SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON D.C. 20549 ––––––––––FORM 10-QSB Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 For the Quarter ended
March 31, 2001 Commission file
number: 0-18188 PAULSON CAPITAL CORP.Exact name of registrant as specified in
  its charter
  Oregon
  93–0589534(State of incorporation)
  (I.R.S. Employer Identification)811 S.W. Naito Parkway
  Portland, OR
  97204(Address of principal
  (Zip Code)executive offices)Registrant's telephone number, including
  area code:
  (503) 243–6000
 Check whether the issuer (1) filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YesxNoo  Number of shares
outstanding of each of the issuer's classes of common stock, as of May ­­10,
2001: Common stock, no par value  - 3,263,866 shares Transitional Small Business Disclosure
Format    YesoNox   PART I
 FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

PAULSON
CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS(unaudited)

ASSETS
  3/31/01
  12/31/00CURRENT
  ASSETSCash
  and cash equivalents
  $127,940
  $104,309Receivable
  from clearing organization
  4,175,585
  8,878,083Notes
  and other receivables
  813,884
  1,247,520Trading
  securities, at market value
  1,103,954
  1,305,989Investment
  securities, at market value
  13,828,651
  13,063,135Underwriter
  warrants, at estimated fair value
  --
  --Prepaid
  and deferred expenses
  273,292
  865,986Deferred
  income taxes
  5,298,000
  5,298,000Total current assets
  25,621,306
  30,763,022NOTE
  RECEIVABLE
  105,374
  103,551FURNITURE
  AND EQUIPMENT, net
  467,611
  509,676INVESTMENT
  IN REAL ESTATE
  169,900
  169,900$26,364,191
  $31,546,149LIABILITIES
  AND SHAREHOLDERS EQUITYCURRENT
  LIABILITIESAccounts
  payable and accrued liabilities
  $185,827
  $194,399Payable
  to clearing organization
  713,122
  828,859Compensation,
  employee benefits and payroll taxes
  370,658
  1,037,465Securities
  sold, not yet purchased, at market value
  93,749
  31,496Income
  taxes payable
  719,251
  3,896,000Total
  current liabilities
  2,082,607
  5,988,219Deferred
  income taxes
  39,100
  39,100SHAREHOLDERS
  EQUITYPreferred
  stock, no par value; authorized, 500,000 shares; issued and outstanding, no
  shares
  --
  --Common
  stock, no par value; authorized, 10,000,000 shares; issued and outstanding,
  3,276,866 and 3,367,366, respectively
  1,059,196
  1,080,011Retained
  earnings
  23,183,288
  24,438,819Total
  shareholders equity
  24,242,484
  25,518,830$26,364,191
  $31,546,149The
accompanying notes are an integral part of these statements.

PAULSON CAPITAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
for the three month periods ended March
31, 2001and March
31, 2000 (unaudited)

3/31/01
  3/31/00RevenuesCommissions
  $1,931,901
  $6,348,435Corporate
  finance
  371,382
  15,744Investment
  income
  (854,566)
  17,763,423Trading
  income
  215,977
  831,657Interest
  and dividends
  10,864
  20,024Other
  673
  2,6941,676,231
  24,981,977ExpensesCommissions
  and salaries
  2,016,889
  8,019,576Underwriting
  expenses
  217,397
  4,922Rent,
  telephone and quotation services
  255,104
  288,665Interest
  expense
  3
  --Professional
  fees
  71,599
  99,920Bad
  debt expense
  30,000
  30,155Travel
  and entertainment
  62,201
  52,579Settlements
  1,050
  20,000Other
  338,816
  1,282,0762,993,059
  9,797,893Earnings
  (loss) before income taxes
  (1,316,828)
  15,184,084Provision
  for income taxesCurrent
  (526,730)
  4,128,000Deferred
  --
  1,945,000Net
  Earnings (Loss)
  $(790,098)
  $9,111,084Earnings
  (loss) per share
  $(0.24)
  $2.57

