trading profits in the investment account.
There were no underwriter warrant exercises in the 1998 quarter and investment
profits were lower. Trading income rose $111,304, or 46.9 percent, from $237,250
in the first quarter of 1997 to $348,554 in the comparable 1998 period. This
increase was also due to the better market conditions in the 1998 quarter
compared to the volume levels in the 1997 quarter for small capitalization OTC
stocks.

     Total expenses rose $171,516 in the first quarter of 1998 from the
comparable 1997 period, an increase of 5.4 percent, to $3,347,801 from
$3,176,285. Commissions and salaries rose $54,981, or 2.3 percent, to $2,422,031
in the 1998 period from $2,367,050 in 1997. This increase was primarily due to
increased commission revenues resulting in a higher level of commissions paid.
(Higher percentage commission levels are generally paid to employee registered
representatives at higher production levels.) Underwriting expenses rose by
$144,406, due primarily to increased legal and other fees relating to the one
transaction in 1998. There were no completed transactions in the 1997 quarter.
Rent, telephone and quote expenses increased to $214,774 in the 1998 period from
$194,642 in 1997, an increase of 10.4 percent. Other expenses decreased 8.0
percent, to $552,757 in the first quarter of 1998 from $600,760 in the first
quarter of 1997. This decrease was primarily due to decreased professional fees
associated with litigation and consulting fees.

     The Company had a pretax profit of $1,318,559 in the first quarter of 1997
compared to a pretax profit of $289,340 in the comparable 1998 period, primarily
due to lower investment income and corporate finance in the 1998 quarter more
than offsetting higher sales commissions. Significant fluctuations can occur in
PIC's revenues and operating results from one period to another.

     The Company also accrued $115,736 in income taxes for the first quarter of
1998, compared to an accrual for income taxes in the first quarter of 1997 of
$527,500. Independent of investment income, the Company would have had a loss
before income taxes of $43,634 in the first quarter of 1998 compared to a loss
before income taxes of $169,639 in the first quarter of 1997.

                                       11
<PAGE>
Liquidity and Capital Resources

     The majority of PIC's assets are cash and assets readily convertible to
cash. PIC's securities inventory is stated at market value. The liquidity of the
market for many of PIC's securities holdings, however, varies with trends in the
stock market. Since many of the securities held by PIC are thinly traded, and
PIC is in many cases a primary market maker in the issues held, any significant
sales of PIC's positions could adversely affect the liquidity of the issues
held. In general, falling prices in OTC securities (which make up most of PIC's
trading positions) lead to decreased liquidity in the market for these issues,
while rising prices in OTC issues tend to increase the liquidity of the market
for these securities. The overall increase in prices for the OTC securities
traded by PIC in both 1996 and 1998 was combined with a general increase in the
liquidity of the markets for these securities. The decline in prices for the OTC
securities traded by PIC in early 1997 was combined with a general decrease in
the liquidity of the markets for these securities. PIC's investment account and
trading inventory accounts are stated at fair market value, which is at or below
quoted market price.

     PIC owed $100,000 at March 31, 1998 pursuant to a subordinated loan from an
investor. PIC also borrows money from its clearing firm in the ordinary course
of its business, pursuant to an understanding under which the clearing firm
agrees to finance PIC's trading accounts. As of March 31, 1998, no net loans
were outstanding pursuant to this arrangement. PIC and the Company are generally
able to meet their compensation and other obligations out of current liquid
assets.

