##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission
file number: 0-18188





PAULSON CAPITAL CORP.

(Exact name of
registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Oregon                                                         |  | 93-0589534                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|811 SW Naito Parkway, Portland, Oregon                         |  | 97204                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: 503-243-6000





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.



|                           |  |                                               |  |                             
|-------------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  |                                               |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈   |  | (Do not check if a smaller reporting company) |  | Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                           |  |                              
|-------------------------- |  | -----------------------------
|Common stock, no par value |  | 5,982,150                    
|(Class)                    |  | (Outstanding at May 15, 2008)









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##### Table of Contents

PAULSON CAPITAL CORP. AND SUBSIDIARY

FORM 10-Q

INDEX



|                               |  |                                                                                                |  |     
|------------------------------ |  | ---------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                               
|                               |  |                                                                                               
|Item 1.                        |  | Financial Statements                                                                           |  |     
|                               |  |                                                                                               
|                               |  | Consolidated Balance Sheets - March 31, 2008 and December 31, 2007 (unaudited)                 |  | 2   
|                               |  |                                                                                               
|                               |  | Consolidated Statements of Operations - Three Months Ended March 31, 2008 and 2007 (unaudited) |  | 3   
|                               |  |                                                                                               
|                               |  | Consolidated Statements of Cash Flows - Three Months Ended March 31, 2008 and 2007 (unaudited) |  | 4   
|                               |  |                                                                                               
|                               |  | Notes to Consolidated Financial Statements (unaudited)                                         |  | 5   
|                               |  |                                                                                               
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 7   
|                               |  |                                                                                               
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 12  
|                               |  |                                                                                               
|Item 4T.                       |  | Controls and Procedures                                                                        |  | 13  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                               
|                               |  |                                                                                               
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                    |  | 13  
|                               |  |                                                                                               
|Item 6.                        |  | Exhibits                                                                                       |  | 13  
|                               | 
|Signatures                     |  | 14                                                                                            



1



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Paulson Capital
Corp. and Subsidiary

Consolidated Balance Sheets



|                                                                                                                 |  |               |            |                  |   |           
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                                                                                                                 |  | March 31,2008 |            | December 31,2007
|                                                                                                                 |  | (Unaudited)   |            |                 
|Assets                                                                                                           |  |               |            |                  |   |           
|Cash and cash equivalents                                                                                        |  | $             | 195,766    |                  | $ | 43,619    
|Receivable from clearing organization                                                                            |  |               | 14,446,991 |                  |   | 11,702,341
|Notes and other receivables                                                                                      |  |               | 549,905    |                  |   | 1,563,530 
|Deferred tax asset                                                                                               |  |               | 1,104,603  |                  |   |          
|Trading securities, at market value                                                                              |  |               | 9,514,526  |                  |   | 12,037,368
|Investment securities, at market or estimated fair value                                                         |  |               | 6,449,801  |                  |   | 8,157,546 
|Underwriter warrants, at estimated fair value                                                                    |  |               | 9,981,000  |                  |   | 16,373,000
|Prepaid and deferred expenses                                                                                    |  |               | 630,121    |                  |   | 939,371   
|Furniture and equipment, at cost, net of accumulated depreciation and amortization of $891,684 and $862,616      |  |               | 168,787    |                  |   | 196,333   
|                                                                                                                 |  |               |            |                  |   |           
|Total Assets                                                                                                     |  | $             | 43,041,500 |                  | $ | 51,013,108
|                                                                                                                 |  |               |            |                  |   |           
|Liabilities and Shareholders Equity                                                                             |  |               |            |                  |   |           
|Accounts payable and accrued liabilities                                                                         |  | $             | 1,972,313  |                  | $ | 3,240,877 
|Payable to clearing organization                                                                                 |  |               | 75,878     |                  |   | 2,463,413 
|Compensation, employee benefits and payroll taxes                                                                |  |               | 1,775,516  |                  |   | 2,065,972 
|Securities sold, not yet purchased, at market value                                                              |  |               | 36,110     |                  |   | 36,259    
|Income taxes payable - current                                                                                   |  |               | 1,564,825  |                  |   | 1,369,710 
|Income taxes payable - long-term                                                                                 |  |               | 302,000    |                  |   | 297,000   
|Deferred revenue                                                                                                 |  |               | 350,000    |                  |   | 375,000   
|Underwriter warrants - employee and independent contractor, at estimated fair value                              |  |               | 560,000    |                  |   | 651,000   
|Deferred income taxes                                                                                            |  |               |           |                  |   | 1,821,000 
|                                                                                                                 |  |               |            |                  |   |           
|Total Liabilities                                                                                                |  |               | 6,636,642  |                  |   | 12,320,231
|Commitments and Contingencies                                                                                    |  |               |           |                  |   |          
|Shareholders Equity                                                                                             |  |               |            |                  |   |           
|Preferred stock, no par value; 500,000 shares authorized; none issued                                            |  |               |           |                  |   |          
|Common stock, no par value; 20,000,000 shares authorized; shares issued and outstanding: 6,007,150 and 6,037,150 |  |               | 1,965,419  |                  |   | 1,972,319 
|Retained earnings                                                                                                |  |               | 34,439,439 |                  |   | 36,720,558
|                                                                                                                 |  |               |            |                  |   |           
|Total Shareholders Equity                                                                                       |  |               | 36,404,858 |                  |   | 38,692,877
|                                                                                                                 |  |               |            |                  |   |           
|Total Liabilities and Shareholders Equity                                                                       |  | $             | 43,041,500 |                  | $ | 51,013,108
|                                                                                                                 |  |               |            |                  |   |           

See accompanying Notes to Consolidated Financial Statements.



