----

----

----

| FORM 10-Q |
|-----------|

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

| [  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
|----------------|---------------------------------------------------------------------|

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| PAULSON CAPITAL CORP. |
|-----------------------|

| 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 |

----

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

| Common stock, no par value |   | 5,766,985                        |
|----------------------------|--------|----------------------------------|
| (Class)                    |   | (Outstanding at August 14, 2012) |

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----

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| PART I - FINANCIAL INFORMATION | Page                                                                                                         |
|--------------------------------|--------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                         |   |
| Item 1.                        | Financial Statements                                                                                         |   |
|                           |                                                                                                         |   |
|                           | Consolidated Balance Sheets – June 30, 2012 and December 31, 2011 (unaudited)                          | 2 |
|                           |                                                                                                         |   |
|                           | Consolidated Statements of Operations - Three and Six Month Periods Ended June 30, 2012 and 2011 (unaudited) | 3 |
|                           |                                                                                                         |   |
|                           | Consolidated Statements of Cash Flows - Six Months Ended June 30, 2012 and 2011 (unaudited)                  | 4 |
|                           |                                                                                                         |   |
|                           | Notes to Consolidated Financial Statements (unaudited)                                                       | 5 |
|                           |                                                                                                         |   |
| Item 2.                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations                  | 8 |
|                           |                                                                                                         |   |
| Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                                   | 15 |
|                           |                                                                                                         |   |
| Item 4.                        | Controls and Procedures                                                                                      | 15 |
|                           |                                                                                                         |   |
| PART II - OTHER INFORMATION    |                                                                                                         |
|                           |                                                                                                         |   |
| Item 2.                        | Unregistered Sales of Equity Securities and Use of Proceeds                                                  | 15 |
|                           |                                                                                                         |   |
| Item 6.                        | Exhibits                                                                                                     | 16 |
|                           |                                                                                                         |   |
| Signatures                     | 17                                                                                                           |

----

|                                                                                                             |   | June 30,2012 |       |   | December 31,2011 |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|--------|------------------|--------|
| Assets                                                                                                           |   |         |       |   |             |   |
| Cash                                                                                                             |   | $            | 341,893    |   |             | $      | 292,002 |   |
| Receivable from clearing organization                                                                            |   |         | 3,592,300  |   |             |   | 5,511,538 |   |
| Notes and other receivables, net of allowances for doubtful accounts of $509,997 and $387,853                    |   |         | 1,165,208  |   |             |   | 607,454 |   |
| Income taxes receivable                                                                                          |   |         | 54,090     |   |             |   | 10,835 |   |
| Trading and investment securities owned, at fair value                                                           |   |         | 7,693,096  |   |             |   | 7,708,868 |   |
| Underwriter warrants, at fair value                                                                              |   |         | 1,203,000  |   |             |   | 1,395,000 |   |
| Prepaid and deferred expenses                                                                                    |   |         | 615,208    |   |             |   | 543,987 |   |
| Furniture and equipment, at cost, net of accumulated depreciation and amortization of $192,331 and $930,199      |   |         | 10,456     |   |             |   | 48,755 |   |
| Total Assets                                                                                                     |   | $            | 14,675,251 |   |             | $      | 16,118,439 |   |
| Liabilities and Shareholders' Equity                                                                             |   |         |       |   |             |   |   |   |
| Accounts payable and accrued liabilities                                                                         |   | $            | 283,500    |   |             | $      | 136,839 |   |
| Payable to clearing organization                                                                                 |   |         | 92,216     |   |             |   | 366,588 |   |
| Compensation, employee benefits and payroll taxes                                                                |   |         | 89,106     |   |             |   | 658,940 |   |
| Trading securities sold, not yet purchased, at fair value                                                        |   |         | -          |   |             |   | 356,705 |   |
| Deferred revenue                                                                                                 |   |         | 148,808    |   |             |   | 229,590 |   |
| Total Liabilities                                                                                                |   |         | 613,630    |   |             |   | 1,748,662 |   |
| Commitments and Contingencies                                                                                    |   |         | -          |   |             |   | - |   |
| Shareholders' Equity                                                                                             |   |         |       |   |             |   |   |   |
| Preferred stock, no par value; 500,000 shares authorized; none issued                                            |   |         | -          |   |             |   | - |   |
| Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding: 5,766,985 and 5,767,985 |   |         | 2,163,711  |   |             |   | 2,163,941 |   |
| Retained earnings                                                                                                |   |         | 11,897,910 |   |             |   | 12,205,836 |   |
| Total Shareholders' Equity                                                                                       |   |         | 14,061,621 |   |             |   | 14,369,777 |   |
| Total Liabilities and Shareholders' Equity                                                                       |   | $            | 14,675,251 |   |             | $      | 16,118,439 |   |

