##### 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 June 30, 2009

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: 000-18188





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 has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).    Yes   ̈    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 the
definitions of large accelerated filer, 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 |  | 5,880,285                       
|(Class)                    |  | (Outstanding at August 10, 2009)









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##### Table of Contents

PAULSON CAPITAL CORP. AND SUBSIDIARIES

FORM 10-Q

INDEX



|                               |  |                                                                                                       |  |   
|------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                                 
|PART I  FINANCIAL INFORMATION |  |                                                                                                      
|                               |  |                                                                                                      
|Item 1.                        |  | Financial Statements                                                                                  |  |   
|                               |  |                                                                                                      
|                               |  | Consolidated Balance Sheets  June 30, 2009 and December 31, 2008 (unaudited)                         |  | 2 
|                               |  |                                                                                                      
|                               |  | Consolidated Statements of Operations  Three and Six Months Ended June 30, 2009 and 2008 (unaudited) |  | 3 
|                               |  |                                                                                                      
|                               |  | Consolidated Statements of Cash Flows  Six Months Ended June 30, 2009 and 2008 (unaudited)           |  | 4 
|                               |  |                                                                                                      
|                               |  | Notes to Consolidated Financial Statements (unaudited)                                                |  | 5 
|                               |  |                                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 9 
|                               |  |                                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 16
|                               |  |                                                                                                      
|Item 4T.                       |  | Controls and Procedures                                                                               |  | 16
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                      
|                               |  |                                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 17
|                               |  |                                                                                                      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                   |  | 17
|                               |  |                                                                                                      
|Item 6.                        |  | Exhibits                                                                                              |  | 17
|                               | 
|Signatures                     |  | 18                                                                                                   



1



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

Paulson Capital Corp. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                 |  |              |            |                  |   |           
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------------- | - | ----------
|                                                                                                                 |  | June 30,2009 |            | December 31,2008
|Assets                                                                                                           |  |              |            |                  |   |           
|Cash                                                                                                             |  | $            | 263,270    |                  | $ | 318,810   
|Receivable from clearing organization                                                                            |  |              | 11,737,867 |                  |   | 7,469,811 
|Notes and other receivables                                                                                      |  |              | 1,563,536  |                  |   | 635,027   
|Income taxes receivable                                                                                          |  |              | 77,410     |                  |   | 6,480,699 
|Deferred tax asset                                                                                               |  |              | 1,184,000  |                  |   | 1,409,000 
|Trading and investment securities, at fair value                                                                 |  |              | 8,860,172  |                  |   | 6,611,097 
|Underwriter warrants, at fair value                                                                              |  |              | 2,279,000  |                  |   | 1,675,000 
|Prepaid and deferred expenses                                                                                    |  |              | 474,097    |                  |   | 885,136   
|Furniture and equipment, at cost, net of accumulated depreciation and amortization of $907,706 and $881,621      |  |              | 62,844     |                  |   | 94,991    
|                                                                                                                 |  |              |            |                  |   |           
|Total Assets                                                                                                     |  | $            | 26,502,196 |                  | $ | 25,579,571
|                                                                                                                 |  |              |            |                  |   |           
|                                                                                                                 |  |             
|Liabilities and Shareholders Equity                                                                             |  |              |            |                  |   |           
|Accounts payable and accrued liabilities                                                                         |  | $            | 768,919    |                  | $ | 675,491   
|Payable to clearing organization                                                                                 |  |              | 2,034,391  |                  |   | 2,490,075 
|Compensation, employee benefits and payroll taxes                                                                |  |              | 920,019    |                  |   | 497,791   
|Securities sold, not yet purchased, at fair value                                                                |  |              | 6,935      |                  |   |          
|Income taxes payable-long-term                                                                                   |  |              | 323,000    |                  |   | 315,000   
|Deferred revenue                                                                                                 |  |              | 325,000    |                  |   | 375,000   
|Underwriter warrants  employee and independent contractor, at fair value                                        |  |              | 23,000     |                  |   | 124,000   
|                                                                                                                 |  |              |            |                  |   |           
|Total Liabilities                                                                                                |  |              | 4,401,264  |                  |   | 4,477,357 
|                                                                                                                 |  |             
|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: 5,880,285 and 5,928,285 |  |              | 1,936,240  |                  |   | 1,947,280 
|Retained earnings                                                                                                |  |              | 20,164,692 |                  |   | 19,154,934
|                                                                                                                 |  |              |            |                  |   |           
|Total Shareholders Equity                                                                                       |  |              | 22,100,932 |                  |   | 21,102,214
|                                                                                                                 |  |             
|                                                                                                                 |  |              |            |                  |   |           
|Total Liabilities and Shareholders Equity                                                                       |  | $            | 26,502,196 |                  | $ | 25,579,571
|                                                                                                                 |  |              |            |                  |   |           

See accompanying Notes to Consolidated Financial Statements.