The
accompanying notes are an integral part of these statements

PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three year period ended December 31, 2000
and the three months ended March 31, 2001 (unaudited)

Common
  Stock
  RetainedShares
  Amount
  EarningsBalance at December 31, 1997
  3,970,536
  794,416
  16,256,322Issuance of common stock in lieu of directors cash
  compensation
  4,283
  16,500
  -Redemption of common stock
  (177,967)
  (35,593)
  (451,323)Net loss for the year
  -
  -
  (1,768,640)Balance at December 31, 1998
  3,796,852
  775,323
  14,036,359Issuance of common stock in lieu of directors cash
  compensation
  1,783
  8,500
  -Redemption of common stock
  (257,400)
  (51,480)
  (1,065,332)Net earnings for the year
  -
  -
  11,711,236Balance at December 31, 1999
  3,541,235
  $732,343
  $24,682,263Stock option grants
  -
  317,750
  -Stock options exercised
  16,000
  71,000
  -Redemption of common stock
  (189,869)
  (41,082)
  (1,235,230)Net earnings for the year
  -
  -
  991,786Balance at December 31, 2000
  3,367,366
  $1,080,011
  $24,438,819Redemption of common stock
  (90,500)
  (20,815)
  (465,433)Net loss for year to date
  -
  -
  (790,098)Balance at March 31, 2001
  3,276,866
  $1,059,196
  $23,183,288The accompanying notes
are an integral part of these statements

PAULSON CAPITAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the three month periods ended March 31, 2001 and March 31, 2000

3/31/01
  3/31/00Increase (Decrease) in Cash and Cash EquivalentsCash flows from operating activitiesNet
  earnings (loss)
  $(790,098)
  $9,111,084Adjustments
  to reconcile net earnings (loss) to net cash provided by (used in) operating
  activitiesUnrealized (appreciation) depreciation on investment securities
  1,707,537
  (5,118,960)Realized gain on investment securities
  (852,971)
  (12,644,464)Depreciation and amortization
  50,602
  42,222Deferred income taxes
  --
  1,945,000Change in assets and liabilitiesReceivables
  5,134,311
  (17,370,838)Trading securities
  202,035
  (868,172)Prepaid and deferred expenses
  592,694
  83,159Accounts payable and accrued liabilities
  (791,115)
  8,691,604Securities sold, not yet purchased
  62,253
  (470)Income taxes payable
  (3,176,749)
  3,349,600Net cash
  provided by (used in) operating activities
  2,138,499
  (12,780,235)Cash flows from investing activitiesPurchases
  of investment securities
  (10,890,701)
  (46,977,794)Proceeds
  from sale of investment securities
  9,270,619
  60,022,869Additions
  to furniture and equipment
  (8,538)
  (51,471)Proceeds
  from sale of furniture and equipment
  --
  --Net
  cash provided by (used in) investing activities
  $(1,628,620)
  $12,993,604Cash flows from financing activitiesProceeds
  from exercise of stock options
  --
  --Payments to
  retire common stock
  (486,248)
  --Decrease in
  bank overdraft payable
  --
  --Net
  cash provided by (used in) financing activities
  (486,248)
  --NET
  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  23,631
  213,369Cash and cash equivalents at beginning of period
  104,309
  48,210Cash and cash equivalents at March 31
  $127,940
  $261,579Cash paid during the three months forInterest
  $3
  $--Income
  taxes
  $2,650,019
  $778,400The
accompanying notes are an integral part of these statementsNOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)1. Basis of Presentation

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

2. Securities Owned

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

3. Commitments and Contingencies

In
October 1998, Russell W. Cummings, a former PIC customer, filed a lawsuit in
California state court asserting claims against PIC and a former PIC registered
representative alleging violations of the California Consumers Legal Remedies
Act, fraud, negligent misrepresentation, breach of contract, tortious breach of
the implied covenant of good faith and fair dealing, breach of fiduciary duty
and negligence.  Plaintiff had agreed to
arbitrate the matter before the NASD but never did so.  Consequently, in July 2000, the California
state court dismissed the case.  In
November 2000, the California state court reinstated the case and, in January
2001, Cummings filed an arbitration claim against PIC and its former registered
representative.  The complaint seeks
$250,000 in actual damages and $1,500,000 in punitive damages.  PIC has not had an opportunity to fully
investigate this claim, but believes it has meritorious defenses and intends to
defend this matter vigorously.