----

|                                                     |   | For the Three Months Ended June 30, |       |   | For the Six Months ended June 30, |   |
|----------------------------------------------------------|--------|-------------------------------------|------------|--------|-----------------------------------|--------|
|                                                     |   | 2012                                |       |   | 2011                              |   |   | 2012 |   |   | 2011 |   |
| Revenues                                                 |   |                                |       |   |                              |   |   |   |   |   |   |   |
| Commissions                                              |   | $                                   | 450,887    |   |                              | $      | 3,915,986 |   |   | $ | 3,657,025 |   |   | $ | 8,310,016 |   |
| Corporate Finance                                        |   |                                | 24,670     |   |                              |   | 108,551 |   |   |   | 47,464 |   |   |   | 177,688 |   |
| Investment loss                                          |   |                                | (829,132   | )      |                              |   | (109,828 | ) |   |   | (579,621 | ) |   |   | (212,510 | ) |
| Trading income (loss)                                    |   |                                | (1,026,076 | )      |                              |   | (1,521,936 | ) |   |   | 942,845 |   |   |   | (1,136,527 | ) |
| Interest and dividends                                   |   |                                | 39,309     |   |                              |   | 135,897 |   |   |   | 160,715 |   |   |   | 267,272 |   |
| Loss on asset disposition                                |   |                                | (702       | )      |                              |   | - |   |   |   | (702 | ) |   |   | - |   |
| Gain on sale of assets                              |   |                                | 1,619,656  |   |                              |   | - |   |   |   | 1,619,656 |   |   |   | - |   |
| Other                                                    |   |                                | 54,096     |   |                              |   | 46,764 |   |   |   | 94,985 |   |   |   | 91,462 |   |
|                                                     |   |                                | 332,708    |   |                              |   | 2,575,434 |   |   |   | 5,942,367 |   |   |   | 7,497,401 |   |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Expenses                                                 |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Commissions and salaries                                 |   |                                | 879,777    |   |                              |   | 4,019,006 |   |   |   | 4,089,049 |   |   |   | 8,378,630 |   |
| Underwriting expenses                                    |   |                                | 525        |   |                              |   | 436 |   |   |   | 37,714 |   |   |   | 10,650 |   |
| Rent and utilities                                       |   |                                | 59,623     |   |                              |   | 144,371 |   |   |   | 215,007 |   |   |   | 285,709 |   |
| Communication and quotation services                     |   |                                | 88,546     |   |                              |   | 134,068 |   |   |   | 217,240 |   |   |   | 264,676 |   |
| Professional fees                                        |   |                                | 173,671    |   |                              |   | 177,786 |   |   |   | 429,930 |   |   |   | 387,109 |   |
| Travel and entertainment                                 |   |                                | 8,227      |   |                              |   | 31,491 |   |   |   | 45,827 |   |   |   | 61,413 |   |
| Advertising and promotion                                |   |                                | 651        |   |                              |   | 5,217 |   |   |   | 9,123 |   |   |   | 16,139 |   |
| Settlement expense                                       |   |                                | -          |   |                              |   | 25,000 |   |   |   | - |   |   |   | 25,000 |   |
| Clearing expenses                                        |   |                                | 85,142     |   |                              |   | 112,944 |   |   |   | 164,196 |   |   |   | 217,596 |   |
| Bad debt expense                                         |   |                                | 232,129    |   |                              |   | - |   |   |   | 232,129 |   |   |   | - |   |
| Depreciation and amortization                            |   |                                | 444        |   |                              |   | 5,160 |   |   |   | 4,557 |   |   |   | 9,642 |   |
| Licenses, taxes and insurance                            |   |                                | 141,047    |   |                              |   | 109,778 |   |   |   | 266,344 |   |   |   | 239,189 |   |
| Other                                                    |   |                                | 93,777     |   |                              |   | 170,198 |   |   |   | 249,808 |   |   |   | 341,879 |   |
|                                                     |   |                                | 1,763,559  |   |                              |   | 4,935,455 |   |   |   | 5,960,924 |   |   |   | 10,237,632 |   |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                                 |   |                                | (1,430,851 | )      |                              |   | (2,360,021 | ) |   |   | (18,557 | ) |   |   | (2,740,231 | ) |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense:                                      |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                  |   |                                | -          |   |                              |   | 2,000 |   |   |   | - |   |   |   | 3,000 |   |
| Deferred                                                 |   |                                | -          |   |                              |   | - |   |   |   | - |   |   |   | - |   |
|                                                     |   |                                | -          |   |                              |   | 2,000 |   |   |   | - |   |   |   | 3,000 |   |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                 |   | $                                   | (1,430,851 | )      |                              | $      | (2,362,021 | ) |   | $ | (18,557 | ) |   | $ | (2,743,231 | ) |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                     |   |                                | (0.25      | )      |                              |   | (0.41 | ) |   |   | (0.00 | ) |   |   | (0.48 | ) |
|                                                     |   |                                |       |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in basic and diluted per share calculations: |   |                                | 5,766,985  |   |                              |   | 5,767,985 |   |   |   | 5,767,441 |   |   |   | 5,768,416 |   |

