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 June 30, 1998

                         Commission file number: 0-18188

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


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

!
             811 S.W. Front Avenue
                 Portland, OR                       97204
             ---------------------                  -----
             (Address of principal                (Zip Code)
              executive offices)

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


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

                                    Yes X  No  
                                       ---   ---


              Number of shares outstanding of each of the issuer's
                 classes of common stock, as of August 3, 1998:

                  Common stock, no par value - 3,956,169 shares

           Transitional Small Business Disclosure Format Yes     No X
                                                             ---   ---

<PAGE>
                         PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                   (unaudited)
<TABLE>
<CAPTION>
ASSETS                                                6/30/98           12/31/97

CURRENT ASSETS

<S>                                               <C>                <C>   
Cash and cash equivalents                              95,218             73,220
Receivable from broker-dealers and
  clearing organizations                            1,196,973          4,497,086
Notes and other receivables                           874,610            657,918
Trading securities                                  3,494,947          8,901,802
Investment securities                               7,333,778          7,068,580
Refundable income taxes                               996,847            101,907
Prepaid and deferred expenses                         190,588            400,845
Secured demand note                                        --            100,000
Deferred income taxes                                 289,100            289,100
                                                  -----------        -----------

Total current assets                               14,472,061         22,090,458
                                                  -----------        -----------

FURNITURE AND EQUIPMENT, net                          290,264            202,605
                                                  -----------        -----------

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

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

                                                  $14,932,225        $22,462,963
                                                  ===========        ===========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       2
<PAGE>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEET - CONTINUED
                                   (unaudited)


<TABLE>
<CAPTION>
                                                      6/30/98           12/31/97

LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                              <C>                <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities         $    199,055       $    264,294
Payable to broker-dealers and clearing
  organizations                                     1,089,051          6,041,296
Compensation, employee benefits and
  payroll taxes                                       454,519          1,942,906
Securities sold, not yet purchased                    187,008            330,729
Income taxes payable                                       --                 --
Subordinated note payable                                  --            100,000
                                                 ------------       ------------

Total current liabilities                           1,929,633          8,679,225
                                                 ------------       ------------

SHAREHOLDERS' EQUITY

Preferred stock, no par value;
  authorized, 500,000 shares; issued and
  outstanding, no shares                                   --                 --
Common stock, no par value; authorized,
  10,000,000 shares; issued and
  outstanding, 3,956,169 and
  3,970,536, respectively                             791,543            794,416
Retained earnings                                  12,211,049         12,989,322
                                                 ------------       ------------

                                                   13,002,592         13,783,738
                                                 ------------       ------------

                                                 $ 14,932,225       $ 22,462,963
                                                 ============       ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    for the three and six month periods ended
                   June 30, 1998 and June 30, 1997 (unaudited)

<TABLE>
<CAPTION>
                                         Three months ended               Six months ended
                                        6/30/98      6/30/97            6/30/98      6/30/97
<S>                                   <C>           <C>               <C>           <C>
Revenues
Commissions                           $ 2,777,981   $ 2,748,611       $ 5,495,454   $ 5,208,165
Corporate finance                          39,326       548,975           271,691       848,384
Investment income                        (795,141)      760,055          (462,167)    2,248,253
Trading income (loss)                      17,535       381,547           366,089       618,797
Interest and dividends                      1,204         1,331             2,002         2,740
Other                                       5,366         7,432            10,343        16,456
                                       ----------     ---------        ----------    ----------

                                        2,046,271     4,447,951         5,683,412     8,942,795
                                       ----------     ---------        ----------    ----------
Expenses
Commissions and salaries                2,299,006     2,616,310         4,721,037     4,983,360
Underwriting expenses                       2,503       131,742           160,742       145,575
Rent, telephone and
     quotation services                   207,255       189,000           422,029       383,642
Interest expense                            1,046         1,464             2,561         2,996
Professional fees                         117,128       176,325           212,196       318,232
Bad debt expense                           30,000        29,513            60,000        58,513
Travel and entertainment                   75,924        40,701           139,856        79,988
Settlements                                    --         7,000             3,693         7,000
Other                                     308,635       280,026           667,184       669,060
                                       ----------     ---------        ----------    ----------