2



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Paulson Capital Corp. and Subsidiary

Consolidated Statements of Operations

(Unaudited)



|                                       |  |                                      |            |   |      |   |          
|-------------------------------------- |  | ------------------------------------ | ---------- | - | ---- | - | ---------
|                                       |  | For the Three Months Ended March 31,
|                                       |  | 2008                                 |            |   | 2007
|Revenues                               |  |                                      |            |   |      |   |          
|Commissions                            |  | $                                    | 4,455,829  |   |      | $ | 4,116,568
|Corporate finance                      |  |                                      | 395,389    |   |      |   | 995,511  
|Investment income (loss)               |  |                                      | (7,037,585 | ) |      |   | 3,184,344
|Trading income                         |  |                                      | 4,322,435  |   |      |   | 1,340,076
|Interest and dividends                 |  |                                      | 14,621     |   |      |   | 34,173   
|Other                                  |  |                                      | 25,225     |   |      |   | 25,375   
|                                       |  |                                      |            |   |      |   |          
|                                       |  |                                      | 2,175,914  |   |      |   | 9,696,047
|Expenses                               |  |                                      |            |   |      |   |          
|Commissions and salaries               |  |                                      | 4,339,564  |   |      |   | 3,964,709
|Underwriting expenses                  |  |                                      | 145,597    |   |      |   | 159,955  
|Rent, telephone and quotation services |  |                                      | 286,724    |   |      |   | 313,235  
|Professional fees                      |  |                                      | 260,139    |   |      |   | 203,945  
|Bad debt expense                       |  |                                      | 2,937      |   |      |   | 47,689   
|Travel and entertainment               |  |                                      | 32,210     |   |      |   | 35,380   
|Advertising and promotion expense      |  |                                      | 58,196     |   |      |   | 48,006   
|Settlement expense                     |  |                                      | 16,500     |   |      |   | 79,717   
|Depreciation and amortization          |  |                                      | 29,068     |   |      |   | 28,964   
|Other                                  |  |                                      | 380,793    |   |      |   | 314,048  
|                                       |  |                                      |            |   |      |   |          
|                                       |  |                                      | 5,551,728  |   |      |   | 5,195,648
|                                       |  |                                      |            |   |      |   |          
|Income (loss) before income taxes      |  |                                      | (3,375,814 | ) |      |   | 4,500,399
|Income tax expense (benefit):          |  |                                      |            |   |      |   |          
|Current                                |  |                                      | 1,681,603  |   |      |   | 486,955  
|Deferred                               |  |                                      | (2,925,603 | ) |      |   | 1,236,247
|                                       |  |                                      |            |   |      |   |          
|                                       |  |                                      | (1,244,000 | ) |      |   | 1,723,202
|                                       |  |                                      |            |   |      |   |          
|Net income (loss)                      |  | $                                    | (2,131,814 | ) |      | $ | 2,777,197
|                                       |  |                                      |            |   |      |   |          
|Basic net income (loss) per share      |  | $                                    | (0.35      | ) |      | $ | 0.45     
|                                       |  |                                      |            |   |      |   |          
|Diluted net income (loss) per share    |  | $                                    | (0.35      | ) |      | $ | 0.45     
|                                       |  |                                      |            |   |      |   |          
|Shares used in per share calculations: |  |                                      |            |   |      |   |          
|Basic                                  |  |                                      | 6,018,908  |   |      |   | 6,157,672
|                                       |  |                                      |            |   |      |   |          
|Diluted                                |  |                                      | 6,018,908  |   |      |   | 6,166,906
|                                       |  |                                      |            |   |      |   |          

See accompanying Notes to Consolidated Financial Statements.



