<PAGE>1 
                     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 September 30, 1995

                      Commission file number: 0-18118

                           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  
                                                                -------------  

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

                              Yes  X       No     
                                  ---         ---        

       Number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1995:

                Common stock, no par value  -  4,314,201 shares 
<PAGE>2 

                             FINANCIAL INFORMATION 


ITEM 1.     FINANCIAL STATEMENTS 

<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

                          CONSOLIDATED BALANCE SHEET 

                                    ASSETS 
                                    ------- 
                                  (unaudited) 

<CAPTION>
                                                         9/30/95      12/31/94 
                                                         -------      -------- 
<S>                                                   <C>           <C>        
CURRENT ASSETS 
   Cash and cash equivalents                          $  259,270    $  145,417 
   Receivables from brokers or dealers and 
     clearing organizations                            5,900,134     1,342,230 
   Notes and other receivables                           249,436       482,776 
   Refundable income taxes                                  --         515,000 
   Trading securities and investments                    652,928     1,563,674 
  Investment Securities                                1,285,270        15,063 
   Prepaid and deferred expenses                         195,604       169,268 
  Secured demand notes                                   100,000       100,000 
   Deferred income taxes                                 170,000       170,000 
                                                       ---------     --------- 

          Total current assets                         8,812,642     4,503,428 
                                                       ---------     --------- 

FURNITURE AND EQUIPMENT, net                             117,848       137,254 
                                                       ---------     --------- 

DEFERRED INCOME TAXES                                     12,700        12,700 
                                                       ---------     --------- 

                                                      $8,943,190    $4,653,382 
                                                       =========     ========= 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>3 
<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

                    CONSOLIDATED BALANCE SHEET - CONTINUED 

                     LIABILITIES AND SHAREHOLDERS' EQUITY 
                     ------------------------------------ 
                                  (unaudited) 


<CAPTION>
                                                         9/30/95      12/31/94 
                                                         -------      -------- 
<S>                                                   <C>           <C>        
CURRENT LIABILITIES 
   Bank Overdraft                                       $   --        $ 51,888 
   Accounts payable                                      291,990       268,146 
   Brokers or dealers and clearing organ- 
     izations                                            419,542     1,750,193 
   Compensation, employee benefits 
     and payroll taxes                                 1,325,479       284,562 
   Securities sold, not yet purchased, at 
     market                                              115,252       197,820 
   Income taxes payable                                1,823,876          --   
  Deferred income taxes                                     --            --   
   Subordinated notes payable                            100,000       100,000 
                                                       ---------     --------- 

          Total current liabilities                    4,076,139     2,652,609 
                                                       ---------     --------- 

COMMITMENTS AND CONTINGENCIES                              -0-           -0-   

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 outstand- 
     ing, 4,314,201 and 4,363,501, 
     respectively                                        725,389       775,730 
  Retained earnings                                    4,141,662     1,225,043 
                                                       ---------     --------- 

                                                       4,867,051     2,000,773 
                                                       ---------     --------- 

                                                      $8,943,190    $4,653,382 
                                                       =========     ========= 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>4 
<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

                     CONSOLIDATED STATEMENTS OF OPERATIONS 
                                  (unaudited) 

<CAPTION>
                                 For the three month          For the nine month 
                                period ended Sept. 30        period ended Sept. 30 
                                 1995          1994          1995           1994    
                              ----------    ----------    ----------     ---------- 
<S>                           <C>           <C>            <C>           <C>        
REVENUES  
  Commissions                 $2,908,449    $1,658,334     $7,613,579    $6,117,788 
  Corporate Finance              506,479       552,816      1,873,490     1,301,951 
  Investment Income            5,612,826       (20,849)     5,939,082       246,676 
  Trading Income                 292,078       109,679        405,828       378,299 
  Interest and Dividends           7,676         1,651         18,123        13,778 
  Other                            3,280         5,237         14,405        11,361 
                               ---------     ---------      ---------     --------- 

                               9,330,788     2,306,868     15,864,507     8,069,853 
                               ---------     ---------     ----------     --------- 