2



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##### Table of Contents

Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)



|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|-------------------------------------- |  | ----------------------------------- | --------- | ---- | --------------------------------- | ---------- | ---- |  | ---- | --------- |  | - | ----------- | -
|                                       |  | For the Three Months Ended June 30, |           |      | For the Six Months Ended June 30, |           
|                                       |  | 2009                                |           | 2008 |                                   |            | 2009 |  | 2008 |          
|Revenues                               |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|Commissions                            |  | $                                   | 3,516,719 |      | $                                 | 3,556,903  |      |  | $    | 6,215,756 |  | $ | 8,012,732   |  
|Corporate finance                      |  |                                     | 482,876   |      |                                   |           |      |  |      | 487,510   |  |   | 395,389     |  
|Investment income (loss)               |  |                                     | 1,008,033 |      |                                   | (5,036,636 | )    |  |      | 581,157   |  |   | (12,074,221 | )
|Trading income (loss)                  |  |                                     | 1,513,821 |      |                                   | (1,770,393 | )    |  |      | 1,907,442 |  |   | 2,552,042   |  
|Interest and dividends                 |  |                                     | 60,476    |      |                                   | 12,850     |      |  |      | 100,579   |  |   | 27,471      |  
|Other                                  |  |                                     | 25,076    |      |                                   | 31,671     |      |  |      | 50,326    |  |   | 56,896      |  
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     | 6,607,001 |      |                                   | (3,205,605 | )    |  |      | 9,342,770 |  |   | (1,029,691  | )
|                                       |  |                                     |           |     
|Expenses                               |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|Commissions and salaries               |  |                                     | 3,277,576 |      |                                   | 3,188,836  |      |  |      | 5,963,845 |  |   | 7,528,400   |  
|Underwriting expenses                  |  |                                     | 113,976   |      |                                   | 168,409    |      |  |      | 125,629   |  |   | 314,006     |  
|Rent, telephone and quotation services |  |                                     | 291,139   |      |                                   | 301,893    |      |  |      | 593,615   |  |   | 588,617     |  
|Professional fees                      |  |                                     | 145,088   |      |                                   | 213,419    |      |  |      | 415,046   |  |   | 473,558     |  
|Travel and entertainment               |  |                                     | 21,344    |      |                                   | 169,017    |      |  |      | 50,705    |  |   | 201,227     |  
|Advertising and promotion expense      |  |                                     | 35,349    |      |                                   | 56,390     |      |  |      | 77,450    |  |   | 114,586     |  
|Settlement expense                     |  |                                     | 66,016    |      |                                   | 15,500     |      |  |      | 161,016   |  |   | 32,000      |  
|Depreciation and amortization          |  |                                     | 15,434    |      |                                   | 28,116     |      |  |      | 34,493    |  |   | 57,184      |  
|Other                                  |  |                                     | 249,480   |      |                                   | 396,623    |      |  |      | 512,123   |  |   | 780,353     |  
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     | 4,215,402 |      |                                   | 4,538,203  |      |  |      | 7,933,922 |  |   | 10,089,931  |  
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     |           |     
|Income (loss) before income taxes      |  |                                     | 2,391,599 |      |                                   | (7,743,808 | )    |  |      | 1,408,848 |  |   | (11,119,622 | )
|                                       |  |                                     |           |     
|Income tax expense (benefit):          |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|Current                                |  |                                     | 302,926   |      |                                   | (1,156,805 | )    |  |      | 141,930   |  |   | 524,798     |  
|Deferred                               |  |                                     | 225,000   |      |                                   | (1,760,195 | )    |  |      | 225,000   |  |   | (4,685,798  | )
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     | 527,926   |      |                                   | (2,917,000 | )    |  |      | 366,930   |  |   | (4,161,000  | )
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     |           |     
|Net income (loss)                      |  | $                                   | 1,863,673 |      | $                                 | (4,826,808 | )    |  | $    | 1,041,918 |  | $ | (6,958,622  | )
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     |           |     
|Basic net income (loss) per share      |  | $                                   | 0.31      |      | $                                 | (0.81      | )    |  | $    | 0.18      |  | $ | (1.16       | )
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     |           |     
|Diluted net income (loss) per share    |  | $                                   | 0.31      |      | $                                 | (0.81      | )    |  | $    | 0.18      |  | $ | (1.16       | )
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|                                       |  |                                     |           |     
|Shares used in per share calculations: |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|Basic                                  |  |                                     | 5,920,373 |      |                                   | 5,966,051  |      |  |      | 5,924,307 |  |   | 5,992,480   |  
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  
|Diluted                                |  |                                     | 5,920,373 |      |                                   | 5,966,051  |      |  |      | 5,924,307 |  |   | 5,992,480   |  
|                                       |  |                                     |           |      |                                   |            |      |  |      |           |  |   |             |  

See accompanying Notes to Consolidated Financial Statements.