3



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Paulson Capital Corp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                               |  |                                      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                               |  | For the Three Months Ended March 31, |           
|                                                                                               |  | 2008                                 |            |   | 2007 |  
|Cash flows from operating activities:                                                          |  |                                      |            |   |      |   |            |  
|Net income (loss)                                                                              |  | $                                    | (2,131,814 | ) |      | $ | 2,777,197  |  
|Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: |  |                                      |            |   |      |   |            |  
|Receipt of underwriter warrants                                                                |  |                                      | (462,320   | ) |      |   | (375,519   | )
|Unrealized (appreciation) depreciation/expiration of underwriter warrants                      |  |                                      | 6,854,320  |   |      |   | (4,075,987 | )
|Unrealized depreciation of underwriter warrants - employee and independent contractor          |  |                                      | (91,000    | ) |      |   |           |  
|Noncash compensation associated with underwriter warrants                                      |  |                                      |           |   |      |   | 86,506     |  
|Depreciation and amortization                                                                  |  |                                      | 29,068     |   |      |   | 28,964     |  
|Deferred income taxes                                                                          |  |                                      | (2,925,603 | ) |      |   | 1,236,248  |  
|Deferred revenue                                                                               |  |                                      | (25,000    | ) |      |   | (25,000    | )
|Change in assets and liabilities:                                                              |  |                                      |            |   |      |   |            |  
|Receivable from/payable to clearing organization                                               |  |                                      | (5,132,185 | ) |      |   | (2,762,645 | )
|Notes and other receivables                                                                    |  |                                      | 1,013,625  |   |      |   | 26,382     |  
|Income taxes receivable                                                                        |  |                                      |           |   |      |   | 304,695    |  
|Trading and investment securities                                                              |  |                                      | 4,230,587  |   |      |   | 2,243,019  |  
|Prepaid and deferred expenses                                                                  |  |                                      | 309,250    |   |      |   | 218,539    |  
|Accounts payable, accrued liabilities and compensation payables                                |  |                                      | (1,559,020 | ) |      |   | 208,359    |  
|Securities sold, not yet purchased                                                             |  |                                      | (149       | ) |      |   | (11,967    | )
|Income taxes payable - current                                                                 |  |                                      | 195,115    |   |      |   | 78,151     |  
|Income taxes payable - long-term                                                               |  |                                      | 5,000      |   |      |   | 100,000    |  
|                                                                                               |  |                                      |            |   |      |   |            |  
|Net cash provided by operating activities                                                      |  |                                      | 309,874    |   |      |   | 56,942     |  
|Cash flows from investing activities:                                                          |  |                                      |            |   |      |   |            |  
|Additions to furniture and equipment                                                           |  |                                      | (1,522     | ) |      |   | (6,127     | )
|                                                                                               |  |                                      |            |   |      |   |            |  
|Net cash used in investing activities                                                          |  |                                      | (1,522     | ) |      |   | (6,127     | )
|Cash flows from financing activities:                                                          |  |                                      |            |   |      |   |            |  
|Proceeds from stock option exercise                                                            |  |                                      |           |   |      |   | 77,110     |  
|Payments to retire common stock                                                                |  |                                      | (156,205   | ) |      |   | (196,162   | )
|                                                                                               |  |                                      |            |   |      |   |            |  
|Net cash used in financing activities                                                          |  |                                      | (156,205   | ) |      |   | (119,052   | )
|                                                                                               |  |                                      |            |   |      |   |            |  
|Increase (decrease) in cash and cash equivalents                                               |  |                                      | 152,147    |   |      |   | (68,237    | )
|Cash and cash equivalents:                                                                     |  |                                      |            |   |      |   |            |  
|Beginning of period                                                                            |  |                                      | 43,619     |   |      |   | 219,341    |  
|                                                                                               |  |                                      |            |   |      |   |            |  
|End of period                                                                                  |  | $                                    | 195,766    |   |      | $ | 151,104    |  
|                                                                                               |  |                                      |            |   |      |   |            |  
|Supplemental cash flow information:                                                            |  |                                      |            |   |      |   |            |  
|Cash paid during the period for income taxes                                                   |  | $                                    | 1,527,900  |   |      | $ | 4,190      |  
|Supplemental non-cash flow information:                                                        |  |                                      |            |   |      |   |            |  
|Deferred tax benefit from stock option exercises                                               |  | $                                    |           |   |      | $ | 11,600     |  
|Effect of adoption of FIN 48                                                                   |  |                                      |           |   |      |   | 90,000     |  

See accompanying Notes to Consolidated Financial Statements.



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PAULSON CAPITAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information for Paulson Capital Corp. and its wholly-owned subsidiary, Paulson Investment Company, included herein as of
March 31, 2008 and December 31, 2007 and for the three-month periods ended March 31, 2008 and 2007 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the
opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2007 is derived from our 2007 Annual Report on
Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2007 Annual Report on Form 10-K. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Earnings Per Share

Following is a reconciliation of our shares used for our basic net income (loss) per share and our diluted net income (loss) per share:



|                                                                                                                    |  |                             |  |          
|------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ---------
|                                                                                                                    |  | Three Months EndedMarch 31,
|                                                                                                                    |  | 2008                        |  | 2007     
|Shares used for basic net income (loss) per share                                                                   |  | 6,018,908                   |  | 6,157,672
|Effect of dilutive stock options                                                                                    |  |                            |  | 9,234    
|                                                                                                                    |  |                             |  |          
|Shares used for diluted net income (loss) per share                                                                 |  | 6,018,908                   |  | 6,166,906
|                                                                                                                    |  |                             |  |          
|Stock options not included in diluted net income (loss) per share because their effect would have been antidilutive |  | 95,000                      |  |         
|                                                                                                                    |  |                             |  |          

Note 3. Repurchases of Common Stock

In the first quarter of 2008, we repurchased a total of 30,000 shares of our common stock for a weighted average price of $5.21 per share, which totaled approximately $156,000. The amount paid above the original issue
price, which totaled $7,000, was offset against retained earnings. The plan to repurchase up to a total of 600,000 shares of our common stock was approved by our Board of Directors in September 2001 and does not have an expiration date. As of
March 31, 2008, 121,876 shares remained available for purchase.