EXPENSES 
  Commissions 
   and Salaries                3,170,890     1,802,508      7,763,062     6,120,797 
  Underwriting Expense            56,666       116,598        488,131       276,392 
  Rent, telephone 
   and quotation                 257,066       239,569        710,676       845,178 
    services 
  Interest expense                 1,536         1,500          4,909         4,500 
  Professional fees              144,596       133,706        351,513       474,163 
  Bad debt expense               237,508        29,600        356,957        88,877 
  Travel and 
   entertainment                  33,489        42,934         77,704       127,130 
  Settlements                    437,500        67,500        586,750       216,501 
  Branch office expenses            --         (16,976)          --          22,328 
  Other                          345,850       167,069        708,186       654,625 
                               ---------     ---------      ---------     --------- 

                               4,685,101     2,584,008     11,047,888     8,830,491 

   Earnings (loss) 
     before income 
     taxes and extra- 
      ordinary gain            4,645,687      (277,140)     4,816,619      (760,638) 

Provision (credit) 
   for income taxes 
  Current                      1,832,000         --         1,900,000          --   
  Deferred                         --            --             --             --   
                               ---------     ---------      ---------     --------- 

   Net earnings               $2,813,687    $ (277,140)    $2,916,619    $ (760,638) 
                               =========     =========      =========     ========= 

Earnings (loss) 
   per share                  $      .65    $    (.064)    $      .67    $    (.175) 
                               =========     =========      =========     ========= 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>5 
<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY 

                   Three year period ended December 31, 1994 
           and the nine months ended September 30, 1995 (unaudited) 


<CAPTION>
                                                Common Stock             Retained 
                                                ------------             Earnings 
                                           Shares          Amount        (Deficit) 
                                          --------        --------       --------- 
<S>                                      <C>              <C>            <C>      
Balance at January 1, 1992               4,569,016        $990,573       $775,214 

Issuance of common stock in 
  lieu of Directors' cash 
  compensation                              10,080          17,500            -   

Redemption of common stock                 (10,000)        (10,600) 

Net earnings for the year                     -               -           693,815 
                                         ---------         -------      --------- 

Balance at December 31, 1992             4,569,096        $997,473     $1,469,029 

Issuance of common stock in 
  lieu of Directors' cash 
  compensation                               7,745          10,000            -   

Redemption of common stock                (128,300)       (140,400)               

Net earnings for the year                     -               -           836,476 
                                         ---------         -------      --------- 

Balance at December 31, 1993             4,448,541        $867,073     $2,305,505 

Issuance of common stock in 
  lieu of Directors' cash 
  compensation                              21,960          16,500            -   

Redemption of common stock                (107,000)       (107,843) 

Net loss for the year                         -               -        (1,080,462) 
                                         ---------         -------      --------- 

Balance at December 31, 1994             4,363,501        $775,730     $1,225,043 

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

Net earnings for year to date                 -               -         2,916,619 
                                         ---------         -------      --------- 

Balance at September 30, 1995            4,314,201        $725,389     $4,141,662 
                                         =========         =======      ========= 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>6 
<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

               CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 

       for the nine month period ended Sept. 30, 1995 and Sept. 30, 1994 


<CAPTION>
                                                         9/30/95       9/30/94 
                                                         -------       ------- 

<S>                                                   <C>            <C>        
Increase (Decrease) in cash and cash equivalents 

Cash flows from operating activities  
   Net earnings (loss)                                $2,916,619     $(760,638) 
                                                       ---------      -------- 
     Adjustments to reconcile net earnings 
     (loss) to net cash provided by operating 
     activities 
        Unrealized (appreciation) loss in 
          investment securities                         (529,739)      (17,875) 
        Realized gain on investment 
         securities                                   (5,406,780)     (228,801) 
        Depreciation and amortization                     37,485        38,155 
        (Gain) loss from sale of furniture 
          and equipment                                    7,959          (325) 
        Change in assets and liabilities 
          (Increase) decrease in  
            receivables                               (4,324,567)      371,283 
          (Increase) decrease in 
            refundable income taxes                      515,000       (66,418) 
          (Increase) decrease in 
          trading securities                             910,746    (1,246,665) 
          (Increase) decrease in prepaid 
          and deferred expenses                          (26,336)     (112,380) 
          Increase (decrease) in accounts 
           payable and accrued expenses                 (265,890)    1,099,657 
          Increase (decrease) in securities 
          sold, not yet purchased                        (82,568)      (15,509) 
          Increase (decrease) in income taxes 
             payable                                   1,823,876      (130,475) 
          Decrease in bank overdraft                     (51,888)      (74,717) 
                                                       ---------      -------- 