In
August 2000, Patricia Staples, a former PIC customer, filed an NASD arbitration
claim against PIC and one of its registered representatives alleging that PIC
and its registered representative made certain misrepresentations and committed
violations of law.  Claimant is seeking
$100,000 in compensatory and punitive damages. 
Claimant's statement of claim is vague and does not specify the alleged
misrepresentations or violations of law. 
PIC has filed a motion to require a more definite and certain statement
of claim by claimant.  PIC also has
filed an answer denying any liability. 
PIC has not had an opportunity to fully investigate this matter but
intends to defend this matter vigorously.

In
January 2001, V.J.E. Enterprises, Inc. and Vincent and Diana Nartker, former
PIC customers, filed a complaint with PIC regarding the handling of their
account by PIC and one of its registered representatives.  They have asserted that their account was
mismanaged and that PIC failed to supervise its registered representative.  They have requested that PIC pay them
$275,100.  PIC has not had an
opportunity to fully investigate this claim, but believes it has meritorious
defenses and intends to defend this matter vigorously if an arbitration is filed.

In April 2001, Michael Swan, a PIC customer,
complained that a PIC broker failed to place a stop loss order on a stock that
Swan held in one of his PIC accounts. 
The price of the stock subsequently declined significantly and Swan now
claims that PIC and its broker failed to place the stop loss, resulting in a
loss of $125,000.  Swan has demanded
that PIC pay this amount to him.  PIC
has not had an opportunity to fully investigate this claim.

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

ITEM 2. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Three
Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000

Results of
Operations

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

Summary
of Changes in Major Categories
of Revenues and Expenses

Quarters Ended3/31/01 vs. 3/31/00Revenues:Sales
  Commissions
  $(4,416,534)
  -69.6 %Corporate
  Finance
  355,638
  2,258.9 %Investment
  Income
  (18,617,989)
  -104.8 %Trading
  Income
  (615,680)
  -74.0 %Other
  (11,181)
  -49.2 %Total
  $(23,305,746)
  -93.3 %Expenses:Commissions
  and Salaries
  $(6,002,687)
  -74.8 %Underwriting
  Expenses
  212,475
  4,316.8 %Rent,
  Telephone and Quotes
  (33,561)
  -11.6 %Other
  (981,061)
  -66.1 %Total
  $(6,804,834)
  -69.4 %Pretax
  Income
  $(16,500,912)
  -108.7 %Total
revenues for the first quarter of 2001 fell 93.3 percent from the first quarter
of 2000, from $24,981,977 to $1,676,231. 
As shown in the table above, sales commissions fell $4,416,534, or 69.6
percent, from $6,348,435 in the first quarter of 2000 to $1,931,901 in the
comparable 2001 period.  This decrease
resulted primarily from the less favorable price movements and trading levels
in the stock market, especially the market for the very small capitalization
issues (the primary focus of PIC's investment banking and trading businesses)
in the 2001 quarter compared to 2000. 
The Nasdaq Industrial Average rose 8.09 percent in the first quarter of
2000 but fell 17.05 percent in the first quarter of 2001.  Corporate finance revenues rose $355,638 in
the first quarter of 2001 compared to the first quarter of 2000, to $371,382
from $15,744.  One transaction for $10
million was completed in the first quarter of 2001; no transactions were
completed in the 2000 quarter. 
Corporate finance revenue is directly related to the amount of money
raised in completed transactions. 
Investment income fell from $17,763,423 in the first quarter of 2000 to
a loss of $854,566 in the first quarter of 2001. There were no underwriter
warrant exercises in the 2001 quarter, while four were exercised in 2000.  Investment income was all due to net losses
in investment securities unrelated to underwriter warrants. Trading income fell
$615,680, or 74.0 percent, to $215,977 in the first quarter of 2001 from
$831,657 in the comparable 2000 period. 
This decrease was also due to decreased prices and trading in the market
for very small capitalization companies described above.  Other Income declined $11,181, from $22,718
in the first quarter of 2000 to $11,537 in the 2001 quarter, due primarily to a
decline in interest and dividend income.