----

|                                                                          |   | For the Six Months Ended June 30, |                |
|-------------------------------------------------------------------------------|--------|-----------------------------------|---------------------|
|                                                                          |   | 2012                              |                |   | 2011 |   |
| Cash flows from operating activities:                                         |   |                              |                |   |   |   |
| Net loss                                                                      |   | $                                 | (18,557             | ) |   | $ | (2,743,231 | ) |
| Adjustments to reconcile net loss to net cash flows from operating activities |   |                              |                |   |   |   |   |   |
| Receipt of underwriter warrants                                               |   |                              | -                   |   |   |   | (79,000 | ) |
| Unrealized depreciation/expiration of underwriter warrants                    |   |                              | 192,000             |   |   |   | 220,000 |   |
| Depreciation and amortization                                                 |   |                              | 4,557               |   |   |   | 9,642 |   |
| Bad debt expense                                                              |   |                              | 232,129             |   |   |   | - |   |
| Loss on asset disposition                                                     |   |                              | 702                 |   |   |   | - |   |
| Gain on sale of assets                                                   |   |                              | (1,619,656          | ) |   |   | - |   |
| Change in assets and liabilities:                                             |   |                              |                |   |   |   |   |   |
| Receivables from/payable to clearing organization, net                        |   |                              | 1,644,866           |   |   |   | 1,163,187 |   |
| Notes and other receivables                                                   |   |                              | (221,577            | ) |   |   | (170,798 | ) |
| Income taxes receivable                                                       |   |                              | (43,255             | ) |   |   | 126,451 |   |
| Trading and investment securities owned                                       |   |                              | 15,772              |   |   |   | 1,524,227 |   |
| Prepaid and deferred expenses                                                 |   |                              | (71,221             | ) |   |   | 244,169 |   |
| Deferred revenue                                                              |   |                              | (80,782             | ) |   |   | (76,530 | ) |
| Accounts payable, accrued liabilities and compensation payables               |   |                              | (423,173            | ) |   |   | (203,773 | ) |
| Trading securities sold, not yet purchased                                    |   |                              | (356,705            | ) |   |   | 10,562 |   |
| Income taxes payable - current                                                |   |                              | -                   |   |   |   | 7,159 |   |
| Income taxes payable - uncertain tax positions                                |   |                              | -                   |   |   |   | 3,000 |   |
| Net cash provided by (used in) operating activities                           |   |                              | (744,900            | ) |   |   | 35,065 |   |
|                                                                          |   |                              |                |   |   |   |   |   |
| Cash flows from investing activities:                                         |   |                              |                |   |   |   |   |   |
| Additions to furniture and equipment                                          |   |                              | (800                | ) |   |   | (32,746 | ) |
| Proceeds from sale of fixed assets                                            |   |                              | 250                 |   |   |   | - |   |
| Proceeds from sale of assets                                             |   |                              | 1,084,940           |   |   |   | - |   |
| Net cash provided by (used in) investing activities                           |   |                              | 1,084,390           |   |   |   | (32,746 | ) |
|                                                                          |   |                              |                |   |   |   |   |   |
| Cash flows from financing activities:                                         |   |                              |                |   |   |   |   |   |
| Dividends paid to common shareholders                                         |   |                              | (288,349            | ) |   |   | - |   |
| Payments to retire common stock                                               |   |                              | (1,250              | ) |   |   | (2,400 | ) |
| Net cash used in financing activities                                         |   |                              | (289,599            | ) |   |   | (2,400 | ) |
|                                                                          |   |                              |                |   |   |   |   |   |
| Increase (decrease) in cash                                                   |   |                              | 49,891              |   |   |   | (81 | ) |
|                                                                          |   |                              |                |   |   |   |   |   |
| Cash:                                                                         |   |                              |                |   |   |   |   |   |
| Beginning of period                                                           |   |                              | 292,002             |   |   |   | 375,649 |   |
|                                                                          |   |                              |                |   |   |   |   |   |
| End of period                                                                 |   | $                                 | 341,893             |   |   | $ | 375,568 |   |
|                                                                          |   |                              |                |   |   |   |   |   |
| Supplemental cash flow information:                                           |   |                              |                |   |   |   |   |   |
| Cash (paid) received during the period for income taxes, net                  |   | $                                 | (43,255             | ) |   | $ | 126,451 |   |
| Receivable from sale of assets                                                |   | $                            |   568,306 |   |   | $  |  - |   |