            Total adjustments                         (7,392,702)     (384,070) 
                                                       ---------      -------- 

   Net cash provided by (used in) 
     operating activities                             (4,476,083)   (1,144,708) 
                                                       ---------     --------- 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>7 
<TABLE>
                     PAULSON CAPITAL CORP. AND SUBSIDIARY 

         CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED 


<CAPTION>
                                                         9/30/95       9/30/94 
                                                         -------       ------- 
<S>                                                   <C>           <C>         
Cash flows from investing activities 
   Purchases of short-term investment 
   securities                                         (3,689,272)   (1,416,431) 
   Proceeds from sale of short-term 
   investment securities                               8,355,586     2,140,703 
   Additions to furniture and equipment                  (31,037)      (73,520) 
   Proceeds from sale of furniture 
   and equipment                                           5,000           325 
                                                       ---------     --------- 
   Net cash provided by (used in) 
   investing activities                                4,640,277       651,077 
                                                       ---------     --------- 
Cash flows from financing activities 
   Additions to notes payable                               --             --  
   Payments on contracts payable and 
   obligations under capital leases                         --             --  
   Payments on subordinated notes payable                   --             --  
   Payments to retire common stock                       (50,341)     (107,844) 
                                                       ---------     --------- 
   Net cash provided by (used in) 
   financing activities                                  (50,341)     (107,844) 
                                                       ---------     --------- 

     NET INCREASE (DECREASE) IN CASH AND 
        CASH EQUIVALENTS                                 113,853      (601,475) 

Cash and cash equivalents 
   at beginning of year                                  145,417       941,048 
                                                       ---------     --------- 

Cash and cash equivalents at Sept. 30                 $  259,270    $  339,573 
                                                       =========     ========= 

Cash paid during the three months 
--------------------------------- 

   Interest                                            $   1,536     $   1,500 
                                                        ========      ======== 

   Income taxes                                        $  45,000     $   2,690 
                                                        ========      ======== 
</TABLE>


         The accompanying notes are an integral part of this statement 
<PAGE>8 
             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 

      PIC and Chester L.F. Paulson, Paulson Capital's president, are
defendants in Kevin J. O'Rourke, et. al v. With Design In Mind
International, Inc., filed in U.S. District Court for the Central District
of California in February 1993, an asserted class action alleging
violations of Sections 11 and 12(2) of the Securities Act of 1933, relating
to alleged misstatements in the prospectus used in connection with a May
1991 public offering in which PIC acted as the managing underwriter. Mr.
Paulson has not been served with the complaint. PIC sold $4.96 million of
securities in the offering. PIC believes it has meritorious defenses to the
lawsuit. The lawsuit has been settled between the parties but no final
settlement has yet been presented to the court for approval.

      PIC has been named as a defendant in Denardo, et al. v. Paulson
Investment Company, Inc., et al., filed in U.S. District Court for the
District of Connecticut in June 1995. Plaintiffs allege that an individual
claiming to be an agent of PIC took approximately $105,000 from them. The
claims allege violations of federal and state securities laws, state unfair
trade practice statutes, gross negligence, breach of fiduciary duties,
common law fraud and conversion. Plaintiffs are seeking compensatory
damages, punitive damages and attorney's fees. PIC has not had an
opportunity to fully investigate this claim and is unable to assess its
merit.