Total
expenses fell $6,804,834 in the first quarter of 2001 from the comparable 2000
period, a decrease of 69.4 percent, from $9,797,893 to $2,993,059.  Commissions and salaries fell $6,002,687, or
74.8 percent, from $8,019,576 in the 2000 period to $2,016,889 in 2001.  This decrease was primarily due to lower
bonus and compensation arrangements related to lesser investment and trading
profits and decreased commission revenues resulting in a lower level of
commissions paid.  (Higher percentage
commis­sion levels are generally paid to employee registered representa­tives
at higher production levels.)  Underwrit­ing
expenses rose $212,475, from $4,922 in the 2000 quarter to $217,397 in the
first quarter of 2001.  No transactions
were completed in the 2000 period, while one transaction was completed in
2001.  Rent, telephone and quote
expenses decreased from $288,665 in the 2000 period to $255,104 in 2001, a
decrease of 11.6 percent, primarily due to expenses related to improvements in
quotation and phone systems in the 2000 quarter.  The aggregate of all other expenses fell 66.1 percent, from
$1,484,730 in the first quarter of 2000 to $503,669 in the first quarter of
2001, primarily due to decreased accrual for PIC's profit sharing.

The
Company had a pretax profit of $15,184,084 in the first quarter of 2000
compared to a pretax loss of $1,316,828 in the comparable 2001 period,
primarily due to the decrease in investment income and, to a lesser extent, decreased
sales commissions and trading income. Significant fluctuations can occur in
PIC's revenues and operating results from one period to another.

The
Company also accrued $6,073,000 in income taxes for the first quarter of 2000,
compared to an estimated tax benefit for income taxes in the first quarter of
2001 of $526,730.  Independent of
investment income, the Company would have had a loss before income taxes in
both quarters.

Liquidity
and Capital Resources

The
majority of PIC's assets are cash and assets readily convertible to cash.  PIC's securities inventory is stated at
market value.  The liquidity of the
market for many of PIC's securities holdings, however, varies with trends in
the stock market.  Since many of the
securities held by PIC are thinly traded, and PIC is in many cases a primary
market maker in the issues held, any significant sales of PIC's positions could
adversely affect the liquidity of the issues held.  In general, falling prices in OTC securities (which make up most
of PIC's trading positions) lead to decreased liquidity in the market for these
issues, while rising prices in OTC issues tend to increase the liquidity of the
market for these securities.  The
overall increase in prices for the OTC securities traded by PIC in early 2000
and 1999 was combined with a general increase in the liquidity of the markets
for these securities.  The decline in
prices for the OTC securities traded by PIC to date in 2001 and late 2000 was
combined with a general decrease in the liquidity of the markets for these
securities.  PIC's investment account
and trading inventory accounts are stated at fair market value, which is at or
below quoted market price.

PIC
borrows money from its clearing firm in the ordinary course of its business,
pursuant to an understanding under which the clearing firm agrees to finance
PIC's trading accounts.  As of March 31,
2001, no net loans were outstanding pursuant to this arrangement.  PIC and the Company are generally able to
meet their compensation and other obligations out of current liquid assets.