----

|   | · | Level 1 – unadjusted 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------|

|                                        |   | June 30, 2012 |   | December 31, 2011 |
|---------------------------------------------|--------|---------------|--------|-------------------|
|                                        |   | Fair Value    |   | Input Level       |   | Fair Value |   | Input Level |
| Trading and investment securities owned:    |   |          |   |              |   |   |   |   |
| Corporate equities, marketable              |   | $             | 3,991  |              | Level 1 |   | $ | 3,763 |   | Level 1 |
| Corporate equities, not readily marketable  |   |          | 3,477  |              | Level 3 |   |   | 3,857 |   | Level 3 |
| Corporate options/warrants, marketable      |   |          | 225    |              | Level 1 |   |   | 89 |   | Level 1 |
| Underwriter warrants                        |   |          | 1,203  |              | Level 3 |   |   | 1,395 |   | Level 3 |
| Trading securities sold, not yet purchased: |   |          |   |              |   |   |   |   |   |   |
| Corporate equities, marketable              |   |          | -      |              | Level 1 |   |   | 357 |   | Level 1 |

----

|                                                                                            |   |   Underwriter Warrants |   |   | Not Readily Marketable Investment Securities |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------|----------------------------------------------|--------|
| Balance, December 31, 2011                                                                      |   | $                                | 1,395  |   |                                         | $      | 3,857 |   |
| Fair value of underwriter warrants received included as a component of corporate finance income |   |                             | -      |   |                                         |   | - |   |
| Investment in privately-held company                                                            |   |                             | -      |   |                                         |   | - |   |
| Net unrealized loss, included as a component of investment loss related to securities held      |   |                             | (192   | )      |                                         |   | (380 | ) |
| Balance, June 30, 2012                                                                          |   | $                                | 1,203  |   |                                         | $      | 3,477 |   |

|                                                                                                       |   |   Underwriter Warrants |   |   | Not Readily Marketable Investment Securities |   |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------|----------------------------------------------|--------|
| Balance, December 31, 2010                                                                                 |   | $                                | 1,122  |   |                                         | $      | 2,945 |   |
| Fair value of underwriter warrants received included as a component of corporate finance income            |   |                             | 79     |   |                                         |   | - |   |
| Investment in privately-held company                                                                       |   |                             | -      |   |                                         |   | 100 |   |
| Net unrealized gain (loss), included as a component of investment income (loss) related to securities held |   |                             | (220   | )      |                                         |   | 20 |   |
| Balance, June 30, 2011                                                                                     |   | $                                | 981    |   |                                         | $      | 3,065 |   |