                                        3,041,497     3,472,081         6,389,298     6,648,366
                                       ----------     ---------        ----------    ----------

Earnings (loss) before income taxes      (995,226)      975,870          (705,886)    2,294,429

Provision for income taxes
  Current                                (115,736)      392,500                --       920,000
  Deferred                                     --            --                --            --
                                       -----------    ---------        ----------    ----------

Net Earnings (Loss)                    $ (879,490)    $ 583,370        $ (705,886)   $1,374,429
                                       ===========    =========        ===========   ==========

Earnings (loss) per share              $    (0.22)    $    0.15        $    (0.18)   $     0.35
                                       ===========    =========        ===========   ==========

</TABLE>

         The accompanying notes are an integral part of these statements

                                       4
<PAGE>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                For the three year period ended December 31, 1997
               and the six months ended June 30, 1998 (unaudited)


<TABLE>
<CAPTION>
                                                          Common Stock                             
                                            ------------------------------------------             Retained
                                                  Shares                   Amount                  Earnings
                                            -----------------         ----------------        --------------------

<S>                                         <C>                       <C>                     <C>
Balance at December 31, 1994                    4,363,501                  775,730                  1,225,043

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

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

Net earnings for the year                               -                        -                  2,925,033
                                            -----------------        -----------------         -------------------
Balance at December 31, 1995                   4,324,539                  735,889                  4,150,076

Exercise of stock options                          38,570                   40,892                          -

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

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

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

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

Exercise of stock options                          87,140                   89,283                          -

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

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

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

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

Exercise of stock options                               -                        -                          -

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

Net earnings for the year to date                       -                        -                   (705,886)
                                            -----------------        -----------------         -------------------

Balance at June 30, 1998                        3,956,169            $     791,543             $   12,211,049
                                            =================        =================         ===================
</TABLE>

         The accompanying notes are an integral part of these statements

                                       5
<PAGE>
                      PAULSON CAPITAL CORP. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
        for the six month periods ended June 30, 1998 and June 30, 1997

<TABLE>
<CAPTION>
                                                                      6/30/98              6/30/97
                                                                   ---------------     ----------------

<S>                                                                <C>                 <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities
    Net earnings (loss)                                              $  (705,886)        $ 1,374,429
    Adjustments to reconcile net earnings (loss) to
       net cash used in operating activities
          Unrealized (appreciation) depreciation
              on investment securities                                 1,695,237            (165,909)
          Realized gain on investment securities                      (1,233,070)         (2,115,407)
          Depreciation and amortization                                   37,320              28,937
          Gain from sale of furniture and equipment                         (300)             (6,799)
          Change in assets and liabilities
              Receivables                                              3,083,421           2,042,418
              Trading securities                                       5,406,855            (792,223)
              Refundable income taxes                                   (894,940)           (389,031)
              Prepaid and deferred expenses                              210,257            (203,931)
              Accounts payable and accrued liabilities                (6,505,871)         (3,516,476)
              Securities sold, not yet purchased                          56,279             594,270
              Bank overdraft                                                  --                  --
              Income taxes payable                                            --                  --
                                                                   ---------------     ----------------

       Net cash provided by (used in) operating activities             1,149,302          (3,149,722)
                                                                   ---------------     ----------------

Cash flows from investing activities
    Purchases of investment securities                               (13,861,429)         (7,161,322)
    Proceeds from sale of investment securities                       12,934,064          10,744,660
    Additions to furniture and equipment                                (124,979)            (31,396)
    Proceeds from sale of furniture and equipment                            300               9,600
                                                                   ---------------     ----------------

       Net cash provided by (used in) investing activities           $(1,052,044)        $ 3,561,542
                                                                   ---------------     ----------------
</TABLE>




         The accompanying notes are an integral part of these statements

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

<TABLE>
<CAPTION>
                                                                       6/30/98             6/30/97
                                                                   ---------------     ---------------

<S>                                                                <C>                 <C>
Cash flows from financing activities
    Proceeds from exercise of stock options                              -                  40,892
    Payments to retire common stock                                   (75,260)            (561,236)
    Decrease in bank overdraft payable                                   -                    -
                                                                   ---------------     ---------------