Note 4. Unrecognized Tax Benefits

During the three-month period ended March 31, 2008, accrued interest on unrecognized tax benefits increased $5,000 as a result of tax positions taken in prior
periods.



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Note 5. Fair Value Measurements

Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for our financial assets and liabilities.
The adoption of this portion of SFAS No. 157 did not have any effect on our financial position or results of operations and we do not expect the adoption of the provisions of SFAS No. 157 related to non-financial assets and liabilities to
have an effect on our financial position or results of operations.

Various inputs are used in determining the fair value of our financial assets and
liabilities and are summarized into three broad categories:



| |  |  | Level 1  quoted prices in active markets for identical securities;
| | - |  | -------------------------------------------------------------------



| |  |  | Level 2  other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  significant unobservable inputs, including our own assumptions in determining fair value.
| | - |  | ---------------------------------------------------------------------------------------------------

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets and (liabilities) pursuant to SFAS No. 157 (in thousands):



|                                                           |  |                |       |   |             |        
|---------------------------------------------------------- |  | -------------- | ----- | - | ----------- | -------
|                                                           |  | March 31, 2008
|                                                           |  | Fair Value     |       |   | Input Level
|Trading securities                                         |  | $              | 9,515 |   |             | Level 1
|Investment securities, marketable                          |  |                | 4,518 |   |             | Level 1
|Investment securities, not readily marketable              |  |                | 1,932 |   |             | Level 3
|Underwriter warrants                                       |  |                | 9,981 |   |             | Level 3
|Underwriter warrants  employee and independent contractor |  |                | (560  | ) |             | Level 3



|                                                                                             |  |                     |        |   |                                                        |   |      |                                           |  |   |       |  
|-------------------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ------------------------------------------------------ | - | ---- | ----------------------------------------- |  | - | ----- | -
|                                                                                             |  | UnderwriterWarrants |        |   | UnderwriterWarrants Employee andIndependentContractor |   |      | Not ReadilyMarketableInvestmentSecurities | 
|Balance, December 31, 2007                                                                   |  | $                   | 16,373 |   |                                                        | $ | (651 | )                                         |  | $ | 1,946 |  
|Fair value of warrants received, included as a component of corporate finance revenue        |  |                     | 462    |   |                                                        |   |     |                                           |  |   |      |  
|Net unrealized gain (loss), included as a component of investment income (loss)              |  |                     | (6,057 | ) |                                                        |   | 91   |                                           |  |   | (14   | )
|Value of warrants exercised and expired, included as a component of investment income (loss) |  |                     | (797   | ) |                                                        |   |     |                                           |  |   |      |  
|                                                                                             |  |                     |        |   |                                                        |   |      |                                           |  |   |       |  
|Balance, March 31, 2008                                                                      |  | $                   | 9,981  |   |                                                        | $ | (560 | )                                         |  | $ | 1,932 |  
|                                                                                             |  |                     |        |   |                                                        |   |      |                                           |  |   |       |  

Valuation of Trading Securities and Marketable Investment Securities

The fair value of our trading securities and our marketable investment securities is determined based on quoted market prices.

Valuation of Not Readily Marketable Investment Securities

The
fair value of our not readily marketable investment securities are estimated using generally accepted valuation approaches, including the asset, income and market approaches.

Valuation of Underwriter Warrants

We estimate the value of our underwriter warrants using the Black-Scholes
Option Pricing Model. The Black-Scholes model requires us to use five inputs including: price, risk free rate, exercise price, time remaining on the warrant and price volatility. After stock price, the most influential factor in this model is



6



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price volatility, which we calculate for each companys warrants based on each companys own historical closing stock prices as well as an index of
historical prices for comparable companies. When we initially receive a new underwriter warrant from an initial public offering, its calculated volatility factor is entirely based on the volatility of an index of comparable companies, since there is
no price history for a new publicly traded company. As each underwriter warrant approaches its expiration date, its volatility factor is derived primarily from the historical prices of its underlying common stock. We cannot assure you that we will
ultimately be able to exercise any of our warrants in a way that will realize the value that we attribute to them in our financial statements based on this model.

Note 6. New Accounting Pronouncements

SFAS No. 161

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities, which requires certain disclosures related to derivative instruments. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. We do not have any derivative
instruments that fall under the guidance of SFAS No. 161 and, accordingly, the adoption of SFAS No. 161 will not have any effect on our financial position or results of operations.