----

----

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

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

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

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

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

|   | · | We are subject to the 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 and executive officers control approximately 47% of our common stock and may have interests differing from those of other stockholders. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

----

|   | · | 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. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                 |   | Three Months EndedJune 30, |   |   | Favorable(Unfavorable) |   |   | Percentage |   |
|--------------------------------------|--------|----------------------------|--------|--------|------------------------|--------|--------|------------|--------|
|                                 |   | 2012                       |   |   | 2011                   |   |   | Change     |   |   | Change |   |
| Revenues:                            |   |                       |   |   |                   |   |   |       |   |   |   |   |
| Commissions                          |   | $                          | 451    |   |                   | $      | 3,916  |       |   | $ | (3,465 | ) |   |   | (88.5 | )% |
| Corporate finance                    |   |                       | 25     |   |                   |   | 108    |       |   |   | (83 | ) |   |   | (76.9 | ) |
| Investment loss                      |   |                       | (829   | )      |                   |   | (110   | )          |   |   | (719 | ) |   |   | (653.6 | ) |
| Trading loss                         |   |                       | (1,026 | )      |                   |   | (1,522 | )          |   |   | 496 |   |   |   | 32.6 |   |
| Interest and dividends               |   |                       | 39     |   |                   |   | 136    |       |   |   | (97 | ) |   |   | (71.3 | ) |
| Loss on asset disposition            |   |                       | (1     | )      |                   |   | -      |       |   |   | (1 | ) |   |   | (100.0 | ) |
| Gain on sale of assets               |   |                       | 1,620  |   |                   |   | -      |       |   |   | 1,620 |   |   |   | 100.0 |   |
| Other                                |   |                       | 54     |   |                   |   | 47     |       |   |   | 7 |   |   |   | 14.9 |   |
| Total revenues                       |   |                       | 333    |   |                   |   | 2,575  |       |   |   | (2,242 | ) |   |   | (87.1 | ) |
| Expenses:                            |   |                       |   |   |                   |   |   |       |   |   |   |   |   |   |   |   |
| Commissions and salaries             |   |                       | 880    |   |                   |   | 4,019  |       |   |   | 3,139 |   |   |   | 78.1 |   |
| Underwriting expenses                |   |                       | 1      |   |                   |   | 1      |       |   |   | - |   |   |   | * |   |
| Rent and utilities                   |   |                       | 60     |   |                   |   | 144    |       |   |   | 84 |   |   |   | 58.3 |   |
| Communication and quotation services |   |                       | 88     |   |                   |   | 134    |       |   |   | 46 |   |   |   | 34.3 |   |
| Professional fees                    |   |                       | 174    |   |                   |   | 178    |       |   |   | 4 |   |   |   | 2.2 |   |
| Travel and entertainment             |   |                       | 8      |   |                   |   | 31     |       |   |   | 23 |   |   |   | 74.2 |   |
| Advertising and promotion            |   |                       | 1      |   |                   |   | 5      |       |   |   | 4 |   |   |   | 80.0 |   |
| Settlement expense                   |   |                       | -      |   |                   |   | 25     |       |   |   | 25 |   |   |   | 100.0 |   |
| Clearing expenses                    |   |                       | 85     |   |                   |   | 105    |       |   |   | 19 |   |   |   | 18,1 |   |
| Bad debt expense                     |   |                       | 232    |   |                   |   | -      |       |   |   | (232 | ) |   |   | (100.0 | ) |
| Depreciation and amortization        |   |                       | 1      |   |                   |   | 5      |       |   |   | 4 |   |   |   | 80.0 |   |
| Licenses, taxes and insurance        |   |                       | 141    |   |                   |   | 110    |       |   |   | (31 | ) |   |   | (28.2 | ) |
| Other                                |   |                       | 93     |   |                   |   | 178    |       |   |   | 85 |   |   |   | 47.8 |   |
| Total expenses                       |   |                       | 1,764  |   |                   |   | 4,935  |       |   |   | 3,171 |   |   |   | 64.3 |   |
| Loss before income taxes             |   | $                          | (1,431 | )      |                   | $      | (2,360 | )          |   | $ | 929 |   |   |   | 39.4 | % |