       Net cash provided by (used in) financing activities            (75,260)            (520,344)
                                                                   ---------------     ---------------


              NET INCREASE (DECREASE) IN CASH AND
                  CASH EQUIVALENTS                                     21,998             (108,524)

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

Cash and cash equivalents at June 30                               $   95,218          $    76,921
                                                                   ===============     ===============



Cash paid during the three months for

    Interest                                                       $    1,046          $     1,464
                                                                   ===============     ===============

    Income taxes                                                   $  819,940          $ 1,313,130
                                                                   ===============     ===============
</TABLE>





         The accompanying notes are an integral part of these statements

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

1. Basis of Presentation

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

2. Securities Owned

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

3. Commitments and Contingencies

     The Company and PIC are defendants in Holly Millar and Bertram Ostrau v.
Pearce Systems International, Inc., et al., filed in San Francisco Superior
Court, State of California, in March 1996. An asserted class action, plaintiffs
allege violations of the California securities law, deceit, negligent
misrepresentation and unfair business practices relating to alleged
misstatements in the prospectus used in connection with a February 1994, $5
million public offering in which PIC acted as the managing underwriter.
Plaintiffs seek rescission of the offering as well as actual damages, interest,
attorney fees and punitive damages. No class has been certified, although a
motion for class certification is expected shortly. The case is set for trial
April 6, 1999. Factual discovery in this matter has begun and should be
completed by October 1998. Therefore, the Company and PIC are still
investigating this matter but believe they have meritorious defenses and intend
to defend this matter vigorously. Pursuant to a tolling agreement with the
plaintiff, the Company (but not PIC) expects to be dismissed without prejudice
from the lawsuit.

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

                                       8
<PAGE>
     Philip Cutler Claim  In March 1996, Philip Cutler, a former PIC customer,
asserted various claims against Todd Bollman, a former PIC broker, and PIC
alleging unsuitability and churning in his account with PIC. Mr. Cutler has
indicated that his losses approach $90,000, not including commissions. PIC has
indicated to Mr. Cutler that it believes he is an experienced, sophisticated
investor who spoke regularly with Mr. Bollman and was well informed with respect
to the risks involved in the trading that he selected in his account. Although
Mr. Cutler indicated that he would seek arbitration, no arbitration has been
filed at this time. PIC has not had an opportunity to fully investigate this
matter, but believes it has meritorious defenses and intends to defend this
matter vigorously if an arbitration claim is filed.

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

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

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

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

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

Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997

     Results of Operations

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

                     Summary of Changes in Major Categories
                            of Revenues and Expenses

<TABLE>
<CAPTION>
                                    Quarter Ended June 30             Six Months Ended June 30
                                        1998 vs. 1997                       1998 vs. 1997

<S>                                 <C>              <C>              <C>                <C>
Revenues:
Sales Commissions                   $    29,370         1.1%          $    287,289          5.5%
Corporate Finance                      (509,649)      (92.8%)             (576,693)       (68.0%)
Investment Income                    (1,555,196)     (204.6%)           (2,710,420)      (120.6%)
Trading Income                         (364,012)      (95.4%)             (252,708)       (40.8%)
Other                                    (2,193)      (25.0%)               (6,851)       (35.7%)
                                    ------------     --------         -------------      --------

Total                               $(2,401,680)      (54.0%)         $ (3,259,383)       (36.4%)

Expenses:
Commissions and Salaries            $  (317,304)      (12.1%)         $   (262,323)        (5.3%)
Underwriting Expenses                  (129,239)      (98.1%)               15,167         10.4%
Rent, Telephone and Quotes               18,255         9.7%                38,387         10.0%
Other                                    (2,296)       (0.4%)              (50,299)        (4.4%)
                                    ------------      -------         -------------       -------

Total                               $  (430,584)      (12.4%)         $   (259,068)        (3.9%)

Pretax Income                       $(1,971,096)          N/A         $ (3,000,315)          N/A