SFAS No. 159

In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of the provisions of SFAS
No. 159 effective January 1, 2008 did not have any effect on our financial position or results of operations.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward Looking Statements and Risk Factors

This report, including, without limitation, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains or incorporates both historical and forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as anticipates, believes, expects, intends, future and similar expressions identify
forward-looking statements. Any such forward-looking statements in this report reflect our current views with respect to future events and financial performance and are subject to a variety of factors that could cause our actual results to differ
materially from historical results or from anticipated results expressed or implied by such forward-looking statements. Because of such factors, we cannot assure you that the results anticipated in this report will be realized. As noted elsewhere in
this report, various aspects of our business are subject to extreme volatility often as a result of factors beyond our ability to anticipate or control. In particular, factors, such as the condition of the securities markets, which are in turn based
on popular perceptions of the health of the economy generally, can be expected to affect the volume of our business as well as the value of the securities maintained in our trading and investment accounts. Other factors that may affect our future
financial condition or results of operations include the following:



| |  |  | Aspects of our business are volatile and affected by factors beyond our control.
| | - |  | --------------------------------------------------------------------------------



| |  |  | Our ability to attract and retain customers may be affected by our reputation.
| | - |  | ------------------------------------------------------------------------------



| |  |  | We are subject to extensive regulation that could result in investigations, fines or other penalties.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | We face intense competition in our industry.
| | - |  | --------------------------------------------



| |  |  | Our future success depends on retaining existing management and hiring and assimilating new key employees, and our inability to attract or retain key personnel
would materially harm our business and results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are subject to an increased risk of legal proceedings, which may result in significant losses to us that we cannot recover. Claimants in these proceedings may be
customers, employees, or regulatory agencies, among others, seeking damages for mistakes, errors, negligence or acts of fraud by our employees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | As a public company, we are subject to complex legal and accounting requirements that require us to incur substantial expense and expose us to risk of
non-compliance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our directors control approximately 60 percent of our common stock and may have interests differing from those of other stockholders.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

Overview

Substantially all of our business consists of the
securities brokerage and corporate finance activities of our wholly-owned subsidiary, Paulson Investment Company, Inc., which has operations in four principal categories, all of them in the financial services industry. These categories are:



| |  |  | securities brokerage activities for which we earn commission revenues;
| | - |  | ----------------------------------------------------------------------



| |  |  | corporate finance revenues consisting principally of underwriting discounts and underwriter warrants;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | securities trading from which we record profit or loss, depending on trading results; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | investment income resulting from earnings on, and increases or decreases in the value of, our investment portfolio.
| | - |  | -------------------------------------------------------------------------------------------------------------------

Because we operate in the financial services industry, our revenues and earnings are substantially affected by general conditions in financial markets. In our securities
brokerage business, the amount of our revenues depends on levels of market activity requiring the services we provide. Our corporate finance activity, which consists of acting as the managing underwriter of initial and follow-on public offerings,
private investments in public equity (PIPEs) and private placements for smaller companies, is similarly affected by the strength of the market for new equity offerings, which has historically experienced substantial cyclical fluctuation.
Although we attempt to match operating costs with activity levels, many of our expenses are either fixed or difficult to change on short notice. Accordingly, fluctuations in brokerage and corporate finance revenues tend to result in sharper
fluctuations, on a percentage basis, in net income or loss.

Our investment income or loss and, to a lesser extent, our trading income or loss is affected
by changes in market valuation of securities generally and, in particular, by changes in valuation of the equity securities of microcap companies in which our investments and trading activities tend to be concentrated. Equity markets in general, and
microcap equity markets in particular, have always experienced significant volatility and this volatility has, in recent years, been extreme. The result of this volatility on the value of our investment portfolio and securities held in connection
with our trading and investment activities include large quarterly fluctuations in income or loss from these operations and substantial increases or decreases in our net worth as our securities holdings are marked to market.

A substantial portion of our corporate finance business consists of acting as managing underwriter of initial and follow-on public offerings for microcap and smallcap
companies. As a part of our compensation for these activities, we typically receive warrants exercisable to purchase securities similar to those that we offer and sell to the public. The warrants generally have a five-year expiration date and
vest immediately. The warrants are generally subject to a restricted period of six months to one-year during which we cannot exercise. The exercise price is typically 120% of the price at which the securities were initially sold to the public.
Accordingly, unless there is at least a 20% increase in the price of these securities at some time more than six months and less than five years after the offering, the warrants will remain under water and will ultimately expire
unexercised. We also receive warrants in connection with PIPEs, which have varying terms and conditions.

Critical Accounting Policies and Use of
Estimates

With the exception of the adoption of SFAS No. 157 as described in Note 5 of Notes to Consolidated Financial Statements, we reaffirm the
critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 31, 2008.