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Paulson Capital Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                                         |  |                                   |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                         |  | For the Six Months Ended June 30, |           
|                                                                                                         |  | 2009                              |            |   | 2008 |  
|Cash flows from operating activities:                                                                    |  |                                   |            |   |      |   |            |  
|Net income (loss)                                                                                        |  | $                                 | 1,041,918  |   |      | $ | (6,958,622 | )
|Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: |  |                                   |            |   |      |   |            |  
|Receipt of underwriter warrants                                                                          |  |                                   | (217,000   | ) |      |   | (462,320   | )
|Unrealized (appreciation) depreciation/expiration of underwriter warrants                                |  |                                   | (387,000   | ) |      |   | 11,607,320 |  
|Unrealized depreciation of underwriter warrants  employee and independent contractor                    |  |                                   | (101,000   | ) |      |   | (443,000   | )
|Depreciation and amortization                                                                            |  |                                   | 34,493     |   |      |   | 57,184     |  
|Deferred income taxes                                                                                    |  |                                   | 225,000    |   |      |   | (4,685,798 | )
|Deferred revenue                                                                                         |  |                                   | (50,000    | ) |      |   | (50,000    | )
|Loss on asset disposition                                                                                |  |                                   | 134        |   |      |   |           |  
|Change in assets and liabilities:                                                                        |  |                                   |            |   |      |   |            |  
|Receivables from/payable to clearing organization                                                        |  |                                   | (4,723,740 | ) |      |   | 1,520,384  |  
|Notes and other receivables                                                                              |  |                                   | (928,509   | ) |      |   | 853,729    |  
|Income taxes receivable                                                                                  |  |                                   | 6,403,289  |   |      |   | (269,623   | )
|Trading and investment securities                                                                        |  |                                   | (2,249,075 | ) |      |   | 3,361,369  |  
|Prepaid and deferred expenses                                                                            |  |                                   | 411,039    |   |      |   | 586,246    |  
|Accounts payable, accrued liabilities and compensation payables                                          |  |                                   | 515,656    |   |      |   | (3,256,562 | )
|Securities sold, not yet purchased                                                                       |  |                                   | 6,935      |   |      |   | (36,259    | )
|Income taxes payable  current                                                                           |  |                                   |           |   |      |   | (1,369,710 | )
|Income taxes payable  long-term                                                                         |  |                                   | 8,000      |   |      |   | 10,000     |  
|                                                                                                         |  |                                   |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                                      |  |                                   | (9,860     | ) |      |   | 464,338    |  
|                                                                                                         |  |                                  
|Cash flows from investing activities:                                                                    |  |                                   |            |   |      |   |            |  
|Additions to furniture and equipment                                                                     |  |                                   | (2,480     | ) |      |   | (2,516     | )
|                                                                                                         |  |                                   |            |   |      |   |            |  
|Net cash used in investing activities                                                                    |  |                                   | (2,480     | ) |      |   | (2,516     | )
|                                                                                                         |  |                                   |            |   |      |   |            |  
|                                                                                                         |  |                                  
|Cash flows from financing activities:                                                                    |  |                                   |            |   |      |   |            |  
|Payments to retire common stock                                                                          |  |                                   | (43,200    | ) |      |   | (482,205   | )
|                                                                                                         |  |                                   |            |   |      |   |            |  
|Net cash used in financing activities                                                                    |  |                                   | (43,200    | ) |      |   | (482,205   | )
|                                                                                                         |  |                                   |            |   |      |   |            |  
|                                                                                                         |  |                                  
|Decrease in cash                                                                                         |  |                                   | (55,540    | ) |      |   | (20,383    | )
|                                                                                                         |  |                                  
|Cash:                                                                                                    |  |                                   |            |   |      |   |            |  
|Beginning of period                                                                                      |  |                                   | 318,810    |   |      |   | 43,619     |  
|                                                                                                         |  |                                   |            |   |      |   |            |  
|                                                                                                         |  |                                  
|End of period                                                                                            |  | $                                 | 263,270    |   |      | $ | 23,236     |  
|                                                                                                         |  |                                   |            |   |      |   |            |  
|                                                                                                         |  |                                  
|Supplemental cash flow information:                                                                      |  |                                   |            |   |      |   |            |  
|Cash (paid) received during the period for income taxes, net                                             |  | $                                 | 6,269,359  |   |      | $ | (2,154,131 | )

See accompanying Notes to Consolidated Financial Statements.



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PAULSON CAPITAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information for Paulson Capital Corp. and its wholly-owned subsidiaries, Paulson Investment Company and Paulson Capital Properties, LLC, included herein as of June 30, 2009 and December 31,
2008 and for the three and six-month periods ended June 30, 2009 and 2008 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, 2008 is derived from our 2008 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 2008 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

The number of shares used for our basic net income (loss) per share and diluted net income (loss) per share was the same for all periods presented. For the three and
six-month periods ended June 30, 2009, we did not have any common stock equivalents outstanding. For the three and six-month periods ended June 30, 2008, we were in a loss position and, accordingly, the 95,000 stock options outstanding
during those periods would have been antidilutive.

Note 3. Unrecognized Tax Benefits and Deferred Taxes

During the three and six-month periods ended June 30, 2009, accrued interest on unrecognized tax benefits increased $4,000 and $8,000, respectively, as a result of
tax positions taken in prior periods. During the three and six-month periods ended June 30, 2008, accrued interest on unrecognized tax benefits increased $5,000 and $10,000, respectively, as a result of tax positions taken in prior periods.