</TABLE>
                                       10
<PAGE>
     Total revenues for the second quarter of 1998 fell 54.0 percent from the
second quarter of 1997, from $4,447,951 to $2,046,271. As shown in the table
above, sales commissions rose $29,370, or 1.1 percent, from $2,748,611 in the
second quarter of 1997 to $2,777,981 in the comparable 1998 period. This small
increase resulted primarily from the active trading levels in smaller
capitalization issues in the 1998 quarter compared to 1997, particularly in
companies for which PIC had recently completed public offerings. Corporate
finance revenues fell 92.8 percent, or $506,649, in the second quarter of 1998
compared to the second quarter of 1997. One corporate finance transaction was
completed in the 1997 quarter in which PIC acted as the managing underwriter,
raising a total of $20.70 million for the issuer; only one private placement
raising $690,000 was completed in the 1998 quarter. Investment income fell
$1,555,196 to a loss of $795,141 in the second quarter of 1998 from a gain of
$760,055 in the second quarter of 1997. No underwriter warrants were exercised
in either period. The decline was due to substantial realized gains on positions
in the investment account in the 1997 quarter and substantial losses in the
investment account in 1998. Trading income fell $364,012, or 95.4 percent, from
$381,547 in the second quarter of 1997 to $17,535 in the comparable 1998 period,
due primarily to losses on inventory positions in the 1998 quarter.

     Total expenses fell $430,584 in the second quarter of 1998 from the
comparable 1997 period, a decrease of 12.4 percent, to $3,041,497 from
$3,472,081. Commissions and salaries fell $317,304, or 12.1 percent, to
$2,299,006 in the 1998 period from $2,616,310 in 1997. This decrease was
primarily due to an increased percentage of commission revenues coming from
employee salespersons in PIC's offices in Portland and Salem offices relative to
independent salespersons in other branch offices, resulting in a lower level of
commissions paid. Employee salespersons receive a lower percentage of commission
revenues. Underwriting expenses decreased by $129,239, due to the lack of any
completed public corporate finance transactions in the 1998 quarter. Rent,
telephone and quote expenses increased to $207,255 in the 1998 period from
$189,000 in 1997, an increase of 9.7 percent, primarily due to decreased
overhead reimbursements from independent contractor representatives. Other
expenses decreased 0.4 percent to $532,733 in the second quarter of 1998 from
$535,029 in the second quarter of 1997.

     The Company had a pretax loss of $995,226 in the second quarter of 1998
compared to a pretax profit of $975,870 in the second quarter of 1997. The
biggest factor in this decline was the decrease in investment income in the 1998
quarter, which added to declines in PIC's corporate finance and trading
activities. Significant fluctuations can occur in PIC's revenues and operating
results from one period to another.

     The Company also accrued a refund of $115,736 in income taxes for the
second quarter of 1998, compared to an accrual for income taxes in the second
quarter of 1997 of $392,500. Independent of investment income, the Company would
have had a loss before income taxes of $200,085 in the second quarter of 1998
compared to a profit before income taxes of $215,815 in the second quarter of
1997.

                                       11
<PAGE>
Liquidity and Capital Resources

     The majority of PIC's assets are cash and assets readily convertible to
cash. PIC's securities inventory is stated at market value. The liquidity of the
market for many of PIC's securities holdings, however, varies with trends in the
stock market. Since many of the securities held by PIC are thinly traded, and
PIC is in many cases a primary market maker in the issues held, any significant
sales of PIC's positions could adversely affect the liquidity of the issues
held. In general, falling prices in OTC securities (which make up most of PIC's
trading positions) lead to decreased liquidity in the market for these issues,
while rising prices in OTC issues tend to increase the liquidity of the market
for these securities. The overall increase in prices for the OTC securities
traded by PIC in 1995, 1996, 1997 and early 1998 was combined with a general
increase in the liquidity of the markets for these securities. The decline in
prices for the OTC securities traded by PIC in the second quarter of 1998 and in
1994 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 June 30, 1998, no net loans were
outstanding pursuant to this arrangement. PIC had no subordinated loans at June
30, 1998. PIC and the Company are generally able to meet their compensation and
other obligations out of current liquid assets.