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|                                 |   | Six Months EndedJune 30, |   |   | Favorable(Unfavorable) |   |   | Percentage |   |
|--------------------------------------|--------|--------------------------|--------|--------|------------------------|--------|--------|------------|--------|
|                                 |   | 2012                     |   |   | 2011                   |   |   | Change     |   |   | Change |   |
| Revenues:                            |   |                     |   |   |                   |   |   |       |   |   |   |   |
| Commissions                          |   | $                        | 3,657  |   |                   | $      | 8,310  |       |   | $ | (4,653 | ) |   |   | (56.0 | )% |
| Corporate finance                    |   |                     | 47     |   |                   |   | 178    |       |   |   | (131 | ) |   |   | (73.6 | ) |
| Investment loss                      |   |                     | (580   | )      |                   |   | (212   | )          |   |   | (368 | ) |   |   | (173.6 | ) |
| Trading income (loss)                |   |                     | 943    |   |                   |   | (1,136 | )          |   |   | 2,079 |   |   |   | 183.0 |   |
| Interest and dividends               |   |                     | 161    |   |                   |   | 267    |       |   |   | (106 | ) |   |   | (39.7 | ) |
| Loss on asset disposition            |   |                     | (1     | )      |                   |   | -      |       |   |   | (1 | ) |   |   | (100.0 | ) |
| Gain on sale of assets          |   |                     | 1,620  |   |                   |   | -      |       |   |   | 1,620 |   |   |   | 100.0 |   |
| Other                                |   |                     | 95     |   |                   |   | 91     |       |   |   | 4 |   |   |   | 4.4 |   |
| Total revenues                       |   |                     | 5,942  |   |                   |   | 7,498  |       |   |   | (1,556 | ) |   |   | (20.8 | ) |
| Expenses:                            |   |                     |   |   |                   |   |   |       |   |   |   |   |   |   |   |   |
| Commissions and salaries             |   |                     | 4,089  |   |                   |   | 8,379  |       |   |   | 4,290 |   |   |   | 51.2 |   |
| Underwriting expenses                |   |                     | 38     |   |                   |   | 11     |       |   |   | (27 | ) |   |   | (245.5 | ) |
| Rent and utilities                   |   |                     | 215    |   |                   |   | 286    |       |   |   | 71 |   |   |   | 24.8 |   |
| Communication and quotation services |   |                     | 217    |   |                   |   | 265    |       |   |   | 48 |   |   |   | 18.1 |   |
| Professional fees                    |   |                     | 430    |   |                   |   | 387    |       |   |   | (43 | ) |   |   | (11.1 | ) |
| Travel and entertainment             |   |                     | 46     |   |                   |   | 61     |       |   |   | 15 |   |   |   | 24.6 |   |
| Advertising and promotion            |   |                     | 9      |   |                   |   | 16     |       |   |   | 7 |   |   |   | 43.8 |   |
| Settlement expense                   |   |                     | -      |   |                   |   | 25     |       |   |   | 25 |   |   |   | 100.0 |   |
| Clearing expenses                    |   |                     | 164    |   |                   |   | 217    |       |   |   | 53 |   |   |   | 24.4 |   |
| Bad debt expense                     |   |                     | 232    |   |                   |   | -      |       |   |   | (232 | ) |   |   | (100.0 | ) |
| Depreciation and amortization        |   |                     | 5      |   |                   |   | 10     |       |   |   | 5 |   |   |   | 50.0 |   |
| Licenses, taxes and insurance        |   |                     | 266    |   |                   |   | 239    |       |   |   | (27 | ) |   |   | (11.3 | ) |
| Other                                |   |                     | 250    |   |                   |   | 342    |       |   |   | 92 |   |   |   | 26.9 |   |
| Total expenses                       |   |                     | 5,961  |   |                   |   | 10,238 |       |   |   | 4,277 |   |   |   | 41.8 |   |
| Loss before income taxes             |   | $                        | (19    | )      |                   | $      | (2,740 | )          |   | $ | 2,721 |   |   |   | 99.3 | % |