During the three and six-month periods ended June 30, 2009, our valuation allowance against our deferred tax assets increased by $0.2 million and
decreased by $0.2 million, respectively. At this time, management does not believe that it is more likely than not that these deferred tax assets will be realized. At June 30, 2009, our valuation allowance totaled $0.5 million and our net
deferred tax assets totaled $1.2 million.

Deferred tax assets relating to unrealized capital losses totaled $1.2 million at June 30, 2009. The
realization of these deferred tax assets is almost entirely dependent on our ability to trigger such losses and obtain refunds from carryback years. Accordingly, if such losses are not triggered by December 31, 2009, then a significant portion
of these deferred tax assets may need to be subjected to a valuation allowance and additional tax expense would be incurred.

Additionally, the corollary
tax benefits recorded within our reserve for uncertain tax positions is dependent upon our ability to obtain refunds from carryback years. If the liabilities associated with the uncertain tax positions are not incurred in the year ended
December 31, 2009, and if we are unable to generate a sufficient amount of taxable income for the year ended December 31, 2009, then the corollary income tax benefits associated with the reserve for uncertain tax positions may require a
valuation allowance against such assets and additional tax expense would be incurred.



5



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##### Table of Contents

Note 4. Fair Value Measurements

Effective January 1, 2009, we adopted the provisions of SFAS No. 157, Fair Value Measurements, for our non-financial assets and liabilities, which did not have any effect on our financial
condition, results of operations or cash flows.

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):



|                                                           |  |               |       |   |             |        
|---------------------------------------------------------- |  | ------------- | ----- | - | ----------- | -------
|                                                           |  | June 30, 2009
|                                                           |  | Fair Value    |       |   | Input Level
|Trading securities                                         |  | $             | 5,805 |   |             | Level 1
|Trading securities sold, not yet purchased                 |  |               | (7    | ) |             | Level 1
|Investment securities, marketable                          |  |               | 370   |   |             | Level 1
|Investment securities, not readily marketable              |  |               | 2,685 |   |             | Level 3
|Underwriter warrants                                       |  |               | 2,279 |   |             | Level 3
|Underwriter warrants  employee and independent contractor |  |               | (23   | ) |             | Level 3

Following is a summary of activity related to our Level 3 financial assets and liabilities (in thousands):



|                                                                                |  |                     |       |   |                                                        |   |      |                                           |  |   |       |  
|------------------------------------------------------------------------------- |  | ------------------- | ----- | - | ------------------------------------------------------ | - | ---- | ----------------------------------------- |  | - | ----- | -
|                                                                                |  | UnderwriterWarrants |       |   | UnderwriterWarrants Employee andIndependentContractor |   |      | Not ReadilyMarketableInvestmentSecurities | 
|Balance, December 31, 2008                                                      |  | $                   | 1,675 |   |                                                        | $ | (124 | )                                         |  | $ | 2,276 |  
|Fair value of underwriter warrants received                                     |  |                     | 217   |   |                                                        |   |     |                                           |  |   |      |  
|Net unrealized gain (loss), included as a component of investment income (loss) |  |                     | 394   |   |                                                        |   | 101  |                                           |  |   | (94   | )
|Underwriter warrants exercised or expired                                       |  |                     | (7    | ) |                                                        |   |     |                                           |  |   |      |  
|Note receivable converted to equity                                             |  |                     |      |   |                                                        |   |     |                                           |  |   | 503   |  
|                                                                                |  |                     |       |   |                                                        |   |      |                                           |  |   |       |  
|Balance, June 30, 2009                                                          |  | $                   | 2,279 |   |                                                        | $ | (23  | )                                         |  | $ | 2,685 |  
|                                                                                |  |                     |       |   |                                                        |   |      |                                           |  |   |       |  

Valuation of Trading Securities and Marketable Investment Securities

The fair value of our trading and our marketable investment securities is determined based on quoted market prices. Securities traded on a national exchange are stated at
the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price.

Valuation of Not Readily Marketable Investment Securities

Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration
has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions or conditions applicable to the securities or to us. The fair value of not readily marketable securities
is estimated by management using available information including the following: quoted market prices of similar securities (i.e., unrestricted shares of the same company); price of recent known trades of the same or similar securities; the cost of
the security, if recently purchased, adjusted for changes in the financial condition of the issuer; all other information available from review of available documents related to the issuer or discussions with management of the issuer.



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Valuation of Underwriter Warrants

We estimate the fair value of our underwriter warrants using the Black-Scholes Option Pricing Model. The Black-Scholes model requires us to use five inputs including: stock 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 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 5. Conversion of Note Receivable to Equity

In February 2009, our $0.4 million note receivable from
Shiftwise was converted to 966,598 shares of Series A2 Preferred Stock of Shiftwise with a value of $0.5 million. When added to our previously existing shares, this resulted in our ownership of a total of 3,466,598 shares of Shiftwise Series A2
Preferred Stock.

Note 6. Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

Note 7. New
Accounting Pronouncements

SFAS No. 168

In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168 FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162. SFAS
No. 168 will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. As we believe that our accounting practices are consistent with the Codification, we do not believe that the adoption of SFAS No. 168 will have a material effect on our financial position, results of operations or cash flows.