      PIC has been named as respondent in Carimi v. Paulson Investment
Company, Inc., an NASD arbitration filed in December 1994. Claimant alleges
that PIC is liable for prematurely
<PAGE>9 
exercising various cashless options without authorization. Claimant seeks
$45,000 in compensatory damages and $100,000 in punitive damages. A hearing
has been set on this matter for November 14, 1995. PIC intends to defend
this matter vigorously.

      PIC has been named as respondent in Mokhtari v. Paulson Investment
Company, Inc., et al., an NASD arbitration, filed in February 1995.
Claimants allege breach of fiduciary duty, negligence, fraud and securities
fraud. Claimants seek $27,000 in compensatory damages and $73,000 in
punitive damages. PIC believes it has meritorious defenses and intends to
defend this matter vigorously.

      PIC has been named as respondent in Rosner v. Investors Associates,
Inc., et al. and MRS Investments v. Investors Associates, Inc., et al.,
NASD arbitrations filed in April and May 1995, respectively. Claimants
assert claims for violation of Sections 12(2) and 15 of the Securities Act
of 1933 and Connecticut securities law in connection with investments by
claimants in a company for which PIC had entered into a non-binding letter
of intent to conduct a public offering. Claimants seek a total of $200,000
in compensatory damages, interest and attorney's fees. PIC believes it has
meritorious defenses and intends to defend these matters vigorously.

      PIC has been named as respondent in Elliot v. Paulson Investment
Company, Inc., et al., an NASD arbitration filed in July 1995. Claimant
asserts claims for violation of the Texas Deceptive Trade
Practices-Consumer Protection Act, securities fraud, violation of NASD
rules, sale of an unregistered security and negligence. Claimant seeks
$30,000 in compensatory damages, treble damages pursuant to state law, and
punitive damages in an unspecified amount. PIC has not had an opportunity
to fully investigate this claim and is unable to assess its merit.

      PIC has been named as respondent in Eaton v. Paulson Investment
Company, Inc., an NASD arbitration filed in July 1995. Claimant asserts
claims for equitable rescission of the trades made in her account, breach
of fiduciary duty, negligence, fraud, negligent misrepresentation and
securities fraud. Claimant seeks approximately $42,000 in compensatory
damages. PIC has not had an opportunity to fully investigate this claim and
is unable to assess its merit.

      PIC has been named as respondent in Volkert v. Investors Associates,
Inc., et al., an NASD arbitration filed in February 1995. The legal and
factual basis of the claim against PIC is unclear but is apparently based
on a claim that the securities claimant purchased were not suitable to meet
his needs and objectives. Claimant seeks $16,500 in compensatory damages.
An arbitration hearing is set for March 12, 1996 in Los Angeles, 
<PAGE>10 
California. PIC has not had an opportunity to fully investigate this claim
and is unable to assess its merit.

      PIC has been named as respondent in Shapiro v. Paulson Investment
Company, Inc., an NASD arbitration filed in September 1995. Claimant
alleges securities fraud, including claims of unsuitability, churning and
unauthorized trading, and seeks $47,000 in compensatory damages. PIC
believes it has meritorious defenses and intends to defend this matter
vigorously.

      Assessment from State of California The California Employment
Development Department (the "EDD") has made employment tax assessments
against PIC for the tax period April 1, 1991 through March 31, 1994. The
amount of the assessments totals approximately $575,000. The EDD made the
assessments because it believes that PIC's registered representatives in
California are employees. PIC believes that the California registered
representatives are independent contractors. PIC is not obligated to make
contributions for unemployment insurance or to withhold state personal
income tax for independent contractors. PIC has filed petitions for
reassessment requesting that the assessments be found erroneous because the
registered representatives were properly treated as independent
contractors. PIC also requested that any assessments be recomputed and
credits be applied against any assessment amounts for personal income tax
paid by the registered representatives individually. PIC believes that the
EDD's position is erroneous and intends to defend this matter vigorously. A
hearing before the California Unemployment Insurance Appeals Board has not
yet been scheduled. PIC is unable to predict the financial impact of this
matter.