     Another source of capital to PIC and the Company has been the exercise of
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are not
reflected on the balance sheet of PIC or Paulson Capital. While the warrants and
the securities issuable upon exercise of the warrants are not immediately
saleable, PIC receives the right to require the issuer to register the
underlying securities for resale to the public. Profits, if any, from the
warrants are realized based upon the difference between the market price and the
exercise price on the date of exercise. Further profits or losses are
subsequently realized when the underlying securities are sold. Profits and
losses realized from the warrants are recorded as "Investment Income." There is
no public market for the underwriter warrants. The securities receivable upon
exercise of the underwriter warrants cannot be resold unless the issuer has
registered these securities with the SEC and the states in which the securities
will be sold or exemptions are available. Any delay or other problem in the
registration of these securities would have an adverse impact upon PIC's ability
to obtain funds from the exercise of the underwriter warrants and the resale of
the underlying securities. At March 31, 1998, PIC owned 34 underwriter warrants
(from 32 issuers), of which 28 were currently exercisable and nine had an
exercise price below the current market price of the securities receivable upon
exercise. The value of the firm's underwriter warrants depends on the prices of
the underlying securities. These prices are influenced by general movements in
the prices of OTC securities as well as the success of the issuers of the
underwriter warrants.

     In the three months ended March 31, 1998, $1,840,017 of net cash was
provided by operating activities of the Company. The major adjustments to
reconcile this result to the 

                                       12
<PAGE>
Company's net profit of $173,604 include a decrease in trading securities of
$5,678,885, a decrease in receivables of $1,917,995 and unrealized depreciation
on investment securities of $644,506 and a $140,892 decrease in prepaid and
deferred expenses which are partially offset by a decrease in accounts payable
and accrued liabilities of $5,820,783 and a realized gain on investment
securities of $977,480. In the quarter, $1,749,592 of net cash was used by the
Company in investing activities, which is primarily the result of $8,961,785 in
proceeds from the sale of short-term investment securities being more than
offset by the purchase of $10,666,360 of short-term investment securities and
$45,017 of additions to furniture and equipment. $75,260 of net cash was used in
financing activities in the quarter, consisting of payments to retire common
stock. The net increase in cash and cash equivalents for the quarter totaled
$15,165. See "Financial Statements -- Consolidated Statements of Cash Flows."

     As a securities broker-dealer, the Company's wholly owned subsidiary, PIC,
is required by SEC regulations to meet certain liquidity and capital standards.
At March 31, 1998, the Company had no material commitments for capital
expenditures.

     In general, the primary ongoing sources of PIC's, and therefore the
Company's, liquidity, including PIC's trading positions, borrowings on those
positions and profits realized upon the exercise of underwriter warrants, all
depend in large part on the trend in the general markets for OTC securities.
Rising OTC price levels will tend to increase the value and liquidity of PIC's
trading positions, the amount that can be borrowed from its clearing firm based
upon those positions, and the value of PIC's underwriter warrants. The Company
believes its liquidity is sufficient to meet its needs for the foreseeable
future.

Inflation

     Because PIC's assets are primarily liquid, they are not significantly
affected by inflation. The rate of inflation affects PIC's expenses, such as
employee compensation, office leasing and communications costs. These costs may
not readily be recoverable in the price of services offered by the Company. To
the extent inflation results in rising interest rates and has other adverse
effects in the securities markets and the value of securities held in inventory
or PIC's investment account, it may adversely affect the Company's financial
position and results of operations.

                                       13
<PAGE>
                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings.

          See Note 3 of Notes to Condensed Consolidated Financial Statements in
Item 1.

Item 2. Changes in Securities.

          None

Item 3. Defaults upon Senior Securities.

          None

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

          None

Item 5. Other Information.

          None

Item 6. Exhibits and Reports on Form 8-K

          Exhibit 
             No.         Description
          -------        -----------

            27           Financial Data Schedule

No reports on Form 8-K were filed during the quarter ended March 31, 1998.

                                       14
<PAGE>
                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                  PAULSON CAPITAL CORP.



Date:  MAY 4, 1998                By:  CHESTER L.F. PAULSON
       --------------------            ----------------------------
                                       Chester L.F. Paulson
                                       President



Date:   MAY 12, 1998              By:  CAROL RICE
        -------------------            ----------------------------
                                       Carol Rice
                                       Principal Accounting Officer

                                       15
<PAGE>
                                  EXHIBIT INDEX

      Exhibit                                                         Sequential
        No.        Description                                          Page No.
      -------      -----------                                        ----------

        27         Financial Data Schedule

                                       16