SFAS No. 167

In June 2009, the FASB
issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 improves financial reporting by enterprises involved with variable interest entities. SFAS No. 167 is effective as of the beginning of an
entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We
do not have any entities that fall under the guidance of SFAS No. 167 and, accordingly, the adoption of SFAS No. 167 will not have any effect on our financial position, results of operations or cash flows.



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SFAS No. 166

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140. SFAS No. 166 improves the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors
continuing involvement in transferred financial assets. SFAS No. 166 also amends certain provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 166 is effective as of the beginning of an entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. SFAS No. 166 must be applied to transfers occurring on or after the effective date. While we are still analyzing the effects of the adoption of SFAS No. 166, we do not believe that the
adoption of SFAS No. 166 will have a material effect on our financial position, results of operations or cash flows.

SFAS No. 165

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 defines subsequent events as transactions that occur after
the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed
at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date
of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, SFAS No. 165 requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is
the date the financial statements were issued or the date the financial statements were available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. The adoption of SFAS No. 165 effective June 30,
2009 did not have any effect on our financial position, results of operations or cash flows.

FSP No. FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of this FSP effective June 30, 2009 did not have any effect on our
financial position, results of operations or cash flows.

FSP No. FAS 157-4

In April 2009, the FASB issued FSP No. FAS157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, and emphasizes that, even if there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under current market conditions. This FSP amends SFAS No. 157 to require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure
fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities in accordance with paragraph 19 of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The adoption of this FSP effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows. See Note 4 for the disclosure
requirements related to this FSP.



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SFAS No. 162

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the Securities and Exchange
Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section 4311, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We believe that our accounting
principles and practices are consistent with the guidance in SFAS No. 162, and, accordingly, we do not expect the adoption of SFAS No. 162 to have a material effect on our financial position or results of operations.

SFAS No. 161

In March 2008, the FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities, which requires certain disclosures related to derivative instruments. We adopted SFAS No. 161 effective January 1, 2009. We do not have any
derivative instruments that fall under the guidance of SFAS No. 161 and, accordingly, the adoption of SFAS No. 161 did not have any effect on our financial position or results of operations.

Note 8. Subsequent Events

We have considered all events that
have occurred subsequent to June 30, 2009 and through August 12, 2009, the date the financial statements as of and for the periods ended June 30, 2009 were available to be issued.

Stock Option Grants

On July 1, 2009, we granted options
exercisable for a total of 487,500 shares of our common stock with an exercise price of $1.13 per share, which was equal to the closing price of our common stock on that day. The fair value of the stock options will be determined using the
Black-Scholes valuation method. The options are immediately exercisable and, accordingly, the fair value will be recognized as a component of commissions and salaries in the third quarter of 2009.

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.
| | - |  | --------------------------------------------



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| |  |  | 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, investors or regulatory agencies, among others, seeking damages for mistakes, errors, negligence or acts of fraud by our employees.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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% 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 from 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------

In addition, our wholly-owned subsidiary Paulson Capital Properties, LLC was established in 2008 for the purpose of purchasing, improving and remarketing undervalued
real estate. Through June 30, 2009, we had not purchased any real estate.

Because we operate in the financial services industry, our revenues and
earnings are substantially affected by general conditions in financial markets. Further, past performance is not necessarily indicative of results to be expected in future periods. 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. The number of initial public
offerings (IPOs) in the U.S. has declined as volatility in the U.S. economy continues. According to Renaissance Capital LLC, during the first six months of 2009, there were 14 U.S. IPOs with gross proceeds totaling $2.4 billion. During
2008, 43 companies completed IPOs in the U.S., with proceeds totaling $28 billion. This compares to 272 IPOs in 2007, with proceeds totaling $59.7 billion. With the VISA IPO excluded from the 2008 results, the IPOs in 2008 raised $10 billion. 2008
was the slowest year for U.S. IPOs since 1978. The low demand for IPOs in 2008 was also evidenced by the 101 companies that filed with the SEC to withdraw proposed offerings, almost double the 51 that did so in 2007. 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 and 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.



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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.

CURRENT EVENTS

As a result of the continuing global economic turmoil and our poor operating results, in February 2009, we terminated 15% of
our back office staff, discontinued the 401(k) matching contribution and implemented 10% pay cuts for all salaried employees effective April 1, 2009. In addition, we suspended the summer 2009 investment banking conference and the November 2009
Westergaard Conference, as well as eliminated other non-essential business expenditures. We anticipate that these actions will result in annualized cost savings of approximately $1.5 million. Costs associated with these actions were primarily for
severance and related costs and were immaterial.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with
the Securities and Exchange Commission on March 31, 2009.