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Results of Operations

Our revenues and operating results are influenced by fluctuations in the equity markets as well as general economic and market conditions, particularly conditions in the over-the-counter market, where our investment and trading positions
and the underlying stock for the underwriter warrants are heavily concentrated. Significant fluctuations can occur in our revenues and operating results from one period to another. Our results of operations depend upon many factors, such as the
number of companies that are seeking financing, the quality and financial condition of those companies, market conditions in general, the performance of our previous 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. Our revenues include the following:



| |  |  | Commissions, which represent amounts earned from our retail securities brokerage activities;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Corporate finance revenues, which are a function of total proceeds from offerings done during the period, compensation per offering and the fair value of
underwriter warrants received;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investment income (loss), which includes (i) the unrealized appreciation and depreciation of securities held based on quoted market prices, (ii) the
unrealized appreciation and depreciation of securities held that are not readily marketable, based upon our estimate of their fair value, (iii) realized gains and losses on the sale of securities with quoted market prices and securities that
are not readily marketable, (iv) income on the exercise of underwriter warrants, and (v) the unrealized appreciation and depreciation of underwriter warrants held; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trading income (loss), which is the gain or loss from trading positions before commissions paid to the representatives in the trading department.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

The following tables set forth the changes in our operating results in the three-month period ended March 31, 2008 compared to the
three-month period ended March 31, 2007 (dollars in thousands):



|                                       |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|-------------------------------------- |  | --------------------------- | ------ | ------------------ | ---- | - | ------------------- |  | - | ------- | - |  | ----- | -
|                                       |  | Three Months EndedMarch 31, |        | Increase(Decrease) |      |   | %Increase(Decrease) | 
|                                       |  | 2008                        |        |                    | 2007 |   |                    
|Revenues:                              |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|Commissions                            |  | $                           | 4,456  |                    |      | $ | 4,117               |  | $ | 339     |   |  | 8.2   | %
|Corporate finance                      |  |                             | 395    |                    |      |   | 996                 |  |   | (601    | ) |  | (60.3 | )
|Investment income (loss)               |  |                             | (7,037 | )                  |      |   | 3,184               |  |   | (10,221 | ) |  | *     |  
|Trading income                         |  |                             | 4,322  |                    |      |   | 1,340               |  |   | 2,982   |   |  | 222.5 |  
|Interest and dividends                 |  |                             | 15     |                    |      |   | 34                  |  |   | (19     | ) |  | (55.9 | )
|Other                                  |  |                             | 25     |                    |      |   | 25                  |  |   |        |   |  |      |  
|                                       |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|Total revenues (loss)                  |  |                             | 2,176  |                    |      |   | 9,696               |  |   | (7,520  | ) |  | (77.6 | )
|Expenses:                              |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|Commissions and salaries               |  |                             | 4,340  |                    |      |   | 3,965               |  |   | 375     |   |  | 9.5   |  
|Underwriting expenses                  |  |                             | 146    |                    |      |   | 160                 |  |   | (14     | ) |  | (8.8  | )
|Rent, telephone and quotation services |  |                             | 287    |                    |      |   | 313                 |  |   | (26     | ) |  | (8.3  | )
|Professional fees                      |  |                             | 260    |                    |      |   | 204                 |  |   | 56      |   |  | 27.5  |  
|Bad debt expense                       |  |                             | 3      |                    |      |   | 48                  |  |   | (45     | ) |  | (93.6 | )
|Travel and entertainment               |  |                             | 32     |                    |      |   | 35                  |  |   | (3      | ) |  | (8.6  | )
|Advertising and promotion              |  |                             | 58     |                    |      |   | 48                  |  |   | 10      |   |  | 20.8  |  
|Settlement expense                     |  |                             | 16     |                    |      |   | 80                  |  |   | (64     | ) |  | (80.0 | )
|Depreciation and amortization          |  |                             | 29     |                    |      |   | 29                  |  |   |        |   |  |      |  
|Other                                  |  |                             | 381    |                    |      |   | 314                 |  |   | 67      |   |  | 21.3  |  
|                                       |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|Total expenses                         |  |                             | 5,552  |                    |      |   | 5,196               |  |   | 356     |   |  | 6.9   |  
|                                       |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  
|Income (loss) before income taxes      |  | $                           | (3,376 | )                  |      | $ | 4,500               |  | $ | (7,876  | ) |  | *     |  
|                                       |  |                             |        |                    |      |   |                     |  |   |         |   |  |       |  



|* | Not meaningful.
|- | ---------------

Revenues

Commissions increased 8.2% in the three-month period ended March 31, 2008 compared to the same period of 2007. The total number of trades, including mutual fund
trailing commissions, executed by our registered representatives were 31,504 in the three-month period ended March 31, 2008 compared to 25,400 in the same period of 2007. We had 92 registered representatives at March 31, 2008 compared to
95 at December 31, 2007.



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Corporate finance income in the three-month period ended March 31, 2008 included underwriting discounts earned from
the following:



| |  |  | An initial public offering in which we raised $5.1 million for Healthy Fast Foods, Inc., as well as the Black-Scholes value of the underwriter warrants received in
connection with that offering.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Corporate finance income in the three-month period ended March 31, 2007 included underwriting
discounts earned from the following:



| |  |  | an initial public offering in which we raised $9.8 million for Converted Organics Inc., as well as the Black-Scholes value of the underwriter warrants received in
connection with that offering; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | one private transaction in which we raised $2.2 million.
| | - |  | --------------------------------------------------------