     Another source of capital to PIC and the Company has been the exercise of
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are not
reflected on the balance sheet of PIC or Paulson Capital. While the warrants and
the securities issuable upon exercise of the warrants are not immediately
saleable, PIC receives the right to require the issuer to register the
underlying securities for resale to the public. Profits, if any, from the
warrants are realized based upon the difference between the market price and the
exercise price on the date of exercise. Further profits or losses are
subsequently realized when the underlying securities are sold. Profits and
losses realized from the warrants are recorded as "Investment Income." There is
no public market for the underwriter warrants. The securities receivable upon
exercise of the underwriter warrants cannot be resold unless the issuer has
registered these securities with the SEC and the states in which the securities
will be sold or exemptions are available. Any delay or other problem in the
registration of these securities would have an adverse impact upon PIC's ability
to obtain funds from the exercise of the underwriter warrants and the resale of
the underlying securities. At June 30, 1998, PIC owned 33 underwriter warrants
(from 31 issuers), of which 27 were currently exercisable. Seven of the
exercisable warrants had an exercise price below the current market price of the
securities receivable upon exercise. The value of the firm's underwriter
warrants depends on the prices of the underlying securities. These prices are
influenced by general movements in the prices of OTC securities as well as the
success of the issuers of the underwriter warrants.

                                       12
<PAGE>
     In the six months ended June 30, 1998, $1,149,302 of net cash was provided
by operating activities of the Company. The major adjustments to reconcile this
result to the Company's net profit included a decrease in accounts payable and
accrued liabilities of $6,505,871 and a realized gain on investment securities
of $1,233,070 being more than offset by a decrease in trading securities of
$5,406,855, a decrease in receivables of $3,083,421, unrealized depreciation of
$1,695,237 on investment securities and a decrease in prepaid and deferred
expenses of $210,257. In the first six months of 1998, $1,052,044 of net cash
was used by the Company in investing activities, primarily resulting from
$12,934,064 of proceeds from the sale of short-term investment securities being
more than offset by the purchase of $13,861,429 of short-term investment
securities and the purchase of $124,979 in furniture and equipment. In the first
six months of 1998, $75,260 of net cash was used in financing activities to
retire common stock. The net increase in cash and cash equivalents for the six
month period totaled $21,998. 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 June 30, 1998, the Company had no material commitments for capital
expenditures.

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

Inflation

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

                                       13
<PAGE>
                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 2. Changes in Securities.

     None

Item 3. Defaults upon Senior Securities.

     None

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

     The Company held its annual meeting on June 16, 1998. The three existing
Company directors (Chester L.F. Paulson, Jacqueline M. Paulson and Kenneth T.
LaMear) were elected for additional one year terms and three new directors
(Shannon P. Pratt, Paul Shoen and John Westergaard) were also elected to one
year terms. In addition, the Company's shareholders approved a proposal to
authorize an amendment to the articles of incorporation of the Company to effect
a 1-for-4 reverse split of the Common Stock of the Company upon the occurrence
of certain events, with 3,790,243 shares voting for the proposal, 133,805 shares
voting against the proposal, with 15,500 votes abstaining. Under the proposal,
the Company's directors are authorized to effect the reverse split if the
closing bid of the Company's common stock falls below $1.00 and the directors
determine that the reverse split is in the best interests of the Company's
shareholders. The purpose of the proposal was to enable the Company to maintain
a listing for the Company's common stock on the Nasdaq System.

Item 5. Other Information.

     None

Item 6. Exhibits and Reports on Form 8-K

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

           27                Financial Data Schedule

No Reports on Form 8-K were filed during the quarter ended June 30, 1998.

                                       14
<PAGE>
                                   SIGNATURES


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


                                       PAULSON CAPITAL CORP.



Date:    8/5/98                        By:  CHESTER L.F. PAULSON
     ---------------------                --------------------------------------
                                            Chester L.F. Paulson
                                            President


Date:    8/6/98                        By:  CAROL RICE
     ---------------------                --------------------------------------
                                            Carol Rice
                                            Principal Accounting Officer

                                       15
<PAGE>
                                  EXHIBIT INDEX

      Exhibit                                                     Sequential
        No.                Description                             Page No.


        27                 Financial Data Schedule

                                       16