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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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The following tables set forth the changes in our operating results in the three and six-month periods ended
June 30, 2009 compared to the three and six-month periods ended June 30, 2008 (dollars in thousands):



|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|-------------------------------------- |  | -------------------------- | ----- | ---- | ------------------ | ------- | - | ------------------- | - | ------ | - |  | ----- | --
|                                       |  | Three Months EndedJune 30, |       |      | Increase(Decrease) |         |   | %Increase(Decrease) |  
|                                       |  | 2009                       |       | 2008 |                    |         |  
|Revenues:                              |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Commissions                            |  | $                          | 3,517 |      | $                  | 3,557   |   |                     | $ | (40    | ) |  | (1.1  | )%
|Corporate finance                      |  |                            | 483   |      |                    |        |   |                     |   | 483    |   |  | *     |   
|Investment income (loss)               |  |                            | 1,008 |      |                    | (5,037  | ) |                     |   | 6,045  |   |  | *     |   
|Trading income (loss)                  |  |                            | 1,514 |      |                    | (1,770  | ) |                     |   | 3,284  |   |  | *     |   
|Interest and dividends                 |  |                            | 60    |      |                    | 13      |   |                     |   | 47     |   |  | 361.5 |   
|Other                                  |  |                            | 25    |      |                    | 31      |   |                     |   | (6     | ) |  | (19.4 | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Total revenues                         |  |                            | 6,607 |      |                    | (3,206  | ) |                     |   | 9,813  |   |  | *     |   
|Expenses:                              |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Commissions and salaries               |  |                            | 3,278 |      |                    | 3,189   |   |                     |   | 89     |   |  | 2.8   |   
|Underwriting expenses                  |  |                            | 114   |      |                    | 168     |   |                     |   | (54    | ) |  | (32.1 | ) 
|Rent, telephone and quotation services |  |                            | 291   |      |                    | 302     |   |                     |   | (11    | ) |  | (3.6  | ) 
|Professional fees                      |  |                            | 145   |      |                    | 214     |   |                     |   | (69    | ) |  | (32.2 | ) 
|Travel and entertainment               |  |                            | 21    |      |                    | 169     |   |                     |   | (148   | ) |  | (87.6 | ) 
|Advertising and promotion              |  |                            | 35    |      |                    | 56      |   |                     |   | (21    | ) |  | (37.5 | ) 
|Settlement expense                     |  |                            | 66    |      |                    | 16      |   |                     |   | 50     |   |  | 312.5 |   
|Depreciation and amortization          |  |                            | 15    |      |                    | 28      |   |                     |   | (13    | ) |  | (46.4 | ) 
|Other                                  |  |                            | 250   |      |                    | 396     |   |                     |   | (146   | ) |  | (36.9 | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Total expenses                         |  |                            | 4,215 |      |                    | 4,538   |   |                     |   | (323   | ) |  | (7.1  | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Income (loss) before income taxes      |  | $                          | 2,392 |      | $                  | (7,744  | ) |                     | $ | 10,136 |   |  | *     | % 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|                                       |  |                            |      
|                                       |  | Six Months EndedJune 30,   |       |      | Increase(Decrease) |         |   | %Increase(Decrease) |  
|                                       |  | 2009                       |       | 2008 |                    |         |  
|Revenues:                              |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Commissions                            |  | $                          | 6,216 |      | $                  | 8,013   |   |                     | $ | (1,797 | ) |  | (22.4 | )%
|Corporate finance                      |  |                            | 488   |      |                    | 395     |   |                     |   | 93     |   |  | 23.5  |   
|Investment income (loss)               |  |                            | 581   |      |                    | (12,074 | ) |                     |   | 12,655 |   |  | *     |   
|Trading income                         |  |                            | 1,907 |      |                    | 2,552   |   |                     |   | (645   | ) |  | (25.3 | ) 
|Interest and dividends                 |  |                            | 101   |      |                    | 27      |   |                     |   | 74     |   |  | 274.1 |   
|Other                                  |  |                            | 50    |      |                    | 57      |   |                     |   | (7     | ) |  | (12.3 | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Total revenues                         |  |                            | 9,343 |      |                    | (1,030  | ) |                     |   | 10,373 |   |  | *     |   
|Expenses:                              |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Commissions and salaries               |  |                            | 5,964 |      |                    | 7,528   |   |                     |   | (1,564 | ) |  | (20.8 | ) 
|Underwriting expenses                  |  |                            | 126   |      |                    | 314     |   |                     |   | (188   | ) |  | (59.9 | ) 
|Rent, telephone and quotation services |  |                            | 594   |      |                    | 589     |   |                     |   | 5      |   |  | 0.8   |   
|Professional fees                      |  |                            | 415   |      |                    | 474     |   |                     |   | (59    | ) |  | (12.4 | ) 
|Travel and entertainment               |  |                            | 51    |      |                    | 201     |   |                     |   | (150   | ) |  | (74.6 | ) 
|Advertising and promotion              |  |                            | 77    |      |                    | 115     |   |                     |   | (38    | ) |  | (33.0 | ) 
|Settlement expense                     |  |                            | 161   |      |                    | 32      |   |                     |   | 129    |   |  | 403.1 |   
|Depreciation and amortization          |  |                            | 34    |      |                    | 57      |   |                     |   | (23    | ) |  | (40.4 | ) 
|Other                                  |  |                            | 512   |      |                    | 780     |   |                     |   | (268   | ) |  | (34.4 | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Total expenses                         |  |                            | 7,934 |      |                    | 10,090  |   |                     |   | (2,156 | ) |  | (21.4 | ) 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   
|Income (loss) before income taxes      |  | $                          | 1,409 |      | $                  | (11,120 | ) |                     | $ | 12,529 |   |  | *     | % 
|                                       |  |                            |       |      |                    |         |   |                     |   |        |   |  |       |   



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

Revenues

The global economic turmoil that started in the fall of 2008 was easing by the second quarter of 2009. For the period from December 31, 2008 to June 30, 2009,
the Dow Jones Industrial average decreased 3.8% and the NASDAQ composite increased 16.4%. In the second quarter of 2009, the Dow Jones Industrial average increased 11% and the NASDAQ composite increased 20%.