      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. Management of the
Company believes, based upon information received to date and, where
management believes it appropriate, discussions with counsel, that
resolution of this additional pending litigation will have no material
adverse effect on the consolidated financial condition, results of
operations, or business of the Company.
<PAGE>11 
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
            CONDITION AND RESULTS OF OPERATIONS 

Three Months Ended September 30, 1995 vs. Three Months Ended  
      September 30, 1994 

      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.

<TABLE>
<CAPTION>
                    Summary of Changes in Major Categories 
                           of Revenues and Expenses 

                                Three Months Ended          Nine Months Ended 
                                   September 30,              September 30, 
                                   1995 vs. 1994              1995 vs. 1994 
                                   -------------              ------------- 
<S>                          <C>              <C>      <C>              <C>   
Revenues: 

Sales Commissions            $ 1,250,115      75.4%    $ 1,495,791      24.4% 
Corporate Finance               ( 46,337)    ( 8.4%)       571,539      43.9% 
Investment Income              5,633,675       N/A       5,692,406       N/A  
Trading Income                   182,399     166.3%         27,529       7.3% 
Other                              4,068      59.1%          7,389      29.4% 

Total                          7,023,920     304.5%      7,794,654      96.6% 

Expenses: 

Commissions/Salaries           1,368,382      75.9%      1,642,265      26.8% 
Underwriting Expenses            (59,932)    (51.4%)       211,739      76.6% 
Rent, Telephone/Quotes            17,497       7.3%       (134,502)    (15.9%) 
Other                            775,146     182.2%        497,895      31.4% 

Total                          2,101,093      81.3%      2,217,397      25.1% 

Pretax Income                  4,922,827       N/A       5,577,257       N/A  
</TABLE>
<PAGE>12
      Total revenues for the third quarter of 1995 rose 304.5 percent from
the third quarter of 1994, from $2,306,868 to $9,330,788. As shown in the
table above, sales commissions rose $1,250,115, or 75.4 percent, from
$1,658,334 in the third quarter of 1994 to $2,908,449 in the comparable
1995 period. This increase resulted primarily from the more favorable price
movements and trading levels in OTC issues in the 1995 quarter, compared to
a flat market with lower trading levels in 1994. Corporate finance revenues
fell 8.4 percent, or $46,337, in the third quarter of 1995 compared to the
third quarter of 1994. Two transactions were completed in the 1994 quarter,
raising a total of $6.9 million for the issuers; three transactions were
completed in the 1995 quarter, raising an aggregate of $17.5 million for
corporate finance clients, but the two largest transactions (accounting for
$14.6 million) were jointly managed, resulting in significantly reduced
fees to PIC. Corporate finance revenue is directly related to the amount of
money raised by PIC in completed transactions. Investment income increased
$5,633,675, from a loss of $20,849 in the third quarter of 1994 to a gain
of $5,612,826 in the 1995 quarter. No underwriter warrants were exercised
in the 1994 quarter while six warrants were exercised in the 1995 quarter.
Trading income rose $182,399, or 166.3 percent, from $109,679 in the 1994
quarter to $292,078 in the 1995 period. This improvement was also due to
greater trading levels and generally higher prices in OTC issues in the
1995 quarter compared to a flat market in 1994.

      Total expenses rose $2,101,093 in the third quarter of 1995 from the
comparable 1994 period, an increase of 81.3 percent from $2,584,008 to
$4,685,101. Commissions and salaries rose $1,368,382, or 75.9 percent, from
$1,802,508 in the 1994 period to $3,170,890 in 1995. This increase was
primarily due to increased commission revenues resulting in a higher level
of commissions paid. Higher commissions are generally paid to employee
registered representatives at higher production levels as an incentive.
Underwriting expenses decreased by $59,932, or 51.4 percent, due primarily
to decreased legal fees for the jointly managed corporate finance
transactions completed in the 1995 quarter compared to the two solely
managed transactions completed in the 1994 quarter. Rent, telephone and
quote expenses increased from $239,569 in the 1994 period to $257,066 in
1995, an increase of 7.3 percent. Other expenses increased 182.2 percent,
from $425,333 in the third quarter of 1994 to $1,200,479 in the third
quarter of 1995. This increase was primarily due to a $370,000 increase in
settlements, a $207,908 increase in bad debt expense and a $139,750 accrual
for the employee profit sharing plan.