Investment income (loss) included the following (in thousands):



|                                                                                                                                                                  |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                  |  | Three Months EndedMarch 31, |       
|                                                                                                                                                                  |  | 2008                        |        |   | 2007 |  
|Net unrealized appreciation (depreciation) related to underwriter warrants                                                                                        |  | $                           | (6,854 | ) |      | $ | 4,076  |  
|Net unrealized depreciation of underwriter warrants  employee and independent contractor                                                                         |  |                             | 91     |   |      |   |       |  
|Net unrealized depreciation of securities held based on quoted market prices or, for securities that are not readily marketable, our estimate
of their fair value |  |                             | (1,339 | ) |      |   | (1,137 | )
|Net realized gains on the sale of securities with quoted market prices, securities that are not readily marketable and from the exercise of
underwriter warrants  |  |                             | 1,065  |   |      |   | 245    |  
|                                                                                                                                                                  |  |                             |        |   |      |   |        |  
|                                                                                                                                                                  |  | $                           | (7,037 | ) |      | $ | 3,184  |  
|                                                                                                                                                                  |  |                             |        |   |      |   |        |  

We exercised two underwriter warrants in the three-month period ended March 31, 2008 compared to none in the
same period of 2007. Generally, when we exercise a warrant to obtain the underlying common stock, the common stock is subsequently sold in the near term and the related gain is reflected as a component of investment income.

Investment income (loss) is volatile from period to period due to the fact that it is driven by the market value or fair value of the securities and underwriter warrants
held. In addition, the performance of the securities in which we have a concentration can significantly affect our investment income from period to period.

Trading income increased $3.0 million to $4.3 million in the three-month period ended March 31, 2008 compared to $1.3 million in the same period of 2007. In both the three-month periods ended March 31, 2008 and 2007, trading
income was positively affected by highly favorable results for certain securities that we were holding in our trading inventories. Our focus is on very small capitalization issues, especially those tied to our corporate finance clients. Trading
income (loss) can be volatile from period to period because it is driven by the market value of the securities in which we make a market.

Expenses

Total expenses increased $0.4 million in the three-month period ended March 31, 2008 compared to the same period of 2007, primarily due to an
increase in commissions and salaries as described in more detail below.

Commissions and salaries increased $375,000 in the three-month period ended
March 31, 2008 compared to the same period of 2007. The increase was primarily due to higher commissions earned on higher commission revenue and amounts due employees for the exercise of underwriter warrants and the sale of the related stock.
Retail commissions as a percentage of retail sales was comparable period over period.

Professional fees increased $56,000 in the three-month period ended
March 31, 2008 compared to the same period of 2007. The increase was primarily due to additional legal expense for general corporate matters and additional accounting expense relating to new accounting requirements.



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Bad debt expenses are recorded for specific amounts when they are determined by management to be uncollectible. For the
three-month periods ended March 31, 2008 and 2007, receivables of $3,000 and $48,000, respectively, were determined by management to be uncollectible and written off to bad debt expense.

Settlement expense of $16,000 in the first quarter of 2008 was related to a current legal matter that was resolved during the period. Settlement expense of $80,000 in
the first quarter of 2007 was related to a $63,000 adjustment for open claims and the payment of $17,000 for the settlement of other matters.

Liquidity
and Capital Resources

Our primary sources of liquidity include our cash and cash equivalents and receivables from our clearing organization, offset by
payables to our clearing organization.

In addition, our sources of liquidity include our trading positions, investment positions, borrowings on those
positions and profits realized upon the sale of the securities underlying underwriter warrants exercised. The liquidity of the market for many of our securities holdings, however, varies with trends in the stock market. Since many of the securities
we hold are thinly traded, and we are, in many cases, a primary market maker in the issues held, any significant sales of our positions could adversely affect the liquidity of the issues held. In general, falling prices in NASDAQ securities (which
make up most of our trading positions) lead to decreased liquidity in the market for these issues, while rising prices in NASDAQ issues tend to increase the liquidity of the market for these securities.

We believe our liquidity is sufficient to meet our needs for both the short and long-term horizon. However, our liquidity could be negatively affected by protracted
unfavorable market conditions.

As a securities broker-dealer, we are required by SEC regulations to meet certain liquidity and capital standards. We
believe we were in compliance with these standards at March 31, 2008.

Following the lapse of restrictions upon issuance, capital available from the
sale of the underlying securities of underwriter warrants exercised can fluctuate significantly from period to period as the value of the underlying securities fluctuates with overall market and individual company financial condition or performance.
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 with the states in which the securities
will be sold unless exemptions are available. Any delay or other problem in the registration of these securities would have an adverse impact upon our ability to obtain funds from the exercise of the underwriter warrants and the resale of the
underlying securities.

At March 31, 2008, we owned 18 underwriter warrants from 17 issuers, all but three of which were exercisable. Two of the
warrants had an exercise price below the March 31, 2008 market price of the securities receivable upon exercise. The intrinsic value of these warrants was $5.4 million at March 31, 2008. There is little or no direct relationship between
the intrinsic value of our underwriter warrants at the end of any given period and the fair value calculated using the Black-Scholes option pricing model. The prices of the securities underlying the underwriter warrants are very volatile, and
substantial fluctuations in our estimate of their value can be expected in the future.