Commissions decreased 1.1% and 22.4%, respectively, in the three and six-month periods ended June 30, 2009 compared to the same periods of 2008, primarily as a
result of market uncertainty. We had 89 registered representatives at June 30, 2009 compared to 96 at December 31, 2008.



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Corporate finance income in the second quarter of 2009 included underwriting discounts earned from a follow-on public
offering in which we raised $3.4 million for ICOP Digital, Inc., as well as the Black-Scholes value of the underwriter warrants received in connection with the offering. Corporate finance income in the six-month period ended June 30, 2009 also
included revenue related to our participation in closed-end mutual funds.

We did not have any corporate finance income during the second quarter of 2008.
The six-month period ended June 30, 2008 included underwriting discounts earned from 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.

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



|                                                                                                                                                                                 |  |                             |       |   |                           |   |        |      |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ------- | -
|                                                                                                                                                                                 |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                                                                                                                 |  | 2009                        |       |   | 2008                      |   |        | 2009 |  |   | 2008 |  
|Net unrealized appreciation (depreciation) related to underwriter warrants                                                                                                       |  | $                           | 1,006 |   |                           | $ | (4,753 | )    |  | $ | 387  |   |  | $ | (11,607 | )
|Net unrealized depreciation of underwriter warrants  employee and independent contractor                                                                                        |  |                             | 7     |   |                           |   | 352    |      |  |   | 101  |   |  |   | 443     |  
|Net unrealized appreciation (depreciation) of securities held based on quoted market prices or, for securities that are not readily
marketable, our estimate of their fair value |  |                             | 16    |   |                           |   | (196   | )    |  |   | 343  |   |  |   | (1,536  | )
|Net realized gains (losses) on the sale of securities with quoted market prices, securities that are not readily marketable and gains from the
exercise of underwriter warrants  |  |                             | (21   | ) |                           |   | (440   | )    |  |   | (250 | ) |  |   | 626     |  
|                                                                                                                                                                                 |  |                             |       |   |                           |   |        |      |  |   |      |   |  |   |         |  
|                                                                                                                                                                                 |  | $                           | 1,008 |   |                           | $ | (5,037 | )    |  | $ | 581  |   |  | $ | (12,074 | )
|                                                                                                                                                                                 |  |                             |       |   |                           |   |        |      |  |   |      |   |  |   |         |  

We did not exercise any underwriter warrants during the three or six-month periods ended June 30, 2009 or
2008. 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. In order to successfully complete a
follow-on offering in the second quarter of 2009, we returned 75,750 ICOP Digital, Inc. (units) underwriter warrants and 17,875 ICOP Digital, Inc. (common and warrant) underwriter warrants to ICOP Digital, Inc.

Investment income (loss) is volatile from period to period due to the fact that it is driven by the 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 $3.3 million and decreased $0.6 million, respectively, in the three and six-month periods ended June 30, 2009 compared to the same periods of 2008. In the three-month period ended June 30, 2009 and the six-month period
ended June 30, 2008, trading income was positively affected by 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 fair value of the securities in which we make a market.

Expenses

Total expenses decreased $0.3 million and $2.2 million, respectively, in the three and six-month periods ended
June 30, 2009 compared to the same periods of 2008, as described in more detail below.

Commissions and salaries increased $0.1 million and decreased
$1.6 million, respectively, in the three and six-month periods ended June 30, 2009 compared to the same periods of 2008. The decrease in the six-month period was primarily due to lower commissions earned on lower commission revenue. The 2009
periods were also positively affected by our staff reductions and salary decreases as discussed above. Retail commissions as a percentage of retail sales was comparable period over period.



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Travel and entertainment expenses decreased $148,000 and $150,000, respectively, in the three and six-month periods ended
June 30, 2009 compared to the same periods of 2008 as a result of an investment banking conference in June 2008 with no comparable conference in 2009.

Settlement expense of $66,000 and $161,000, respectively, in the three and six-month periods ended June 30, 2009 was related to current legal matters and an accrual for a legal matter that was settled in the second quarter of 2009.
Settlement expense of $16,000 and $32,000 in the three and six-month periods ended June 30, 2008 was related to legal matters that were resolved during the periods.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include our cash and receivables from our clearing
organization, offset by payables to our clearing organization. In addition, during the fourth quarter of 2008, we sold certain securities at a loss. The sale of these securities increased our income taxes receivable as we are able to carry back the
losses to prior years. We received $0.7 million of the income tax receivable during the first quarter of 2009 and $5.6 million in the second quarter of 2009.