Another source of capital to PIC
and the Company has been the underwriter warrants issued to PIC in connection
with its corporate finance activities and the sale of the underlying
securities.  These warrants are reflected
on the balance sheet of PIC and the Company at their estimated fair value, with
estimated discounts for lack of marketability. 
While the warrants and the securities issuable upon exercise of the
warrants are not immediately saleable, PIC receives the right to require the
issuer to register the underlying securities for resale to the public.  Profits, if any, from the warrants are
recognized based upon the difference between the market price and the exercise
price less discounts, if any, for trading volume, the remaining warrant
exercise period and other factors. 
Further profits or losses are subsequently realized when the underlying
securities are sold.  Profits and losses
recognized from the warrants are recorded as "Investment
Income."  There is no public market
for the underwriter warrants. The securities receivable upon exercise of the
underwriter warrants cannot be resold unless the issuer has registered these
securities with the SEC and the states in which the securities will be sold or
exemptions are available.  Any delay or
other problem in the registration of these securities would have an adverse
impact upon PIC's ability to obtain funds from the exercise of the underwriter
warrants and the resale of the underlying securities.  At March 31, 2001, PIC owned 24 underwriter warrants (from 23
issuers), of which 20 were currently exercisable; none had an exercise price
below the current market price of the securities receivable upon exercise. The
value of the firm's underwriter warrants depends on the prices of the
underlying securities.(A warrant with an
exercise price above the market price for the underlying security is valued at
zero. If the exercise price is below the market price, the value is the amount
of the aggregate spread, discounted for lack of liquidity.) These prices are influenced by general movements
in the prices of OTC securities as well as the success of the issuers of the
underwriter warrants. As of March 31, 2001, the Company placed no value
on PIC's underwriter warrants that had an exercise price below the current
market price of the securities issuable upon exercise. This estimate includes
estimates by the Company of discounts for lack of marketability, risk of
failure of the issuer to register the securities for resale and other possible
difficulties that may prevent the Company from realizing the value of the
underwriter warrants. The prices of the securities underlying the underwriter
warrants are very volatile, and substantial fluctuations in the Company's
estimate of their value can be expected in the future.

In
the three months ended March 31, 2001, $2,138,499 of net cash was provided by
operating activities of the Company. 
The major adjustments to reconcile this result to the Company's net loss
of $790,098 include a decrease in receivables of $5,134,311 and unrealized
depreciation in investment securities of $1,707,537 more than offsetting a
decrease in income taxes payable of $3,176,749, a realized gain on investment
securities of $852,971, a decrease in accounts payable and accrued liabilities
of $791,115 and a decrease in trading securities of $202,035.  In the quarter, $1,628,620 of net cash was
used by the Company in investing activities, the result of $9,270,619 in
proceeds from the sale of investment securities being more than offset by the
purchase of $10,890,701 of investment securities and $8,538 of additions to
furniture and equipment. $486,248 in cash was used in financing activities by
the Company in the quarter, the result of payments to retire common stock.  See "Financial Statements 
Consolidated Statements of Cash Flows."

As a
securities broker–dealer, the Company's wholly owned subsidiary, PIC, is
required by SEC regulations to meet certain liquidity and capital
standards.  At March 31, 2001, the
Company had no material commitments for capital expenditures.

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

Inflation

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

PART II
OTHER INFORMATION

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

Item 2. Changes in Securities.
                                None

Item 3. Defaults upon Senior Securities.
                                None

Item 4. Submission of Matters to a Vote of Security
Holders.
                                None

Item 5. Other Information.
                                None

Item 6. Exhibits and Reports on Form 8-K

Exhibits - None

No Reports on Form 8-K were filed during the quarter
ended March 31, 2001.

SIGNATURES



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



PAULSON CAPITAL CORP.Date: May 7, 2001
  By:
  /s/ CHESTER L.F. PAULSONChester L.F. PaulsonPresidentDate: May 7, 2001
  By:
  /s/ CAROL RICECarol RicePrincipal Accounting
  Officer

EXHIBIT INDEX

None