      The Company had a pretax profit of $4,645,687 in the third quarter of
1995 compared to a pretax loss of $277,140 in the
<PAGE>13 
comparable 1994 period. The primary reason for this increase wasthe
significant increase in investment income resulting from the exercise of
underwriter warrants. Independent of investment income, the Company would
have had a loss before income taxes of $967,139 in the third quarter of
1995 compared to a loss before income taxes of $256,291 in the comparable
1994 period. Investment income in the quarter was significantly higher than
in any previous quarter in the Company's history. This was due to gains in
the value of the underwriter warrants sold in response to significant
increases in OTC prices, particularly the technology sector. This source of
income cannot be expected to regularly recur. Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.

      The Company also accrued a credit of $20,000 for an income tax refund
for the third quarter of 1994, compared to an accrual for income taxes in
the third quarter of 1995 of $1,832,000.

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 was combined with a general increase in the liquidity of the
markets for these securities. Markets in 1994 for OTC securities generally
declined. PIC's investment account and trading inventory accounts are
stated at fair market value, which is at or below quoted market price.

      PIC owed $100,000 at September 30, 1995 pursuant to a subordinated
loan from an investor. PIC also 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 September
30, 1995, no net loans were outstanding pursuant to this arrangement. PIC
and the Company are generally able to meet their compensation and other
obligations out of current liquid assets.

      Another source of capital to PIC and the Company has been the
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
<PAGE>14 
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 September 30, 1995, PIC owned
36 underwriter warrants (from 33 issuers), of which 30 were currently
exercisable and six 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. In 1995, PIC exercised underwriter warrants for seven issuers,
and sold its entire position in Ryka Inc., Action Performance Companies,
Inc., Cree Research, Inc., Research Frontiers Incorporated, Irvine Sensors
Corporation and Identix Incorporated.

      In the nine months ended September 30, 1995, $4,476,083 of net cash
was used in operating activities by the Company. The major adjustments to
reconcile this result to the Company's net profit included an increase in
receivables of $4,324,567, a realized gain on investment securities of
$5,406,780 and unrealized appreciation of $529,739 in investment
securities, offset by an increase in income taxes payable of $1,823,876, a
decrease in trading securities of $910,746 and a decrease in refundable
income taxes of $515,000. The primary reason for the increase in
receivables was that certain proceeds from the sales of securities
underlying underwriter warrants remained in PIC's account at its clearing
firm. In the quarter, $4,640,277 of net cash was provided to the Company by
investing activities, primarily resulting from $8,355,586 of proceeds from
the sale of short-term investment securities offset partially by the
purchase of $3,689,272 of short-term investment securities. $50,341 of net
cash was used in financing activities in the quarter for payments to retire
common stock. The net increase in cash and cash equivalents for the quarter
totaled $113,853. See "Financial Statements -- Consolidated Statements of
Cash Flows."
<PAGE>15 
      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 September 30, 1995, 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.
<PAGE>16 
                                    PART II 
                               OTHER INFORMATION 

Item 1.     Legal Proceedings. 

      None 

Item 2.     Changes in Securities. 

      None 

Item 3.     Defaults upon Senior Securities. 

      None 

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

      None 

Item 5.     Other Information. 

      None 

Item 6.     Exhibits and Reports on Form 8-K 

      (a)   Exhibits 

            27 - Financial Data Schedule 

      (b)   Reports on Form 8-K 

            None 
<PAGE>17 
                                  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: 11/9/95                       By: CHESTER L.F. PAULSON                   
      ------------------                ------------------------------- 
                                        Chester L.F. Paulson 
                                        President 


Date: 11/9/95                       By: CAROL RICE                             
      ------------------                ------------------------------- 
                                        Carol Rice 
                                        Principal Accounting Officer 
<PAGE>18 
                                 EXHIBIT INDEX 

   Exhibit                                                         Sequential 
     No.          Description                                       Page No.  
   -------        -----------                                      ---------- 

     27           Financial Data Schedule