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 cash and receivables from our clearing organization at
June 30, 2009 are sufficient to meet our cash and regulatory net capital needs for at least the next twelve-month period from June 30, 2009, which allows us to hold our investment securities for the long-term. Our liquidity could be
negatively affected by protracted unfavorable market conditions. The major market indices declined significantly during 2008 and this decline continued in the first quarter of 2009, with improvements in the second quarter of 2009.

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 June 30, 2009.

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 June 30, 2009, we owned 11 underwriter warrants from 9 issuers, all of which but one was exercisable. None of the warrants had an exercise price below the
June 30, 2009 market price of the securities receivable upon exercise. 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 their fair value can be expected in the future.



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Cash used in operating activities totaled $10,000 in the first six months of 2009, primarily due to our net income of
$1.0 million being offset by net non-cash income items of $0.5 million and changes in our operating assets and liabilities as discussed in more detail below.

Our net receivable from our clearing organization increased $4.7 million to $9.7 million at June 30, 2009 from $5.0 million at December 31, 2008, primarily due to the results of the activity in our trading and investment accounts,
reduced broker commissions, as well as the timing of general corporate expenditures and cash flow requirements.

Notes and other receivables increased $1.0
million to $1.6 million at June 30, 2009 from $0.6 million at December 31, 2008, primarily due to additional amounts loaned to corporate finance clients, offset by the conversion of a $0.4 million note receivable to equity.

Income taxes receivable, current decreased $6.4 million to $0.1 million at June 30, 2009 from $6.5 million at December 31, 2008, primarily due to refunds
received.

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 values during the period.

A summary of activity related to the fair value of our underwriter warrants was as follows (in thousands):



|                                         |  |   |       |  
|---------------------------------------- |  | - | ----- | -
|Balance, December 31, 2008               |  | $ | 1,675 |  
|Receipt of underwriter warrants          |  |   | 217   |  
|Net unrealized gain on value of warrants |  |   | 394   |  
|Warrants exercised or expired            |  |   | (7    | )
|                                         |  |   |       |  
|Balance, June 30, 2009                   |  | $ | 2,279 |  
|                                         |  |   |       |  

Deferred revenue of $0.3 million at June 30, 2009 related to amounts received from our clearing firm based on
the execution of a five-year agreement and a one-year extension of the agreement, and is being amortized at the rate of $8,333 per month through September 2012.

Underwriter warrants  employee and independent contractor of $23,000 at June 30, 2009 represented the 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. In addition, in June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. We repurchased 48,000 shares during the first six months of 2009 and, at
June 30, 2009, 195,011 shares remained available for repurchase. These repurchase programs do 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 7 of Notes to Consolidated Financial Statements.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for Smaller Reporting Companies.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer 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.



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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 second quarter of 2009:



|                    |  |                                |  |                            |      |                                                                  |        |                                                                |        
|------------------- |  | ------------------------------ |  | -------------------------- | ---- | ---------------------------------------------------------------- | ------ | -------------------------------------------------------------- | -------
|                    |  | Total numberof sharespurchased |  | Averageprice paidper share |      | Total number ofshares purchasedas part of publiclyannounced plan |        | Maximum numberof shares that mayyet be purchasedunder the plan
|April 1 to April 30 |  |                               |  | $                          |     |                                                                  |       |                                                                |       
|May 1 to May 31     |  |                               |  |                            |     |                                                                  |       |                                                                |       
|June 1 to June 30   |  | 48,000                         |  |                            | 0.90 |                                                                  | 48,000 |                                                                | 195,011
|                    |  |                                |  |                            |      |                                                                  |        |                                                                |        
|Total               |  | 48,000                         |  |                            | 0.90 |                                                                  | 48,000 |                                                                | 195,011
|                    |  |                                |  |                            |      |                                                                  |        |                                                                |        

A 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. In addition, in June 2008, our Board of Directors approved the repurchase of up to a total of an additional 200,000 shares of our common stock. This authorization also does not have an expiration
date.

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

Our annual meeting of the shareholders was held on June 18, 2009. The following action was approved:



| | 1. | To elect the following persons to serve as directors of Paulson Capital Corp. until the next annual meeting of shareholders and until their successors are duly elected and
qualified:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                        |  |                            |  |                                
|----------------------- |  | -------------------------- |  | -------------------------------
|Name                    |  | Number of SharesVoting For |  | Number of SharesWithheld Voting
|Chester L. F. Paulson   |  | 5,646,046                  |  | 74,956                         
|Jacqueline M. Paulson   |  | 5,645,846                  |  | 75,156                         
|Denis R. Burger, Ph.D.  |  | 5,646,046                  |  | 74,956                         
|Steve H. Kleemann       |  | 5,646,046                  |  | 74,956                         
|Charles L. F. Paulson   |  | 5,645,846                  |  | 75,156                         
|Shannon P. Pratt, Ph.D. |  | 5,646,046                  |  | 74,956                         
|Paul F. Shoen           |  | 5,646,046                  |  | 74,956                         

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: August 12, 2009 |  |  |  | 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          



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