Cash provided by operating activities totaled $0.3 million in the
three-month period ended March 31, 2008, primarily due to our net loss of $2.1 million being offset by net non-cash expense items of $3.4 million and changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization increased $5.2 million to $14.4 million at March 31, 2008 from $9.2 million at December 31, 2007,
primarily due to the results of the activity in our trading and investment accounts, as well as the timing of general corporate expenditures.



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##### Table of Contents

Notes and other receivables decreased $1.1 million to $0.5 million at March 31, 2008 from $1.6 million at
December 31, 2007, due to repayment of a $1.1 million note from one of our corporate finance clients.

Deferred income tax assets increased $2.9
million to $1.1 million at March 31, 2008 from a liability of $1.8 million at December 31, 2007, primarily due to the decrease in the value of our underwriter warrants.

Changes in our trading and investment securities are dependent on the purchase and sale of securities during the period, as well as changes in their fair market values during the period.

A roll-forward of the value of our underwriter warrants was as follows (in thousands):



|                                         |  |   |        |  
|---------------------------------------- |  | - | ------ | -
|Balance, December 31, 2007               |  | $ | 16,373 |  
|Fair value of warrants received          |  |   | 462    |  
|Net unrealized loss on value of warrants |  |   | (6,057 | )
|Value of warrants exercised or expired   |  |   | (797   | )
|                                         |  |   |        |  
|Balance, March 31, 2008                  |  | $ | 9,981  |  
|                                         |  |   |        |  

Accounts payable and accrued liabilities decreased $1.2 million to $2.0 million at March 31, 2008 from $3.2
million at December 31, 2007, primarily due to a decrease in amounts payable to certain employees as a result of a decrease in the market value of stock related to the exercise of underwriter warrants.

Deferred revenue of $0.4 million at March 31, 2008 related to amounts received from our clearing firm based on the execution of a five-year agreement, and is being
amortized at the rate of $8,333 per month through September 2011.

Underwriter warrants  employee and independent contractor of $0.6 million at
March 31, 2008 represented the estimated fair value of underwriter warrants held for which the gain from the sale of the related stock upon exercise is due to certain employees.

In September 2001, our Board of Directors approved a stock repurchase program pursuant to which we are authorized to repurchase up to 600,000 shares of our common stock. During the three-month period ended
March 31, 2008, we repurchased a total of 30,000 shares for $156,000 and, at March 31, 2008, 121,876 shares remained available for repurchase. This repurchase program does not have an expiration date.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet
arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.

New Accounting Pronouncements

See Note 6
of Notes to Consolidated Financial Statements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Not required for Smaller Reporting Companies.



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|Item 4T. | Controls and Procedures
|-------- | -----------------------

Disclosure Controls and
Procedures

Our management has evaluated, under the supervision and with the participation of our President and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that
evaluation, our President and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our
Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and our Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

We repurchased the following shares of our common stock during the first quarter of 2008:



|                          |  |                                |  |                            |      |                                                                  |         |                                                                |        
|------------------------- |  | ------------------------------ |  | -------------------------- | ---- | ---------------------------------------------------------------- | ------- | -------------------------------------------------------------- | -------
|                          |  | Total numberof sharespurchased |  | Averageprice paidper share |      | Total number ofshares purchasedas part of publiclyannounced plan |         | Maximum numberof shares that mayyet be purchasedunder the plan
|January 1 to January 31   |  | 10,000                         |  | $                          | 5.25 |                                                                  | 458,124 |                                                                | 141,876
|February 1 to February 28 |  | 20,000                         |  | $                          | 5.19 |                                                                  | 478,124 |                                                                | 121,876
|March 1 to March 31       |  |                               |  |                            |     |                                                                  | 478,124 |                                                                | 121,876
|                          |  |                                |  |                            |      |                                                                  |         |                                                                |        
|Total                     |  | 30,000                         |  | $                          | 5.21 |                                                                  | 478,124 |                                                                | 121,876
|                          |  |                                |  |                            |      |                                                                  |         |                                                                |        

The plan to repurchase up to a total of 600,000 shares of our common stock was approved by our Board of Directors
in September 2001 and does not have an expiration date.



|Item 6. | Exhibits
|------- | --------

The following exhibits are filed herewith and this
list is intended to constitute the exhibit index:



|     |  |                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                           
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                               
|     | 
|32.1 |  | Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.    



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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.



|                   |  |  |  |                       |  |                                                                                         |  |                          
|------------------ |  |  |  | --------------------- |  | --------------------------------------------------------------------------------------- |  | -------------------------
|Date: May 15, 2008 |  |  |  | PAULSON CAPITAL CORP.
|                   |  |  |  |                      
|                   |  |  |  |                       |  | By                                                                                      |  | /s/ CHESTER L. F. PAULSON
|                   |  |  |  |                       |  | Chester L. F. Paulson President and Chief
Executive Officer Principal Executive Officer
|                   |  |  |  |                      
|                   |  |  |  |                      
|                   |  |  |  |                       |  | By                                                                                      |  | /s/ KAREN L. JOHANNES    
|                   |  |  |  |                       |  | Karen L. Johannes Chief Financial Officer Principal Financial Officer                  



14