----

|                                                                                                                                                                             |   | Three months Ended June 30, |   |   | Six months Ended June 30, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|--------|---------------------------|--------|
|                                                                                                                                                                             |   | 2012                        |   |   | 2011                      |   |   | 2012 |   |   | 2011 |   |
| Net unrealized appreciation (depreciation) related to underwriter warrants                                                                                                       |   | $                           | (449   | )      |                      | $      | (130 | ) |   | $ | (192 | ) |   | $ | (220 | ) |
| 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 |   |                        | (380   | )      |                      |   |     20 |   |   |   | (254 | ) |   |   |     7 |   |
| Net realized loss on the sale of securities with quoted market prices and securities that are not readily marketable                                                             |   |                        | -      |   |                      |   |   - |   |   |   | (134 | ) |   |   |   - |   |
|                                                                                                                                                                             |   | $                           | (829   | )      |                      | $      | (110 | ) |   | $ | (580 | ) |   | $ | (213 | ) |

----

----

| Balance, December 31, 2011               |   | $      | 1,395 |   |
|------------------------------------------|--------|--------|-------|--------|
| Receipt of underwriter warrants          |   |   | -     |   |
| Net unrealized loss on value of warrants |   |   | 192   |   |
| Warrants exercised or expired            |   |   | -     |   |
| Balance, June 30, 2012                   |   | $      | 1,203 |   |

----

|                      |   | Total number of shares purchased |   |   | Average price paid per share |   |   | Total number of shares purchased as part of publicly announced plan |   |   | Maximum number of shares that may yet be purchased under the plan |   |
|---------------------------|--------|----------------------------------|--------|--------|------------------------------|--------|--------|---------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------|--------|
| January 1 to January 31   |   |                             | -      |   |                         |   | -      |                                                                |   |   | -                                                                 |   |   |   | 69,011 |   |
| February 1 to February 29 |   |                             | -      |   |                         |   | -      |                                                                |   |   | -                                                                 |   |   |   | 69,011 |   |
| March 1 to March 31       |   |                             | 1,000  |   |                         | $      | 1.25   |                                                                |   |   | 1,000                                                             |   |   |   | 68,011 |   |
| April 1 to June 30        |   |                             | -      |   |                         |   | -      |                                                                |   |   | -                                                                 |   |   |   | 68,011 |   |
| Total                     |   |                             | 1,000  |   |                         | $      | 1.25   |                                                                |   |   | 1,000                                                             |   |   |   | 68,011 |   |

----

| 2.1*   | Asset Purchase Agreement dated April 10, 2012 by and between JHS Capital Advisors, LLC, Paulson Investment Company, Inc. and the Company.                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.     |

| 101.INS*** | XBRL Instance                        |
|------------|--------------------------------------|
| 101.SCH*** | XBRL Taxonomy Extension Schema       |
| 101.CAL*** | XBRL Taxonomy Extension Calculation  |
| 101.DEF*** | XBRL Taxonomy Extension Definition   |
| 101.LAB*** | XBRL Taxonomy Extension Labels       |
| 101.PRE*** | XBRL Taxonomy Extension Presentation |

| *     | Filed herewith                                                                                                                                                                                                                                                                                                                                  |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **    | Furnished herewith                                                                                                                                                                                                                                                                                                                              |
| ***   | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |

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| Date: | August 14, 2012 |   | PAULSON CAPITAL CORP. |   |
|-------|-----------------|--------|-----------------------|--------|
|   |   |   | By:    | /s/ Chester L. F. Paulson        |   |
|--------|--------|--------|--------|---------------------------------------|--------|
|   |   |   |   | Chester L. F. Paulson                 |   |
|   |   |   |   | President and Chief Executive Officer |   |
|   |   |   |   | Principal Executive Officer           |   |

|   |   |   | By:    | /s/ Murray G. Smith    |   |
|--------|--------|--------|--------|-----------------------------|--------|
|   |   |   |   | Murray G. Smith             |   |
|   |   |   |   | Chief Financial Officer     |   |
|   |   |   |   | Principal Financial Officer |   |